||Over the past decade, new approaches to innovation management have become prime drivers of various industries. Considering product quality, product innovation and service innovation in the automotive industry, this study tries to adopt game theory and real option models to analyze competing and consuming behavior among high- quality firms, low-quality firms and rational consumers. With an argument that firms will undertake innovation activities if they produce high-quality products, this study wishes to demonstrate that high quality products will induce both product and service innovations simultaneously.|
To achieve the research objective, this study divides innovation into product and service innovations, and then, discusses quality’s impacts on product and service innovations separately. Game theory models concerning quality and product innovation indicate that the fixed cost of innovation, the barrier to a firm’s engaging in innovative activities, is overcome only if a firm produces high-quality products. Moreover, another dynamic game also shows the strong relationship between product quality and service innovation. Applying real options models to evaluate service innovations in the automotive industry, including half-price purchase warranty and extended test drive service, also verify that effective service innovations might increase consumer willing-to-buy and enlarge the sales and profits for the innovative firms. Besides quality, this study also reveals that consumer preference to new product or service is another key successful factor for business innovation management. Successful innovation management depends on continuously improving product and service, concerning the status of expected market, and understanding the needs of potential consumers.
Even though a general consensus on product and service innovations among different industries remains lacking, this study strongly supports the argument that firms producing high-quality products will be active in innovations. From the broader perspective of process management, total quality management, which increases product quality, undoubtedly supports innovation management.