PRODUCT DESIGN STRATEGY $(5$ home points$+12$ in$-$class points$)$

Creative Technology $($CT$)$ has just pioneered a high$-$performance disk drive for engineering workstations. The market for this product is highly lucrative because very few companies have the technology to develop a competing product. Storage Technology $($ST$)$ has the needed design expertise and has decided to enter the market to compete with Creative Technology. After careful screening of different new product ideas, Storage Technology finds the following three product design options attractive:

$\backslash$table$[[$Option$,\backslash$table$[[$Development$],[$Cycle Time$],[($months$)]],\backslash$table$[[$Product$],[$Performance$],[$Rating$]],\backslash$table$[[$Project$],[$Development$],[$Expense $($$ Millions$)]]],[$I$,20,160,5\mathrm{.}0],[$II$,15,120,4\mathrm{.}5],[$III$,10,80,4\mathrm{.}0]]$

Strategy option I is a "revolutionary" strategy because it employs a technology that is new to the company and the industry. The strategy will develop a product that has a performance rating of $160$ but it requires a long development cycle of $20$ months. Strategy option III is an "evolutionary" design. Option III makes use of proven technology and requires $10$ months to launch the product. The performance rating of the product is $80($on a consumer satisfaction scale$).$ Strategy option II is in between I and III in terms of performance and development time. Development expense includes capital and labor costs and increases with the development cycle as indicated.

According to industry experts, Creative technology's current product has a performance rating of $100.$ The company sells its product for $$2,000.$ The demand window for this product is expected to last for another sixty months. Demand is assumed to be constant over the entire demand window and total market sales are estimated to be $2,000$ units$/$month$.$ Storage Technology also plans to sell its new product for $$2,000.$ The unit production cost of the product excluding the development expense is $$1,500$ regardless of the development option selected. Assume that market share for Storage Technology is determined by the following function:

Storage Technology Market Share $=\frac{STp}{CTp+Stp}$

STp $=$ Storage Technology's Product Performance Rating

CTp $=$ Creative Technology's Product Performance Rating

Thus, if Storage Technology adopts strategy option I, it will capture a market share of $160/(100+160$ for a period of $40$ months $(60-20)$ since $20$ months has been spent in development.

Assume that Creative Technology does not introduce a new product during the entire demand window and that both firms keep their prices at $$2,000.$

What is the most profitable strategy option for Storage Technology?