Keywords: ROI, return on investment, supply side, demand side, business strategy, objective function, design investment, production investment, marketing investment, advertising investment, product quality, product performance, high tech firms, high technology, sales rate, technological performance level, market demand, technological supply, product design, distribution, investment allocation, design specification
Unifying the supply–side and demand–side of business strategy with an ROI objective function
This paper provides a derivation, justification, and application of a generalised return on investment (ROI) objective function of a design–and–manufacturing or 'high–tech' industrial firm. Based on analysis originally presented in Steele (1995), it offers a more expansive literature review and derivation, while also demonstrating its utility for increasing the rigor of strategic business reasoning. The ROI objective function reveals the consistent mathematical structure of the profits derived from a differentiated product over its product–life cycle as a function of its production/sales rate, technological performance level(s), and investments in both stimulating its market demand (marketing and advertising) and technological supply (product design and production/distribution process). This fundamental utility model of a design and manufacturing firm is compatible with the assumptions of neoclassical and neo–Schumpeterian economists. The paper concludes by noting how the ROI objective function represents a simultaneous theory of investment allocation and design specification.