Optimal Control Model for Strategic Technology Transition

In this research, we explore how to manage the transition of technology generations considering incremental innovation of the existing technology generation. Firms can slow down decaying of the existing technology by continuous incremental improvements rather than introducing a new generation technology at the first time if the former strategy is better. We characterize optimal technology transition problem by setting up an optimal control model. The model which is originally designed and solved by Thompson(1968) as a ‘Machine maintenance problem’ has been cited to build the main body of our model. With this analytical model, we derive optimal ‘incremental innovation’ strategy which is considering transition to the next technology. Our analysis indicates that there exists an unique ‘stopping incremental innovation timing’. Before the point of time, the decision maker should make his effort at a maximum level to enhance the current technology. However from the stopping timing to the final time horizon where the new technology is introduced, it is found that not to invest to the current technology any more is optimal.