Bob (Sridhar) Viswanathan Michigan State University 12 August 2006

1. Bob (Sridhar) Viswanathan Michigan State University 12 August 2006 Dissertation chair: Dr. Ram Narasimhan The rate of new product introduction and investment through the supply chainPhase: Early proposal development

2. Motivation • Several new product development (NPD) perspectives exist • Supplier involvement perspective primarily addresses coordinated processes • Economic perspective primarily addresses a single firm's decision problem • Comparatively little literature addresses how uncoordinated NPD processes manifest in a supply chain • Important to firms seeking to understand why their suppliers introduce products when they do

3. Overview • Research Question In an uncoordinated supply chain, how does end-consumer demand for a firm's product influence: • the amount an upstream supplier spends on NPD? • the frequency with which the supplier launches new products? • Approach: mathematical model with empirical validation • Unit of analysis: an individual firm

4. Literature Review

5. Evaluation of existing literature • Timing of NPD in a single-firm context has been well-covered (e.g. Souza, et al. 2004) • 2-tier investigations into NPD deal primarily with intentional coordination of a buyer with a supplier (e.g. Peterson, et al. 2005) • Existing clockspeed models generally deal with only a single tier of the supply chain (e.g. Souza, et al. 2004; Mendelson and Pillai 1999) • Little research found that ties the size of NPD investments or the timing of new product launches at a supplier to end-consumer demand

6. Model Description – Markets • 3 tiers: customer, firm, supplier • 1 product • Assumptions about consumer demand • Customer demand constantly decreasing (clockspeed, Souza, et. al 2004, product life cycle) • Customer experiences diminishing returns to quality (Adner and Levinthal 2001) • Customer's willingness to pay for high quality products increases over time

7. Model Description - NPD • Assumptions about firm NPD • Firm's product improvements follow an s-curve (Foster, 1986; Christensen 1992) • Firm invests in NPD at a constant rate • Firm does not rely on supplier performance improvements for planning • Assumptions about supplier NPD • Linear returns to investments • Can estimate the firm's profit function

8. Model Development - Demand Customer Demand, D D = r + gt ln(Q) – hP – ft Where: • r = demand function parameter • g = parameter indicating the effectiveness of quality increases in increasing demand • h = price elasticity of demand • P = unit price set by firm • f = related to clockspeed, the rate at which demand for the product decays because of exogenous substitutes and competition • t = time since the introduction of the existing supplied component • Q = product performance

9. Model Development – Performance Firm's Product Performance, Q Q = Qmax/(1+e^-a(It+b)) where: Qmax = maximum possible performance using existing supplied components a is related to the speed of improvement b is related to where on the s-curve the firm starts I is the rate at which the firm invests in NPD

10. Firm's Profit Firm's profit function in t=0 dollars Πm(I, P, t, D, δ) = ʃ(DP – It)(1-δ)tdt Where: • I = investment rate in NPD • P = the price of the product set by the manufacturer • t = time since the last supplied component was released • D = customer demand • δ = discount rate

11. Supplier's Component Performance • Supplier's Component Performance Qnewmax = Qmax + uIst Where: • Qmax = performance of the component being shipped at the moment • Qnewmax = performance of the component if the product were shipped at time t • u = related to the effectiveness of supplier spending on NPD • Is = supplier investment rate in NPD • t = time since last component was launched

12. Supplier's Profit Function Supplier's NPD costs ʃIst(1-δ)tdt Firm's profits under old component Πm (Qmax,tstart=t,tstop=thorizon +t) Firm's potential profits with new component Πm(Qmax+uIst,tstart=0,tstop=thorizon) Fraction of the profit difference firm will share with supplier Ɵ Supplier's profit function: Πs(Is,t,Qmax,tstart,tstop,δ) = Ɵ(Πm(Qmax+uIst,tstart=0,tstop=thorizon)-Πm (Qmax,tstart=t,tstop=thorizon +t)-ʃIst(1-δ)tdt

13. Proposal for mathematical model • Solve model for the following: • At what rate does the firm invest, I? • At what rate does the supplier invest, Is? • How long does it take for the supplier to introduce a new product, t?

14. Implications Identify the key drivers of supplier investment choices (sensitivity analysis): • s-curve parameters • demand parameters • discount rate • supplier improvement parameters • fraction of potential profits the firm shares with the supplier • Firm's planning horizon

15. Additional research questionsfor empirical study • How does the rate of price declines in each industry affect NPD rates? • Do suppliers release new products when the focal firm is unable to improve its own product quality?

16. Potential empirical support • Firm data: • Rates of NPD investment and releases • Rates of price declines • Ability to innovate without supplier NPD • Whether supplier NPD schedule is used for planning • How much of the additional proceeds from a new component are captured by the supplier • Control: importance of supplier's industry • Supplier data: • Rates of NPD investment and releases • Rates of price declines • Control: importance of focal firm's industry

17. Limitations • Does not address how suppliers operating in a network might behave differently • Assumes firm does not anticipate supplier actions (decision-theoretic, not game-theoretic model) • Firm NPD might not be supplier-constrained • Does not consider price changes in supplier components

18. Directions for future research • Supplier faces a continuous menu of technological platforms to select among • Supplier services two customer industries who benefit from improvements: could there be a tragedy of the commons?