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KNOWLEDGE MANAGEMENT FOR NPD: COMPETITION VERSUS JOINT DEVELOPMENT Gülru F. Özkan, Cheryl Gaimon INFORMS 2009. Knowledge Management and New Product Development. Why is the problem I address so important?..

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KNOWLEDGE MANAGEMENT FOR NPD: COMPETITION VERSUS JOINT DEVELOPMENT

Gülru F. Özkan, Cheryl Gaimon

INFORMS 2009

slide2

Knowledge Management and New Product Development

Why is the problem I address so important?..

“The only real security that a man will have in this world is a reserve of knowledge, experience, and ability.”

- Henry Ford, founder of the Ford Motor Company

"In an industry with its entire foundation built upon R&D, I can’t think of anything more compelling than a solid KM strategy. It’s what will differentiate the winners from the losers.”

- Claire Hogikyan, Senior Director of Intellectual Property, Pfizer

www.clemson.edu

slide3

Focus: Strategic Level KM for NPD

  • Two stochastic game theoretic models of 2 firms that develop KM strategies for NPD.
  • Model 1: one firm sells knowledge to other (KT); each firm separately pursues KD; firms compete in same market. COMPETITIVE DEVELOPMENT (CD)
  • Model 2: both firms share knowledge (KS); firms jointly pursue KD; firms jointly enter same market. JOINT DEVELOPMENT (JD)
  • Both games are stochastic: a firm’s ability to integrate knowledge is uncertain; market valuation of knowledge embedded in NPD is uncertain.

www.clemson.edu

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Related Literature

  • Dynamics of knowledge
    • Clark and Fujimoto 1991, Thomke and Fujimoto 2000, Terwiesch et al 2002, Argote & Ingram (2000), Hatch and Mowery (1998), Carrillo & Gaimon (2000)
  • Cooperation between firms
  • Loebecke et al (1999), D’Aspremont (2000), Arora and Fosfuri (2003), Fosfuri (2006), Kutikala and Lin (2006), Casadesus-Masanell and Yoffie (2007), Spiegel (2007)

www.clemson.edu

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Research Questions

  • Under what conditions should competing firms enter into CD
  • agreements?
  • What drives each firm’s KT and KD strategies? How do
  • the strategies relate to each other?
  • What is the effect of market specific factors such as the
  • drivers of expected net revenue?
  • What is the effect of one firm’s uncertainty in its ability to
  • integrate knowledge on KM strategies of both firms?
  • What is the effect of the loss of competitive advantage when
  • a firm transfers (sells) knowledge with its competitor?

www.clemson.edu

slide6

Mechanisms of Cooperation

Competitive Development (CD)

www.clemson.edu

slide7

Competitive development

KT

NPD

Firm 1

NPD

Firm 2

Revenue

KD

KD

Launch new products and

compete in the same market

www.clemson.edu

slide8

Expected Profit Consists of:

  • Expected net revenue from new product at end of period 2 is based on customers’ valuation of embedded knowledge.
    • Distinguish between loyal and switching customers
    • Earnings if the firm is the sole developer of the product
  • Other revenue or costs
    • Revenue earned from selling knowledge; cost incurred from purchasing knowledge.
    • Cost due to loss of proprietary knowledge
    • Cost of KD

www.clemson.edu

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Competitive development

PK201Q2

K10

K11

K20

K21

PQ

K21= K20+PK201Q2

K11= K10

www.clemson.edu

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Competitive development

K11

K12

K21

K22

1K111

2K212

K12= K11+K1111

K22= K21+K2122

www.clemson.edu

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Competitive development

K12

K22

E{1} = 1v1K12

+ 12w1P(K12-K22)

+ 1(1-2)z1K12

+ PQ - m1Q - c112

E{2} = 2v2K22

+ 12w2P(K22-K12)

+ 2(1-1)z2K22

- PQ - c222

www.clemson.edu

slide12

Insights - CD mechanism (selected results)

  • KD for firm i is larger if:
    • firm i’sprobability of successfully developing a
    • new product is large
    • firm i\'sloyal customers’ valuation or expected
    • valuation by switching customers is large
  • KD for firm 2 is larger if
    • it is more capability of integrating the
    • knowledge
    • it acquires more knowledge from firm 1 
    • complementary relationship between Q and KD

www.clemson.edu

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Interaction between P & Q (selected results)

If P is large Q may be either small or large.

  • Ifcustomer valuation for firm 2 is below a threshold

 firm 2 less incentive to receive KT  smaller Q.

To entice firm 2 for larger Q, firm 1 lowers price  firm 2

increases Q some but Q still smaller despite lower P.

  • If firm 2 predicts its integration capability is below a threshold

 firm 2 has less incentive to receive KT  smaller Q.

 To entice firm 2 for larger Q, firm 1 lowers price  firm 2

increases Q slightly but Q still smaller despite lower P.

  • If firm 2 starts with low level of absorptive capacity...

www.clemson.edu

slide14

Insights - CD mechanism

  • If returns to firm 2 for Q is large  firm 1 sets smaller Pand firm 2 sets larger Q. Also, KD2 larger; KD1 same.
  • If returns on Q large, to increase revenue from KT, firm 1 lowers
  • price. Thus, firm 2 acquires more knowledge. With more
  • absorptive capacity, KD2 larger. Since firm 1’s knowledge
  • doesn’t change (same absorptive capacity), KD1 is same.
    • Analogous results for:
      • customer’s valuation of firm 2;
      • probability firm 2 successfully develops the new product;
      • loss in of proprietary knowledge.

www.clemson.edu

slide15

Insights - CD mechanism

  • If switching customers’ valuation of firm 1knowledge is large
  • then
    • firm 1 sets larger P; firm 2 sets smaller Q
    • firm 1 larger KD; firm 2 smaller KD
    • Larger P to discourage Q and thereby keep firm 2
    • knowledge small; firm 2 reacts to larger P with smaller Q.
    • Firm 1 reaps more benefits from knowledge so KD larger.
    • Firm 2 less absorptive capacity so KD smaller.

www.clemson.edu

slide16

Impact of uncertainty

  • Suppose uncertainty for switching customer’s valuation of firm 2
  • knowledge is large. Then:
    • firm 1 sets larger P for KT
    • firm 2 sets smaller Q
    • KD by firm 1 is not impacted
    • firm 2 pursues smaller KD
    • expected profit of firm 1 (E{1}) is smaller
    • expected profit of firm 2 (E{2}) is smaller

www.clemson.edu

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Contributions

  • Conditions drive each firm’s KT and KD strategies
  • Impact of market specific factors
    • Customer’s expected valuation of knowledge
    • Uncertainty of customer valuation
  • Effectiveness of KT
    • integration capabilities from KT
    • absorptive capacity
    • returns of knowledge purchased
  • Impact of loss in competitive advantage by source firm
  • due to KT with competitor
  • Impact of above on firms decisions to cooperate

www.clemson.edu

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Future Research

  • Price competition in the marketplace
    • : competition intensity in the marketplace
    • pi = fi[customer valuation of firm i, , knowledge level of each firm]
  • Probability of successfully developing new product
  • dependent on knowledge levels
  • Model an additional cooperation mechanism:
    • Two directional KT: Cross-licensing

www.clemson.edu

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