KNOWLEDGE MANAGEMENT FOR NPD:

COMPETITION VERSUS JOINT

DEVELOPMENT

Gülru F. Özkan, Cheryl Gaimon

INFORMS 2009

Knowledge Management and New Product Development

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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

Focus: Strategic Level KM for NPD

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• 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.

Related Literature

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• 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)

Research Questions

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• 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?

Mechanisms of Cooperation

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Competitive Development (CD)

Competitive development

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NPD Firm 1NPD

Firm 1

Launch new products andcompete in the same market

NPD Firm 2NPD

Firm 2

KT

Revenue

KDKD

Expected Profit Consists of:

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• 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

Competitive development

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K10K10 K20

K20

PK201Q2

PQ

K11K11 K21

K21

K11= K10K21= K20+PK20

1Q2

Competitive development

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K11K11 K21

K21

1K111 2K21

2

K12K12 K22

K22

K12= K11+K1111 K22= K21+K21

22

Competitive development

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K12K12 K22

K22

E{1} = 1v1K12

+ 12w1P(K12-K22)

+ 1(1-2)z1K12

+ PQ - m1Q - c112

E{2} = 2v2K22

+ 12w2P(K22-K12)

+ 2(1-1)z2K22

- PQ - c222

Insights - CD mechanism (selected results)

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• KD for firm i is larger if: • firm i’s probability of successfully developing a new product is large• firm i's loyal 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

Interaction between P & Q (selected results)

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

• If customer 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...

Insights - CD mechanism

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If returns to firm 2 for Q is large firm 1 sets smaller P and 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.

Insights - CD mechanism

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• If switching customers’ valuation of firm 1 knowledge 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.

Impact of uncertainty

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• 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

Contributions

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• 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

Future Research

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• 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