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KNOWLEDGE MANAGEMENT FOR NPD: COMPETITION VERSUS JOINT DEVELOPMENT Gülru F. Özkan, Cheryl Gaimon

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

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  1. KNOWLEDGE MANAGEMENT FOR NPD: COMPETITION VERSUS JOINT DEVELOPMENT Gülru F. Özkan, Cheryl Gaimon INFORMS 2009

  2. 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

  3. 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

  4. 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

  5. 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

  6. Mechanisms of Cooperation Competitive Development (CD) www.clemson.edu

  7. Competitive development KT NPD Firm 1 NPD Firm 2 Revenue KD KD Launch new products and compete in the same market www.clemson.edu

  8. 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

  9. Competitive development PK201Q2 K10 K11 K20 K21 PQ K21= K20+PK201Q2 K11= K10 www.clemson.edu

  10. Competitive development K11 K12 K21 K22 1K111 2K212 K12= K11+K1111 K22= K21+K2122 www.clemson.edu

  11. 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

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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

  17. 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

  18. 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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