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

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

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

Literature Review

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

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

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

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

Model Development – Performance Firm's Product Performance, Q Q = Q max /(1+e^-a(It+b)) where: Q max = 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

Firm's Profit Firm's profit function in t=0 dollars Π m (I, P, t, D, δ) = ʃ (DP – It)(1-δ) t dt 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

Supplier's Component Performance Q new max = Q max + uI s t Where: Q max = performance of the component being shipped at the moment Q new max = performance of the component if the product were shipped at time t u = related to the effectiveness of supplier spending on NPD I s = supplier investment rate in NPD t = time since last component was launched

Supplier's Profit Function Supplier's NPD costs ʃ I s t(1-δ) t dt Firm's profits under old component Π m (Q max,t start =t,t stop =t horizon +t) Firm's potential profits with new component Π m (Q max +uI s t,t start =0,t stop =t horizon ) Fraction of the profit difference firm will share with supplier Ɵ Supplier's profit function: Π s (I s,t,Q max,t start,t stop,δ) = Ɵ (Π m (Q max +uI s t,t start =0,t stop =t horizon )-Π m (Q max,t start =t,t stop =t horizon +t)- ʃ I s t(1-δ) t dt

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

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

Additional research questions for 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?

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

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

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?