Managing Technology Uncertainty Under Multi-Firm New Product Development

Abstract

The growing sophistication of component technologies and the rising costs of product development require firms to collaborate in the development of new products by pooling their resources and entering into resource or cost-sharing arrangements. However, the management of new product development that occurs jointly between a technology supplier and its industrial customer presents a new set of challenges. While such vertical collaboration enables each firm to focus on what it does best and achieve certain economies of specialization, it also introduces new issues associated with the alignment of decisions and incentives that have to be managed alongside conventional performance and timing uncertainties of new product development. In this paper, we conceptualize and formulate the co-development of products involving two firms and examine the implications of two collaboration mechanisms found in industrial practice. We term these approaches which involve sharing of the development cost and sharing of the development work, investment sharing and innovation sharing, and find that they have subtle effects on the degree of product innovation and profits of individual firms, depending on the nature and extent of technological uncertainty, product development cost structure, and complementary relationships with other products. We consider both exogenous and endogenous technology uncertainty, and study the impact of investment and innovation sharing on a firm's technology consideration set, product qualities, and profits. Conditions under which firms should consider one mechanism over the other and over single firm product development are proposed. Our analysis shows that, while investment sharing plays an important role in environments with higher levels of technology uncertainty, innovation sharing can result in greater quality improvements and profits if firms are able to manage the distributed product development process more efficiently. We translate our analytical findings into a managerial framework and illustrate it with examples from the industry.