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Turning Waste into By-Product

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  • Deishin Lee

    (Harvard Business School, Harvard University, Boston, Massachusetts 02163)

Abstract

This paper studies how a firm can create and capture value by converting a waste stream into a useful and saleable by-product (i.e., implementing by-product synergy (BPS)). We show that BPS creates an operational synergy between two products that are jointly produced. In essence, BPS is a process innovation that reduces the marginal cost of the original product and/or the by-product. The firm creates value through this process innovation and can capture this value by capturing newly created market opportunities, taking market share from competitors, or licensing the innovation to its competitors. We determine the optimal operating and licensing strategies for the firm and find market conditions under which the firm would benefit most from implementing BPS. We show that the optimal operating and licensing strategies are driven by the size of the cost reduction enabled by the BPS process innovation. We also show that leveraging the synergies between the original product and by-product can lead to counterintuitive profit-maximizing operating strategies such as increasing the amount of waste generated, and strategically increasing the quantity of original product above the business as usual production volume. We present a framework for assessing the environmental impact of BPS that incorporates the impact of the optimal operating and licensing strategies.

Suggested Citation

  • Deishin Lee, 2012. "Turning Waste into By-Product," Manufacturing & Service Operations Management, INFORMS, vol. 14(1), pages 115-127, January.
    • Handle: RePEc:inm:ormsom:v:14:y:2012:i:1:p:115-127
    DOI: 10.1287/msom.1110.0352
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    References listed on IDEAS

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