Industrialization as a key element of sustainable product-service solutions

Product-service systems are seen by many authors to offer potential for significant sustainability benefit. Manufacturing companies are said to be essential to such a change through their influence over product performance and over the use and end-of-life stages. Yet linking these stages such that the producer is incentivized to improve the performance of later stages is still a challenge. This paper argues for placing the producer at the centre of a new arrangement: by seeking to utilize the producer's knowledge of designing and the knowledge of volume production, through creation of platforms, while cooperating closely with other actors. The paper describes three case studies that have used such an approach to design and implement new food production systems. Based on 12 months of action research observations, 10 participating organizations from the cases were studied, and the implemented solutions assessed for environmental, economic and social performance. The results demonstrate a high level of sustainability benefit is achievable using platforms and partners to design product-service systems, while highlighting that changes to production arrangements are necessary but not sufficient to improve whole life-cycle environmental performance of product-service systems, and that producers need to cooperate closely with other actors to achieve the claimed benefits.

Opt-out options in new product co-development partnerships

We study three contractual arrangements—co-development, licensing, and co-development with opt-out options—for the joint development of new products between a small and financially constrained innovator firm and a large technology company, as in the case of a biotech innovator and a major pharma company. We formulate our arguments in the context of a two-stage model, characterized by technical risk and stochastically changing cost and revenue projections. The model captures the main disadvantages of traditional co-development and licensing arrangements: in co-development the small firm runs a risk of running out of capital as future costs rise, while licensing for milestone and royalty (M&R) payments, which eliminates the latter risk, introduces inefficiency, as profitable projects might be abandoned. Counter to intuition we show that the biotech's payoff in a licensing contract is not monotonically increasing in the M&R terms. We also show that an option clause in a co-development contract that gives the small firm the right but not the obligation to opt out of co-development and into a pre-agreed licensing arrangement avoids the problems associated with fully committed co-development or licensing: the probability that the small firm will run out of capital is greatly reduced or completely eliminated and profitable projects are never abandoned.