Turning Waste into By-Product

44 Pages Posted: 5 Feb 2009 Last revised: 22 Feb 2015

Deishin Lee

Boston College

Date Written: July 29, 2011

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 which incorporates the impact of the optimal operating and licensing strategies.

Keywords: Waste, by-product, environment, disposal cost, operations, competition

Suggested Citation

Lee, Deishin, Turning Waste into By-Product (July 29, 2011). Harvard Business School Technology & Operations Mgt. Unit Working Paper No. 07-098. Available at SSRN: https://ssrn.com/abstract=1337751 or http://dx.doi.org/10.2139/ssrn.1337751

Deishin Lee (Contact Author)

Boston College ( email )

140 Commonwealth Avenue
Fulton 344
Chestnut Hill, MA 02467
United States

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