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The Pitfalls of Subsystem Integration: When Less is More

Forthcoming in Management Science

45 Pages Posted: 16 Apr 2009 Last revised: 29 Oct 2015

Sanjiv Erat

University of California, San Diego (UCSD) - Rady School of Management

Stelios Kavadias

University of Cambridge - Judge Business School

Cheryl Gaimon

Georgia Institute of Technology - Operations Management Area; Georgia Institute of Technology - Scheller College of Business

Date Written: May 8, 2012

Abstract

In various industries end-product manufacturers acquire core subsystems from upstream technology provider firms, and focus primarily on efficient end-product integration.We examine the strategic interactions between a technology firm that introduces a new subsystem, and the respective end-product manufacturers (’integrators’). We analyze how the fraction of end-product functionalities pre-packaged into the subsystem impacts the optimal introduction strategy and the relative value appropriation power across the industries. Offering a subsystem that performs many end-product functions has a dual effect on the provider’s profits. On the positive side, the provider extracts a higher ease-of-use rent from the integrators because of the easier/cheaper integration. On the negative side, such subsystems may curtail the adopters’ ability for competitive differentiation, and render adoption less valuable. We discuss the role of subsystem functionality in value appropriation in technology markets, and we highlight the perils of subsystem over-integration.

Suggested Citation

Erat, Sanjiv and Kavadias, Stelios and Gaimon, Cheryl, The Pitfalls of Subsystem Integration: When Less is More (May 8, 2012). Forthcoming in Management Science. Available at SSRN: https://ssrn.com/abstract=1381624 or http://dx.doi.org/10.2139/ssrn.1381624

Sanjiv Erat (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

HOME PAGE: http://www.rady.ucsd.edu/faculty/directory/erat/

Stylianos Kavadias

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, Cambridgeshire CB2 1AG
United Kingdom

HOME PAGE: http://www.jbs.cam.ac.uk/research/kavadiass.html

Cheryl Gaimon

Georgia Institute of Technology - Operations Management Area ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-4934 (Phone)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

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