Sourcing Innovation: Integrated System or Individual Components?

33 Pages Posted: 21 Sep 2018 Last revised: 3 Oct 2018

See all articles by Zhi Chen

Zhi Chen

INSEAD

Jurgen Mihm

INSEAD

Jochen Schlapp

Frankfurt School of Finance & Management gemeinn├╝tzige GmbH

Date Written: September 21, 2018

Abstract

Scholars have developed a sound theory of how to design procurement mechanisms for sourcing a simple innovative product. In practice, however, many (if not most) procurement efforts involve complex products consisting of multiple interacting components. Yet theory offers few guidelines regarding the design of procurement efforts for such complex innovations despite an abundance of pertinent questions. Of these, perhaps the most crucial is whether a firm procuring a complex innovation should purchase (a) an integral product from a single supplier or rather (b) the product's constituent components from (possibly) different suppliers. We use a game-theoretic model to identify the two most critical factors for answering this question: the extent of the required innovation and the size of the supplier base. We also characterize favorable designs of procurement contests that aim to source (respectively) a full product or individual components.

Keywords: Innovation Contest, Procurement, Tournament, Product Component, Modular System

Suggested Citation

Chen, Zhi and Mihm, Jurgen and Schlapp, Jochen, Sourcing Innovation: Integrated System or Individual Components? (September 21, 2018). INSEAD Working Paper No. 2018/40/TOM. Available at SSRN: https://ssrn.com/abstract=3252967 or http://dx.doi.org/10.2139/ssrn.3252967

Zhi Chen

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Jurgen Mihm (Contact Author)

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Jochen Schlapp

Frankfurt School of Finance & Management gemeinn├╝tzige GmbH ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

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