When Worse Is Better: Strategic Choice of Vendors with Differentiated Capabilities in a Complex Co-Creation Environment

Abstract

The increasing complexity of consulting, research and development, and information technology projects has resulted in close collaboration between clients and vendors, who co-create value through co-design and co-production. In such co-creation environments, the output is contingent on the positive efforts exerted by all parties involved. These collaborative settings often involve a client engaging with more than one vendor. However, existing research on collaborative value co-creation has mainly focused on the one-vendor scenario, while research on multi-vendor sourcing has rarely considered value co-creation. We study a scenario involving a client and two vendors, examining the trade-offs that arise in the strategic interactions among the three firms. We derive novel and interesting insights about how these interactions differ from those under one-vendor co-creation, and from those under traditional multi-vendor sourcing. Specifically, we determine the conditions under which the client prefers the two-vendor arrangement over one-vendor co-creation, and the effects of such a preference on the primary vendor. Several counter-intuitive results emerge from our model: The client can sometimes be better off by adding a new vendor less efficient than the primary one, and the primary vendor becoming more expensive can sometimes make the client less inclined to add the new vendor. We also show that the collaborative nature of the interaction results in the primary vendor benefiting from the addition of a new vendor whenever it is beneficial for the client to add this vendor. The conceptual and managerial insights drawn from our research contribute to a better theoretical and practical understanding of strategic decision-making by firms in multi-vendor co-creation environments that are increasingly prevalent.

Keywords: collaboration, co-production, co-creation, multiple vendors, game theory, analytical modeling