“Sourcing Innovation: Integrated System or Individual Components?” by Mr. Zhi Chen
Mr. Zhi Chen
Ph.D. Candidate in Management (Decision Sciences)
Scholars have developed a sound theory of how to design procurement mechanisms for sourcing simple innovative products. 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 three most critical factors in answering this question: the novelty of the innovation to be sourced, the size of the supplier base, and the extent and distribution of component integration costs.