Management Insights

Proprietary component manufacturers (PCMs) are often the sole source for critical ingredients used in assembling many consumer products. For example, Intel is a PCM that provides central processing units to personal computer manufacturers such as Dell and HP. By contrast, Sony may sell Trinitron-based monitors in the end-product market while simultaneously supplying the Trinitron tubes to an original equipment manufacturer (OEM) like Toshiba that competes against Sony to sell monitors to end consumers. Furthermore, a PCM such as Bose may choose not to supply its proprietary components or technology to other OEMs, but instead builds and markets its own products (e.g., speakers) to the end consumers. In these examples, the PCM plays the role of a component supplier, dual distributor, or monopoly producer, respectively. The extent to which the OEM enjoys a capability advantage over the PCM in serving the end consumers, along with the degree of differentiation between the end-products, can determine the PCM’s optimal supply chain role. Xu, Gurnani, and Desiraju offer a couple of valuable insights. First, when a PCM invests in component branding, the preference between a dual distributor and a component supplier structure revolves critically around the impact of the PCM’s investment. Second, when there is uncertainty in consumer valuation of the end-product, the component supplier structure becomes less attractive as the PCM has to commit to a sub-optimal pricing decision prior to the realization of the product potential.