Uncharted Territory

Based on research by Amit Pazgal, Dinah Cohen-Vernik and Niladri B. Syam

• When upstream suppliers and downstream firms create products together, the result can be better suited for consumer needs.
• Downsteam firms often worry that their innovations may be copied by competitors at a lower price if those competitors work with the same upstream supplier.
• New research shows that in many cases, both upstream and downstream members make higher profits when they co-create.

There’s a special cachet to being an innovator ⁠— but there are also serious costs. Say you’re the owner of a camping supply store, and you’ve come up with a carpet-soft, totally waterproof flooring for tents. Your instinct is to build it together with your favorite tent supplier, a family-run company that makes the best shelters in your store. The problem: They also supply your arch-rival. Do you collaborate, knowing the supplier may sell the luxurious new tents to your nemesis? Or do you leave your idea unused?

Rice Business professor Amit Pazgal joined colleagues Dinah Cohen-Vernik, who conducted her research while at Rice but is currently a professor at the University of Houston Downtown, and Niladri B. Syam of the University of Missouri, to sort out the risks and benefits. In past work about co-creation, researchers focused on the supplier-side of the equation. Cohen-Vernik, Pazgal and Syam’s innovation was to study co-creation from the downstream firm’s point of view, carefully sorting the competitive issues involved.

On its face, it might seem logical to keep your idea off the market rather than share it. What’s the point of your R&D if the competition profits from it? Even worse, they could actually undercut your price, since they didn’t have to sink resources into developing anything.

These concerns are legitimate, Cohen-Vernik, Pazgal and Syam advise. Surprisingly, though, the researchers discovered that in many cases, everyone involved enjoyed higher profits when co-creating together. That’s a striking contrast to situations in which upstream firms design products alone.

Using a variety of models, Cohen-Vernik, Pazgal and Syam first examined a “base case scenario” where one top-level supplier developed a new product and sold it to two downstream resale firms. Next they looked at scenarios in which those downstream firms engaged with the upstream supplier in three different ways: neither firm working with the supplier, both firms working together and also with the supplier and one firm working with the supplier while the other firm simply reaps the benefits of selling the upgraded product.

Through this analysis, the researchers were able to model the effort expended by both the supplier and the downstream firms, as well as product fit and profit. Their conclusion: As with any business decision, a rigorous competitive analysis is critical before leaping into a co-creating project. Above all, if you and your competitor are in an extremely price-sensitive market, co-creating might not do you much good. Your work might indeed give your rival a newly improved product ⁠— at a lower price.

If you’re the supplier, meanwhile, it’s important that the downstream firm approaching you with a plan is only low or moderately price-sensitive. Otherwise, if your collaborator senses its rival gaining on them, your firm could end up doing most of the work in the race to stay ahead. One of the best ways to dodge such surprises, the researchers say, is to limit the number of firms that you co-create with.

So, to share or not to share your discovery for the perfect glamping upgrade? Like for any adventurer, the key is to scan the horizon before setting out. If your idea is unique; your business is not overly price-sensitive; or you’re confident your rival isn’t courting the same supplier, pooling intellectual and economic resources can be lucrative.

Dare to innovate, in other words. Run with the resources that only collaboration can bring. Just check weather conditions ⁠— not only your own, but those of the competition ­before you head for uncharted territory.

Amit Pazgal is Friedkin Chair in Management and Professor of Marketing and Operations Management at Jones Graduate School of Business at Rice University.

To learn more, please see: Cohen-Vernik, D., Pazgal, A. & Syam, N. (2019). Competing with co-created products. International Journal of Research in Marketing, 36(1), 63-82.