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Mrinal Ghosh
  Mrinal Ghosh

When Should Vendors Take Control While Customizing Industrial Equipment?

2/16/2006 --

Making a strategic decision about who should control the customization of engineered products can work to the benefit of industrial suppliers and their customers.

ANN ARBOR, Mich.—Industrial-systems suppliers and their customers can mutually benefit by selectively working out the appropriate level of control a vendor has over the customization decisions for complex engineered products, rather than taking a hands-off approach and letting the customer choose under all circumstances, according to a Ross School study.

The study, forthcoming in the Journal of Marketing Research, suggests that decisions on customization control in business-to-business markets are largely influenced by technology and knowledge considerations.

"Our findings show that contracting parties choose the level of vendor control over customization in a strategic and discriminating fashion to enhance the benefits from customization for both parties," said Mrinal Ghosh, assistant professor of marketing at the University of Michigan's Stephen M. Ross School of Business.

Ghosh and colleagues Shantanu Dutta of the University of Southern California and Stefan Stremersch of Erasmus University in the Netherlands, developed a conceptual model to examine how two technology-related factors, modularity and technological unpredictability, and two knowledge-related factors, customer knowledge and vendor's customer knowledge mobilization resources, differentially influence the ease with which a vendor or buyer can customize the product and how that in turn affects the customization-control decision.

They tested their theories by analyzing survey data on 304 procurement contracts from vendors of custom-engineered products in four industry sectors and explored the effects of customization-control decisions on three measures of performance: the fit of the delivered product with customer needs, the delivery performance of the supplier, and the operating profit the vendor derives from that specific customer relationship.

In the study, modularity refers to the degree of product standardization and interchangeability of components; technological unpredictability concerns the inability to accurately predict the technological evolution in the focal product category; customer knowledge is the degree of expertise, experience, training and competence of a buying organization in a focal product category; and vendor's customer knowledge mobilization resources encompass the procedures and structures a supplier has put in place to absorb customer knowledge and generate customized solutions.

In their findings, Ghosh, Dutta and Stremersch suggest that vendors should take more customization control with increasing technological unpredictability and decreasing modularity and customer knowledge.

"Suppliers operating in highly unpredictable technological environments, where different, incompatible standards exist and customers are relatively inexperienced, should aim for higher customization control," Ghosh said.

The degree of control a vendor takes, however, depends on the extent of its own customer knowledge mobilization resources.

"When dealing with knowledgeable customers, highly resourced vendors can provide value by having more control over the customization decision because they are better able to assess and deliver solutions that meet customer needs," Ghosh said. "The 'absorptive capacity' of the exchange can be high for both contracting parties, and this increases the ease with which the vendor can design customized solutions."

When product modularity is low, thus limiting component interchangeability, highly resourced vendors can reduce uncertainty by identifying best-of-class components that are a better match for customer needs. They also can use their supply-side couplings to develop appropriate components. When product modularity is high, rather than becoming proactively involved in product design, highly resourced vendors can focus on setting up back-office operations, such as identifying the most desired components, developing links with component suppliers to ensure timely deliveries, and setting up a customer-side interface to enable buyers to mix and match their preferred product configurations.

The researchers also found that relationships where the level of customization control is generally consistent with their conceptual model also are high-performing relationships.

"Companies that take these recommendations to heart will not only find a better match with customer needs and increase their delivery performance, but they also will increase their overall performance," Ghosh said.

Written by Claudia Capos

For more information, contact:
Bernie DeGroat
Phone: (734) 936-1015 or 647-1847