Using brand equity to counter outsourcing opportunism: A game theoretic approach
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Using brand equity to counter outsourcing opportunism: A game theoretic approach Wei Shi Lim & Soo-Jiuan Tan
Published online: 24 February 2009 # Springer Science + Business Media, LLC 2009
Abstract Outsourcing has long been touted as an avenue for companies to divest their non-core processes for cost and efficiency gains. However, outsourcing has since become so sophisticated that some companies are even outsourcing core functions such as engineering, marketing, and R&D and as a consequence, could be unknowingly nurturing its outsourcing partners as future competitors. Through formal game theoretic analysis, we show that in addition to learning, outsourcing firms could also make use of brand equity to safeguard themselves from the threat of potential market entry by their outsourcing suppliers when the outsourced component is a core competence, particularly when the rate of learning is at best moderate. In addition, we show that it may be optimal for outsourcing firms to adopt a make-and-buy strategy. Keywords Brand equity . Rate of learning . Core competence . Outsourcing decision . Market entry . Game theory
1 Introduction Recently, it has been found that although outsourcing allows some US manufacturers to achieve short-term gains in returns and cost efficiencies, the long-term cost could be the multinational’s inability to compete against the expanding number of local manufacturers in these markets (Koudal 2005). This long term cost is more real than apparent, considering that “in the 1980s a number of US businesses in many business sectors outsourced to Asian firms who subsequently opened up as competitors,” (Doole and Lowe 2004, p. 156). Goldstar, Samsung, Kia, and Daewoo are examples of Korean companies who managed to build up their product W. S. Lim : S.-J. Tan (*) Marketing Department, NUS Business School, National University of Singapore, BIZ 1 Building #04-19, 1 Business Link, Singapore 117592, Singapore e-mail: [email protected] W. S. Lim e-mail: [email protected]
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leadership in their respective areas through their OEM-supply contracts with Western companies (Prahalad and Hamel 1990). Other examples include Taiwan’s BenQ Corp which used to design and manufacture Motorola’s mobile phones but then ended up selling phones in China under its own brand (Business Week, March 21, 2005), and China’s Lenovo (personal computer), Haier (household appliances), and TCL (television) which have become three of the world’s leading companies in their own industries as a result of their contract manufacturing experience (Arrunada and Vazquez 2006). Hence, effectively in the long run the manufacturer who is practicing outsourcing (hereafter referred to as the buyer) could be unknowingly nurturing its outsourcing partners (hereafter referred to as the suppliers) to compete against itself, particularly so if the outsourced component is a core competency. Thus far, there is no formal research being done to develop a decision framework that considers the opportunistic behavior of the s
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