Executive Summary
Industrial-systems suppliers are often called on to offer customized solutions for individual customers. Observations of industry practices regarding customization show radically different approaches. Some firms take a “hands-off” approach and allow customers to self-select their desired product, whereas other firms are proactively involved in designing custom solutions to individual customer needs. In this article, the authors develop a conceptual model to show how the appropriate level of vendor control over the customization decision is a function of the product’s technological attributes and the knowledge/resource possessed by the vendor and the customer. The research shows that vendors and customers can both benefit by selectively working out the appropriate level of control a vendor (versus the customer) has over the customization decisions for complex engineered products rather than taking a hands-off approach and allowing the customer to choose in all circumstances.
The conceptual model examines 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. Modularity refers to the degree of product standardization and interchangeability of components. Technological unpredictability pertains to the inability to accuratelypredict the technological evolution in the focal product category. Customer knowledge is the degree of expertise, experience, training, and competence of the buying organization in a focal product category. A vendor’s customer knowledge mobilization resources encompass the procedures and structures a supplier has put into place to absorb customer knowledge and generate customized solutions.
The authors test the model by analyzing data on 304 procurement contracts from vendors of custom-engineered products in four industry sectors. Furthermore, the authors explore 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. They find that relationships in which the level of customization control is consistent with their conceptual model are also high-performing relationships in terms of finding a better match with customer needs, improving the vendor’s delivery performance, and improving the vendor’s profitability.
The authors 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, in which different, incompatible standards exist and customers are relatively inexperienced, should aim for higher customization control. However, the appropriate degree of vendor control also depends on the extent of the vendor’s 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. 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.
Biography
Mrinal Ghosh is Assistant Professor of Marketing in the Stephen M. Ross School of Business at the University of Michigan. His research interests are in business-to-business marketing, high-technology marketing, distribution channels, and sales force management. His work has appeared in journals, such as Journal of Marketing, Journal of Marketing Research, Marketing Science, Review of Industrial Organization, and Applied Economic Letters.
Shantanu Dutta is David and Jeanne Tappan Professor of Marketing in the Marshall School of Business at the University of Southern California. He has done extensive research on strategic marketing issues. Before joining the Marshall School of Business, he was on the faculty at the University of Chicago. He was also a visiting professor at London Business School. He has published extensively in leading marketing, economics, law, and strategy journals, such as Journal of Marketing; Journal of Marketing Research; Marketing Science; Management Science; Journal of Law and Economics; Journal of Law, Economics, and Organization; Quarterly Journal of Economics; Review of Economics and Statistics; Strategic Management Journal; and Sloan Management Review; among others. He is in the editorial board of Journal of Marketing Research, Marketing Science, and Marketing Letters. His work has also been a finalist for best-paper award in the Journal of Marketing Research in 1996 and the O’Dell Award for the long-term impact in Marketing in 2001. His work has also been a finalist for the best-paper award at the Marketing Science Community (John Little Award 1999). He ahs been interviewed and his research has been cited in Financial Times and The Economist. Some of the companies he has worked for are BP Amoco, Abbott Laboratory, Motorola, Distribution Economics Institute of Japan, 3M, Marks & Spencer, Nokia, and Vodafone, among others.
Stefan Stremersch is Professor of Marketing in the School of Economics at Erasmus University Rotterdam and Visiting Associate Professor of Marketing at Goizueta Business School, Emory University. His current research interest is in marketing high-tech products, innovation, and new product growth. His work has appeared in journals such as International Journal of Research in Marketing, Journal of Marketing, Journal of Marketing Research, and Marketing Science. He has won several awards for his research, such as the Harold H. Maynard Best Paper Award of the Journal of Marketing (2002) and the 2004 J.C. Ruigrok Prize for the most productive young researcher in the social sciences in the Netherlands (this award is given only once in every four years to an economist). He also won several awards at Erasmus for teaching excellence (2004) and research productivity, both at the school level and at the university level (2003, 2004, and 2005). He is on the editorial board of several journals.
J Marketing Research, Volume 43, Number 4, November 2006
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