Strategic Analysis of Dual Sourcing and Dual Channel with an Unreliable Alternative Supplier

Abstract

In today's increasingly interconnected world, co‐opetition has emerged as a new business practice among many high‐tech firms. The boundaries between cooperation and competition becomes vague, and rivals engage in collaborative activities. This study develops an analytical model to investigate the dual sourcing decision of the original equipment manufacturer (OEM) in the presence of a competitive supplier (i.e., frenemy) as well as a non‐competitive supplier who nevertheless suffers from unreliable production yield. We study the competitive supplier's dual channel decision if it prefers operating both component‐selling business and self‐branded business, and find that the OEM always prefers supplier diversification even though the additional non‐competitive supplier is unreliable. Interestingly, our results reveal that the non‐competitive supplier's expected profit is unimodal in its production technology level, which suggests the non‐competitive supplier may not have incentive to improve its production technology once it reaches a threshold. Furthermore, we analyze the credibility of the competitive supplier's threat to terminate the supply of the components to OEM as a response of OEM's engagement of a new supplier. We show that this termination of component‐selling business by competitive supplier is a non‐credible threat to prevent OEM from seeking the alternative supplier.