Modeling Co-Evolution between One Branding Company and One Contract Manufacturer

Collaboration is usually considered the only relationship between contract manufacturers and brand companies. Actually, they have other relationships of competition and co-evolution. Consider the Notebook industry. Contract manufacturers are responsible for R&D, manufacture, assembly and transport the computers, while the branding companies are responsible for marketing, sales and after sales service. The current literature mostly describes the co-evolution between contract manufacturers and brand companies by qualitative models. There lack models for quantitative analysis and project of capability co-evolution. This study is to identify the factors that induce the capability evolution and situations that would induce the evolution, perform analysis and construct a qualitative capability co-evolution model between one contract manufacturer and one brand company.
This thesis is focused on modeling the capability co-evolution relationship between one contract manufacturer and one brand company. Based on Tsai’s capability migration model in 2005, Fine’s double helix cycle model that describes production forms change by capability migration within the industry in 1998, Jacobides’ capability transformation in 2004 and mathematical model in 2005, we construct co-evolution model There are two parts in this study: 1. decision model of vertical scope and 2. capability co-evolution model.
In decision model of vertical scope, both of them face the end user market and intermediate market of purchase negotiation mechanism. They have respective transaction cost to decide to outsource or product by itself. Under the limits of manufacture, marketing, capacity and outsourcing factors, we construct the game model of maximum profit which determinates the vertical scope of buying or selling intermediate and final products. The important captured features include:
(1) Different market demand of final customers. They own different market demands that have the error term for not surely understanding the market. The variance of error term of branding company is lower because it has much information.
(2) Intermediate market of purchase negotiation mechanism. They have respective selling or buying prices and quantities. By the interacting negotiation process continuously, they will reach the equilibrium prices and quantities for transaction.
(3) Respective and objective transaction cost. Transaction cost could directly affect
the decisions of outsource or producing by itself. The different and unknown parameters within both objective functions could directly affect these decisions.
(4) Manufacture capability and marketing capability. Marketing capability has the
effect of decreasing marginal utility. The more are marketing investments, the less rise of final production price would be. The relationship between marketing cost and final production price could be modeled as an exponential distribution.
In the following, we take the profit that was decided by objective function in the decision model of vertical scope as the input of capability co-evolution model. We transform the profit into future investments of capacity expansion, original and new technologies. The model integrates the capacity and investments to influence the future capability distribution. Finally, we finish the co-evolution model between one contract manufacturer and one brand company. The important properties include:
(1) Investment revenues are from expansion, shrink and investments of original manufacture, marketing and new technology. The revenues are the added items in the objective function. The effects of expansion, shrink and investment are decided by the coefficients. If the coefficient is less than 0, it means the revenue as a loss.
(2) Investments include expansion and capability of original manufacture, marketing and new technology. The investments are the subtracted items in the objective function. Only the expansion costs have the coefficient. If the coefficient is higher, it means that expanding some capability would result in more potential loss.
(3) There is the new technology factor by investing in new technology. If new technology happens, the factor will be 1 and the the revenue of new technology arise. Otherwise, If there is no capacity of new technology, the factor would be 0.
(4) Capability development process shows the capabilities of manufacture, marketing and new technology in the next period. Capabilities of manufacture and marketing in the next period are related to original capabilities, efficiency of investing capabilities and investing amounts. The capabilities would be cumulated continuously. But capability of new technology in the next period is only related to efficiency of investing capabilities and investing amounts because of no cumulated capability.
The contributions of the thesis are:
1. We provide the factors which could affect the co-opetition among the firms who might make use of their own capabilities to maintain their competitive advantages.
2. We construct the game model of maximum profit which determinates the vertical scopes between one contract manufacturer and one brand company.
3. We propose the dynamic concept to describe the relationship between the profit and investment. Investments show how to transform the profit into capacity expansion and shrink, original and new technology to react to the general phenomenon.
4. In addition of original capabilities, the firm could get new technology by innovation. Not only considering evaluating transaction cost, the innovation of new technology can also affect the interaction within the industry.
5. We expect this mathematical model also could be applied to other industries for predicting the future capability co-evolution.
6. We propose a mathematical model to illustrate the co-evolution model. It could be as a fundamental structure for quantitative analysis and design of capability migration.