Business Models for Technology-Intensive Supply Chains

Upstream technology and intellectual property plays an increasingly important role in emerging supply chains by endowing products with digital, data-networking, energy-storage and other sought-after capabilities. In such technology-intensive supply chains, intellectual property invented by an upstream firm must be embedded in a manufactured subsystem which is then integrated into a full system sold to end consumers. Upstream technology providers face key business model decisions about how to monetize their innovation and intellectual property that we study in this paper. They typically employ a royalty-driven business model, but the royalty-based approach has gotten complicated in industrial multi-lateral supply chains necessitating formal research attention. We consider these business model decisions in the context of the industry structure of the subsystem and full system markets which may face varying degrees of competition. We characterize the appropriateness of different business model decisions for markets with varying levels of customer diversity and competitive intensity at intermediate layers. Our key results show that a subsystem-based royalty approach is the optimal business model decision when dealing with monopolistic intermediaries. However, it becomes increasingly optimal for the technology provider to adopt a full-system based royalty business model when the intermediate supply chains face competition and the end-market customer diversity increases. Our formulation and results have significant direct relevance to the prevailing heated global discussion on royalty base among technology providers, national policymakers, and industry groups. We also provide actionable managerial insights on product and business model innovation in technology-intensive supply chains