Inclusive Innovation: Broader Market Coverage for Innovative Products with Deliberate Supply Chain Leadership

Abstract

New technological and product innovations, including some life-saving ones, conventionally traverse a sequentially downward path of gradually lowering costs and prices, which limits their initial availability and affordability to the lower-end of the market. In this paper, we focus on the central question of how to achieve broader market coverage for innovative products, which we refer to as inclusive innovation. We unearth a new innovation investment degree of freedom in a multi-tiered supply chain that offers product development firms the ability to expand market coverage. Through an analytical model grounded in industrial practice, we show that deliberately choosing which firm in a multi-tiered supply chain invests in product quality improvement and acts as a leader by initiating contract offers can have a significant impact on the market coverage of the product. Our model deals with products that have non-linear development and production costs and a product lifecycle that is characterized initially by product innovation being the most dominant effect followed by a period of process innovation. We demonstrate that aligning product innovation investment decision making with price-quantity decision-making leads to greater total supply chain profits and market coverage. In addition, we are able to identify a sequence of deliberate leadership transfers by which contract leadership is shifted upstream during the product innovation phase and shifted back to downstream entities during the process innovation phase so as to maintain highest market coverage during the lifecycle of a product. We go beyond a normative prescription by identifying conditions under which tierwise rational leadership transfers occur and discuss how to align individually rational schedule of leadership transfers with an optimal schedule that results in the highest market coverage. These findings have subtle, but important, implications for firms launching innovative products and aspiring to expand market coverage. Specifically, to obtain broader market coverage for its innovations, innovating firms in a supply chain should finely tune the level of innovation investment, identity of the investor, and contract leadership. These results help to explain the evolution of industries such as automotives and personal computers and also offer opportunities for new industries and firms to expand both market coverage and profits.