The developer’s sourcing strategy in the presence of a competing manufacturer and consumers’ two-dimensional differentiated preferences

Integrating a technology platform into a hardware device creates a new platform hardware business model. This study presents a model for the exploration of the technology platform developer’s sourcing strategy and the response of a competing manufacturer who produces hardware devices when facing consumers’ differentiated preferences for the product across two dimensions: the hardware device and the operating system (OS, a typical technology platform). The developer possesses three types of sourcing strategies: producing in-house, outsourcing to a competing manufacturer (CM), and outsourcing to a non-competing manufacturer (NM). We find that the level of OS quality plays a critical role for the developer in determining which sourcing strategy to choose. Specifically, the developer chooses to produce in-house when the OS quality is high and outsource to the NM when this quality is low. The prerequisite for outsourcing to the CM is moderate OS quality and low preference differences between the devices. The CM cannot benefit from outsourcing to the NM, but may benefit from the developer’s in-house production, which is dependent on the OS quality. The Pareto zone occurs only when the developer outsources to the CM for a moderate OS quality. For an endogenous OS quality, it is never optimal for the developer to outsource to the CM when consumers have a moderate differential preference for the device. Interestingly, the developer’s in-house production may bring a higher profit for the CM when consumers’ differential preference for OS quality is low and the unit production cost is high. A low unit production cost is a prerequisite for the two parties achieving a win–win situation. Several extensions further strengthen the robustness of the basic model. Finally, we discuss the implications of the sourcing strategies for managers.