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Ingredient Branding Strategies in an Assembly Supply Chain:

Models and Analysis

Juan Zhang, Qinglong Gou, Liang Liang

School of Management, University of Science & Technology of China,

Hefei, Anhui, 230026, P.R.China

hgdzhang@mail.ustc.edu.cn, tslg@ustc.edu.cn, lliang@ustc.edu.cn

Xiuli He

Belk College of Business, University of North Carolina at Charlotte,

Charlotte, NC 28223-0001

xhe8@uncc.edu

mailto:xhe8@uncc.edu

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Abstract

We consider a supply chain in which an original equipment manufacturer (OEM)

procures a key component from a supplier. We consider an ingredient branding strategy under

which the supplier and the OEM form a brand alliance. Specifically, the supplier invests in

ingredient branding to build up her goodwill and additionally she shares a portion of the

OEM’s advertising cost through a cooperative advertising program. Under a differential game

framework, we obtain the equilibrium advertising efforts of the supplier and OEM, and the

supplier’s equilibrium subsidy rate for the cooperative advertising program. We further

extend the model to the case in which the OEM procures two complementary components

from two suppliers. We consider three different scenarios of supplier interaction, i.e., the

suppliers are (I) independent, (II) allied and keep two brands, and (III) allied and keep one

brand. We demonstrate how the different interactions between suppliers affect the channel

members’ advertising efforts, goodwill levels, and their profits.

Keywords: Ingredient Branding, Cooperative advertising, Goodwill, Differential game

models

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1. Introduction

Owing to the Intel’s huge success in its “Intel Inside” program, Ingredient Branding, as a

special brand alliance form which emphasizes on identification of components in the final

product, is picking up in popularity in recent years. According to Kotler and Pfoetsh (2010),

Ingredient Branding is the brand policy concerning a branded object of materials,

components, or parts (raw materials, component materials, or component parts) that

represents a brand for the respective target group. Besides Intel, a number of companies from

different industries have successfully used Ingredient Branding strategy. Examples include

DuPont, Dolby Laboratories, Tetra Pak, Microban and so on.

According to the motivation behind it, Ingredient Branding can be manufacturer- initiated

or supplier-initiated one (Norris, 1992). In manufacturer-initiated Ingredient Branding, the

Original Equipment Manufacturer (OEM) usually chooses an existing ingredient brand with

strong brand awareness and promotes the fact that this ingredient is part of his final products.

Supplier-initiated Ingredient Branding occurs when a component supplier promotes her

ingredient to final users in efforts to build up brand awareness.

Combing the two kinds of Ingredient Branding together, Luczak et al. (2007) proposed a

new concept of InBranding, which is shown in Figure 1. To create the brand awareness of her

ingredient brand, the ingredient/component supplier forms an alliance with an OEM in a

supply chain framework. Under the alliance, the component supplier leaps the OEM and

communicates to final users directly (supplier-initiated Ingredient Branding), whereas the

OEM labels the ingredient brand logos in his final products, trying to persuade final users that

his products have certain positive attributes which are related to this ingredient brand

(manufacturer-initiated Ingredient Branding).

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Figure 1. InBranding framwork

InBranding strategy could create a win-win situation (Luczak et al., 2007). For the

component suppliers, such a strategy enables them to communicate their product offerings

and performance directly to end consumers and hence increase their brand equity.

Accordingly, the component suppliers gain greater bargaining power as the brand awareness

of suppliers will result in the consumers’ request or pulling the ingredient brands from the

OEMs. Furthermore, the good brand image built in consumers makes the component

suppliers escape the anonymity and substitutability of supplying a part or component by

competitors easily. For the downstream OEMs, incorporating a reliable supplier’s component

may enhance the image of their end products and increase demand due to the superior

performance of a key component.

Doyle (1989) argues that advertising is central to the process by informing consumers of

inherent product benefits and positioning the brand in the mind of the consumer. Our model

focuses on advertising decisions for InBranding and tries to answer the following questions:

Ingredient

Supplier

OEM

Final user

Cooperative

advertising program

Manufacturer-Initiated

Ingredient Branding

Advertising efforts

Demand Supply

Supply Demand

Supplier-Initiated

Ingredient Branding

Advertising efforts

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(i) When a component supplier implements her InBranding strategy, what are her optimal

advertising efforts directly to final users? (ii) What are the OEM’s optimal advertising

efforts?

Furthermore, noting that Intel has launched one of the largest cooperative advertising

program in the world to stimulate computer OEMs to label the “Intel Inside” logos in their

computers for its InBranding strategy, we also incorporate cooperative advertising decisions

in our model, trying to illustrate: (iii) Whether and under what condition should a component

supplier offer a cooperative advertising program to her OEM when she implements an

InBranding strategy? (iv) And if so, what is the supplier’s optimal subsidy rate under a

cooperative advertising program?

To answer the above questions, we consider a supply chain in which an OEM procures a

key component from a supplier. To implement the InBranding strategy, the supplier not only

builds up her goodwill through advertising, which is just the same as the OEM, but also

shares a portion of the OEM’s advertising cost via a cooperative advertising program. Noting

that building a brand is a long-term process and must be regarded as an investment in the

future (Meenaghan, 1995), we model the impact of advertising efforts on the goodwill of the

two channel members in a Nerlove-Arrow framework. Specifically, the goodwill of the OEM

depends on his own advertising and the supplier’s goodwill level whereas the supplier’s

goodwill depends on her own ingredient branding efforts and the OEM’s advertising efforts.

The sales of the final products are expressed as a function of the OEM’s advertising efforts

and goodwill. Under a Stackelberg-Nash game framework, we calculate out the equilibrium

advertising efforts of the supplier and OEM, as well as the supplier’s optimal subsidy rate for

her cooperative advertising program.

Main findings include the following. First, the component supplier shares the OEM’s

advertising cost only when her profit margin exceeds a threshold. Second, the supplier will

not advertise directly to final users if the OEM does not label her component brand logos in

his final products. Third, the supplier’s decisions on her own advertising efforts and subsidy

rate of the cooperative advertising program can be made separately. That is to say, the

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supplier’s optimal subsidy rate of the cooperative advertising program does not depend on

whether the supplier implements an supplier-initiated Ingredient Branding strategy (i.e., the

supplier advertises directly to the final users), it is just influenced by the relative magnitude

of the OEM’s and the supplier’s profit margins.

In practice, there are usually multiple component suppliers for OEMs and the marginal

profit threshold plays a key role when a firm decides whether to offer a cooperative

advertising program to its partner (Huang and Li, 2001; Jørgensen et al., 2000; 2001; Li et al.,

2002). We extend our model to the case in which the OEM procures two complementary

components from two suppliers in three different scenarios in which the suppliers are (I)

independent, (II) allied and keep two brands, and (III) allied and keep one brand. We attempt

to address the following questions: How does a complementary component supplier affect a

supplier’s ingredient branding strategy? Whether the two suppliers should cooperatively offer

a cooperative advertising program when they implement ingredient branding strategies?

Analysis of the extended models result in the following findings: (i) Whether or not a

supplier should offer the OEM a cooperative advertising program depends on the supplier’s

own profit margin and not on the other supplier’s profit margin; (ii) Suppliers will share a

part of the OEM’s advertising costs when their profit margins exceed a threshold level; (iii) If

both share the OEM’s co