Customizing Complex Products: When Should the Vendor Take Control?

Casual observation suggests that firms use contrasting practices and procedures when offering customized products to individual customers. Some firms take a “hands-off” approach and let customers self-select their desired product. In contrast, other firms are proactively involved in designing customized solutions to individual customer needs. The authors call the former “low vendor customization control” and the latter “high vendor customization control.” Despite the strategic importance of customization, no research has shed light on the rationale for using these contrasting approaches to customization and their normative consequences. The authors develop a conceptual model that contends that the appropriate level of vendor control over the customization decision is a function of technology and knowledge considerations. They use data on 304 procurement arrangements for customized products to test their hypotheses and to explore the normative ramifications for three key measures of performance: closeness of the delivered product to customer needs, delivery performance, and the vendor's operating profits. The results show that contracting parties choose the level of vendor control over customization in a strategic and discriminating way to enhance the benefits from customization for both parties. The authors discuss implications for both theory and practice.