Strategic incentives for complementary producers to innovate for efficiency and support sustainability

Process innovation that increases operational efficiency through a step change improvement in resource utilisation and waste reduction can help boost manufacturing profitability but also offer broader social and environmental benefits. Business owners, though, might be reluctant to make investments in process innovation unless they serve a pure profit motive. While not guided by altruistic intentions, the owners might nonetheless see a strategic benefit in providing their managers with remuneration incentives supported by public commitments to increase innovation effort for more efficient, lean and sustainable operations. We model such a possibility amongst producers controlling the supply of essential complementary components that go into the assembly of competitively produced composite finished goods. We demonstrate the ruinous effect of independent strategic delegation to managers of powerful complementary producers. Instead, collaboration amongst the owners of the complementary producers to establish common managerial incentives can increase innovative effort to raise efficiency that benefits the whole industry supply chain, end consumers, and social welfare. Government-backed voluntary agreements with sector-wide commitments may be helpful in encouraging process innovation to support lean supply chains and sustainability.