Chapter 4 - Economic models of product family design and development

Abstract

Firms in many industries are experiencing the need to offer increasing levels of product variety. While the length of the product lifecycle during which profits can be earned is becoming shorter due to intense competition and rapid technological advances, the cost of developing and offering products has been rising sharply due to the increasing technological complexity of products. As a consequence of these trends, the ability to share design elements and development resources across products has become important for such firms to reduce costs and to benefit from product variety (Macduffie et al., 1996; Fisher, Ramdas, and Ulrich, 1999). In their quest to manage the complexity and costs of product variety whileensuring high levels of product performance, some firms have begun exploring the use of a product family-based approach to development (Sanderson and Uzumeri, 1996). In this approach, a firm meets the market need for variety through a family of externally differentiated but internally closely related products. Figure 4.1, from Gupta and Krishnan (1999), illustrates how such an approach differs from a ‘conventional’ product development process in which individual product variants are developed independently (Pahl and Beitz, 1988). Two key factors differentiate product family development from the conventional individual product-based approach. First, the optimal product line offerings, or number of products and their locations on an attribute space, are decided by integrating marketing, design, manufacturing, and distribution considerations (Dobson and Kalish, 1988; Krishnan, Singh and Tirupati, 1999; Moore et al., 1999). We call this product family-based design. Second, the products in a family are developed in an integrated manner as much as possible before detailed differences necessitate a more dedicated effort (Gupta and Krishnan, 1999). Integrated product family-based development involves joint decision-making about components and suppliers of a product family, leadingto the development of subsystems and vendors common to all the products in the family, thereby maximizing the profits from the product family. When a firm faces a market of heterogeneous customers, it is useful to offera Product Line that meets individual preferences and functional requirements of different customers. To maximize its profits (especially minimize cost of development, production, and distribution), the set of offerings in the line must be limited in the number and the degree to which they are different from each other. A major source of complexity faced by firms offering product lines is the proliferation of components and component suppliers, which leads to higher product development costs and overhead burden. General Motors Corporation, for instance, carried 131 different rear-axle components in its pickup truck division, while the variety of pickup trucks that reached the consumer was much lower (Fonte, 1994). The classical economic models of product line design do not model thecosts of products or the inter-relationships among the products in a line adequately. These inter-relationships are often operationally manifested in the sharing of component subsystems resulting in economies of scale and scope that different products in a firm’s line might enjoy. The automotive industry popularized the notion of product platforms, which are component and subsystem assets shared across different products. Robertson and Ulrich (1998) define platforms in general as intellectual and material assets shared across a family of product. Figure 4.2 provides a schematic conceptualization of such a platform-based product family. Product family-based development helps address these component and supplier proliferation driven complexity and costs resulting from product line design occasionally by common platforms. Platform-based approach offers a number of benefits. First, their ‘design-once-deploy-throughout the product family’ effect can potentially reduce the fixed cost of developing individual product variants. Second, the platform’s greater degree of reuse often encourages firms to invest more time and effort in their design and development, which results in better architecture, tighter integration of components, and lower unit variable cost. Because a platform is common to many products in a line, the shared subsystems may enjoy lower variable costs due to higher volume usage. Platforms may also enhance responsiveness of firms, as the product variants can be developed quickly once time has been invested in architecting and developing the platform. Though the idea of platform-based design and development is alluringfrom the perspective of minimizing costs and time, managers typically face challenges in this approach. First, the fixed cost and time of developing platforms can be enormous. Second, sharing a platform across a family with both high-and low-end products may make the products appear similar or lead to the usage of higher functionality and priced components in low-end products.