Product Line Design with Component Commonality and Cost-Reduction Effort

Abstract

Market pressure for low prices paired with customer demand for high product variety presents a considerable dilemma for many manufacturers. Industry practice and research to date suggest that approaches based on component commonality can substantially lower the costs of proliferated product lines, but at the cost of reducing product differentiation and revenues. We analyze a stylized model of a manufacturer who designs a product line consisting of two products for sale to two market segments with different valuations of quality. The manufacturer determines the component quality levels, the amount of effort to reduce production costs, and whether to use common or different components for the two products. Explicitly considering potential interdependencies between cost-reduction effort and quality decisions, we characterize environments where the optimal product line involving component commonality features products of higher quality and yields higher revenues. Counter to earlier research we show that it can be preferable to make those components common that, relative to their production cost, are attributed a higher importance by customers. Disregarding the interactions between commonality, production cost, quality, and effort decisions can lead manufacturers to offer product lines with excessive differentiation and inefficiently low quality.