Economic models of product family design and development

Vish V. Krishnan and Karthik Ramachandran

Jianxin (Roger) Jiao, Timothy W. Thomson, and Siddique

Prepared by:
JEMUEL S. CINSO
MSTHE Student
1. Introduction: Product family-
based design and development
Firms in many industries are experiencing
the need to offer increasing levels of
product variety. 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.
 Fundamental Issues

Product family
 A product family refers to a set of similar
products that are derived from a common
platform and yet possess specific
features/functionality to meet particular
customer requirements (Meyer & lehnerd,
1997).
 Fundamental Issues

Product platform
 Baldwin & Clark (2000) define three aspects
of a product platform:
(1) its modular architecture, (2) the interfaces,
and (3) standards that provide design rules to
which the modules must conform.
 Fundamental Issues

Product variety
 Defined as the diversity of products that a
production system provides to the
marketplace (Ulrich, 1995).
 Du et al. (2001) discern functional variety
from technical variety.
2. Product family-based development
approach: An illustration

 The set of products that a firm offers

clearly depends on the nature of
market heterogeneity: specifically
whether the market is vertically
differentiated market or horizontally
differentiated.
 2.1. Literature review

 The rationale for developing a family

of products-customer demand for
product variety and its associated
complexity and costs (such as loss
scale economies)- has been studied by
researchers in the economics
literature (Baumol, Panzar, and Willig,
1988).
 2.1. Literature review

Variety impacts logistical and

procurement related costs by
forcing the firm to interface with
a number of suppliers (Gupta and
Krishnan, 1999).
 2.2. A decision-making
framework
 The firm’s profit maximization for the
design and pricing of the product
family can be presented as follows:
3. Product family design under
vertical different
The self-selection model for
vertical differentiation

 Consider a firm that caters to

the needs of a high-end and a
low-end segment in a vertically
differentiated market (Moorthy
and png, 1992).
 Product family approach to
vertical differentiation

 Product family-based approach

aims to model the
interrelationships among products
in line.
 Designing and developing DIPs
for vertical differentiation

 Krishnan and Zhu (2006) have

developed a similar model for
product positioning to obtain
insights regarding Development
Intensive Products for a
vertically differentiated market.
 4. Product family design under
horizontal differentiation

 A traditional approach to modeling

horizontally differentiated market
is to consider different segments
as being separated in space.
 5. Product family-based
component selection

 In the conventional approach,

suppliers are selected after the
conceptual and detailed design of
a product is completed, resulting
in the usage severe unique
suppliers.
 5. Product family-based
component selection

 In the conventional approach for

supplier selection, component
selection, and sourcing, decisions
are made independently for each
product to maximize its
performance.