A cross-functional approach to evaluating multiple line extensions for assembled products

Assembled product manufacturers often introduce line extensions that share components with existing products, or among themselves, resulting in cost i nteractions among products because of shared costs, and revenue interaction s because of cannibalization. We present a cross-functional approach to eva luating multiple line extensions that simultaneously considers revenue impl ications of component sharing at the product level and cost implications at the component level. We develop a source-of-volume model and a measurement procedure to decompose the life-cycle sales volume from a line extension i nto sales from cannibalization, competitive draw, and demand expansion. We develop an activity-based costing procedure for estimating the life-cycle c osts of line extensions that share components. We develop an optimization m odel that uses these revenue and cost estimates to identify a subset of lin e extensions that maximizes incremental profits. We implement our approach at a quartz wristwatch manufacturer. Results suggest that our approach woul d have improved profits for the firm by over 5%, while actually launching f ewer line extensions. We also find that the drivers of cannibalization are counterintuitive. In simulation studies, our approach outperforms three man agerial heuristics. We demonstrate that this approach is most valuable when cannibalization dominates competitive draw as a source of volume, and disc uss its relative merits under low and high parts-sharing.