Achieving product variety through optimal choice of module variations

The trade-off in designing products typically involves consideration of man ufacturing and development costs, and the potential market share. Modular d esign of products has been identified as one way of providing firms with a competitive advantage. In the context of modular product design, some of th e pertinent questions are: (i) how many product varieties in a product grou p should be introduced in the market; and (ii) what is the minimum number o f module-options required to support this variety? In this paper we study t he optimality of such decisions related to modularization in two separate s cenarios: (i) the module supplier is an independent operator whose decision s are not coordinated with that of the firm; and (ii) the module supplier i s a wholly owned subsidiary of the firm. For these scenarios, we show how t he choice of module-options affects product variety, total sales, product d evelopment cost, and hence, the firm's profit. We establish that the module -options can be rank ordered, based on profit margin and customer rating, a nd that the optimal set of module-options to be acquired or developed would include only the top ranked options. We also show how to determine the num ber and type of module-options a firm should acquire to maximize its profit . Finally, we discuss how our algorithm can be extended to the case of firm s that deal with products having multiple module-types.