Product Design Strategy with Commonality by Considering Customer-Choice Behavior in Supply Chain

Abstract

Product design decisions have significant impact on a firm's competitive edge. This paper investigates the condition under which component commonality is a profitable product design strategy for a firm by considering customer-choice behavior in the supply chain environment. The design configuration with commonality can lower manufacturing cost, but it also reduces product differentiation and revenue. While the customer-choice behavior with utility maximization will impact the retailer's product pricing, we analyze a stylized model of the manufacturer who designs a product family consisting of two products for two market segments with different valuations of quality. By explicitly considering the interrelationship between customer's utility and retail price, we find that commonality strategy is conditionally profitable. Theoretical research reveals that the optimal product design strategy depends on the marginal valuations of customer-choice behavior and the cost-coefficient of the common component determined by the supplier. An example is used to illustrate how some supply chain parameters impact the optimal product design strategy.