Introduction to Product Variety The Problem and Basic Concepts

1. Introduction to Product VarietyThe Problem and Basic Concepts

2. Course Outline Monday Introduction Strategic Decisions Tuesday Costs of Variety Cost Tools Wednesday Decouple Points Customer Interface Thursday Platform Development Friday Final Case Due 15:00 Grading: Group Assignments 30% Class Participation 20% Final Case 50%

3. Why offer more variety? • Higher revenues come from variety through many mechanisms. • Enter new market segments - Toyota entry into luxury autos. • Stimulate demand - ice cream flavors • Deter price competition - mattress sales • Deter channel competition - Laser jet printers • Deter market entry - Breakfast cereal • Shelf space - Tooth paste • Value capture with pricing - bicycle product lines • Better technology attracts more customers - Technological change.

4. Variety manifests itself at different levels in an organization Toy Inc. Product Category (Division) Blocks Dolls Model SKU (Stock Keeping Unit)

5. Product variety conveys competitive position

6. Variety is introduced over time Timing Strategy Asynchronous Synchronous Matched or One-to-one Replacement Strategy Unmatched (Computers, Automobiles, Bicycles) (Consumer Packaged Goods)

7. Average of 5 new models per year

8. Growth from 50 to nearly 1600 mountain bikes

9. Over 200,000 mutual funds to choose from in 2000

10. Over 350 PCs to choose from by 1996.

11. Increase in variety across 4 industries at different stages of product life cycle.

12. The variety increase will payoff only if costs are balanced against revenues. Complex economic relationships make this a non-trivial balance! R&D Production investment Tooling Inventory obsolesence Marketing costs Price Quantity Revenue Costs Profit

13. Product Variety and Profit Revenue + + Profit Variety Costs - +

14. Unit sales per model decrease from 4000 to 2500 per year.

15. Unit sales decrease from 4000 to 1000 per year

16. Net assets per account increase by over $700 per year.

17. Sales growth per model increase over $2.6 million per year.

18. Decreasing sales per model in autos and bicycles… Increasing sales per model in mutual funds and PCs

19. Increase in probability of bankruptcy if you continue to proliferate!

20. How did successful companies manage variety? Success in Autos defined by stock price performance. Successful: Toyota, Honda, Ford Unsuccessful: GM, Nissan, Chrysler Success in Bicycles defined by market share and no bankruptcy. Successful: GT, Trek, Diamond Back Unsuccessful: Bridgestone, Mountain Goat, Miyata

21. Auto Industry Returns (1974-1999) Toyota Honda Ford

22. Observation 1: At successful firms, sales growth exceeds variety growth.

23. Toyota, Honda, Ford GM, Nissan, Chrysler Bridgestone, Miyata, Mountain Goat Diamond Back, Trek, GT,

24. Observation 2: At successful firms, sales growth and variety growth move in lock-step.

25. Honda moves in lock-step Correlation = .94 GM does not Correlation = -.33

26. Toyota, Honda, Ford GM, Nissan, Chrysler Diamond Back, Trek, GT, Bridgestone, Miyata, Mountain Goat

27. Observation 3: Successful firms expand product lines along dimensions that leverage existing supply chain assets, product architectures, and production processes.

28. Product Variety at 4 Successful Mountain Bike Companies Cannondale Specialized VooDoo National Models 110 134 1728 6240 Which company offers the most variety?

29. Basic Mountain Bike Attributes Model level variety is created by changing the level of each attribute Frame Material - Carbon Fiber Frame Geometry/size - Softtail, Grande Color - Burnished Black Component group - Shimano LX, P-bone front shock

30. Product Variety at 4 Successful Mountain Bike Companies Cannondale Specialized VooDoo National Models 110 134 1728 6240 Frame Geometries 12 6 2 3 Materials 1 6 (3 basic) 3 2 Components per frame 2 1.4 48 6 Colors per model 1.25 1 1 104 In bicycles, companies optimize around attributes.

31. Not All Attributes Should be Managed the Same Quality Fit Taste Individual Preference Function XS S M L XL XXL 16 kg 12 kg 8 kg Frame Weight Frame Size Frame Color Population Preference Function 16 kg 12 kg 8 kg XS S M L XL XXL Frame Color Frame Weight Frame Size Meet Changing Tastes (Service) Customization and Service Competitive Emphasis More Quality for Less Money

32. Effect of product variety on costs(occurs at the attribute level) Production Costs Incremental production costs : Fixed investments in tooling, dies etc. Production (batch) related costs Production technology choice + Product variety + Costs of making supply meet demand: Mark-down costs Excess inventory Increased safety stock Market Mediation Costs

33. Differences in Production and Market Mediation Costs Across Product Attributes Production Cost (tooling investment) Mediation Cost (forecast difficulty) Materials US$ 2,000,000 Low Geometry/Size US$ 10,000 Medium Colors US$ 1,000 High Components US$ 0 Medium Materials is a “production dominant” attribute. Geometry/Size, colors and components are “mediation dominant” attributes.

34. Product Variety at 4 Successful Mountain Bike Companies Cannondale Specialized VooDoo National Models 110 134 1728 6240 Frame Geometries 12 6 2 3 Materials 1 6 (3 basic) 3 2 Components per frame 2 1.4 48 6 Colors per model 1.25 1 1 104 Core Asset Flexible Welding Alliances Configuration Color System

35. Toolkit of Vital Variety Statistics Test 1: Test of Market Acceptance • Statistic: Determine the difference between sales growth and model growth. • Diagnosis: Difference should be positive. If negative indicates lack of return on variety. (Sales²-Sales¹)/Sales¹ - (Models²-Models¹)/Models¹

36. Toolkit of Vital Variety Statistics Test 2: Test of Coordinated Efforts Company Correlation • Statistic: Determine the correlation between sales and models over time. • Diagnosis: The correlation should be close to 1. If significantly less than 1 or negative indicates lack of coordinated efforts in managing variety.

37. Toolkit of Vital Variety Statistics Test 3: Test of Leveraged Resources • Statistics: Decompose product line into attributes and tie attributes to core assets. • Diagnosis: Clear link between variety and assets indicates coherent leveraging of existing assets. No pattern indicates wasted variety related assets.

38. Honda expanded product lines using platforms. Accord Platform: Chassis of a car Civic Odyssey

39. Who offers the most variety? Model level analysis hides true differences in variety

40. 6 Strategic Variety Decisions • The dimension of variety offered to the market • The degree of vertical integration • The nature of the customer interface/distribution channel • The process technology • The location of the decouple point in the supply chain • The product architecture.

41. Critical Elements of Variety Strategies 1. Dimension of variety must offer perceived value to consumer. 2. Variety strategies are distinct. 3. Product architecture and distribution system minimizes the costs of the chosen dimension of variety. 4. Firm possesses the capabilities to support dimension of variety. 5. Strategy exploits the unique context and resources of the firm.

43. Product Variety and Profit Revenue + + Profit Variety Costs - +

44. Vertical Integration Motive to outsourceMotive to insource Lower Costs vs. More Control Helps production costs Helps mediation costs

45. Implications of Vertical Integration Supply chain structure = distance of production from target market, degree of scale economies

46. The supply chain structure will have an effect on production and market mediation costs. Higher production costs due to scale inefficiency, but low mediation costs attributed to shorter lead times. Low production costs due to scale economies, but high mediation costs attributed to longer lead times.

47. Supply Chain Structure and Product Variety High Production-Dominant Variety Low Mediation-Dominant Variety Low Variety Distant Distance of production from target market High Production-Dominant Variety and High Mediation-Dominant Variety Low Production-Dominant Variety High Mediation-Dominant Variety Local Scale Inefficient Scale Efficient Degree of Scale in Production

48. Customer Interface Au Bon Pain Lee’s Hoagie House Select a Bread Hoagie Roll Croissant Bagel Whole wheat Select a Meat Turkey Ham Roastbeef Select Toppings Lettuce Tomato Pickle Onion Peppers Mayonaise El Grande $3.50 (Turkey, Ham, Roastbeef lettuce, tomato, onion on a hoagie roll) The Varden $5.60 (Ham, Pickle, Onion, Peppers on Whole wheat) The Molde $7.75 (Turkey on a bagel)

49. Frame geometries of 4 bicycle companies

50. Tub cutting options