Achieving product variety through optimal choice of module variations

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Abstract
The trade-off in designing products typically involves consideration of manufacturing and development costs, and the potential market share. Modular design of products has been identified as one way of providing firms with a competitive advantage. In the context of modular product design, some of the pertinent questions are: (i) how many product varieties in a product group should be introduced in the market; and (ii) what is the minimum number of module-options required to support this variety? In this paper we study the optimality of such decisions related to modularization in two separate scenarios: (i) the module supplier is an independent operator whose decisions are not coordinated with that of the firm; and (ii) the module supplier is a wholly owned subsidiary of the firm. For these scenarios, we show how the choice of module-options affects product variety, total sales, product development cost, and hence, the firm's profit. We establish that the module-options can be rank ordered, based on profit margin and customer rating, and 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 number 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 firms that deal with products having multiple module-types.