«Abstract In this chapter, we introduce the beneﬁts and penalties of commonality (both to the customer and the manufacturer), emphasizing the need ...»
Crafting Platform Strategy Based
on Anticipated Beneﬁts and Costs
Bruce G. Cameron and Edward F. Crawley
In this chapter, we introduce the beneﬁts and penalties of commonality
(both to the customer and the manufacturer), emphasizing the need for anticipation
of divergence when estimating beneﬁts. We highlight the importance of mapping
commonality strategy to the ﬁnancial beneﬁts, with a view to creating long-term
competitive advantage for the ﬁrm.
2.1 Introduction Platforming, the sharing of products or processes across products, has become an important means of cost-sharing across industrial products. Examples include Volkswagen’s MQB platform (including VW Golf, Audi A3, and Seat Octavia) (Pander 2012), the Joint Strike Fighter program (variants for the Air Force, Marines, and Navy), and Black and Decker’s electric hand tools (Meyer and Lehnerd 1997).
The use of platform over the last three decades has grown in response to market demand for variety. Consumers have come to expect $50, $100, and $150 version of a hand drill to choose from (Halman et al. 2003). Car buyers now enjoy bundled option packages (Basic, Leather, SportPlus), supported by option code sheets that could ﬁll a book. This variety has a direct impact on the ﬁrm—for example, one automotive model can have as many as ﬁve million possible variants, when considering all of the offered options in combination (Cameron 2011). The process complexity deployed to support this market variety can threaten the organization’s survival. A recent study of wasted complexity at Proctor and Gamble identiﬁed $3 billion in savings (Wilson and Perumal 2009).
B.G. Cameron (*) • E.F. Crawley Massachusetts Institute of Technology, Cambridge, MA 02139, USA e-mail: email@example.com T.W. Simpson et al. (eds.), Advances in Product Family and Product Platform 49 Design: Methods & Applications, DOI 10.1007/978-1-4614-7937-6_2, # Springer Science+Business Media New York 2014 50 B.G. Cameron and E.F. Crawley Platforming is a strategy for providing variety to the market against a reduced cost base. When executed well, it can provide a vital competitive advantage to the ﬁrm. Firms have cut costs by 30 % and reduced lead times by 50 % by employing commonality (Pander 2012). The ability to bring products to market quickly and cheap can create signiﬁcant ﬁrst mover advantage. However, gaining this competitive advantage is not quick or cheap. The list of ﬁrms that have attempted to build platforms and failed is long. Many ﬁrms fail to reach their commonality targets— the Joint Strike Fighter has famously seen divergence from 80–90 % parts commonality down to 30–40 % parts commonality (Boas et al. 2012). A senior executive in Automotive stated his belief that learning platforming takes at least two product lifecycles.
Sharing parts does not fundamentally create competitive advantage. Commonality as a strategy is only successful insofar as it enables ﬁnancial advantages, be it increased revenue or decreased cost. In fact, we will show that platforming requires signiﬁcant upfront risk, in the form of large multiproduct investments and downstream risk of low product differentiation—platforms can negatively affect the ﬁrm’s brand.
We begin an examination of platform strategy by weighing the beneﬁts and costs. We argue that the ﬁrm’s ability to achieve a competitive advantage through platforming is rooted in a meaningful strategy process, examining the investment required against the downstream savings. In this chapter, we ﬁrst provide a holistic overview of the beneﬁts. Then we examine the associated drawbacks and costs. We review the data on divergence in commonality, to understand the potential downside risk. Finally, we illustrate how the choice of commonality strategy (what to make common) should be mapped to the desired beneﬁts to be achieved.
2.2 Trade-Offs in Platforming
The discussion of platforming and commonality as a strategy is perhaps best illustrated in the context of trade-offs posed by this choice of strategy, as revealed in the literature. These trade-offs arise from conserved parameters and shared efforts—examining them provides a starting point for examining cost dynamics.
In platform development, there are a number of high-level trade-offs posed at the ¨¨ beginning of the platform development (Otto and Holtta-Otto 2007). The trade-offs are critically related to the main architectural parameters, such as number of variants, range of performance, sequencing of variants, and degree of commonality.
In turn, the decisions about these parameters are made about the expected markets for the variants, whose relevant characteristics here are performance requirements, willingness to pay, and availability/timeliness. The market “causes” the ﬁrst set of trade-offs we explore.
2 Crafting Platform Strategy Based on Anticipated Beneﬁts and Costs 51
2.2.1 Trade-Offs Caused by the Market
Firms create multiple variants for market reasons. Customers grouped by similar pricing and performance expectations can represent submarkets, which if served individually can represent greater overall proﬁt than producing a product which serves their average expectation. Meyer and Lehnerd (1997) originally described a process for segmenting a market using a grid tool, illustrating a number of different strategies for spreading commonality investment across a range of product prices and market segments.
These market-facing tensions have been framed in the literature as a trade between variety and commonality. Ramdas (2003) segments the market implications of variety into four categories—the dimensions of variety, the product architecture, the degree of customization, and the timing of variety. In particular, research on understanding the costs of variety forms an important counterpoint in the tension between variety and commonality (MacDufﬁe et al. 1996; Martin et al.
1998; Du et al. 2001; Blecker and Abdelkaﬁ 2006). Further, the trade between closed set discrete variety (e.g., along a linear dimension of variety such as horsepower) and the potential for mass customization has been a fruitful direction of research (Alptekinoglu and Corbett 2008; Blecker and Abdelkaﬁ 2007; Jiao and Tseng 2000; Rungtusanatham and Salvador 2008). Research has begun to unpack the underlying mechanisms which create the variety—commonality trade-off— Rungtusanatham and Salvador (2008) note that difﬁculties identifying latent needs and differentiation opportunities within marketing activities can lead to static offerings.
Commonality strategies architected to deliver this variety in turn create the threat of cannibalization (Sanderson and Uzumeri 1995; Kim and Chhajed 2000), where customers with higher willingness to pay can meet their performance requirements by buying the lower-performance product. Sanderson and Uzumeri (1995) describe a case in the DRAM market, illustrating how sales trajectories can show both within-platform cannibalization and generation to generation platform cannibalization. Absent detailed customer data allowing the manufacturer to bucket variant sales by segment, cannibalization can be weakly inferred from sales trajectories and product introduction timing, but the quality of the inference varies.
Variants that are closely spaced are easier to platform but are at greater risk of cannibalization. One mechanism of this cannibalization is that shared components in the lowest cost variant may be subject to quality standards as applied to higher performance variants. Ulrich et al. (1998) ﬁnd “for low-quality segments, brand price-premium is signiﬁcantly positively correlated with the quality of the lowest quality model in the product line” (Ramdas 2003). Viewed from the other perspective, Nelson et al. (2001) describe how overdesigning lower-level variants can place acquisition and maintenance costs above the reach of some customers, thus decreasing expected platform volume and proﬁtability.
In addition to the threats to submarkets created by platforming, there is an overall brand threat. Cook (1997) notes, “ironically GM’s market share relative to Ford only began to recede in the mid 1980s as GM’s brands—Chevrolet, Pontiac, 52 B.G. Cameron and E.F. Crawley Oldsmobile, Buick, and Cadillac—became less distinctive through the use of common platforms and exterior stampings that reduced product differentiation” [reproduced from de Weck (2006)]. The concept of a trade-off between perceived product differentiation (and its effect on sales) and the beneﬁts of platforming is a difﬁcult one to measure, in that brand is inﬂuenced by many factors, and the signal from product differentiation is spread among the timings of the individual variant introductions.
The idea of ﬂexibility of platforms is related, in that platforms can create opportunities for future variants, opportunities which are only revealed over time.
The existence of a relevant platform can speed time to market, and also reduces development cost for the variant. There are existing tools for comparing ﬂexibility’s beneﬁts against costs. Namely, Triantis (2000), Otto et al. (2003), Jiao et al. (2006), and Rhodes (2010) have framed commonality as a real option.
Baldwin and Clark (2000) argue that modularity has been a central driver of innovation and growth at an industry level, working from deep studies in the computer industry. It is important to note that this growth did not necessarily accrue to all ﬁrms—the ﬁnal external trade-off that we note is a potential threat posed by competitors entering value-creating segments of the market on top of the ﬁrm’s platform.
2.2.2 Internal Trade-Offs
Thus far, we have described the trade-offs with external inﬂuences. There are also a number of trade-offs that emerge through the development cycle. For example, ﬁrms often desire ﬂat development budget proﬁles. If the concurrent development of the platform and all of its variants doesn’t ﬁt under this ﬂat budget, a common technique is to phase variant development. Boas (2008) describes the trade-off created between phasing development and divergence from the platform exacerbated by the offset. Cusumano and Nobeoka (1998) describe a set of strategies for phasing development (ranging from parallel to sequential), highlighting how overlapping development phases, which he titles “rapid design transfer strategy,” can strike a balance in this trade-off. Additionally, Cusumano and Nobeoka (1998) highlight how development head count time series represent a possible measurement of the phasing of development effort.
Insofar as platforms are large product development programs, they embody a whole host of constraints not speciﬁc to platforms. Personnel constraints create constraints for platforms, in that faster ramp up and ramp down times come at the expense of challenging training and quality. Existing manufacturing facilities constrain total capacity and inventory. Past capital equipment constrains current production methods as well as future capital availability (Rungtusanatham and Salvador 2008). These factors apply broadly to product development, so we do not explore in depth here—where appropriate, they are raised below in conjunction with speciﬁc platforming issues.
2 Crafting Platform Strategy Based on Anticipated Beneﬁts and Costs 53 Work in the engineering literature has deﬁned a variety of metrics, with a view to watching one of the key state variables, the actual level of commonality. In theory, each of the trade-offs should result in movement of an appropriately set commonality metric. For example, Thevenot and Simpson (2007) take manufacturing costs into account with a commonality metric where parts are weighted by cost, building on earlier work by Jiao and Tseng (2000).
We can sum up the internal trade-offs resulting from commonality in three key criteria for commonality (Cameron 2011). Commonality strategies must be grounded in technical feasibility—a concept of a design that can be expected to span a range of performance. Commonality strategies must be ﬁnancially beneﬁcial—commonality is a means to an end. Finally, commonality must be organizationally possible—shared designs and co-investments in future products must be supported by organizational structure and process.
2.3 Beneﬁts of Commonality
Much has been written on the topic of platforming and commonality, primarily stemming from seminal work by Utterback and Meyer (1993) and Robertson and Ulrich (1998), although earlier work can be found from 20 years previous (Collier 1981). These early works cited a number of beneﬁts, such as enabling future rapid product introduction, increase model introduction rate, decreased development cost, economies of scale in manufacturing, and faster introduction of new technology into existing product lines. Since the early work on platforming, a broad body of literature has grown up around the concept of platforming, but no consensus around the list of beneﬁts has emerged, despite several past efforts to build a list of pros and cons—see Fisher et al. (1999).
To begin, we break the beneﬁts of commonality into three categories:
(1) Revenue Beneﬁts, (2) Cost Savings, and (3) Risk Beneﬁts. Figure 2.1 shows examples of the tangible beneﬁts possible in each of these categories. We delve deeper into these beneﬁts in the remainder of this chapter.
Embedded in the notion of beneﬁts and penalties in the management literature is the idea that managers weigh these factors when making rational decisions. As compared to the more quantitative literature on commonality, the diversity of beneﬁts in the management literature is broad by comparison and is most likely to discuss commonality decision-making as grounded in organizational structure.
As a potential frame of reference, van Maanen’s organizational decision-making separates decisions into rational strategic, political, and cultural. The rational strategic frame is dominant in the management literature. However, political decisions (the embodiment of organizational power or position) are also referenced, such as in Cusumano’s (1998) discussion of heavyweight program managers. Cultural decision-making is referenced in passing, such as creating a culture of reuse, but 54 B.G. Cameron and E.F. Crawley