Product Complexity: Theoretical Implications and Relationship to Cost

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Product Complexity Theoretical Implications and
Relationship to Cost

• Mark Jacobs

Academy of Management Conference Operations
Management Doctoral Consortium August 4, 2007
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Overview

• Motivation
• Recent trends
• Financial implications
• Typology of product architectural complexity
• Theory
• TPF TCE
• Hypotheses
• Methodology

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Motivation

• Recent trends
• Emphasis on differentiation
• Shorter product life
• Large number of products introduced
• Product complexity not well understood
• Academics
• Practitioners
• Theory building
• Theoretical foundation not well established

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Dimensions of Product Complexity
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Typology
Portfolio
Product
Complimentarity
Component
Interconnectedness
Similarity
Relatedness
Multiplicity
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Theoretical bases

• Theory of Performance Frontiers
• Transaction cost economics

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Hypotheses - multiplicity

• Quality related hypotheses
• H1 As multiplicity increases, product
  conformance
• quality will decrease at an increasing rate.
• H2a As the number of features increase, the
  number of
• warranty claims will increase at an increasing
  rate.
• H2b As the number of features increase, the cost
  of
• warranty claims will increase at an increasing
  rate.

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Hypotheses - multiplicity

• Manufacturing related hypotheses
• H3a As multiplicity increases, inventory costs
  will
• increase at an increasing rate.
• H3c As multiplicity increases, direct costs will
• increase at an increasing rate.
• H4 Total manufacturing cost will increase with
• additions to the product portfolio

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Hypotheses - multiplicity

• Overhead / indirect related hypotheses
• H3b As multiplicity increases, overhead
• and indirect costs will increase
• nonlinearly.
• H5 Total sales and marketing cost will
• increase with additions to the product
• portfolio

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Hypotheses - multiplicity

• Total cost related hypotheses
• H6 The greater the number of products
• introduced the higher the cost
• H7 The shorter the product life the higher
• the cost

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Hypotheses - relatedness

• Quality related hypotheses
• H8 As number of features per product increases,
• warranty costs will increase.

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Hypotheses - relatedness
Manufacturing related hypotheses H9 Direct
costs will increase at an increasing rate with
increasing number of features per
product H10 Direct cost will be influenced by
multiplicity as strongly as by relatedness. H12
Total manufacturing cost will increase with
additions to the product portfolio
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Hypotheses - relatedness
Overhead / indirect related hypotheses H13
Total sales and marketing cost will increase with
additions to the product portfolio
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Hypotheses - relatedness
Total cost related hypotheses H11a Greater
concentration of revenue leads to reduced
cost H11b Fewer variants per brand results will
be associated with reduced cost H14 The greater
the number of products replaced the higher the
cost
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Methodology

• Time series regression
• Quarterly data for 3.5 years
• 5 brands
• Multiple products / brand

Total data base of 75 products 350 variants
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• Questions?