Product Portfolio Strategies: The Case of Multifunction Products
Article first published online: 12 FEB 2009
© 2008 Production and Operations Management Society
Production and Operations Management
Volume 17, Issue 6, pages 587–598, November-December 2008
How to Cite
Chen, Y., Vakharia, A. J. and Alptekinoǧlu, A. (2008), Product Portfolio Strategies: The Case of Multifunction Products. Production and Operations Management, 17: 587–598. doi: 10.3401/poms.1080.0064
- Issue published online: 12 FEB 2009
- Article first published online: 12 FEB 2009
- Received: November 2006; Revised: July 2007 and January 2008; Accepted: February 2008 by Viswanathan Krishnan.
- product functionalities;
- multifunction products;
- product portfolios;
- quantity and pricing decisions
Motivated by the proliferation of multifunction products, we investigate product portfolio decisions of a single firm by analyzing the impact of three major factors. First, because multifunction products provide complete or partial functionalities of single-function products, we incorporate substitution or cannibalization effects between the potential products. Second, we explicitly model the variable costs of manufacturing the single-function and multifunction products. Third, we examine the firm's pricing decisions because of their impact on the degree of cannibalization between the multifunction product and one or more single-function products. Using an economic model, we first characterize the firm's optimal product portfolio (through a quantity-based decision), which in turn determines the market equilibrium prices for each product in its portfolio. Some of the unique insights stemming from our analysis are: (a) the optimal product portfolio choice is driven primarily by maximum profit margins for the single-function products weighted by the demand substitution effects; and (b) from a product design perspective, the complete functionality of the base single-function product is always included in the optimal product offering, but this is not necessarily the case with the complete functionality of the nonbase single-function product.