Interdependent Product Lines

Companies today commonly have complex product lines that may compete in different markets. But even though the products and markets may be different it may be possible to exploit complimentarity and interdependent in the production functions.

Suppose, for example, that a company compete in three basic product markets – color TVs (CTV), hand calculators (HC), and digital watches (DW) – requiring the following main manufacturing activities.

Product specific components manufacture:
Color TV – 5% ; HC – 15%; DW – 15%

Integrated circuit manufacture (ICs):
CTV – 45%; HC – 50%; DW – 40%

Housing manufacture:
CTV – 15% plastic; HC – 10% plastic; DW – 20% metal

Acoustical component manufacture:
CTV – 10%; DW – 5%

CTV – 25%; HC – 20%; DW – 20%

The structure for each of the three product lines is shown above and the percentage numbers indicate the value added by manufacture at each stage for each product. The value added by manufacture here is simply the accumulation of the variable costs of manufacture for each product line at each stage. Some of the activities for a given product are independent of the other products, such as the product specific components. However, the other activities are common to at least two of the product lines. For all three products, the largest value added percentage is for integrated circuits (ICs); the next largest is for assembly.

Interdependent provides some advantages in the scale of operations and experience accumulation for ICs and assembly and to a lesser extent, for plastic housings and acoustical components. Although the volume of ICs required for color TVs might justify process technology of a base level, when the volume of ICs required for all three product lines is taken into account, higher levels of mechanization and automation may be justified. The scale of operations for the combined product lines can contribute to efficiency of operations in ICs, making the company more cost competitive in all three product lines. Furthermore, the larger total volume contributes to organizational learning and the experience curve effects to which we have alluded. These effects are particularly important for ICs because they represent such a large percentage of the value added for all three products. Cost competitiveness is enhanced for all three products.

Similar concepts apply to assembly operations and, to a lesser extent, to plastic housing and acoustical components. The type of productive system employed for these activities should reflect the process technology available and the total volume; perhaps a product focused continuous kind of operation would be appropriate.

On the other hand, the manufacturing systems for the product specific components are independent of each other and will reflect the production economies of the lower volumes associated with each product line. The process technology employed will be that appropriate for the smaller volumes and the rate of experience accumulation will be slower. The type of productive system appropriate may be process focused for production in batches.

Suppose that we are considering exiting the color TV business since it has matured and foreign competition is strong. What are the impacts on the production system as a whole and on our competitive position for the other products? What will happen to the scale of IC operations if color TV demand is withdrawn? Will costs of manufacture increase? Will it be necessary to reorganize the IC production system for a different scale of operations? If the change in demand is significant enough, it might dictate a different type of production system for ICs perhaps a to-order system and/or a process-focused system, where the production economies would result in higher costs. Part of the company’s strength and low cost position in all three product lines stems from the low cost position in IC components, since they account for the largest value added for all three products. Not only that, but the future position may be affected since less experience in IC manufacture will be accumulated in the future if color TVs are withdrawn.