1. The Dynamics of Product Variety
Karl Ulrich
The Wharton School
University of Pennsylvania
547 Huntsman Hall
Philadelphia, PA USA
Joint work with Taylor Randall and Karthik Balasubramaniam.
Funding for this research has been provided by the
Mack Center for Technological Innovation, Emerging Technologies Management Research Progam

2. “Product variety has been increasing steadily in recent years.”
- paraphrasing of many researchers motivating work on management of product variety
Definitional Issues: “Variety”
The number of different products available in a market.
Distinct SKUs; or the theoretical number of “orderable” variants for make-to-order products.
Fundamental vs. peripheral variety.
Variety w.r.t. attributes vs. number of combinations of attributes.
Expected story:
Variety has increased because customer needs are increasingly heterogeneous and production systems/supply chains are increasingly flexible.
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3. Example Data from DataSources
Notebook computers: number of SKUs by company and year
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4. 3372 SKUs
1104 SKUs
1201 SKUs
928 SKUs
1249 SKUs
529 SKUs
1563 SKUs
342 SKUs
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5. If customer needs are increasingly heterogeneous and processes are increasingly flexible, we would expect SKU Density (1/niche-width) to be increasing…
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8. Observed Regularity (?)
SKU Density
skus/unit
Market Size, units
time
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9. Plausible Explanations for Dynamics of Product Variety
Product variety is strongly related to the portfolios of individual firms. The dynamics of the number of firms in the industry is an important driver of the dynamics of variety.
Product portfolios are realizations of plans and strategies crafted 2-5 years in the past. Thus, product variety will exhibit stickiness and the over/undershoot typical of dynamic systems with information delays.
There are economies of variety. The “optimal” level of variety is a concave function of market size, assuming some “fixed costs” per variant.
And many more:
Variety shifts from vertical to horizontal because of changes in supply/demand of fundamental product performance.
Industries “figure out” platforms and architectures to lower the cost of variety.
Early phase of industry development is characterized by a lot of experimentation and associated higher variety (Sorenson, SMJ, 2000).
(your theories here…)
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10. No shakeout (inherently fragmented?)…
Effect of shakeout…
Post shakeout…
No shakeout (inherently fragmented?)…
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11. No shakeout (inherently fragmented?)…
Effect of shakeout…
Post shakeout…
No shakeout (inherently fragmented?)…
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12. 1. Industry Dynamics, Product Variety, and Hotelling’s Street
Expectations of distribution of potential customers
lightweight
full featured
Example: notebook computers
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13. 1. Industry Dynamics, Product Variety, and Hotelling’s Street
Expectations of distribution of potential customers
lightweight
full featured
Example: notebook computers
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14. 1. Industry Dynamics, Product Variety, and Hotelling’s Street
Expectations of distribution of potential customers
lightweight
full featured
Example: notebook computers
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15. 2. Product Portfolios are Sticky… firms are stuck with too much or too little.
Unexpected demand spike
Precipitous erosion of market
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16. 3. Economies of Variety – static model
density
attribute
market width
de Groote (Int. J. of Prod. Econ. 1994)
N* = market-width * market-density^1/3 * (1/fixed-costs)^1/3 * “pickiness”^2/3 p' p
= d*a/2
a/2 a
p + d ( x – a/2)
Market Width
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17. 3. Economies of Variety How does optimal variety change as market width and depth change?
attribute
As the breadth of a market increases, variety increases proportionally.
density
attribute
attribute
density
As density of market increases,
variety increases, but at a decreasing rate.
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18. 3. Economies of Variety – Dynamic forces
lightweight
full featured
Conjecture:
Markets growth patterns over time shift from expansion of breadth to expansion of depth.
density of potential market
1984
1983
1982
1981
1980
price
industry evolution allows product lines to be extended in this direction
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19. First Cut Model – For a monopolist in a growing market category, would a decrease in SKU density be expected?
Assumes constant “set up” or fixed costs per variant over product lifecycle.
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20. Integrated Explanation of Dynamics
Firm dynamics and Industry shakeout
Excess variety is created in initial phases of industry growth.
Experimentation
Expectations of future market size
Niche saturation
Firm shake out is associated with elimination of product redundancy.
Market growth shifts from width to density
Learning, scale efficiencies lead to lower costs, which leads to deeper markets.
Optimal to have less variety “per customer” as markets get more dense
Flexibility, reduction in costs of providing variety
Architectural stability
Component industry develops
Combinatoric variety
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21. Other Interesting Ideas Related to Variety Dynamics
Sequential vs. simultaneous population of market spaces.
R&D capacity decisions
Value of learning from iterations
Diminishing returns to investments in fundamental product performance (e.g., S-curve behavior) gives rise to transition to investments in peripheral variety (e.g., fashion, color, style).
Establishment of platform and industry standards allows combinatorial variety at relatively low cost. (But, this is generally in the “wrong direction” w.r.t. empirical evidence.)
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22. Some Next Steps
Deeper examination of causal structure within two product categories
Notebook computers and Laser Printers
Is there evidence of substantial redundancy and overlap in product lines before the “shakeout.”
Do we in fact observe a shift in market growth from “breadth” to “depth” of product lines.
Analytic model, particularly of “Story 3: Economies of Variety”
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23. So What?
Product portfolio decisions are important problems in managerial decision making.
An understanding of the fundamental drivers of product variety at an industry level informs a firm acting within that industry.
Conjectures:
Managerial decision making with respect to product variety is typically reactive and incremental, without a clear understanding of how product lifecycles and the evolution of markets impact variety strategy.
One of the root causes of the shake out of firms in industry lifecycles is a failure to gain efficient scale, which may be the result of the pursuit of too much product variety.
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