Leveraged high-variety strategies: From portfolio thinking to platform thinking

MARKETING IN THE 21 ST CENTURY

COMMENTARY

Leveraged High-Variety Strategies: From Portfolio Thinking to Platform Thinking

Mohanbir S. Sawhney Northwestern University

The dawn of the 21st century finds marketers in a cruel double bind. On one hand, customers are becoming very sophisticated and are demanding customized products and services to match individual preferences and tastes. These demand-side pressures are forcing marketers to adopt high-variety strategies. On the other hand, competition is becoming intense, fueled by industry convergence, de- regulation, globalization, and internetworking. These supply-side pressures are forcing marketers to hold the line on prices. Barbara Kahn (1998 [this issue]) presents an insightful classification of strategies that marketers can adopt to cope with the "High-Variety" challenge. Marketers can either manage variety creation across consumers (mass- customization strategies) or manage the need for variety within consumers across time (variety-seeking strategies). In either case, marketers face the challenge of creating cost-effective variety. The purpose of this commentary is to amplify Kahn's discussion of cost-effective variety by introducing the concept of leveraged high-variety strategies-strategies that allow firms to achieve high variety and high growth, without a corresponding increase in costs or complexity. The key to leveraged high-variety strategies is plaOCorm thinking--the process of identifying and exploiting commonalities among a firm's offerings, target markets, and the processes for creating and delivering offerings. Various aspects of platform thinking have been discussed in the product design, marketing, operations, strategy, and technology management literature. In this commentary, I tie these disparate strands into a cross- functional tapestry and highlight insights that emerge from the synthesis.

PLATFORM THINKING

As most of us have observed while shopping for cars, cameras, computers, and even candy, different models and variants in any manufacturer's product line seem to have a lot in common. For instance, most models of Sony VCRs or Nikon SLR cameras have a few unique features and share a majority of components with other models in the product line. However, commonality is more than skin deep. Most firms' product lines:

�9 Have a common underlying technology �9 Share a common set of basic components �9 Are targeted at a related set of customers and appli-

cations �9 Compete in a related set of application markets �9 Require similar manufacturing processes �9 Are sold in a related set of geographical markets �9 Are distributed through a common set of channels

and intermediaries �9 Share a common corporate brand name

Just as siblings in a family share a gene pool, a fLrm's offerings are often similar in the way they are designed, manufactured, branded, distributed, and promoted. This common heritage suggests that firms should manage their offerings as families with a common underlying logic, and not as porO~olios of unrelated entities. This shared logic is the platform. Pla~orm thinking is the process of identifying and exploiting the shared logic and structure in a firm's activities and offerings to achieve leveraged growth and variety. Platform thinking can be applied to the firm's

Journal of the Academy of Marketing Science. Volume 26, No. 1, pages 54-61. Copyright �9 1998 by Academy of Marketing Science.

Sawhney / LEVERAGED HIGH-VARIETY STRATEGIES 55

FIGURE 1 Platform Thinking and Leveraged High-Variety Strategies

Product Platform

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Customer Platform Brand <

Strategic Platform , Vision

Global Platform Process

Platform

products, brands, target markets, geographical markets, and business processes. Each of these dimensions is a vector for growth and variety creation (Figure 1). Together, these dimensions enable firms to achieve leveraged high variety.

BENEFITS OF PLATFORM THINKING

Platform thinking allows firms to overcome inherent contradictions in variety management by enabling simultaneous improvements in speed to market, cost, differentiation, and quality. Specifically, platform thinking has the following benefits:

Speed." By reusing technology platforms, component designs, manufacturing processes, distribution channels, and suppliers, firms can dramatically reduce the product development time for derivative products developed from a common platform. Meyer and Lehnerd (1997) report that Black and Decker's power tools division launched one new product every week for several years, after adopting platform thinking in its power tools division.

�9 Cost: Platform thinking allows firms to save significantly in the design, manufacturing, operating, and marketing costs of new products. Shared designs and shared components reduce design costs. For instance, of the 4 million lines of code in Microsoft's Windows NT, 35 percent of the code was reused from earlier versions of the platform, significantly reducing the development cost (Cusumano and Selby 1995). Shared manufacturing and operations infrastructure reduce development, manufacturing, and labor costs, in high-fixed cost industries like automobiles, travel, and hotels. Southwest Airlines has the lowest operating cost position in the U.S. airline industry partly due to the fact that it has standardized on one aircraft platform--the Boeing 737. Shared brands and common customer bases reduce customer acquisition costs, increase customer loyalty, and reduce the cost of brand building.

�9 Design quality: By using common underlying technology, components, and design, finns can improve the design quality of new products, because the underlying platform has been thoroughly debugged and tested. Furthermore, a performance improve- ment in the underlying platform automatically rip-

56 JOURNAL OF THE ACADEMY OF MARKETING SCIENCE WINTER 1998

pies through all derivative products created using the platform. For instance, Minolta introduced "intelli- gent lens" technology in its SLR camera platform and was able to simultaneously upgrade its entire SLR line with this enhancement to launch its popular "/-series" cameras.

�9 Coherence: Offerings that are managed as platforms can be extended more logically and coherently and to related products, markets, and geographical re- gions. Hewlett-Packard's success in Laser printers and Inkjet printers can be traced to excellent platform thinking (Meyer and Lehnerd 1997). On the other hand, the overlap and confusion among Gen- eral Motors' product lines and brands is partly due to poor platform management (Ramdas and Sawh- ney 1997).

�9 Referenceability: Platform thinking encourages marketing of new products to a core customer base, or to a set of customers that are logically related to the core customer base. The relatedness among the customers of the core product and the derivative products results in stronger brand advocacy, because word of mouth travels quicker and carries more weight within a homophilous population (Rogers 1994). Lotus Notes benefited immensely from lead adopters like Price Waterhouse, who spoke highly of the groupware software to their clients, who in turn became users of Notes (Moore 1995).

�9 Option value: Platform thinking and investments in core technologies, flexible manufacturing processes, and country platforms represent a rich set of "call options" that a firm can use to exercise in a flexible and phased manner (Kim and Kogut 1996; Kogut and Kulatilaka 1994). General Electric cur- rently loses money in the Indian appliance market, but the investment in learning about the market is a valuable call option that GE can choose to exercise by entering into related businesses in India.

DEFINING THE CORE PLATFORM

The bedrock of platform thinking is an accurate and insightful definition of the elements of the core platform. To arrive at this definition, the firm needs to carefully assess what is "core" and what is "derivative" in the values that it stands for, the offerings that it creates, the technologies that it employs, the customer franchises that it con- trois, and the customer segments that it targets. In fact, the definition of the core platform goes to the very heart of defining the scope of the firm's business (Abel 1980). Erroneous assessment of the "crown jewels" in a platform can profoundly impact the firm's ability to extract value from the platform. When IBM created the enormously successful PC platform, it outsourced the development of the operating system and Central Processing Unit (CPU) to Microsoft and Intel, respectively, because it did not perceive these as being core platform technologies. In retrospect, this was a very expensive mistake.

How should a firm define its core platform? The roots of a firm's platform should lie in a thoughtful internal assessment of its distinctive capabilities and resources, as well as an external assessment of the drivers of perceived differentiation. The firm's distinctive capabilities are the wellsprings for platform definition (Day 1994; Hamel and Prahalad 1990; McGrath 1995). The understanding of distinctive capabilities and resources should be translated into a strategic vision statement (McGrath 1995). The strategic vision statement should clearly articulate what the firm holds dear and near to its heart. Strategic vision statements are the link between what a firm knows and owns and what it aspires to accomplish. Good strategic vision statements should flow logically from the f'Lrm's assessment of the capabilities and resources that set it apart from competition. Strategic vision statements should pro- vide clear directions for platform thinking. Well-written vision statements guide platform thinking by clarifying the corporate values and brand identity to employees, customers, and stakeholders; by providing a context for decisions on new business opportunities; by imposing structure and cadence in the firm's product families; and by providing the basis for prioritizing the firm's technology development efforts. Consider the following strategic vision statement from Compaq:

Compaq's goal is simple: We want to be the leading supplier of PCs and PC servers in all customer segments worldwide. We intend to accomplish this goal by leading the industry in developing new products, pricing competitively, controlling costs, supporting customers, and expanding distribution. Compaq un- derstands the dynamics of the industry and is poised to move decisively to exploit new opportunities.

This statement is a clear guide to Compaq's platform thinking in terms of its core technology (Windows and Intel platforms), core products (PCs and PC server platforms), and distinctive capabilities (new product development, customer support, and cost management). However, it is less specific in terms of Compaq's core customer segments and markets, owing to the size of the company, and its dual focus on the consumer as well as corporate markets.

The internal assessment of capabilities and resources may be a good guide to defining what is "core" from the firm's perspective, but platform definition also requires a good understanding of what is core from the customer's perspective. Indeed, there may be significant differences between the firm's cost-side perspective on the aspects of its offerings that should be common or unique and the customer's demand-side perspective on what makes different offerings different or similar. This is due to the fact that variety is created at the component level by the f'Lrm, but variety is consumed at the augmented product level by customers (Ramdas and Sawhney 1997). Therefore, the cost impact of variety and component sharing may be quite different from the revenue impact of variety in terms of cannibalization and loss of perceived differentiation. Firms can exploit this asymmetry by sharing expensive


"below-the-skin" components while maintaining unique- ness and differentiation in the highly visible aspects of the augmented offering. For instance, Toyota manages to share a large majority of components between its Camry family sedan and its Lexus ES 300 luxury sedan at the tangible product level while effectively differentiating these offerings at the augmented product level, by varying the exte- rior styling, using different brand names, selling through different dealer networks, and offering different warranty and after-sales service terms. Clearly, in this case, what is core from Toyota's perspective (engine, transmission, sus- pension) is quite different from what is core from the customer perspective (styling, brand name, warranty, after-sales service, dealer attitude), a difference that Toyota exploits quite effectively.

DIMENSIONS OF PLATFORM THINKING

As Figure 1 suggests, platform thinking can find ex- pression along several dimensions. Each dimension is a vector for leveraged growth and variety for the firm. The five most important dimensions along which a firm needs to think about platform strategy are the product platform, the customer platform, the brand platform, the process platform, and the global platform. Various aspects of these dimensions have been discussed by academics and practi- tioners in different areas, but these streams have not been seen as part of a larger framework for platform thinking. I briefly describe these dimensions and highlight the common insights that tie them together.

The Product Platform

A product platform is a set of subsystems and interfaces that form a common structure from which a stream of derivative products can be efficiently developed and produced (McGrath 1995). It is a collection of common building blocks, especially the underlying core technology, that can be implemented across a wide range of products (Meyer and Lehnerd 1997). The set of related products built off a common platform is called a product family. Examples of product platforms are the Windows/Intel computer platform, the Chrysler K-Class car platform, the IBM AS/400 computer platform, and the Boeing 747 aircraft platform. Baldwin and Clark (1997) define three aspects of the underlying logic of a product platform--its archi- tecture (the specification of the modules that constitute the platform, and their functions), the interfaces (the scheme by which the modules interact and communicate), and the standards (the design rules that the modules conform to).

Meyer and Lehnerd (1997) propose a three-step framework for understanding how product platform strategy works (Figure 2). The first step in the framework is to identify the common building blocks that are the "raw material" for creating product platforms. These building blocks may include insights on customer behavior, product technologies, process technologies, and organizational ca-

pabilities. For instance, Black & Decker's power tools division identified several building block technologies and processes, including plastic molding, loctite bonding, powdered-metal gear technology, automated testing, automated motor manufacturing, and magnesium die-casting. Next, some of these building blocks are configured into product platforms for a related set of customer and applications, just as a child chooses Lego blocks to create sophisticated structures. Black & Decker used the building block technologies to create the power drill platform, the power sander platform, the power saw platform, and the hedge trimmer platform. Finally, each product platform is used as the basis for creating a stream of derivative product families targeted at different customer segments and price- points. Black & Decker created offerings for the consumer indoor, consumer outdoor, automotive, and international customer segments, and for the good, better, and best price tiers within each of these segments.

The Customer Platform

When a firm enters a new market, it usually needs to focus its marketing efforts at a relatively small and ho- mogenous niche. The logic of niche marketing is particularly compelling in turbulent technology markets, where technology evolves rapidly and customer preferences are unknown. In such turbulent markets, it is difficult for a firm to simultaneously target a broad "horizontal" set of market segments. Rather, firms need to identify a beachhead--a customer segment that has the most compelling need for the firm's offering and can serve as a base for expansion into related segments and application markets. Moore (1995) uses a "bowling pin" metaphor to capture the essence of this leveraged targeting strategy (see Figure 3). The bowling pin metaphor is nicely illustrated by Intuit in the financial software market. Intuit initially targeted home users with personal financial management software. Later, it expanded its offerings by creating related applications for the same customer segment, including tax planning software, legal software, and more recently, financial services information through its Internet site. Intuit also grew by creating similar offerings for related segments, by creating financial management, payroll management, and in- voicing products for small businesses.

The beachhead that the firm chooses as its point of entry into a new market can be conceptualized as the firm's customerplafform. This initial platform serves as the basis for expansion and leveraged growth into related customer segments and related application markets. Just as the firm shares components across its product family, it also shares customer segments across its product offerings. The firm can grow by reusing established customer relationships and knowledge of customer needs as the springboard for a stream of additional products and services for its customer base. The firm can also grow by referencability and advocacy from the initial customer base to offer its products into related customer segments.


FIGURE 2 Platform Thinking and Product Strategy

Application Markets/Customer Segments

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PRODUCT iT- Med 7 / FAMILIES

"\ , I I / ..ODUC, L~ \ t / PLATFORMS

t | m BUILDING BLOCKS

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SOURCE: Adapted from Meyer and Lehnerd (1997).

Two key insights emerge from applying platform thinking to customer segments. First, firms need to "think backward" from what they want to accomplish in the long term, to derive the logical point of entry for achieving their long-term goals. If it is Europe you want to capture, then it is the beaches of Normandy that you should land in. Second, firms need to pick their first set of strategic customers very carefully, because these customers serve as the foundation for leveraged growth. A good beachhead should be like Normandy, offering connectivity and access to rich territory beyond; and not an island like Hawaii, which offers little leverage potential. The success of Sun workstations, Apple Macintosh, the US Robotics Pilot organizer, and Lotus Notes was largely attributable to a good choice of customer platforms. The initial customer segments became loyal advocates for the firm and were influential in spreading the word to related segments.

The Process Platform

Platform thinking offers insights not only for what offerings a firm should create and market, it also offers insights for how these offerings should be created, produced, and delivered. Platform thinking can be applied to the processes involved in the design, manufacture, and distribution of the firm's offerings. Consider the manufacturing process at Titan Industries Limited, an international

watch manufacturer based in India. Several years of expe- rience in the market revealed that the hundreds of models that Titan manufactured could be divided into three categories based on their production volume and contribution margins--bread-and-butter models, premium models, and exotic models. The bread-and-butter models are produced in large stable volumes, offer slim margins, and need to be produced at the lowest possible cost. At the other extreme, the exotic models are produced in very small batches, have very high margins, and require a very flexible and respon- sive manufacturing process. In response to these conflict- ing demands on the manufacturing process, Titan has segmented its manufacturing and assembly process into three distinct process platforms--the mass-production process, the runner process, and the job-shop process. The mass-production process is a very low-cost process but requires large lot sizes and is very inflexible. The job-shop process, on the other hand, uses expensive flexible auto- mation and high-cost manual assembly to allow very high flexibility, but it can only handle small volumes. By allo- cating products to the appropriate process platform, Titan is effectively able to manage the contradictions between high-volume and high-flexibility manufacturing. And it continues to make process improvements that drive down the costs in the mass-production line and increase the flexibility in the runner and job-shop lines. Platform thinking can also be applied to the new product development


FIGURE 3 Platform Thinking and Targeting Strategy

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SOURCE: Adapted from Moore (1995).

process (Raman and Chhajed 1995) and to the supply chain management process (Fisher 1997).

The Brand Platform

As a firm's product families grow larger, its brand portfolio also tends to proliferate and overlap, creating a need for coordinated branding strategies across the product family. Platform thinking can be applied to brands by managing a firm's brands not as a portfolio of individual brands but as members of a mutually supportive brand system (Aaker 1996). The brand system is a hierarchical conceptualization of a firm's brands, with the corporate brand as the root, and the range brands, product line brands, subbrands, and branded features as the steps in the hierar- chy (Figure 4). Platform thinking applied to brand management allows a firm to exploit synergies among brands, to minimize overlap among brand identities, and to achieve coherence and clarity of positioning across the product family. It also facilitates the adaptation of brand equity as the product family and customer segments evolve.

The core of a firm's brand platform is the driver brand (Aaker 1996). The driver brand conveys the central value proposition and is the key motivator of the purchase deci- sion. The driver brand is often the corporate brand (Sony, Kodak, BMW, and Microsoft). However, some firms pre- fer not to use the corporate brand at all (Proctor & Gamble, General Mills), or do not use the corporate brand as the

driver brand (Ford Taurus, Gillette Sensor). The choices of the driver brand and the brand values conveyed by the driver brand are critical to the success of the brand platform. This is particularly true when the corporate brand is used as the driver brand, because the brand name should echo the people, culture, and values of the entire corporation.

Just as common building blocks are used to create product platforms that are used to create product families, common brand values are used to create the firm's brand platforms, and these brand platforms are extended into several markets and product categories by using subbrands to distinguish a more specific set of the firm's offerings within the brand platforms. Subbrands share and support the parent brand's identity. In addition, they add value by describing the offering, structuring and clarifying the offering, or facilitating a horizontal or vertical line extension by qualifying or modifying the parent brand. With a small set of brand platforms and a relatively large set of subbrands, a firm can leverage its brand equity across a diverse set of offerings without losing focus or proliferating the number of brands that need to be managed.

The Global Platform

Platform thinking can also allow marketers to manage the contradictions between standardization and adaptation in the global marketing of products and services (Douglas


FIGURE 4 Platform Thinking and Brand Strategy

i Corporate Brand ] liP, Microsoft, Intel

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HP LaserJet, Microsoft Office, Intel Proshare, Intel Pentium

HP Laserjet 4M, Intel Pentium 200, Microsoft Office (Developer Edition)

Resolution Enhancement, MMX, A T& T True Voice.

and Wind 1987). This contradiction can be resolved by thinking about global platforms, which consist of a core offering that is common across global markets and customized elements that enable speedy and cost-effective local- ization of the firm's offerings to country-specific conditions and customer preferences. Customization can involve physical changes in the product, pricing adaptation, service adaptation, positioning message adaptation, or channel adaptation. As in all other dimensions of platform thinking, global platform strategy should begin with a deep understanding of what aspects of the offering should be standardized and what aspects should be customized. For instance, Ford's $6 billion effort to develop a "world car" the Ford Mondeo---failed because its European styling did not appeal to U.S. consumers. In contrast, Honda determined that the length, width, and ride of a car are the key determinants of the appeal of family sedans in different countries. Although the ride and length can be easily adjusted from a common platform, it is extremely difficult to create cars with different widths from a common platform. Honda has designed a revolu- tionary global platform for its 1998 Accord, which uses adjustable brackets to push the car's wheels together and to pull them apart ("Can Honda Build" 1997). As a result, Honda can use a common global platform for the Accord to produce an American version that will be big, roomy, and staid; a Japanese Accord that will be six inches shorter, four inches thinner, and loaded with high-tech gadgets; and a European Accord with a short, narrow body and a stiff

ride preferred by European consumers. Global standardization of the Accord platform will save Honda hundreds of millions of dollars.

SUMMARY

Barbara Kahn correctly points out the importance of creating dynamic relationships with customers and adopting high-variety strategies to succeed in today's fiercely competitive world. However, high variety is also often high cost and high complexity. In this commentary, I propose that platform thinking is a powerful way to manage these contradictions in becoming a high-variety provider. Platform thinking relies on a simple insight--un- derstand the common strands that tie your firm's offerings, markets, and processes together, and exploit these commonalities to create leveraged growth and variety. Plat- form thinking should permeate all aspects of the firm's strategy and should guide all strategic decisions on diversification and growth. Marketers who master platform thinking may find the 21 st century to be a somewhat more inviting prospect.

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ABOUT THE AUTHOR

Mohanbir S. Sawhney is an assistant professor of marketing in the Kellogg Graduate School of Management, Northwestern University. His research interests include strategic marketing in technology-based industries, marketing decisions for experien- tial products, and cross-functional integration in new product development. His research has been published in Management Science and Marketing Science, and his modeling work in the motion picture industry has been widely cited in the trade press. He is a consultant for several large technology firms as well as small Interact start-up firms. His current research projects include strategic planning for market-driving firms, cross-functional product line management, and strategy formulation for digital opportunity arenas.

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Leveraged high-variety strategies: From portfolio thinking to platform thinking