International Journal of Operations & Production ManagementEmerald Article: Managing product variety in emerging marketsLuiz Felipe Scavarda, Andreas Reichhart, Silvio Hamacher, Matthias Holweg

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To cite this document: Luiz Felipe Scavarda, Andreas Reichhart, Silvio Hamacher, Matthias Holweg, (2010),"Managing product variety in emerging markets", International Journal of Operations & Production Management, Vol. 30 Iss: 2 pp. 205 - 224

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Managing product varietyin emerging markets

Luiz Felipe ScavardaIndustrial Engineering Department,

Pontifıcia Universidade Catolica do Rio de Janeiro, Rio de Janeiro, Brazil

Andreas ReichhartJudge Business School, University of Cambridge, Cambridge, UK

Silvio HamacherIndustrial Engineering Department,

Pontifıcia Universidade Catolica do Rio de Janeiro, Rio de Janeiro, Brazil, and

Matthias HolwegJudge Business School, University of Cambridge, Cambridge, UK

Abstract

Purpose – The need for an efficient provision of product variety has been widely established as ameans of competing in the marketplace, yet previous studies into the management of product varietyhave commonly analysed products in isolated developed markets. The purpose of this paper is toinvestigate how firms manage their product variety in emerging markets. This paper aims toinvestigate the rationale underlying the restriction of variety in such settings, and define generalmechanisms by which firms can adapt their product variety when operating in both emerging anddeveloped markets simultaneously.

Design/methodology/approach – The paper uses the case of a global vehicle manufacturer thatoffers common products across developed and emerging markets to illustrate the difference betweenthem in terms of product variety, and examine the process that underlies its management. The paperutilises a combination of data collection techniques.

Findings – The paper shows empirically how product variety (in particular ex factory variety) isrestricted in emerging markets, as one would expect, and it identifies the mechanisms by whichproduct variety is managed across different markets. The paper further illustrates how emergingmarkets have developed secondary coping mechanisms to deliver additional variety through lateconfiguration in the distribution system.

Originality/value – By examining the differential management of product variety in emerging anddeveloped markets, the findings yield several novel aspects by providing both empirical evidence andexplanations for the restriction of product variety in emerging markets.

Keywords Supply chain management, Configuration management, Orders and ordering,Product management

Paper type Research paper

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0144-3577.htm

The authors are grateful to the Ford Motor Company for supporting our research, and inparticular would like to thank Marcio Alfonso for his time and comments. The authors are alsovery grateful to the three anonymous referees for their constructive suggestions. This researchwas funded by the European Commission’s ILIPT programme, MCT/CNPq (through researchprojects 022006 – 479377/2006-5, 301887/2006-3, and 309455/2008-1) and CAPES(BRAGECRIM).

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Received January 2008Revised June 2009

Accepted August 2009

International Journal of Operations &Production Management

Vol. 30 No. 2, 2010pp. 205-224

q Emerald Group Publishing Limited0144-3577

DOI 10.1108/01443571011018716

1. IntroductionA trend towards an increase in product variety has been observed across many sectors,including fashion (Fisher et al., 1994), computers (Bayus and Putsis, 1999), automotive(Pil and Holweg, 2004), and fast moving consumer goods (Quelch and Kenny, 1994). As aresult, the efficient provision of product variety as well as the ability to customiseproducts to customer needs have been identified as a means of providing a competitiveadvantage (Pine, 1993; da Silveira, 1998), and it has been shown that offering a broaderproduct line can lead to increased profitability (Kekre and Srinivasan, 1990). A centralquestion in the debate remains the determination of the “optimal” or “appropriate” levelof variety: on one hand, offering variety can provide differentiation in the marketplace,increasing revenues; on the other hand, it increases operational costs (Lancaster, 1990;Ramdas, 2003) – marking a key trade-off at the operations-marketing interface (Shapiro,1977; Malhotra and Sharma, 2002).

We base our investigation in the global automotive industry, which, given its recentexpansion into emerging markets, offers a rich setting for investigating the trade-off,firms make when deciding on the level of product variety in a given market. We followArnold and Quelch (1998) who define “emerging markets” as countries that satisfy twocriteria: a rapid pace of economic development, and government policies favouringeconomic liberalisation and the adoption of a free-market system. This includescountries in Latin America (e.g. Brazil and Mexico), Asia (e.g. China and India), Africa(e.g. South Africa) and the Middle East.

As one would expect, the variety offered on identical passenger car models issignificantly lower in emerging than developed markets (Table I). This applies both tothe absolute number of variants offered, as well as to the relative number of variantsper sales volume. Thus, a first observation is that original equipment manufacturersappear to be restricting the variety offered on identical products in emerging markets.

This observation motivated our investigation into the factors that determine the“appropriate” level of product variety. So far little research has explicitly addressed thedecision process behind the adaptation of a product’s variety for sale in emergingmarkets. We postulate that studying emerging and developed markets simultaneously

UK Brazil

Model Market Variants SalesVariants per1,000 sales Variants Sales

Variants per1,000 sales

Ford Fiesta 1,190,784 29,436 40,453.3 469 99,939 4.7Ford Focus 366,901,933 523,356 701,056.1 156 16,755 9.3GM Astra 27,088,176 440,567 61,484.8 111 34,477 3.2GM Corsa 36,690,436 420,296 87,296.7 363 129,862 2.8Peugeot 206 1,739 596,531 2.9 188 43,067 4.4Renault Clio 81,588 502,497 162.4 904 35,271 25.6Toyota Corolla 162,752 139,837 1,163.9 49 43,269 1.1VW Golf 1,999,813,504 595,465 3,358,406.5 79,776 9,643 8,272.9VW Polo 52,612,300,800 357,539 147,151,222.1 7,440 20,828 357.2

Sources: Source for the UK figures is Pil and Holweg (2004), the figures for Brazil were calculatedusing the same method (Section 3.1) based on 2005 data; see Pil and Holweg (2004) for a detaileddescription of the methodology used

Table I.Comparison of variety fora selection of car modelssold in the UK and Brazil

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is likely to yield novel insights into the management of product variety, and theunderlying paper hence aims to:

. provide empirical evidence on the restriction of product variety in emergingmarkets at product and feature level; and

. identify the reasons for, and mechanism of, the adaptation of product variety inemerging markets.

The paper is structured as follows. First, the existing literature on product variety isreviewed, followed by a discussion of the methodologies employed to investigate theresearch questions. Subsequently, the findings are presented by first providing adetailed overview of the restriction of product variety for a specific car model, the FordFiesta hatchback, across a number of key emerging markets in Latin America – incomparison to the respective level of variety in a selection of European countries.Second, an in-depth case study of Ford and its Latin American operations addressesthe second research question, investigating the management of product variety inemerging markets, extending the key concepts developed by previous contributions.A detailed discussion of the findings is presented in Section 6, before concluding withtheoretical contributions to the product variety debate.

2. Literature reviewAt the most basic conceptual level, product variety can de defined as the number ofdifferent products offered to customers (Pine, 1993). More specifically, the literature hasidentified several dimensions on product variety: for example, Pil and Holweg (2004)explain the differences between static and dynamic variety. Dynamic variety (Fisheret al., 1999a) refers to the choice that is offered over time, resulting from changing timeperiods between introductions of novel or modified products. For example, as theaverage life cycle of passenger cars has been decreasing constantly over the pastdecades, the dynamic variety that is offered to customers in this industry has beenincreasing (Pil and Holweg, 2004). Static variety (i.e. the variety that exists at any pointin time) can be split further into internal and external variety (Child et al., 1991;MacDuffie et al., 1996). External variety is the most common form of product variety inthe academic debate, often measured by the number of different stock keeping units(SKUs) or end product configurations available to customers (Chong et al., 1998).Internal variety represents the variety a manufacturing system needs to cope with todeliver a certain level of external variety (MacDuffie et al., 1996) and essentiallytranslates into complexity in manufacturing systems (Child et al., 1991; Deshmukhet al., 1998). The current investigation is concerned with external variety only; internalvariety (and its implications for manufacturing complexity) is only considered in as faras it is seen as a reason for restricting external variety. We will return to this pointlater. We consider one vintage of the product, in that sense we focus on static externalvariety only, without considering longitudinal aspects.

As discussed by MacDuffie et al. (1996) and Koste and Malhotra (1999), measuringproduct variety gives rise to the need to consider the heterogeneity of the individualproduct variants. For example, a set of ten different end items that are fundamentallydifferent (e.g. that are based different product platforms) does not feature the samevariety level as a set of ten different end items that are very similar (e.g. where only a fewperipheral components are different). Therefore, MacDuffie et al. (1996) suggest a

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grouping into fundamental variety (i.e. different product structures or platforms),intermediate variety (i.e. an intermediate level depending on the impact of the respectivefeatures on manufacturing operations, such as the number of power trains in cars), andperipheral variety (i.e. the number of additional components used to differentiate enditems) to distinguish the different impacts that variety has on manufacturingcomplexity. This typology was subsequently also applied by Pil and Holweg (2004) andwill be used in the current investigation to provide a more differentiated view on howdifferent external variety levels impact upon both manufacturing processes, distributionoperations, and the offering to the customer.

In the following, two key themes in the product variety literature will be reviewed toprovide the theoretical backdrop against which the findings of the current study will bediscussed: the cost-benefit trade-off of product variety, and the concepts at hand formitigating the impacts of static product variety on manufacturing and supply chainoperations.

2.1 The cost-benefit trade-offOffering product variety is one of the traditional competitive priorities inmanufacturing and thus subject to operational trade-offs (Hayes and Pisano, 1996;Mapes et al., 1997; da Silveira and Slack, 2001). Accordingly, the provision of productvariety has been one of the key conflicts between manufacturing and salesdepartments across many industries (Shapiro, 1977; Karmarkar, 1996), and thedecision on how much variety should be offered remains a key theme in the debate(Lancaster, 1990; Ramdas, 2003). The idea of such an “optimal” level of product varietyoriginated in the economics literature (Meade, 1974; Scherer, 1979). A range of authorshave since highlighted the trade-off between the cost incurred by increasing productvariety, and the incremental revenues achieved by offering more variants (Lancaster,1990; Ramdas and Sawhney, 2001; Ramdas, 2003).

In parallel, the marketing literature has been emphasising the importance ofproviding a sufficient product variety consistently for more than two decades, with akey rationale for broadening product lines being matching heterogeneous consumerpreferences more closely than competitors, thus increasing one’s market share and/orbeing able to charge premium prices (Bagozzi, 1986; Pine, 1993; Kotler et al., 2005).Additionally, Schmalensee (1978) outlines how product line extensions have been usedas a barrier to entry against new competitors into the ready-to-eat cereal market. In linewith these arguments, Kekre and Srinivasan (1990) have shown that broadeningproduct lines leads to increased profitability, while Quelch and Kenny (1994) highlightthe downside of uncontrolled product proliferation and its potential negative impact onprofits, especially as product variety does not necessarily increase overall demand in agiven industry. In this sense, Bayus and Putsis (1999, p. 150) refer to productproliferation as a “double-edged strategy”, as associated cost increases can exceedincremental revenues.

In the operations management literature the impact of product variety on costs hasbeen a key focus of the debate. For example, Mapes et al. (1997) found that offeringincreased product variety leads to a lower performance on value-added per employee,delivery speed, delivery reliability and new product innovation. Randall and Ulrich(2001) categorise the associated cost increases into production costs and marketmediation cost. Production costs (Ittner and MacDuffie, 1995; Fisher and Ittner, 1999)

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include the cost of managing complexity in manufacturing and losses in economies ofscale, while market mediation costs (Fisher et al., 1999b; Holweg and Pil, 2004) consistof inventory holding costs, costs of incentives and mark downs, lost sales and costscaused by obsolescence.

2.2 Mitigating the impact of product varietyOwing to the strong link between product variety and supply chain costs, a range ofcontributions have studied how this correlation can be mitigated to allow for a morecost-efficient provision of product variety (Lampel and Mintzberg, 1996; Feitzinger andLee, 1997; Pil and Holweg, 2004). These concepts can broadly be grouped into threecategories: first, changes in product architecture, in particular the use of modular andplatform strategies and component standardization, which can reduce the complexityand associated cost in product development, sourcing and manufacturing (Starr, 1965;Ulrich, 1995; Baldwin and Clark, 1997; Salvador et al., 2002; Pil and Holweg, 2004).Second, flexibility in manufacturing operations, such as quick machine changeoversand multi-skilling of the workforce, leading to the cost-efficient production of smallbatch sizes has been discussed as a suited mitigation strategy (de Meyer et al., 1989;Child et al., 1991; Berry and Cooper, 1999). Finally, the postponement of productconfiguration decisions beyond the final assembly of products into the distributionsystem (a concept also referred to as “late configuration”) that can reduce the impact ofdemand uncertainty caused by increasing product variety (Feitzinger and Lee, 1997;Lee and Tang, 1997; Pagh and Cooper, 1998). This in turn means that additionalexternal variety can be made available post factory.

3. MethodDespite the numerous contributions on product variety, to our knowledge, little researchexists on the management of product variety in emerging markets, and the study shouldbe regarded as exploratory (Meredith, 1998). Given the nature of the research questions(Yin, 2003; Bryman, 2004) we opted for a case study research design. The unit ofanalysis for the case study is a single high-volume product, the Ford Fiesta hatchback.The Fiesta was chosen as it is manufactured in both Europe (Cologne, Germany),i.e. a developed market, and in Latin America (Camacari, Brazil), i.e. an emergingmarket, and shows significant sales in both regions. Additionally, at the time of theinvestigation, both regions produced and sold the same generation of the Fiesta model(internal code: B256), which is not always the case, as some manufacturers tend to offerolder vintages in emerging markets.

The study consists of two main parts: the first part presents an empiricalquantitative view by comparing product variety across a number of developed andemerging markets and the second part is an empirical qualitative investigation thatfurther develops our arguments by investigating the reasons for the observeddifferences.

3.1 Part I. A multi-market comparisonThe multi-market comparison of the Ford Fiesta’s product variety (Section 4) uses thedata available from Ford’s respective distribution organisations. The so-called “carconfigurators” were used to determine the ex factory product variety available to theend customer across the three largest B256 Fiesta markets (in terms of annual new

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vehicle sales) in Europe and Latin America, respectively: Germany, the UK, France,Brazil, Mexico and Argentina. To diversify our sample, one smaller market from eachregion was added (Portugal for Europe, and Chile for Latin America). All data werecollected simultaneously in 2006 Ford’s web site catalogues to ensure comparabilityacross the different markets and model years.

Our analysis uses the framework initially developed by MacDuffie et al. (1996) andlater refined by Pil and Holweg (2004), for the grouping and calculation of productvariety (as discussed in the literature review). In order to determine the number of enditems V that are available to consumers, i.e. the external product variety, we considerthe different product features that drive this variety: first, this is the main sub-categoryof a car model (i ¼ 1 to n), the so-called “version” (e.g. the GLX version of the FordFiesta hatchback), and second, the body style ( j ¼ 1 to m, e.g. three-door, five-door, andestate). For each of the n £ m version and body style combinations (ij), such as the GLXthree-door and GLX five-door, there are aij different powertrains to choose from (e.g.the 1.4- litre diesel engine with a four gear automatic transmission). Subsequently, theavailable paint and trim combinations bij (e.g. blue metallic paint and grey interior)were considered. Finally, one needs to consider the number of factory-fitted options cijthat contribute exponentially to the product variety offered (Fisher and Ittner, 1999).For instance, consider the two options of a radio and a sunroof: one could chooseneither, or both, or one or the other – in total four combinations. We hence consideroptions as the final multiplier (equation (1)). This formula is specific to theautomotive context, but could easily be adjusted to reflect those settings of otherindustry sectors:

V ¼Xn

i¼1

Xm

j¼1

aij · bij · 2cij : ð1Þ

Equation (1) is an external product variety as a function of product features.However, it is important to consider potential restrictions, Rij, that affect certain

models i and/or bodystyles j. One kind of restriction is the so-called “option bundling”,where customers cannot choose freely from all factory fitted options, but can only orderoption packages, which reduces the number of options into a small number of optionsbundles offered to the customer. For example, fog lamps may only be available incombination with heated wing mirrors and air-conditioning as “winter package”. Thereare also incompatibilities imposed by the manufacturer that must be considered; it isnot possible to order a sunroof on a convertible, the roof reeling is only an option onestate cars, and one cannot simultaneously choose two different types of alloy wheels.Therefore, the straight multiplication of the factors in equation (1) will lead (in mostcases) to an overestimation of the number of possible product configurations; equation(2) adjusts the calculations for such restrictions. All calculations presented in this paperare based on equation (2):

V ¼Xn

i¼1

Xm

j¼1

aij · bij · 2cij 2Xn

i¼1

Xm

j¼1

Rij: ð2Þ

Equation (2) is an external product variety adjusted for build restrictions.

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3.2 Part II. The management processesThe second part of the study (Section 5) investigates the management, and in particularthe restriction, of the product variety of the Ford Fiesta hatchback in Brazil and itsneighbouring Latin American markets. Brazil was chosen as the main focus for thestudy, as it hosts the Fiesta assembly plant that supplies all markets in Latin America.Furthermore, the Brazilian market is the largest by volume, and features the highestproduct variety (of the Fiesta model) within Latin America and thus allows for thefurther investigation of additional restrictions in other Latin American markets.

Semi-structured interviews were conducted with five key operations executivesfrom Ford’s Latin American operations and one of its main dealer groups in Brazil in2006, each one lasting between two and four hours (Table II). Given the key role thatthe interviewees played in the decision process regarding product variety decisionsand their impacts, we argue that the relatively low number of executives intervieweddoes not pose a major constraint on the validity of our findings, in particular since wewere able to triangulate the findings from the interviews with the results from the firstpart of the study, which allowed us to compare objectively product variety acrossmarkets. We further drew upon contextual data like sales statistics of specific carconfigurations provided by the interviewees at the dealership group.

4. Cross-market comparisonIn this section, we analyse the level of external product variety in emerging marketsavailable ex factory[1], addressing the first research aim of this paper. The sectionconsists of two parts: a high-level comparison of product variety for the Ford Fiestahatchback model across a selection of key developed and emerging markets, and amore detailed analysis of the individual variety drivers within a subset of markets.

4.1 High-level comparison of product varietyThe external product variety (i.e. the total number of configurable end items) of theFord Fiesta hatchback (model code B256) was calculated using equation (2) for aselection of six established and emerging markets (Table III). This comparison showsthat the level of product variety smaller in emerging markets by at least a factor ofk ¼ 104, compared to established markets (a finding that also consistently holds truefor other car models across brands). Following MacDuffie et al. (1996) and Pil andHolweg (2004), we categorised the variant drivers into fundamental variety (i.e. thefactors that lead to a different body in white in the manufacturing process[2]),intermediate variety (power-trains, paint and trim combinations) and peripheral

Firm/functional area Position of interviewee

Product engineering and manufacturing(Ford Camacari Plant, Brazil)

Chief engineer for product developmentin Latin America

Finance (Ford of Brazil) Finance managerSales and marketing (Ford Regional Officeat Rio de Janeiro, Brazil)

Sales manager

Large dealership group with seven outletsaccounting for around 5 per cent of theFord’s sales in Brazil

General managerAfter sales manager Table II.

Interviews conducted

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variety (factory fitted options excluding the sunroof, as this option has to be consideredalready at the body-in-white stage in manufacturing).

Table III shows that product variety is consistently lower in emerging marketscompared to established markets across all of the three levels of product variety.However, the differences in the total number of end items cannot be explained by thesedifferences alone. For example, when comparing Portugal and Brazil, one would expectthe product variety in these two markets to be similar, as customers in Brazil canchoose from 22 as opposed to 18 factory fitted options in Portugal, which (given theexponential impact of options) should compensate for the lower fundamental andintermediate variety in Brazil. It is hence surprising to see that the theoretical numberof end items customers in Brazil can choose from is significantly lower than in thePortuguese market. The explanation is not to be found in the number of optionsoffered, but in the way that Ford permits customers to combine them: in Brazil (and inall the other Latin American markets), Ford significantly restricts its product varietyby so-called “option bundling”, which was considered during the computation processas outlined in Section 3.1. Thus, customers cannot choose freely from all 22 factoryfitted options, but can only order option packages, which effectively transform therelatively high number of factory fitted options into a small number of options bundlesoffered to the customer – a point to be further discussed in Section 5.2.

4.2 Details on product variety differencesIn order to identify the structural differences in product variety between Europe andLatin America beyond the option bundling effect, one needs to consider the differencesat fundamental, intermediate, and peripheral level. To this effect, one needs todistinguish which variants (at each of these variety levels) are offered in theestablished markets that are not available in the emerging markets, and vice versa. Tokeep this analysis as concise as possible, we restrict our study to comparing the fourLatin American markets with a single established reference market, the UK[3].

Fundamentalvariety Intermediate variety

Peripheralvariety

MarketsBodystyles Sunroof

Power-trains

Paint and trimcombinations

Factory-fittedoptions

Total numberof end items

Established marketsGermany 2 Option 9 144 53 116,207,751,304France 2 Option 7 185 35 68,022,528UK 2 Option 8 185 24 45,594,912Portugal 2 Option 3 75 18 1,143,200Emerging marketsBrazil 1 Not

available 2 24 22 120Argentina 1 Not

available 2 24 10 96Chile 1 Not

available 1 16 2 24Mexico 1 Not

available 1 12 3 24

Table III.Product variety for FordFiesta hatchback inselected markets

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Starting with the fundamental variety (Table III), the Latin American markets can onlychoose the five-door body style without sunroof, while in the UK customers can chooseamong four possibilities (the five-door body and the three-door body, each with orwithout sunroof). Second, further restrictions occur at the intermediate level, wherecustomers in Latin America can choose from fewer powertrains (i.e. engines andtransmission combinations) as well as fewer exterior colours and interior trims(i.e. paint-trim combinations).

Finally, peripheral variety can be grouped into three categories:

(1) options that are generally available in the UK and in emerging markets(i.e. shared options);

(2) options that are standard in the UK but available in emerging markets; and

(3) options that are only available in the UK (Table IV).

The second category theoretically reduces product variety in the UK compared toemerging markets, while the third category reduces product variety in emergingmarkets. In addition, there are options that are only offered as part of very specificoption bundles (or versions of a model). For example, UK customers cannot combinefog lamps freely with other options yet, in order to have fog lamps installed, must optfor a specific version of the Fiesta which features these as standard. We chose to treatthese features as regular options, as shown in Table IV, and discuss the practice ofoption bundling separately in order not to convolute the argument.

Table IV provides an initial lead towards understanding the rationale for imposingrestrictions on the product variety offered in emerging markets. For example, somedifferences are due to different legal requirements in the various markets (e.g. the thirdbrake light is a legal requirement in the UK but not in Brazil), often as a result of highersafety standards in developed countries. In addition, there are a number of factors that

UK Brazil Argentina Mexico Chile

1. Shared optionsFog lamps N/Aa Option N/Aa N/Aa Not availableAllow wheels Two options One option N/Aa N/Aa Not availablePower mirrors Option Option Option N/Aa N/Aa

Air-conditioning Option Option Option Option OptionLeather steering wheel N/Aa Option Not available Not available Not available2. Options that are standard in the UK but optional in some emerging marketsPower steering Standard Option Standard Standard StandardThird brake light Standard Option Standard Standard StandardDouble airbags Standard Option Option Option N/Aa

Central locking Standard Option Option N/Aa N/Aa

Electric windows in front Standard Option Option N/Aa N/Aa

ABS Standard Option Option Not available Not available3. Options that are available in the UK onlySide thorax airbags, side curtain airbags, centre rear head restraint, satellite navigation system, rainsensing wipers and automatic headlamps, park distance control, Bluetooth, technology and voicecontrol system, electronic stability programme and privacy glass

Notes: aNot available as optional equipment, but standard on certain high-end versions; ex factory,selected options

Table IV.Differences in peripheral

variety

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lead to differences in product variety that are not based on legal grounds. Here, it can beconcluded that expensive options or options that are based on new technologies (such assatellite navigation and side curtain airbags) are not offered in emerging markets.However, a number of differences remain that cannot be explained by economicarguments alone: for example, it is not apparent why the product variety offered inMexico is significantly lower than that available in the Brazilian market, even though thecars are produced centrally in Brazil, and Mexico’s economic situation in terms of overallsales and gross domestic product per capita is similar to that of Brazil. Furthermore, onecannot easily explain why certain powertrains, colours or expensive options are notoffered in emerging markets, although Ford could choose to supply these at a premium,given that the existing product design is obviously able to accommodate them.

While the existing literature suggests that choices are not offered because thecost-revenue function of product variety makes it unattractive to provide them, anumber of questions remain; more specifically, the assumptions underlying thecost-revenue function do not explain why and where the costs of providing a certainvariety occur in the supply chain (e.g. research and development, component supply,vehicle assembly, distribution). A particularly interesting factor here is that Ford, inprinciple, has the capability to deliver this level of variety in any market, butselectively restricts it. These points were further investigated in the second part of thestudy, to follow in the next section, where we put these questions to the respectivedecision makers within Ford of Brazil.

5. The management of product variety by Ford in Latin AmericaIn this section, we investigate the reasons for, and methods by which firms restrictproduct variety in emerging markets, further investigating the three key areasidentified in the first part of this study:

(1) The rationale for not offering certain choices in emerging markets at all despitethe fact that Ford has the capability of doing so (as, for example, these optionsare offered in other markets).

(2) The reasons for further restricting product variety within some emergingmarkets compared to others (for example, to offer a feature in Brazil, but notMexico), although the cars are assembled in the same regional plant.

(3) The motives for relying on a higher degree of option bundling in emergingmarkets.

5.1 ContextThe Ford Motor Company first invested in Brazil in 1919 and today owns three plantsin the country: two of them assemble cars and commercial vehicles, while the thirdsupplies these with engines, transmissions and other components. Ford’s Braziliansubsidiary is responsible for most of the regional procurement, production, marketingand sales activities, and further plays the leading role in R&D, for instance, by decidingupon any modification to the European design to suit local needs in Latin America.

The Fiesta hatchback model is produced in Ford’s new Camacari plant (in thenorth-eastern region of Brazil): the plant was inaugurated in 2001 and was consideredto be the first large auto-plant outside the southern and south-eastern regions of Brazil.As the north-east of Brazil does not have a strong industrial heritage, government

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incentives played a key role in convincing Ford to locate its new plant in a green-fieldarea, although low wage costs and good access to the port of Salvador providedfavourable conditions. In addition to the Fiesta hatchback, the plant assembles theFiesta sedan and Ecosport (similar to the European Ford Fusion) models. In 2006, itproduced a total of 243,358 cars, of which 69,429 were Fiesta hatchbacks that wereeither sold in Brazil or exported to other Latin American markets.

Ford’s local order-to-delivery strategy is mainly forecast-driven, with less than 1 percent of cars built to customer order. Accordingly, Ford dealers must commit to the finalnumber of cars they require 90 days before production. Subsequently, they must fullyspecify these orders (in terms of colour, engine, and factory-fitted options) 60 days priorto production, providing Ford with two months’ notice of the vehicle build schedule.This period is considerably longer compared to Ford’s European operations, whereminor changes can be accommodated up to six days prior to production.

The decision-making process of determining the product variety for the Fiestahatchback starts with the collection of information on customer requirements andexisting competitor products from the relevant Latin American markets. Subsequently,the Production Planning and Finance departments of Ford of Brazil assess theeconomic viability and technical feasibility of these requirements. Here, Ford of Brazilhas the scope to make decisions regarding the adaptation of the vehicle to regionalrequirements. As the interviewees remarked, this process is largely centralised andlittle input is sought from either dealers or Ford’s regional sales offices. The outcome ofthis process defines the available product variety for each Latin American market,including fundamental, intermediate and peripheral variety, as well as their possiblecombinations. For example, when the B256 Fiesta hatchback was launched, it wasdecided to offer a total of 15 different combinations (i.e. option bundles includingdrive-train and trim specifications) of the Fiesta hatchback in Brazil, each available ineight exterior colours, giving a total variety of 120 different end items (Table III). Thesedecisions are subsequently communicated to manufacturing (which is not part of thisprocess), as well as purchasing.

5.2 Reasons for restricting product variety5.2.1 General restriction of variety in emerging markets. Investigating the reasons forthe variety restrictions in Latin America, the interviewees all supported the notion of acost-revenue trade-off function of product variety, by which certain specifications wereonly offered when the projected incremental revenues exceeded projected incrementalcosts by the required profitability margin. While this finding in itself wasunsurprising, it led to a closer examination of the costs involved along the supplychain. The key difference between the Latin American and the European markets wasthe importance of the retail price to end customers. Customers in Latin America wereconsidered more price-conscious by Ford, and seldom demanded expensive options,such as satellite navigation systems; at least not in the market segment of the FordFiesta. Thus, according to the chief engineer for product development (one of the seniorexecutives responsible for the Brazilian Fiesta), Ford cut the production cost of theLatin American Fiesta by between 30 and 40 per cent compared to the respectiveEuropean model variant. This was mainly achieved by relying on local suppliers andadjusting the manufacturing process in terms of machinery, labour content,complexity and schedule stability. Based on the interviews, it further transpired that

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a key reason for not offering certain options in Latin America was the fixed andsemi-fixed cost associated with the introduction of certain options that, given their lowdemand, could not be recovered. These fell into four categories: R&D, supply,manufacturing and sales and distribution costs, which will be discussed in turn.

As Ford had developed the capability to supply many specifications to its Europeancustomers, one might argue that little R&D effort would be incurred by making thesespecifications available in Latin America also. However, every time a specification isoffered in a different region Ford has to go through a certification process for thisspecification, not just to meet quality standards, but in many cases also to meet legalrequirements. As a result further modifications are often required if parts are notworking as expected in the new environment. For example, the different climate androad conditions in some areas of Brazil (compared with Europe) can result in themalfunctioning of parts completely unrelated to the drive train, such as the side curtainairbags, although this feature functions perfectly according to European specifications.In addition, the religious efforts to reduce unit cost for the Latin American markets led toa number of design changes (i.e. “local adaptations”), which required further testing.Therefore, a series of local (crash) tests was required for every option Ford was intendingto launch in Latin America, adding significant cost to any specification offered in thesemarkets, which was seen as the major obstacle by Ford’s chief engineer.

Furthermore, offering additional specifications causes fixed and semi-fixed costs incomponent supply: first, offering any given specification requires locating a supplierfor the respective components, which incurs a high overhead ratio if the overall volumeis low. Second, Ford needs to integrate the new parts into its existing logistics network,which includes arranging for transportation for the new component between thesupplier and the vehicle assembly plant, a task further complicated by the lowerstandard of infrastructure in emerging markets and the plant’s location in a green-fieldarea far afield. With low demand for a particular component Ford is also unlikely toachieve economies of scale in transportation, due to shipping less-than-full truck loads.Although the interviewees were aware of common ways to reduce logistics coststhrough milk-runs and similar configurations, these were regarded as insufficient dueto the distances between potential suppliers and the very low projected demand forsome components (e.g. less than one component required per week). Furthermore, thepossibility of sourcing the respective components from its European suppliers was alsodismissed due to the high unit cost per part. This cost disadvantage is furtheramplified by the need for dedicated packaging for overseas transport, productdocumentation for customs clearing, and the added complexity of coordinating thesupply chain, which is partially independent of the actual transaction volume.

Within their manufacturing operations, a new specification was seen to potentiallyincrease investment cost for equipment, such as in the body shop for offering anadditional body style for example. Furthermore, employee training would add to thecost, as line operators for example would need to be trained on how to assemble a doorwith side curtain airbags, while training, in general, was more difficult and timedemanding in emerging countries like Brazil due to overall lower skill levels. Third, anincrease in the number of parts to be handled during final assembly increased thecomplexity of the manufacturing process in at least two ways: it required additionalspace for material storage and handling, and led to an increase in operating procedures.

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Finally, every additional specification also incurred a set of fixed costs in sales anddistribution, where dealers needed to be trained, and product documentation andmarketing material had to be created. Both Ford’s sales manager as well as the dealer’sgeneral manager emphasised that they would rather not introduce a new specificationwith low demand, since the incremental revenues would not cover the initial investmentsneeded to develop and distribute product documentation and to train their sales staff.

5.2.2 Explaining cross-market differences. A second question that emerged from thecomparison of the ex factory product variety was the difference between differentemerging markets that were all supplied from the Brazilian factory (e.g. Why areMexican customers offered fewer variants than their Brazilian counterparts?). Initially,we expected that those markets that had fewer variants to choose from also encountereda lower level of product sophistication[4]. However, upon closer examination we foundthat the markets in Argentina and Mexico offered the same level of product“sophistication” (i.e. comparable top-of-the-range specifications), but that customerchoice was restricted at the lower end of the variety spectrum. Specifically, a number ofspecifications that were optional in Brazil were standard in these markets, while severalinexpensive trims were not available in these markets at all. The main rationale behindthis “restriction” is due to marketing considerations: as highlighted by both the chiefengineer and the finance manager, more customers (in the respective market segment) inArgentina and Mexico (compared to Brazil) were willing to buy high-end specifications,and Ford deliberately restricts offering at the lower end of the spectrum.

5.2.3 Rationale for option bundling. Option bundling is a concept for restrictingproduct variety that is not used universally in Latin America, and some aspects of Ford’srationale for applying it are not specific to emerging markets: first, option bundlingdecreases the forecasting error in make-to-forecast settings (Pil and Holweg, 2004).Second, Ford tries to bundle options that require similar tasks or parts inthe manufacturing process, to mitigate the impact that adding options has onmanufacturing complexity and cost. For example, the incremental cost (for themanufacturing process) of adding central locking to a car is less if the car will also beequipped with power door mirrors and electric windows, simply because some of thewiring and work steps are shared between these options. Thus, by bundling them, Fordcan offer all three options at a lower price compared to the individual ones. Althoughthese synergies of option bundling also exist in Europe, Ford perceives its customers inEurope to demand a higher level of product variety, as well as more willing paying to paythe premium. As a result, Ford is less able to enforce option bundling in Europe wherethis would result in a significant competitive disadvantage.

5.3 Alternative points of customisation: factory versus distribution channelDuring the interviews it transpired that investigating only the ex factory productvariety in Latin America neglects a key dimension in the overall product varietymanagement process: late configuration, which the vehicle distribution system ingeneral in Latin America relies on extensively. For instance, at the time the researchwas conducted Ford was offering 23 accessories for the European Fiesta that could beretrofitted by its dealers in the UK, while 46 accessories were available in Brazil.Furthermore, the general manager of the dealership group claimed that 95 per cent ofall Fiesta cars were late configured at the point of sale (this excluded adding floor mats,as this was generally done for all cars). While most of the late configuration activities

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led to very peripheral changes in the product, such as adding a radio and speakers,more sophisticated variant drivers like air-conditioning and leather seats were alsoadded by dealers, and the extent of late configuration was mainly restricted bytechnical feasibility and product safety. For this reason, certain options, such asairbags or ABS, were not late configured at dealerships. Table V presents the extent oflate configuration for selected options obtained from one of the largest Brazilian dealergroups. As can be seen, a wide range of options are late configured, including optionsthat can also be ordered ex factory.

According to our interviews dealers pursued four aims when late configuringvehicles: first, to circumvent the restrictions imposed by the option bundles availableex factory. For example, ex factory the car alarm system was only available in two ofthe 15 possible option combinations (see Section 5.1) in the Brazilian market, yet manyof the customers also required a car alarm system, leading to a large number of carsthat were late configured. Second, dealers are aiming to expand their offering beyondthe product variety available ex factory to provide a competitive offer. For example, exfactory Ford only offered Kenwood radios, while dealers offered any brand desired bythe customer. Similarly, options like roof racks or sportive packs were either notavailable ex factory or dealers wanted to offer more choice (in terms of brands and/orfunctionality) to their customers. The third reason for late configuration was thatdealers wanted to postpone decisions about the final specification of a car until they

Factory-fitted options anddealer-fitted accessories

Late configuration done atdealers as percentage of total

salesFactory fitted options installed

as percentage of total sales

Radio with CD and/or MP3þspeakers 30-40 ,1Car alarm 10-20 1-5Air-conditioninga 7-12 70-75Power windows 5-10 45-50Central locking 5-10 45-50Third break light 1-5 90-95Alloy wheels – 14 inch 1-5 1-5Fog lamps 1-5 1-5Leather seats 1-5 ,1Electric/power side mirrors ,1 5-10Leather steering wheel ,1 ,1Crankcase protector 80-85 –Window film 70-75 –Bumper protector 25-30 –Roof rack, sport pedal set andtrunk mats

1-5 –

Aerodynamics kit, park distancecontrol, automatic headlamps,and spoiler ,1 –

Note: aThe installation at the dealer is cheaper than at the factory, but customers prefer the factoryfitted option because the dealer does not change the battery and the alternator in order to install aircondition

Table V.Levels of ateconfiguration versusfactory fitting for selectedoptions

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had a specific customer order for it. Owing to the make-to-forecast strategy used inLatin America and the resulting long order lead-time of two months, dealers found itdifficult to accurately match actual consumer preferences. Therefore, they preferrednot to order certain specifications ex factory to reduce their forecasting error if thesespecifications could be late configured once an actual customer order was received. Thefinal reason for late configuring cars was that third-party options yield higher margins,and thus are a more attractive proposition for the dealer. For instance, dealers didgenerally not order Fiestas with leather seats since this option costs US$ 1,500 whenordered ex factory, while costs dropped to US$ 500 when purchased from a third partyand late configured at the dealership.

A key finding from our interviews was to highlight the large extent to which lateconfiguration in the distribution channel has created a secondary system forproviding product variety. Although it has adverse revenue implications, this systemis partially endorsed by Ford, and admittedly forms an integral part of Ford’sorder-to-delivery strategy in Latin America – a point that was confirmed by allinterviewees. For example, park distance control sensors for the Ford Fiesta were notavailable ex factory in any Latin American market as demand for this option wasconsidered too low by Ford. However, Ford offered a special kit that could be orderedby dealers only, to late configure this at the point of sale. By relying on thedistribution channel to expand the product variety that was available to customers,Ford circumvents some of the fixed costs related to the complexity increase in thevehicle assembly plant. This approach maps onto Hayes and Wheelwright’s (1979)product-process matrix: as long as the volume for a specific option is very low, it ismore economical to add it in a job-shop environment, such as the dealer’s workshop,as opposed to adding it on the rigid vehicle assembly line. Similarly, Ford executivesadmit that its order-to-delivery strategy is inflexible (i.e. high level of option bundlingand long order lead-times) and thus relies on its dealers to use late configuration as ameans to accommodate specific customer preferences, within considerably shorterlead-times.

On the other hand, the secondary system stands in direct competition with Ford forparts available from either third or as original parts from Ford. Thus, from Ford’s pointof view late configuration is seen a “double-edged sword” that adds flexibility to itsorder-to-delivery process, while at the same time could lead to reduced revenues. Thefinancial implications of this strategy are difficult to assess from Ford’s point of view,as dealers have no incentive at all to inform Ford of the actual level of lateconfiguration used. In this sense, it is impossible to assess to what extentthird-party-based late configuration reduces the transaction price of a car on the onehand, and to what extent this strategy does prevent Ford from losing sales through alack of responsiveness on the other.

6. DiscussionThe existing literature on the management of product variety offers the trade-offbetween the incremental revenues attained and incremental costs caused by offeringvariety as the basic explanation as to how firms decide upon the level of variety offeredin a market setting. While this argument is conceptually convincing, so far littleresearch is available with regards to the different levels of variety found for the sameproduct offered across different markets. Here, the case of Ford Fiesta hatchback

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proved to be a fertile ground for explaining in particular the rationale for, andimplementation of, the adaptation of product variety in emerging markets. Ourfindings extend Randall and Ulrich’s (2001) work by highlighting additional costcategories incurred along the supply chain that prevent firms from offering productvariety in markets where the demand for specific options is expected to be low.A central point to our argument is concerned with the costs required for increasing thelevel of product variety offered in a given market; here we find that these costs,previously grouped as production costs (Ittner and MacDuffie, 1995; Fisher and Ittner,1999; Randall and Ulrich, 2001) are actually incurred at various points in the valuechain, such as R&D, component supply, final assembly and sales, and not just inmanufacturing. Therefore, we would suggest referring to them as supply chain costs,as these costs result from all the activities that are required for supplying productvariety to the consumer.

The second category of costs associated with the provision of product variety aremarket mediation costs, i.e. the costs that result from matching the supplied productswith actual customer demand (e.g. cost of holding inventory, cost of mark downs whensupply exceeds demand and cost of lost sales when demand exceeds supply). Here, ourfindings illustrate that these costs are only applicable for variety that is provided fromstock: concepts such as late configuration are capable of mitigating market mediationcosts under make-to-forecast conditions, but are not relevant at all when variety isoffered through build-to-order supply chains.

While previous contributions have already pointed out the general potential of lateconfiguration in mitigating the financial impact of product variety, we argue that oneimportant explanation for this mitigation potential has been overlooked: whencomparing the points of variety creation in Ford’s supply chain (i.e. factory-fittedversus late configured at dealerships), one can draw parallels to Hayes andWheelwright’s (1979) product-process matrix: low-volume variety can be added morecost-efficiently in a job-shop environment than on an assembly line. Future research onlate configuration should thus consider both volume and variety across all tiers in thesystem, to provide a more holistic assessment of the concept.

Our findings further highlight a number of key points for the future study ofproduct variety. First, the existing discussion on product variety has so far mainlyfocused on the variety that is available ex factory, while a substantial amount ofvariety may be created in the distribution system. Therefore, the gap between the levelof product variety offered in developed and emerging markets may not be as wide asthe initial data suggested, yet it should be noted that it is more difficult (if notimpossible) to increase fundamental and intermediate variety using late configurationat dealers, which puts a severe restriction on the variety offered in emerging markets.

Second, the comparison of external variety levels by means of using the number ofstock units or theoretically configurable product variants has significantshortcomings, as this method may not accurately reflect customer perception. Weargue that it is important to differentiate between interchangeable and optionalproduct features. Exterior colours, for example, are interchangeable product features,as every customer needs to select a colour for the car. Thus, a restriction in the choice ofavailable colours means that customers in the restricted markets cannot obtain therespective feature (e.g. a car in the colour blue). On the other hand, a restriction inproduct variety (measured by the number of available end items) caused by optional

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product features[5] (e.g. power steering) does not necessarily lead to this feature beingunavailable to the customer, as it could simply be a standard product feature in the“restricted” market. The fact that power steering for example is a standard feature inthe UK, but an option in Brazil, “reduces” product variety in the UK when comparedwith Brazil. This in turn means that, while customers in Brazil have more choice toconfigure their car (e.g. by not ordering the power steering option), they cannot choosefrom a potentially higher level of product sophistication. As we have shown, it isimportant not to equate the number of options with the maximum level of productsophistication.

Finally, we have identified three basic mechanisms by which product variety ismanaged across different markets. These are:

(1) not to offer certain options at all in a subset of markets;

(2) to adjust the standard specification’s option content; and

(3) to bundle options.

While all three strategies reduce the overall number of SKUs (or theoreticallyconfigurable product variants), their impact on the supply chain, as well as onconsumers’ perception of choice, differs substantially, and hence these categoriesshould be considered in future studies into the management of product variety.

7. ConclusionIn this study, we have illustrated empirically the differences in product variety betweendeveloped and emerging markets at product and feature level in the case of a passengercar, and have provided an explanation of the factors that drive these differences. Wehave further explored the rationale for, and mechanisms of, adapting a product’s varietyto emerging market settings. Our findings show that the management of variety isindeed largely based on basic economic trade-offs, as the literature suggests, yet we alsoshow that the actual implementation is contingent upon a much wider range of factorsthan previously considered. In particular, we need to emphasise the importance of takingan holistic approach to analysing product variety that considers all actors in the supplychain, not just manufacturing: as our case illustrates, a secondary trade-off exists, wherethe provision of variety through late configuration in the distribution system may bemore economical from the manufacturer’s point of view, yet opens the door tocompetition (and thus lost revenue) from third-party providers.

The underlying study provides evidence of a single firm and product, which limitsthe extent to which the findings can be generalised across a wider range of productsand industries. As comparable studies in the literature are still amiss this investigationcannot claim to be anything more than an initial step towards the study of a topic thatis likely to grow in importance as firms continue to expand their operations inemerging markets. Future studies might want to test and expand on our findings,towards the identification of a more differentiated understanding of the cost-efficientprovision of product variety across multiple divergent market settings. Finally, a firm’sdecision on the provision of product variety is likely to also be a function of anycompetitors’ action, thus future studies might also want to consider the dynamicinterplay between competing firms with regards to their strategy on product variety, inany given context.

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Notes

1. As discussed in Section 2.2 and later also in Section 5.3, additional product variety can becreated further downstream in the supply chain, yet this section will analyse ex factoryproduct variety only to be consistent with previous investigations (Fisher and Ittner, 1999;Pil and Holweg, 2004).

2. This required taking the sunroof out of the factory fitted options, as the sunroof option leadsto a different body in white variant.

3. Instead, one could have chosen any of the other developed markets, such as Germany orFrance. We selected the UK, as it features a medium level of product variety for developedmarkets, and is thus neither too complex nor too restricting for addressing the researchquestion.

4. By level of product sophistication we mean the potential utility of the product to thecustomer. For example, a car is offered in just a single variant in Market A, which includesair-conditioning. In Market B, the same car is offered in two variants, one with and onewithout air-conditioning (everything else being the same). In this scenario, Market B featuresa higher level of product variety, but the level of product sophistication is the same in bothmarkets.

5. By optional product feature, we do not mean that the feature is necessarily an option; itrather refers to whether the product can be built (as manifested by the option’s unavailabilityin at least one market) without this feature or not.

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