Holistic Customer Requirements and the Design-Select Decision

When confronted with the task of developing a new product, a firm chooses either to design new components, unique to the product application, or to select components from those offered in the catalogs of suppliers or from those already in use in its other products. We call this the design-selectdecision. The benefits of selecting an existing component include minimizing investment, exploiting economies of scale, and preserving organizational focus. On the other hand, designing product-specific components allows a firm to (a) maximize product performance with respect to holistic customer requirements---those requirements that arise in a complex way from most of the components of a product; (b) minimize the size and mass of a product; and (c) minimize the true variable costs of production. When these benefits exceed those from selecting existing components, firms will tend to design product-specific components. Our approach is to develop this theory by linking concepts from marketing, technological innovation, and engineering design. This theory yields four testable hypotheses. A cross-sectional analysis of 225 products finds substantial support for the theory.