Product and Process Flexibility in an Innovative Environment

A Literature Review

One of the first academic papers I read when I embarked on my Ph.D. journey and a catalyst of my research was: Product and Process Flexibility in an Innovative Environment.

This paper was written in 1995 (!) by Susan Athey and Armin Schmutzler and was published in the RAND Journal of Economics. 

In this paper, the authors provide a detailed analysis of a monopolistic company's decision-making process in relation to long-run variables such as product, process flexibility, and research. The article offers insights into the factors that determine the company's choices and the complementary nature of these choices. 

The authors emphasize the importance of complementarities between the strategic long-run choices, which originate from the firm's short-run decisions about implementing different types of innovation. 

For Product folks reading this and getting somewhat lost, this would be what we call, 20 years later, a product strategy. 

The study highlights the significance of incremental adjustments to product and process designs in many companies. Implementing an incremental innovation approach (there was no Agile buzz back then) can be viewed as a short-run decision relative to the company's flexibility and research capabilities choices. 

The authors also discuss that many aspects of a company's organisation design and technology are best viewed as long-run choices. For instance, how tasks are grouped into jobs and workers into teams and divisions affects the coordination costs of adjustment and, thus, the firm's product and process flexibility. 

For folks who are somewhat new to Product Management, Engineering, and Design, there is the tendency to believe all of these functions appeared like magic in a post-Agile world. I hate to break it to you (not really!), but these concepts are not new. Some have been re-designed for speed and more innovation, but they are fundamentally the same. 

The article introduced the idea that a company's research capabilities cannot be adjusted as frequently as innovation opportunities arise. That is still true today. 

The probability distribution over the quality of future innovation opportunities depends on the company's investments in labs, market research groups, and workers with specialised knowledge or experience relevant to the firm's production and product process.

The authors suggest that the firm may increase the likelihood of discovering essential opportunities for innovation by improving the flow of information between employees and customers. What?! They had feedback loops in the 90s?

Examples include computer databases, incentives, mechanisms for gathering employee or customer suggestions, or cross-functional teams aiming to improve either products or processes.

The authors also discuss the effects of exogenous factors, such as the costs of achieving flexibility and favorable prospects for innovation, on the returns to long-run decisions. They suggest that complementarities between the long-run decision variables should lead the firm to choose higher levels of all four choices when the marginal cost of any one activity falls. 

The study shows that the returns to long-run decisions vary with the costs of achieving flexibility and the prospects for innovation, and these factors should be taken into account when making short-run decisions about implementing innovations.

Overall, the study truly provides valuable insights into the decision-making process in relation to product and process flexibility and research.

The findings highlight the importance of complementarities between these variables and the effects of exogenous factors on the returns to these long-run decisions. 

In my career to date as a Product Manager, I've held very few opinions firmly: 

• Simple is usually the best 

• Context is king 

• And where possible, try not to reinvent the wheel. Instead, re-think some fundamental concepts and apply them to the business and market context. 

In a function that has been growing, and growing fast, sometimes there is a lot of value in going back to the basics and re-think some concepts, like the ones introduced in this article in 1995. 

Who knows, we might get something valuable out of it! 

See ya next Friday, when I will (hopefully) return to normal and create more platform-specific content.