Platform Flexibility Strategies: Investment versus Customization Tradeoff

Product platforms are flexible assets that facilitate cost-efficient product variety. How much investment in platform flexibility is desirable? We study the platform flexibility investment decision: when is it better to develop low-end or high-end platforms (aligned with the functional- ities of a specific product), or to invest in middle-end platforms with cheaper low- and high-end customization, or in ultimate platforms that cover the functionalities of the entire product range at negligible customization? Or is a portfolio of these platforms better? We present a mathemat- ical model of the platform portfolio flexibility decision where each platform comes with its own fixed investment and variable customization cost. We characterize the optimal strategy using an investment-customization tradeoff curve and value the economies of scale and scope embedded in platforms via comparative statics of investment and customization costs, as well as the mean and covariances of the demand forecast.