Optimizer or pragmatist? One theory focuses on value to the corporation. The other focuses on value to the customer. Any guess which is the real long-term strategy?

It strikes me that the auto industry at this point in time is split between optimizers and pragmatists. Both are on the same trip, but will find themselves at different destinations. The companies following the optimal path look pretty similar: a minimum number of platforms, powertrains, and people working as efficiently as possible to produce the largest number of variations. They have the potential to satisfy a broad swath of the market with a meager base component set, and make tons of money initially. What they don't have in their current line-up they buy, only to pull the new arrivals into the mix to extend the marginal gains all this sharing has to offer.

It's a seductive idea: getting the greatest possible return on your investment by building as many different things from a finite set as you can. Seemingly, the economic theory behind this process is infallible because it shows the marginal return increasing at an accelerating rate as more variants are added to the mix. Variants that are bought and paid for by the blinding efficiency of this program. It even encourages the practitioner to consider each significant variant as an "update" of the original, and the final one in the series as the starting point for the next round--all in the name of efficiency. Underlying this theory is the belief that volume is the key to profits because it drives down costs. No one in this camp ever speaks about its practical limits, leaving the impression that the cost curve isn't asymptotic.

Those companies that are pragmatists believe there is a limit to commonality. They have learned from the profligacy of the past, and have made common as many components as they feel are practical. However, they don't follow a singular course reductio ad absurdum. Therefore, the total number of distinct powertrains and platforms in their lineup may be greater, but the commonality is found in the way in which technology moves downstream from the most expensive offerings to the least. It allows them to compete in a variety of market segments by following a "premium" strategy that makes the buyer, not the company, the focus of the effort to attain the greatest value for the dollar. Ultimate volume is not the key to this strategy. Large and small companies can follow this combination of rational commonality and rational variety to produce vehicles its optimizing competition can't replicate.

This path increases the pragmatic company's profitability for the simple reason that it's able to offer its customer base a variety of real choices embodying an above-average level of technology that is aimed at their needs and desires. Technological change that becomes self-generating each time the bar is raised in the upper segments and makes its way down through the rest of the lineup. Over time, this escalating level of functionality becomes the price of entry, and forces the optimizers into adopting wholesale changes in their carefully laid plans as they try to keep up. Their seemingly rational plans are overtaken by events.

Ultimately, however, both are profitable strategies, though the long-term effects vary greatly. Optimizers make their greatest gains as each replacement cycle begins, while the pragmatists have a steady-to-increasing profit stream. It's the difference between a boom-bust cycle and steady prosperity. Fundamentally, it's the difference between a philosophy that forces the greatest number of buyers into a minimum number of vehicles and one that creates the greatest practical variety to capture the broadest market possible.

By Christopher A. Sawyer, Executive Editor, [e-mail]