The effects of learning on the firm's optimal design quality path

The product design decision making process requires the manager to initially set a target value of the design quality dimensions, and then through a continuous product development effort adjust these targets to meet the changing needs of the market. In this paper, we present a control theoretic model, with the design quality level as the decision variable under the control of the firm. The model captures the effect of learning on production cost. The market is assumed to be reactive to both the design quality level of the product and its price. Optimal decision policies for the design quality path (i.e., the sequence of design quality targets over the product life cycle) under a set of functional assumptions are obtained analytically. Effects of changes in the manufacturing and market conditions — e.g. increase in learning rate, cost of providing certain level of quality, market sensitivities to quality and price, and various pricing strategies — are discussed through the results of extensive numerical experimentation.