Product design: Impact of government policy and consumer preference on company profit and corporate social responsibility

Highlights

• Product development with the incorporation of government policy and corporate social responsibility.

• Classification of government policy and its influences on product development.

• Multi-objective optimization framework for business decision making.

• Solar photovoltaic case study demonstrates the application of the framework.

Abstract

A multi-objective optimization framework that considers the influence of government policy on product design is presented. The government policy affects product design in the form of financial and non-financial incentives, and regulations. The consumers affect product design by their purchase behavior that is in turn influenced by price, product quality, and the presence of competing products. The company responds to these influencing factors to design a product with as high a profit as possible while satisfying corporate social responsibility. Different models as well as rule-based methods – quality, consumer utility, product demand, product cost, capital budgeting, social indices, and government policy – are presented. A solar photovoltaic case study is used to illustrate the framework.

Introduction

Due to increasing global competition, it is a constant struggle for chemical companies engaging in commodity chemicals to maintain a sufficiently high profit margin (Ng, 2004). In response to this challenge, the chemical processing industry as a whole has been expanding from a primarily process-centric industry towards a more product-centric one (Stephanopoulos, 2003, Smith and Ierapepritou, 2010). Although this shift has slowed down recently because of the availability of shale gas, different types of product development projects are currently being implemented by many companies (Zhang et al., 2016). According to the DuPont Data Book (2015), 1643 new products were commercialized in the year 2015 and 31% of sales were derived from products launched in the previous four years. To succeed in product development, the collaboration of personnel from R&D, engineering, marketing, finance, and business development is crucial (Cussler and Wei, 2003, Ng, 2015, Seider et al., 2017).

Product development involves different tasks such as project management, marketing, research and design, and so on spread out in three phases: product conceptualization, detailed design and prototyping, and product manufacturing and commercialization (Kraslawski, 2006, Smith and Ierapepritou, 2011). After over two decades of research on chemical product design, much is known for handling these tasks effectively. For instance, Smith and Ierapepritou (2009) used conjoint analysis to select product composition and process operating conditions so that consumer utility is maximized. For a similar objective, Lee et al., (2014) proposed a knowledge-based ingredient formulation system to facilitate the communication between the sales personnel and formulators so that the most popular formulations are offered to the consumers. The methods for formulating a wide variety of chemical products ranging from fuel additives to refrigerants have been developed (Sundaram et al., 2001, Sahinidis et al., 2003, Bernardo and Saraiva, 2015, Tam et al., 2016, Dahmen and Marquardt, 2016). The integration of product and process design has also attracted much interest (Wibowo and Ng, 2001, Wibowo and Ng, 2002, Fung and Ng, 2003, Almeida-Rivera et al., 2007, Martín and Martínez, 2013). An interesting example is the approach proposed by Bernardo and Sarariva (2015) that treats a product design problem as the inversion of three design functions: quality, property, and process functions. Product pricing is an important task in product commercialization. Bagajewicz (2007) derived a pricing model that relates product price to product quality, the consumers’ familiarity of the product, and the price and quality of competing products on the market. This model has been applied in the design of various products such as disinfectant, wine, and skin lotion (Street et al., 2008, Heflin et al., 2009, Whitnack et al., 2009, Bagajewicz et al., 2011). Based on this pricing model, Chan et al., (2018) proposed a new framework to systematically determine the model parameters for a completely new or an existing but improved chemical product. Recently, Fung et al., (2016) proposed the Grand Product Design Model which shows how the key issues in product development (e.g., ingredient selection, process design, product quality, product cost, and the economics of a product development project, etc.) are interconnected. It was pointed out that government policies and corporate social responsibility should be considered alongside profit analysis. However, how these two factors influence product development has not been elaborated. Thus, these two issues are explicitly considered in this work.

The impact of government policies, in the form of regulations and incentives, on product development is shown in the expanded Grand Product Design Model (Fig. 1). The ‘Government policy’ icon and the ‘Policy model’ have been newly added. Government regulations can prohibit the use of certain chemicals because of environmental and safety concerns. This is captured by the policy model on the top-left corner of Fig. 1. The ban on DDT (dichloro-diphenyl-trichloroethane) as a pesticide and the phasing out of phosphates in detergents are classic examples. Regulations can also influence plant design. For example, regulations can dictate how a waste stream should be treated in a chemical plant. The incorporation of regulatory requirements into product design drives the implementation of eco-design and shortens the time to market (Pigosso et al., 2016). Government incentives can provide the required financial or non-financial resources (such as subsidy, information, product promotion, etc.) for product development (Marshall and Piper, 2005). These are captured by the three relationships linked to the Government policies icon at the bottom-left of Fig. 1. Most of these incentives are designed to invigorate the local economy. For instance, the US government would procure solar panels manufactured in the US for local job creation (Record, 2017). You et al., (2012) considered the impact of government production and construction incentives on choosing the location for the development of cellulosic biofuel. Moreover, another influencing factor on product development is the increasing adoption of corporate social responsibility (CSR) with which a firm advances social good that goes beyond the firm's financial interest and what is required by law (McWilliams and Siegel, 2001, Baumann et al., 2002). Thus, as shown in Fig. 1, another icon ‘Corporate social responsibility’ and the ‘CSR’ model have been newly added. Clearly, whether the targets of CSR are achieved depends on the various decisions made during product development.

In this study, the impact of government policy on product development is explicitly considered from the company's perspective. In developing a new product, ingredients and processes are identified to provide a product with the desired quality. In addition, decisions on product price, marketing strategy, labor force, etc. should be made. The problem we aim to solve as follows. Given different government policies how decisions should be made for the company to make profit and achieve CSR. Note that as CSR covers very broad environmental and social performance, only certain key aspects are considered in this study.

The paper is organized as follows. First, the way in which the government, company, and consumer interact is elucidated. Then, various models for product design such as product quality, consumer utility, and demand that account for these interactions are presented. Based on these models, a multi-objective optimization framework is developed to quantify the trade-off between profitability and CSR for a given set of government regulations and incentives. Finally, a solar photovoltaic case study is discussed to illustrate the application of the developed framework.