A product mix consists of various product lines. In general electric's consumer Appliance Division, there is product-line managers for refrigerators stoves, and washing machines.
In offering a product line, companies normally develop a basic platform and modules that can be added to meet different customer requirements. Car manufacturers build their cars around a basic platform. Home builders show a model home to which additional features can be added. This modular approach enables the company to offer variety while lowering production costs.
Product-line analysis
Product-line managers need to know the sales and profits of each item in their line in order to determine which items to build, maintain, harvest, or divest. They also need to understand each product line's market profile.
SALES AND PROFITS:
shows a sales and profit report for a five-item product line. The first item accounts for 50 percent of total sales and 30 percent of total profits. The first two items account for 80 percent of total sales and 60 percent of total profits. If these two items were suddenly hurt by a competitor, the line's sales and profitability could collapse. These items must be carefully monitored and protected. At the other end, the last item delivers only 5 percent of the product line's sales and profits. The product line manager may consider dropping this item unless it has strong growth potential.
Every company's product portfolio contains products with different margins. Supermarkets make almost no margin on bread and' milk; reasonable margins on canned and frozen foods; and even better margins on flowers, ethnic food lines, and freshly baked goods. A local telephone company makes different margins on its core telephone service, call waiting, caller ID, and voice mail.
A company can classify its products into four types that yield different gross margins, depending on sales volume and promotion. To illustrate with personal computers:
§ Core product: Basic computers that produce high sales volume and are heavily promoted but with low margins because they are viewed as undifferentiated commodities.
§ Staples: Items with lower sales volume and no promotion, such as faster CPUs or bigger memories. These yield a somewhat higher margin.
§ Specialties: Items with lower sales volume but which might be highly promoted, such as digital movie-making equipment; or might generate income for services, such as personal delivery, installation, or on-site training.
§ Convenience items: Peripheral items that sell in high volume but receive less promotion, such as computer monitors, printers, upscale video or sound cards, and software. Consumers tend to buy them where they buy the original equipment because it is more convenient than making further shopping trips. These items can carry higher margins.
The main point is that companies should recognize that these items differ in their potential for being priced higher or advertised more as ways to increase their sales, margins, or both.
PRODUCT-LINE LENGTH
A product line is too short if profits can be increased by adding items; the line is too long if profits can be increased by dropping items.
Company objectives influence product-line length. One objective is to create a product line to induce up selling: Thus BMW would like to move customers up from the BMW 3 series to the 5 to 7 series. A different objective is to create a product line that facilitates cross-selling: Hewlett-Packard sells printers as well as computers. Still another objective is to create a product line that protects against economic ups and downs; thus the GAP runs various clothing-store chains (Old Navy, GAP, banana republic) covering different price points in case the economy moves up or down. Companies seeking high market share and market growth will generally carry longer product lines. Companies that emphasize high profitability will carry shorter lines consisting of carefully chosen items.
Product lines tend to lengthen over time. Excess manufacturing capacity puts pressure on the product-line manager to develop new items. The sales force and distributors also pressure the company for a more complete product line to satisfy customers; but as items are added, several costs rise: design and engineering costs, inventory-carrying costs, manufacturing-changeover costs, order-processing costs, transportation costs and new-item promotional costs. Eventually, someone calls a halt: Top management may stop development because of insufficient funds or manufacturing capacity. The controller may call for a study of money-losing items. A pattern of product-line growth followed by massive pruning may repeat itself many times.
A company lengthens its product line in two ways: by line stretching and line filling.
LINE STRETCHING:
Every company's product line covers a certain part of the total possible range. For example, BMW automobiles are located in the upper price range of the automobile market. Line stretching occurs when a company lengthens its product line beyond its current range. The company can stretch its line down-market, up market, or both ways.Down-market Stretch
A company positioned in the middle market may want to introduce a lower-priced line for any of three reasons:
1. The company may notice strong growth opportunities as mass-retailers such as Wal-Mart, Best Buy, and others attract a growing number of shoppers who want value-priced goods.
2. The company may wish to tie up lower-end competitors who might otherwise try to move up the market. If the company has been attacked by a low-end competitor, it often decides to counterattack by entering the low end of the market.
3. The company may find that the middle markets stagnating or declining.
A company faces a number of naming choices in deciding to move down-market. Sony, for example, faced three choices:
1. Use the name Sony on all of its offerings. (Sony did this.)
2. Introduce the lower-priced offerings using a sub-brand name, such as Sony Value Line. Other companies have done this, such as Gillette with Gillette Good News and United Airlines with United Express. The risks are that the Sony name loses some of its quality image and that some Sony buyers might switch to the lower-priced offerings.
3. Introduce the lower-priced offerings under a different name, without mentioning Sony; but Sony would have to spend a lot of money to build up the new brand name, and the mass merchants may not even accept a brand that lacks the Sony name.
Up market Stretch
Companies may wish to enter the high end of the market for more growth, higher margins, or simply to position themselves as full-line manufacturers. Many markets have spawned surprising upscale segments: Toyota's Lexus; Nissan's Infinity; and Honda's Acura. Note that they invented entirely new names rather than using or including their own names.
Other companies have included their own name in moving upmarket. Two-Way Stretch Companies serving the middle market might decide to stretch their line in both directions..
The Marriott Hotel group also has performed a two-way stretch of its hotel product line. Marriott International develops lodging brands in the most profitable segments in the industry. In order to determine where these opportunities lie, Marriott conducts extensive consumer research to uncover distinct consumer targets and develop products targeted to those needs in the most profitable areas. Examples of this are the development of the JW Marriott line in the upper upscale segment, Courtyard by Marriott in the upper mid-scale segment and Fair field Inn in the lower mid-scale segment. By basing the development of these brands on distinct consumer targets with unique needs, Marriott is able to ensure against overlap between brands.
LINE FILLING:
A product line can also be lengthened by adding more items within the present range. There are several motives for line filling: reaching for incremental profits, trying to satisfy dealers who complain about lost sales because of missing items in the line, trying to utilize excess capacity, trying to be the leading full-line company, and trying to plug holes to keep out competitors.
Line filling is overdone if it results in self-cannibalization and customer confusion. The company needs to differentiate each item in the consumer's mind. Each item should possess a just-noticeable difference. The company should also check that the proposed item meets a market need and is not being added simply to satisfy an internal need.
Line modernization, featuring, and pruning
Product lines need to be modernized. A company's machine tools might have a 1950s look and lose out to newer-styled competitors' lines. The issue is whether to overhaul the line piecemeal or all at once. A piecemeal approach allows the company to see how customers and dealers take to the new style. It is also less draining on the company's cash flow, but it allows competitors to see changes and to start redesigning their own lines.
In rapidly changing product markets, modernization is carried on continuously. Companies plan improvements to encourage customer migration to higher-valued, higher-priced items. Microprocessor companies such as Intel and Motorola, and software companies such as Microsoft and Lotus, continually introduce more advanced versions of their products. A major issue is timing improvements so they do not appear too early (damaging sales of the current line) or too late (after the competition has established a strong reputation for more advanced equipment). The product-line manager typically selects one or a few items in the line to feature. Sears will announce a special low-priced washing machine to attract customers. At other times, managers will feature a high-end item to lend prestige to the product line. Sometimes a company finds one end of its line selling well and the other end selling poorly. The company may try to boost demand for the slower sellers, especially if they are produced in a factory that is idled by lack of demand. This situation faced Honeywell when its medium-sized computers were not selling as well as its large computers, but it could be counter-argued that the company should promote items that sell well rather than try to prop up weak items.
Product-line managers must periodically review the line for deadwood that is depressing profits. Unilever recently cut down its portfolio of brands from 1,600 to 970 and may even prune more, to 400 by 2005. The weak items can be identified through sales and cost analysis. A chemical company cut down its line from 217 to the 93 products with the largest volume, the largest contribution to profits, and the greatest long-term potential. Pruning is also done when the company is short of production capacity. Companies typically shorten their product lines in periods of tight demand and lengthen their lines in periods of slow demand.
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