Companies sell many products to capture a sizable portion of the market. In so doing, they can reach the limit of too many products and give rise to unintentional business complexity – in the supply chain, sales and marketing, product development, and administrative processes. The direct consequence includes increased costs, wasted resources, and significantly lower margins.
WHEN YOUR PRODUCT LINES WEIGH YOU DOWN
Many situations contribute to product proliferation and excessive costs. We explore four of the most common and significant ones:
- End-of-life-cycle product lines
- Product lines with significant overhead cost
- Small-volume low-growth product lines
- First-to-market product lines
1. End-of-life-cycle product lines
2. Product lines with significant overhead cost
3. Small-market-share and low-growth product lines
4. First-to-market product lines
Each of these product situations leads to business complexity and substantial costs that ultimately weigh down the company.
FIXING THE PROBLEM
The prescription for fixing value-destroying complexity is to respond strategically. We find that successful companies follow two principles to help recover from the downside of product proliferation:
- Rationalize unproductive product lines. Management needs to be able to account for the full cost associated with product lines. It needs to determine the actual profitability of the company’s product lines by incorporating costs not easily assigned to products (e.g., warehouse expenses, administrative expenses) and costs not considered product related (e.g., interest associated with financing inventory and accounts receivables). With this information, product-line decisions can be made in the context of a broader business strategy.
- Manage for value, not product variety. There are many ways to manage products for value:
- Cross-selling and bundling are obvious options
- Companies can also enrich products with information and services that help solve customers’ problems
- Finally, adopting the approach of providing integrated customer service has the potential to limit complexity.