If a product is not showing profitable performance, the company may consider one of the alternatives, viz., improve, buy or drop the product.
If the firm continues to make the product, it may be required to make improvement in its production or distribution so as to yield adequate return. Improvement may mean re-designing the product or producing it at a lower cost. Product improvement is particularly necessary when the existing product has become apparently obsolete or out of fashion. Indian companies need to continuously upgrade their products and technology to withstand the pace of change in their business environment and to meet the challenges thrown up by the emergence of a buyer’ market. Product improvement is very important in durable goods, for example, automobiles, refrigerators, etc. This explains the development of a camera with a built-in coupled exposure meter, which proved to be a more saleable product than a camera with a conventional exposure meter fitted to the outside case.
Multinationals operating in India have found it necessary to adapt the product to Indian tastes or to suit to Indian psyche. McDonald has introduced McAloo tikki burger and vegetable nuggets. During Navratras, they serve only vegetable stuff. The Pilsbury chakki-fresh atta proposition illustrates the desi bug that has bitten the big white man on the prowl in Indian markets. They have realized that not only have the products to be tailor-made for local requirements with modifications that may be necessary, but the entire tone and tenor of the marketing mix seeks a distinct Indian identity. Harish Bijoor columnist has termed it as a Desi Customisation.
A decision to buy the product rather than improve it, may be appropriate where the ailing product makes positive strategic or merchandising contribution. Buying the product is possible only if the supplying firm can provide the product in sufficient volume and at sufficiently low costs.
In general, buying instead of making and improving, gives a firm certain flexibility, i.e. it can shop around and buy from the most economical source. It can also change its quality standards, if necessary. Further, buying gives the company the advantages of the supplying firm’s specialization and large-scale production.
For the buying firm, however, this decision may have the following consequences :
- It makes the firm dependent upon others, which may be a disadvantage if the supply of the product is not assured and continuous.
- If the supplying firm is part of an oligopolistic industry, its pricing practices may be erratic enough complicate profit, cost and sales planning by the buying company.
A planned and systematic product elimination programme may contribute substantially to the firm’s profitability and future growth. Profits can be enhanced by eliminating certain costs associated with products in the later stages of their life as well as by increasing the productivity of the resources released from the older products.
Very often product elimination is avoided out of sentiment and blinkers are developed in connection with products, which have been in the company’s line of products for a large number of years. However, deletion of products is as important a consideration as introduction of new products. A sick product generally loses its market appeal. It requires a disproportionately larger amount of executive time merely to prop up the marginal product. Further, continuation of sick products would affect a company’s profitability. Also such product may even spoil the company’s reputation if they are unsuitable to the consumers. Besides, capital is tied up in such a sick product which could be released for more profitable products. Finally, if resources are scarce, the company can ill-afford sick products in the product-mix. A systematic approach is, therefore, required for considering the question of elimination of marginal or unprofitable products. It is also essential to first assign definite responsibility for selecting products which are to be considered for elimination. The next step would be to collect the necessary information and analyze it so that a final decision can be taken regarding elimination.
There are certain indicators, which suggest a careful analysis to determine whether or not to eliminate a particular product. These include the following :
- Reduction in product effectiveness;
- Emergence of a superior substitute product;
- Use of disproportionate executive time;
- Declining sales trend
- Decreasing price; and
- Downward profit trend.
These indicators can help management to identify products which should be considered for deletion. An analysis may, however, result in a decision not to eliminate but may suggest further improvements in the products.
Let us now consider these indicators in some detail. Over a period of time, certain products lose their effectiveness for providing the benefits for which they were produced originally. This particularly happens in the case of pharmaceutical products and certain drugs may have to be eliminated or substituted by other drugs. Where a substitute product emerges which is a considerable improvement on the old product, management must consider this seriously even though the substitute product had been introduced by a competitor. A study of the executive time devoted to various products in the product-mix can highlight the product taking excessive time which may be due to the product being sick. However, this must be distinguished form the growing pains of a new product. A declining sales trend over a reasonably long time period would require a careful analysis of the product concerned. Similarly, decreasing price trend might indicate that obsolescence state cannot be warded off much further.
A downward profit trend is a powerful indicator. The company may even work out a practical minimum profit standard for each of its products. However, all products need not show a profit, as at times a product is included to provide a “full line” for the customers. If the dropping of such a product forces the customer to purchase from another supplier products, which constitute a profitable group of the company, then elimination may not be justified. Again the declining trend in profits can be arrested by other tactics such as analyzing possible reductions in production costs, the use of more effective marketing and even by increasing the marketing expense provided the increased sale and profitability are greater than the extra marketing expense involved. The decision to drop the product entirely, is warranted if its long-run net profit is below what would be attained from an alternative product using the same resources. In the long-run, there may be new products which would produce a greater contribution to overheads than the old product.
The Electronics Corporation of India Ltd. decided to suspend production of certain microwave equipment on the ground of unremunerative price, low demand, obsolete technology and stiff competition from small-scale units. The Gramophone Company decided to phase out gradually, the manufacture of consumer electronic products like stereos and record players, as a part of re-adjustment and re-alignment of operations. ICI in the UK, decided to close two uneconomic plants and withdraw several unprofitable products in its synthetic fibres division to reduce losses.