When Do You Eliminate a Product from your Company’s Offering?
07.01.2015 / Posted in Articles
A company often will have a portfolio of products where each product is playing a unique role in making the company viable. If a product’s role within the company no longer achieves those goals, it ceases to be important. So what do you do when a product at your company is no longer performing?
Products that are limping along should be considered for elimination. They drain the company’s resources and finances that could be used to profit elsewhere. Scenarios to examine that will help to determine if a product is not performing include:
- Low profitability
- Stagnant or declining sales volume or market share
- Maintaining your market share is too costly
- Risk of technological elimination
- Entering the mature or declining phase of the life-cycle
- Poor fit with business’s strengths or declared mission
So, do you just kick ‘em while they’re down? Stop production and cut your losses? Actually, it pays to be more strategic. There are a number of product elimination strategies a company could implement, including harvesting, line simplification, and total line divestment, that will help ease the pain of cutting a poorly producing product.
Harvesting is a strategy whereby a company earns the most cash flow out of a product while it lasts. This strategy is usually employed when a product’s sale volume and market share are slowly declining. Harvesting is done by cutting the costs associated with the business or increasing the price of the product without increasing production or operation costs. This strategy impact is a slow decline in sales. Once the product ceases to provide a positive cash-flow, it is then divested.
Implementing a harvesting strategy involves cutting new investments such as advertising and research budgets, reducing maintenance of facilities, and reducing the number of models among that product.
Harvesting strategy is a strong elimination choice when:
- The product is in a stable or declining market.
- The product has a small market share, but increasing it would be too costly.
- The product has a respectable market share, but too costly to defend or maintain.
- The product is not producing strong profits or may even be producing losses.
- Sales of the product would not decline rapidly as a result of less investment.
- The company has better uses for released resources.
- The product does not provide features such as prestige and sales stability.
Line simplification is where a company’s product line is trimmed to a manageable size by reducing the number and variety of products offered. This is a defensive strategy that is employed to keep a failing line stable. The benefits of implementing a line simplification strategy include a potential cost savings from longer production runs, reduced inventories, and more focused marketing initiatives due to a more concise list of products. One negative consequence of this strategy is that it may impact the company’s market share.
Total line divestment is getting rid of a product that is not doing well despite a growing market. People resist divestment as it means a negative growth in sales and assets, which runs against expansion strategies and advocates failure. Total line divestment usually results in staff changes, which then have an impact on corporate culture and public relations. Adverse year earnings is a likely results of this strategy.
This strategy should be implemented when:
- There is no longer a strategic connection between the core of the business and the product to be divested.
- The company experiences a permanent decline where no profitable alternative can be identified.
- There is inadequate capital to support growth and development.
- The release of assets can be used in other parts of the business where opportunities are growing.
- Divestment can improve ROI and growth rate for a company.
Companies should be undertaking a continual analysis of their market share, growth prospects, profitability, and cash-generating power. Not sure how your product mix is performing or want an analysis of your business? Contact us at FrogDog.
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