A business unit may offer a standard or a custom-designed product to each individual customer. The decision about whether to offer a standard or a customized product can be simplified by asking these questions, among others: What are our capabilities? What business are we in? With respect to the first question, there is a danger of overidentification of capabilities for a specific product. If capabilities are overidentified, the business unit may be in trouble. When the need for the product declines, the business unit will have difficulty in relating its product’s capabilities to other products. It is, therefore, desirable for a business unit to have a clear perspective about its capabilities. The answer to the second question determines the limits within which customizing may be pursued. Between the two extremes of standard and custom products, a business unit may also offer standard products with modifications. These three strategic alternatives, which come under the product-design strategy, are discussed below.

Standard Products Offering standard products leads to two benefits. First, standard products are more amenable to the experience effect than are customized products; consequently, they yield cost benefits. Second, standard products can be merchandised nationally much more efficiently. Ford’s Model T is a classic example of a successful standard product. The standard product has one major problem, however. It orients management thinking toward the realization of per-unit cost savings to such an extent that even the need for small changes in product design may be ignored. There is considerable evidence to suggest that larger firms derive greater profits from standardization by taking advantage of economies of scale and long production runs to produce at a low price. Small companies, on the other hand, must use the major advantage they have over the giants, that is, flexibility. Hence, the standard-product strategy is generally more suitable for large companies. Small companies are better off as job shops, doing customized work at a higher margin. A standard product is usually offered in different grades and styles with varying prices. In this manner, even though a product is standard, customers have broader choices. Likewise, distribution channels get the product in different price ranges. The result: standard-product strategy helps achieve the product/market objectives for growth, market share, and profitability.

Customized Products Customized products are sold on the basis of the quality of the finished product, that is, on the extent to which the product meets the customer’s specifications. The producer usually works closely with the customer, reviewing the progress of the product until completion. Unlike standard products, price is not a factor for customized products. A customer expects to pay a premium for a customized product. As mentioned above, a customized product is more suitable for small companies to offer. This broad statement should not be interpreted to mean that large companies cannot successfully offer customized products. The ability to sell customized products successfully actually depends on the nature of the product. Asmall men’s clothing outlet is in a better position to offer custom suits than a large men’s suit manufacturer. On the other hand, GE is better suited to manufacture a custom-designed engine for military aircraft than a smaller business. An innovative aspect of this product strategy is mass customization, making goods to each customer’s requirements. One company that practices mass customization is Customer Foot. It makes shoes that meet individual tastes and size requirements, yet does so on a mass-production basis, at slightly lower prices than many premium brands sold off the shelf. This requires a flexible manufacturing system that anticipates a wide range of options. Many companies can find an important competitive edge in mass customization. If Company X offers a onesize- fits-all product and Company Y can tailor the same product to individual tastes without charging much more, the latter will be more successful. It is a powerful tool for building relationships with customers, since it requires a company to gather information, often of a very personal nature, about customers’ tastes and needs. Over and above price flexibility, dealing in customized products provides a company with useful experience in developing new standard products. A number of companies have been able to develop mass market products out of their custom work for NASA projects. The microwave oven, for example, is an offshoot of the experience gained from government contracts. Customized products also provide opportunities for inventing new products to meet other specific needs. In terms of results, this strategy is directed more toward realizing higher profitability than are other product-design strategies.

Standard Products with Modifications The strategy of modifying standard products represents a compromise between the two strategies already discussed. With this strategy, a customer may be given the option to specify a limited number of desired modifications to a standard product. A familiar example of this strategy derives from the auto industry. The buyer of a new car can choose type of shift (standard or automatic), air conditioning, power brakes, power steering, size of engine, type of tires, and color. Although some modifications may be free, for the most part the customer is expected to pay extra for modifications. This strategy is directed toward realizing the benefits of both a standard and a customized product. By manufacturing a standard product, the business unit seeks economies of scale; at the same time, by offering modifications, the product is individualized to meet the specific requirements of the customer. The experience of a small water pump manufacturer that sold its products nationally through distributors provides some insights into this phenomenon. The company manufactured the basic pump in its facilities in Ohio and then shipped it to its four branches in different parts of the country. At each branch, the pumps were finished according to specifications requested by distributors. Following this strategy, the company lowered its transportation costs (because the standard pump could be shipped in quantity) even while it provided customized pumps to its distributors. Among other benefits, this strategy permits the business unit to keep in close contact with market needs that may be satisfied through product improvements and modifications. It also enhances the organization’s reputation for flexibility in meeting customer requirements. It may also encourage new uses of existing products. Other things being equal, this strategy can be useful in achieving growth, market share, and profitability.

PRODUCT-ELIMINATION STRATEGY Marketers have believed for a long time that sick products should be eliminated. It is only in recent years that this belief has become a matter of strategy. A business unit’s various products represent a portfolio, with each product playing a unique role in making the business viable. If a product’s role diminishes or if it does not fit into the portfolio, it ceases to be important. When a product reaches the stage where continued support is no longer justified because performance is falling short of expectations, it is desirable to pull the product out of the marketplace. Poor performance is easy to spot. It may be characterized by any of the following:

1. Low profitability.

2. Stagnant or declining sales volume or market share that is too costly to rebuild.

3. Risk of technological obsolescence.

4. Entry into a mature or declining phase of the product life cycle.

5. Poor fit with the business unit’s strengths or declared mission. Products that are not able to limp along must be eliminated. They drain a business unit’s financial and managerial resources, resources that could be used more profitably elsewhere. Hise, Parasuraman, and Viswanathan cite examples of a number of companies, among them Hunt Foods, Standard Brands, and Crown Zellerbach, that have reported substantial positive results from eliminating products. 18 The three alternatives in the product-elimination strategy are harvesting, line simplification, and total-line divestment.

Harvesting Harvesting refers to getting the most from a product while it lasts. It is a controlled divestment whereby the business unit seeks to get the most cash flow it can from the product. The harvesting strategy is usually applied to a product or business whose sales volume or market share is slowly declining. An effort is made to cut the costs associated with the business to improve cash flow. Alternatively, price is increased without simultaneous increase in costs. Harvesting leads to a slow decline in sales. When the business ceases to provide a positive cash flow, it is divested. Du Pont followed the harvesting strategy in the case of its rayon business. Similarly, BASF Wyandotte applied harvesting to soda ash. As another example, GE harvested its artillery business a few years ago. Even without making any investments or raising prices, the business continued to provide GE with positive cash flow and substantial profits. Lever Brothers applied this strategy to its Lifebuoy soap. The company continued to distribute this product for a long time because, despite higher price and virtually no promotional support, it continued to be in popular demand. Implementation of the harvesting strategy requires severely curtailing new investment, reducing maintenance of facilities, slicing advertising and research budgets, reducing the number of models produced, curtailing the number of distribution channels, eliminating small customers, and cutting service in terms of delivery time, speed of repair, and sales assistance. Ideally, harvesting strategy should be pursued when the following conditions are present:

1. The business entity is in a stable or declining market.

2. The business entity has a small market share, but building it up would be too costly; or it has a respectable market share that is becoming increasingly costly to defend or maintain.

3. The business entity is not producing especially good profits or may even be producing losses.

4. Sales would not decline too rapidly as a result of reduced investment.

5. The company has better uses for the freed-up resources.

6. The business entity is not a major component of the company’s business portfolio.

7. The business entity does not contribute other desired features to the business portfolio, such as sales stability or prestige.

Line Simplification Line-simplification strategy refers to a situation where a product line is trimmed to a manageable size by pruning the number and variety of products or services offered. This is a defensive strategy that is adopted to keep a falling line stable. It is hoped that the simplification effort will restore the health of the line. This strategy becomes especially relevant during times of rising costs and resource shortages. The application of this strategy in practice may be illustrated with an example from GE’s housewares business. In the early 1970s, the housewares industry faced soaring costs and stiff competition from Japan. GE took a hard look at its housewares business and raised such questions as: Is this product segment mature? Is it one we should be harvesting? Is it one we should be investing money in and expanding? Analysis showed that there was a demand for housewares, but demand was just not attractive enough for GE at that time. The company ended production of blenders, fans, heaters, and vacuum cleaners because they were found to be on the downside of the growth curve and did not fit in with GE’s strategy for growth. Similarly, Sears, Roebuck & Co. overhauled its retail business in 1993, dropping its famous catalog business, which contributed over $3 billion in annual sales. Sears’s huge catalog operations had been losing money for nearly a decade (about $175 million in 1992), as specialty catalogs and specialty stores grabbed market share from the country’s once-supreme mail-order house. Kodak discovered that more than 80% of all its sales are achieved by less than 20% of the product line. Therefore, the company eliminated 27% of all sales items. Procter & Gamble got rid of marginal brands such as Bain de Soleil sun-care products. In addition, the company cut product items by axing extraneous sizes, flavors, and other variants.

The implementation of a line-simplification strategy can lead to a variety of benefits: potential cost savings from longer production runs; reduced inventories; and a more forceful concentration of marketing, research and development, and other efforts behind a shorter list of products. However, despite obvious merits, simplification efforts may sometimes be sabotaged. Those who have been closely involved with a product may sincerely feel either that the line as it is will revive when appropriate changes are made in the marketing mix or that sales and profits will turn up once temporary conditions in the marketplace turn around. Thus, careful maneuvering is needed on the part of management to simplify a line unhindered by corporate rivalries and intergroup pressures. The decision to drop a product is more difficult if it is a core product that has served as a foundation for the company. Such a product achieves the status of motherhood, and a company may like to keep it for nostalgic reasons. For example, the decision by General Motors to drop the Cadillac convertible was probably a difficult one to make in light of the prestige attached to the vehicle. Despite the emotional aspects of a product-deletion decision, the need to be objective in this matter cannot be overemphasized. Companies establish their own criteria to screen different products for elimination. In finalizing the decision, attention should be given to honoring prior commitments. For example, replacement parts must be provided even though an item is dropped. A well-implemented program of product simplification can lead to both growth and profitability. It may, however, be done at the cost of market share.

Total-Line Divestment Divestment is a situation of reverse acquisition. It may also be a dimension of market strategy. But to the extent that the decision is approached from the product’s perspective (i.e., to get rid of a product that is not doing well even in a growing market), it is an aspect of product strategy. Traditionally, companies resisted divestment for the following reasons, which are principally either economic or psychological in nature:

1. Divestment means negative growth in sales and assets, which runs counter to the business ethic of expansion.

2. Divestment suggests defeat.

3. Divestment requires changes in personnel, which can be painful and can result in perceived or real changes in status or have an adverse effect on the entire organization.

4. Divestment may need to be effected at a price below article and thus may have an adverse effect on the year’s earnings.

5. The candidate for divestment may be carrying overhead, buying from other business units of the company, or contributing to earnings. With the advent of strategic planning in the 1970s, divestment became an accepted option for seeking faster growth. More and more companies are now willing to sell a business if the company will be better off strategically. These companies feel that divestment should not be regarded solely as a means of ridding the company of an unprofitable division or plan; rather, there are some persuasive reasons supporting the divestment of even a profitable and growing business. Businesses that no longer fit the corporate strategic plan can be divested for a number of reasons:

• There is no longer a strategic connection between the base business and the part to be divested.

• The business experiences a permanent downturn, resulting in excess capacity for which no profitable alternative use can be identified.

• There may be inadequate capital to support the natural growth and development of the business.

• It may be dictated in the estate planning of the owner that a business is not to remain in the family.

• Selling a part of the business may release assets for use in other parts of the business where opportunities are growing.

• Divestment can improve the return on investment and growth rate both by ridding the company of units growing more slowly than the basic business and by providing cash for investment in faster-growing, higher-return operations. Whatever the reason, a business that may have once fit well into the overall corporate plan can suddenly find itself in an environment that causes it to become a drain on the corporation, either financially, managerially, or opportunistically. Such circumstances suggest divestment. Divestment helps restore balance to a business portfolio. If the company has too many high-growth businesses, particularly those at an early stage of development, its resources may be inadequate to fund growth. On the other hand, if a company has too many low-growth businesses, it will often generate more cash than is required for investment and will build up redundant equity. For a business to grow evenly over time while showing regular increments in earnings, a portfolio of fast- and slow-growth businesses is necessary. Divestment can help achieve this kind of balance. Finally, divestment helps restore a business to a size that will not lead to an antitrust action. The use of this strategy is reflected in GE’s decision to divest its consumer electronics business in the early 1980s. In order to realize a return that GE considered adequate, the company would have had to make additional heavy investments in this business. GE figured that it could use the money to greater advantage in an area other than consumer electronics.

Hence, it divested the business by selling it to Thomson, a French company. Essentially following the same reasoning, Olin Corporation divested its aluminum business on the grounds that maintaining its small 4 percent share required big capital expenditures that could be employed more usefully elsewhere in the company. Westinghouse sold its major appliance line because it needed at least an additional 3 percent beyond the 5 percent share it held before it could compete effectively against industry leaders GE and Whirlpool. GE and Whirlpool divided about half the total market between them. Between 1986 and 1988, Beatrice sold two-thirds of its business, including such well-known names as Playtex, Avis, Tropicana, and Meadow Gold. The company considered these divestments necessary to transform itself into a manageable organization. It is difficult to prescribe generalized criteria to determine whether to divest a business. However, the following questions may be raised, the answers to which should provide a starting point for considering divestment:

1. What is the earnings pattern of the unit? A key question is whether the unit is acting as a drag on corporate growth. If so, then management must determine whether there are any offsetting values. For example, are earnings stable compared to the fluctuation in other parts of the company? If so, is the low-growth unit a substantial contributor to the overall debt capacity of the business? Management should also ask a whole series of “what-if” questions relating to earnings: What if we borrowed additional funds? What if we brought in new management? What if we made a change in location? etc.

2. Does the business generate any cash? In many situations, a part of a company may be showing a profit but may not be generating any discretionary cash. That is, every dime of cash flow must be pumped right back into the operation just to keep it going at existing levels. Does this operation make any real contribution to the company? Will it eventually? What could the unit be sold for? What would be done with the cash from this sale?

3. Is there any tie-in value financial or operating with existing business? Are there any synergies in marketing, production, or research and development? Is the business countercyclical? Does it represent a platform for growth internally based or through acquisitions?

4. Will selling the unit help or hurt the acquisitions effort? What will be the immediate impact on earnings (write-offs, operating expenses)? What effect, if any, will the sale have on the company’s image in the stock market? Will the sale have any effect on potential acquisitions? (Will I, too, be sold down the river?) Will the divestment be functional in terms of the new size achieved? Will a smaller size facilitate acquisitions by broadening the “market” of acceptable candidates, or, by contrast, will the company become less credible because of the smaller size? In conclusion, a company should undertake continual in-depth analysis of the market share, growth prospects, profitability, and cash-generating power of each business. As a result of such reviews, a business may need to be divested to maintain balance in the company’s total business. This, however, is feasible only when the company develops enough self-discipline to avoid increasing sales volume beyond a desirable size and instead buys and sells businesses with the sole objective of enhancing overall corporate performance.