Dealing with Original-Equipment Manufacturers (OEMs) Following the strategy of dealing with an OEM, a company may sell to competitors the components used in its own product. This enables competitors to compete with the company in the market. For example, in the initial stages of color television, RCA was the only company that manufactured picture tubes. It sold these picture tubes to GE and to other competitors, enabling them to compete with RCA color television sets in the market. The relevance of this strategy may be discussed from the viewpoint of both the seller and the OEM. The motivation for the seller comes from two sources: the desire to work at near-capacity level and the desire to have help in promoting primary demand. Working at full capacity is essential for capitalizing on the experience effect (see Article 12). Thus, by selling a component to competitors, a company may reduce the across-the-board costs of the component for itself, and it will have the price leverage to compete with those manufacturers to whom it sold the component. Besides, the company will always have the option of refusing to do business with a competitor who becomes a problem. The second source of motivation is the support competitors can provide in stimulating primary demand for a new product. Many companies may be working on a new-product idea. When one of them successfully introduces the product, the others may be unable to do so because they lack an essential component or the technology that the former has. Since the product is new, the innovator may find the task of developing primary demand by itself tedious. It may make a strategic decision to share the essential-component technology with other competitors, thus encouraging them to enter the market and share the burden of stimulating primary demand. A number of companies follow the OEM strategy.

Auto manufacturers sell parts to each other. Texas Instruments sold electronic chips to its competitors during the initial stages of the calculator’s development. In the 1950s, Polaroid bought certain essential ingredients from Kodak to manufacture film. IBM has shared a variety of technological components with other computer producers. In many situations, however, the OEM strategy may be forced upon companies by the Justice Department in its efforts to promote competition in an industry. Both Kodak and Xerox shared the products of their technology with competitors at the behest of the government. Thus, as a matter of strategy, when government interference may be expected, a company will gain more by sharing its components with others and assuming industry leadership. From the standpoint of results, this strategy is useful in seeking increased profitability, though it may not have much effect on market share or growth. As far as the OEMs are concerned, the strategy of depending upon a competitor for an essential component only works in the short run because the supplier may at some point refuse entirely to sell the component or may make it difficult for the buyer to purchase it by delaying deliveries or by increasing prices enormously.

PRODUCT-SCOPE STRATEGY

The product-scope strategy deals with the perspective of the product mix of a company (i.e., the number of product lines and items in each line that the company may offer). The product-scope strategy is determined by making reference to the business unit mission. Presumably, the mission defines what sort of business it is going to be, which helps in selecting the products and services that are to become a part of the product mix. The product-scope strategy must be finalized after a careful review of all facets of the business because it involves long-term commitment. In addition, the strategy must be reviewed from time to time to make any changes called for because of shifts in the environment.

The point may be elaborated with reference to Eastman Kodak Company’s decision to enter the instant photography market in the early 1970s. Traditionally, Polaroid bought negatives for its films, worth $50 million, from Kodak. In 1969, Polaroid built its own negative plant. This meant that Kodak would lose some $50 million of Polaroid’s business and be left with idle machinery that had been dedicated to filling Polaroid’s needs. Further, by producing its own film, Polaroid could lower its costs; if it then cut prices, instant photography might become more competitive with Kodak’s business. Alternatively, if Polaroid held prices high, it would realize high margins and would soon be very rich indeed. Encouraged by such achievements, Polaroid could even develop a marketing organization rivaling Kodak’s and threaten it in every sphere. In brief, Kodak was convinced that it would be shut out of the instant photography market forever if it delayed its entry any longer. Subsequently, however, a variety of reasons led Kodak to change its decision to go ahead with instant photography. Its pocket instamatic cameras turned out to be highly successful, and some of the machinery and equipment allocated to instant photography had to be switched over to pocket instamatics. A capital shortage also occurred, and Kodak, as a matter of financial policy, did not want to borrow to support the instant photography project. In 1976, Kodak again revised its position and did enter the field of instant photography. In brief, commitment to the product-scope strategy requires a thorough review of a large number of factors both inside and outside the organization. The three variants of product-scope strategy that will be discussed in this section are single-product strategy, multiple-products strategy, and system-of-products strategy. It will be recalled that in the previous article three alternatives were discussed under market-scope strategy: single-market strategy, multimarket strategy, and total-market strategy. These market strategies may be related to the three variants of product-scope strategy, providing nine different product/market-scope alternatives.

Single Product A business unit may have just one product in its line and must try to live on the success of this one product. There are several advantages to this strategy. First, concentration on a single product leads to specialization, which helps achieve scale and productivity gains. Second, management of operations is much more efficient when a single product is the focus. Third, in today’s environment, where growth leads most companies to offer multiple products, a single-product company may become so specialized in its field that it can stand any competition. A narrow product focus, for example, cancer insurance, has given American Family Life Assurance Company of Columbus, Georgia, a fast track record. Cancer is probably more feared than any other disease in the United States today. Although it kills fewer people than heart ailments, suffering is often lingering and severe. Cashing in on this fear, American Family Life became the nation’s first marketer of insurance policies that cover the expenses of treating cancer. Despite its obvious advantages, the single-product company has two drawbacks: First, if changes in the environment make the product obsolete, the single- product company can be in deep trouble. American history is full of instances where entire industries were wiped out. The disposable diaper, initially introduced by Procter & Gamble via its brand Pampers, pushed the cloth diaper business out of the market. The Baldwin Locomotive Company’s steam locomotives were made obsolete by General Motors’ diesel locomotives. Second, the single-product strategy is not conducive to growth or market share. Its main advantage is profitability. If a company with a single-product focus is not able to earn high margins, it is better to seek a new posture. Companies interested in growth or market share will find the single-product strategy of limited value.

Multiple Products The multiple-products strategy amounts to offering two or more products. Avariety of factors lead companies to choose this strategic posture. A company with a single product has nowhere to go if that product gets into trouble; with multiple products, however, poor performance by one product can be balanced out. In addition, it is essential for a company seeking growth to have multiple product offerings. In 1970, when Philip Morris bought the Miller Brewing Company, it was a one-product business ranking seventh in beer sales. Growth prospects led the company to offer a number of other products. By 1978, Miller had acquired the number two position in the industry with 15 percent of the market. Miller continues to maintain its position (market share in 1998 was 1

8.2 percent), although Anheuser-Busch, the industry leader, has taken many steps to dislodge it. As another example, consider Chicago-based Dean Foods Company, which traditionally has been a dairy concern. Over the years, diet-conscious and aging consumers have increasingly shunned high-fat dairy products in favor of low-calorie foods, and competition for the business that remains is increasingly fierce. To successfully operate in such an environment, the company decided to add other faster-growing, higher-margin refrigerated foods, such as party dips and cranberry drink, to the company’s traditional dairy business. Dean’s moves have been so successful that, although many milk processors were looking to sell out, Dean was concerned that it might be bought out. Similarly, Nike began with a shoe solely for serious athletes. Over the years, the company has added a number of new products to its line. It now makes shoes, for both males and females, for running, jogging, tennis, aerobics, soccer, basketball, and walking. Lately, it has expanded its offerings to include children. Multiple products can be either related or unrelated. Unrelated products will be discussed later in the section on diversification. Related products consist of different product lines and items. Afood company may have a frozen vegetable line, a yogurt line, a cheese line, and a pizza line. In each line, the company may produce different items (e.g., strawberry, pineapple, apricot, peach, plain, and blueberry yogurt). Note, in this example, the consistency among the different food lines: (a) they are sold through grocery stores, (b) they must be refrigerated, and (c) they are meant for the same target market. These underpinnings make them related products. Although not all products may be fast moving, they must complement each other in a portfolio of products. The subject of product portfolios was examined in Article

10. Suffice it to say, the multiple-products strategy is directed toward achieving growth, market share, and profitability. Not all companies get rich simply by having multiple products: growth, market share, and profitability are functions of a large number of variables, only one of which is having multiple products.

System of Products The word system, as applied to products, is a post-World War II phenomenon. Two related forces were responsible for the emergence of this phenomenon: (a) the popularity of the marketing concept that businesses sell satisfaction, not products; and (b) the complexities of products themselves often call for the use of complementary products and after-sale services. A cosmetics company does not sell lipstick, it sells the hope of looking pretty; an airline should not sell plane tickets, it should sell pleasurable vacations. However, vacationers need more than an airline ticket. Vacationers also need hotel accommodations, ground transportation, and sightseeing arrangements. Following the systems concept, an airline may define itself as a vacation packager that sells air transportation, hotel reservations, meals, sightseeing, and so on. IBM is a single source for hardware, operating systems, packaged software, maintenance, emergency repairs, and consulting services. Thus, IBM offers its customers a system of different products and services to solve data management problems. Likewise, ADT Ltd. is a company whose product is security systems. Beginning with consulting on the type of security systems needed, ADT also provides the sales, installation, service, updating on new technologies to existing systems, and the actual monitoring of these alarm systems either by computer or with patrol services and security watchmen. Offering a system of products rather than a single product is a viable strategy for a number of reasons. It makes the customer fully dependent, thus allowing the company to gain monopolistic control over the market. The system-of-products strategy also blocks the way for the competition to move in. With such benefits, this strategy is extremely useful in meeting growth, profitability, and market share objectives. If this strategy is stretched beyond its limits, however, a company can get into legal problems. Several years ago, IBM was charged by the Justice Department with monopolizing the computer market. In the aftermath of this charge, IBM has had to make changes in its strategy. Lately, Microsoft has been under fire for its dominant hold on the Internet technology. The successful implementation of the system-of-products strategy requires a thorough understanding of customer requirements, including the processes and functions the consumer must perform when using the product. Effective implementation of this strategy broadens both the company’s concept of its product and market opportunities for it, which in turn support product/market objectives of growth, profitability, and market share.