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Industrial product elimination: Major factors to consider
Industrial Product Elimination: Major Factors to Consider George
J. Avlonitis
This study investigates the evaluation and decision-making stage of the product elimination process. The study revealed the nature and intensity of the process through which “weak” products are evaluated and eliminationlretention decisions are made.
INTRODUCTION One aspect of product management that is currently receiving special attention in industry is product elimination. Yet, product elimination is one of the key “gaps” in the marketing literature. Most contributions to this area have been theoretical in nature, while little research has been undertaken to provide a thorough understanding of the product elimination function (31. However, basic to the theoretical approaches put forward to provide some guidance in this area is the proposition that the product elimination decision is a sequential multiple-stage process. Indeed, on the basis of the material published to date, the following four-stage elimination process may be envisaged: STAGE I-RECOGNITION OF WEAK PRODUCTS. A product failing to meet the company’s objectives comes to the attention of management through one of a variety of product line audit procedures [ 13, 1, 14, 191. Industrial Marketing Management 13, II-85 (1984) 0 Elsevier Science Publishing Co., Inc., 1984
52 Vanderbilt
Ave., New York, New York 10017
STAGE II-ANALYSIS OF WEAK PRODUCTS. Management attempts to find out why the product does not meet the company’s objectives [9], and considers and evaluates alternative corrective actions that, if brought about, will make the deviant product’s performance compatible with the company’s objectives [8, 12, 71. STAGE III-EVALUATION OF WEAK PRODUCTS AND DECISION-MAKING. If management realizes that no corrective action is feasible, then the managerial attention shifts from the product itself to the impact upon the entire company of eliminating the product; certain evaluation factors related to the product elimination decision are considered to determine whether it is in the best interests of the company to eliminate or retain the product [6, 10, 11, 14, 211. STAGE IV-IMPLEMENTATION OF THE ELIMINATION DECISION . If it is decided to eliminate the product, then management determines the most opportune time and method of its disposal to minimize the elimination’s effects upon customers, dealers, and the company’s profit structure [5, 15, 18, 201. This article focuses on the evaluation and decisionmaking stage (Stage III) of the product elimination process where management examines the implications of dropping those products which have been previously identified as “weak” vis-a-vis the company’s objectives 77 0019-8501/84/$03.00
(Stage I) and which cannot be revitalised (Stage II). Two reasons for this choice should be put forth. First, little is known about the extent to which the various sophisticated quantitative approaches put forward in the literature to assist management in making the elimination/retention decision are actually used in business practice; and second, what little empirical evidence has been reported to date regarding the weak product evaluation, is somewhat confusing. More specifically, the studies by Rothe [ 171 and Pletcher [ 16]-which were specifically designed to explore the evaluation and decision-making stage and in
Product
elimination
OF THE STUDY
The overall purpose of this study was to provide a basic understanding of the rudiments of the evaluation and decision-making stage of the product elimination process within industrial goods companies. The more specific purposes are as follows: l
l
To examine the weak product evaluation process that leads to the elimination/retention decision; To determine the evaluation factors considered by
is a multi-stage
particular the evaluation factors considered by management in making the elimination/retention decisionrevealed a number of evaluation factors that are not pertinent to the stage in question. In both of these studies, executives were asked to note in a self-administered questionnaire the relative importance of such factors as profitability, unit sales, product cost, market share, etc. which, according to major contributions to the literature on product management, represent criteria or diagnostic indicators for use in the product line audit and the recognition of weak products stage. In fact, at least half of the 26 variables (deemed to be relevant to the evaluation and decision-making stage) included in Pletcher’s questionnaire (which was mailed to 23 companies in the American Small Home Appliance Industry) could be classified as product line audit criteria. The lack of extensive field work in both of these studies may help to explain the limitations of their test instrument and consequently the somewhat confusing reported results.
DR. GEORGE J. AVLONITIS is a Lecturer in Marketing at Strathclyde Business School, University of Strathclyde. His research interests include product-range policy, industrial innovation, and sales management. Author of numerous journal articles and papers to conferences in Britain, America, France, Holland and Ireland, he is a member of the American Marketing Association and the Marketing Education Group of the U.K.
78
PURPOSES
l
process.
management at this stage and in particular their relative importance and interrelationships; and To examine whether or not the companies’ behavior at this stage of the product elimination process varies, as Rothe [ 17) speculates, with the type and number of products that they manufacture and the magnitude of market competition and technological change that they experience.
METHODOLOGY This article reports evidence from a study of the product elimination decision-making process in the UK engineering industry [2]. The population subject to investigation in this study was restricted to companies employing more than 100 people and engaged in the manufacture of mechanical, instrument and/or electrical engineering products. The study involved two main phases; 20 in-depth company interviews ranging from 2 days to 1 week duration each and 94 completed mail questionnaires constituting a 3 1% response rate from the sample contacted. The 20 in-depth company interviews were made with those companies who agreed to collaborate on the basis of a judgmental sample of 35 companies drawn from a population of 52 companies operating in Scotland. The interviews were conducted with the organizational equivalents of the Managing Director, the Senior Marketing the Financial Director, and the TechExecutive,
nical/Engineering Executive, utilising two somewhat different interview schedules. One of these interview schedules was designed to obtain data about a specific product recently eliminated and to investigate in depth its actual elimination process. Over the sample of 20 companies contacted, 24 specific product case histories were conducted. The findings in the interviews provided the basis for the test instrument used in the mail survey. A single questionnaire was piloted, reworked, and mailed to a request sample of 300 companies drawn from a population of 550 engineering companies listed in the 1977 edition of the Kompass Directory and in the 1977178 edition of the Dun and Bradstreet-Key to British Enterprises Directory and stratified by size (small = 100-499; medium = 500-999; and large = over 1000 employees) and industry/engineering sector (machine tools SIC 332; pumps, valves, compressors SIC 333; other machinery 339; scientific instruments and systems SIC 354; electrical machinery SIC 36 1). A census (complete) coverage was undertaken within the medium and large size strata, while only a portion (40%) of the companies in the small size strata was selected using a random sampling procedure. The 94 usable questionnaires received were all answered by chief executives within the respondent companies. Analyses of the response revealed no significant difference between the type of respondents and the population from which they were drawn.’
FINDINGS The Weak Product Evaluation Process With respect to the evaluation and decision-making stage of the product elimination process, the normative view sees a weak product as entering a detailed, formalized procedure, in which all relevant considerations are tabulated with numerical weights and ratings. At the termination of this procedure an “index” is obtained indicating the degree of product desirability and thus assisting management to make the decision as to whether or not to drop the product [6, 14, 10, 211. However, there was no evidence in the interviews to suggest that a formalized procedure to reach the elimination/retention decision was in operation. This lack of a formal procedure, however, is not to be thought of as being necessarily synonymous with lack of systematic
‘A fuller account of choice of sample frame, selection of the sample and company characteristics at each stage of the study as well as details of research methodology may be found in Avlonitis (2, Vol. 1, pp. 272-316).
thinking. The interview companies appeared to develop more-or-less clear perceptions of what factors need investigation in evaluating a weak product and in making the retention/elimination decision. The Sales Manager of a large manufacturer of automatic control systems stated, “Ensuring capacity released can be absorbed by either the replacement product or the remaining products is our primary consideration. ” The Marketing Director of a medium-sized manufacturer of compressors stated, “Any product that has to be eliminated must be replaced from a financial point of view, or you must double the sales of what is left; if you knock a product you must know where to find money. ” The Marketing Manager of a small manufacturer of electrical equipment stated, “Finding an appropriate substitute for the customer is our main concern in deciding to drop a product.” It is clear that the financial and marketing implications of a product’s removal tend to dominate the management’s thinking, and, as a result, the involvement of the accounting and sales/marketing functions tend to occur most frequently at this stage of the product elimination process. It was in fact the consideration of such implications that had recently forced all but one of the sample interview companies to retain a weak product. Four companies indicated that “customer relationships” was the determinant factor of retaining the product. Six companies mentioned the product’s contribution to overheads as important to retention and 5 companies cited the product’s contribution to the sales of other products in the range. Finally, 4 companies indicated the impact of the product’s removal upon the company’s “full-line” policy was the driving force behind the product’s retention. Further probing into these retention decisions revealed that in most cases such decisions were not based on rational and objective estimates of the impact of the stated factors upon the company’s operations, but rather on subjective opinions, emotions, and uncertainty avoidance grounds. However, the analysis of responses to specific product case histories indicated that the problem situation which triggers the elimination consideration initially is usually more influential toward forming management’s decision rather than the evaluation process itself. This may be attributed to the fact that in 14 of the 24 cases studied a new product had been developed to replace the one under evaluation; while in the remaining 10 cases the product under evaluation was either a low volume, slow-moving item or a “great loser” that “had to go despite internal resistance and customer inconvenience” stated the Marketing Director of a medium-sized manufacturer of scien79
tific measurement instruments. In fact, the intensity and nature of the weak product evaluation process was found to be dependent on whether or not a new product was available to replace the one under evaluation as well as on the importance of the role played by the product within the company’s environment.2 In the 14 cases where a new product was planned to drive-out the one under evaluation, the management’s primary concern was the identification and evaluation of the human, physical, and financial resources committed to it, in order to determine what, how, and when released resources could be shifted to the production and marketing of the new (replacement) product. In addition, man-
the other products in the range without affecting their cost structure. In fact, a budget with revised sales forecasts and production schedules for the other products in the range had to be prepared in these cases. In the remaining 4 product case histories which involved products that accounted for about 15 to 30% of the company’s resources and sales turnover and which played an important role within the company and vis-avis its users, the evaluation process required intensive bargaining and persuasion among the departmental members of the company and between the company and its customers. In these cases the effects of the product’s elimination upon customer relationships and the sales of
For a product of minor importance, the evaluation was simple and straightforward. agement also had to carefully consider the resistance that the sales force and the customers might put forth regarding the replacement of the existing product. A number of instances were reported indicating that in order to preempt the “sales force resistance” management tended to keep the development of the replacement product secret. Attempts to preempt ‘customer resistance’ usually involved “customer consultation” during the development of the replacement product. In the 6 cases where a product of minor importance to the company’s activities was to be dropped completely, the evaluation process was simple and straight-forward and its impact upon the formation of the management’s decision was generally of secondary importance. The subjective opinions of the sales force regarding the possibility of residual customer demand and the marketing implications of the product’s removal were generally sought, while a stock evaluation had to be conducted to assess the product’s inventory, with the objective to clear it out before the product’s elimination. However, like the marketing implications, the financial implications were also minimal in these cases. The amount of overhead defrayed by these products was not significant due to their low sales volume and it could easily be absorbed by
*The importance of the product refers to the percentage resources and sales turnover that it accounts for.
80
of the company’s
other products in the range had to be carefully assessed. The ability of the other products to take its place had to be analyzed and the future employment prospects of the people attached to the manufacture of the product had to be determined. The impact of the elimination upon the fixed and working capital invested had to be analyzed and the company had to decide how previous profit levels could be maintained. This last issue was the most significant and contentious one and involved a budgeting routine. A budget, without the product under evaluation, had to be prepared to provide some guidelines as to how previous profit levels could be maintained. In two of these cases an increase in the sales of the company’s other products was required, while in the other two cases a drastic reduction in the amount of overheads was necessary involving redundancies and early retirements. However, the proposed solutions encountered political impasses that caused temporary delays. In one of the cases where an increase in the sales of the company’s other products was required, the Financial Director was suspicious about the company’s ability to do so and he resisted the elimination efforts until he was actually convinced by the company’s General Manager that the product had to go. In the other two cases which involved redundancies, members of the organization, particularly the engineering and personnel departments, reacted strongly; representatives of the Trade Unions (AUEW) were brought in and lengthy negotiations took place.
It is clear from the foregoing discussion that the more important and contentious the outcome of the elimination decision on the company’s overall activities, the more detailed the analysis of the impact of the product’s removal on the company’s performance and the greater the intensity of the political activity and bargaining at this stage of the product elimination process.
Weak Product Evaluation Factors: Importance and Interrelationships The investigation of the weak product evaluation process within the sample interview companies provided insights into the evaluation factors generally considered TABLE 1 Means, Standard
Deviations
by industrial goods companies in making the elimination/retention decision. Fifteen evaluation factors were uncovered in this investigation and one of the main objectives of the mail survey was to determine their relative importance. The mail survey respondents were asked to rate each evaluation factor on a 5 point scale. A rating of 5 indicated extreme importance while a rating of 1 indicated little or no importance in terms of the factor’s impact upon the elimination decision. The resulting mean-scores (and standard deviations) shown in Table 1 indicate the relative importance of each evaluation factor. It is interesting to note that none of the evaluation factors scored a mean exceeding 3.9, probably because
and Varimax Factor Loadings for Fifteen Evaluation Factors N = 94 FACTOF LOADINGS Factor 2
Factor 1
Evaluation
Factors
1. Product’s elimination effect on “fullline” policy 2. Product’s elimination effect on corporate image 3. Product’s elimination effect on sales of other products 4. Product’s elimination effect on customer relationships 5. Product’s elimination effect on profitability of other products via production O/H allocation 6. Product’s elimination effect on the profitability of other products via selling O/H allocation 7. Product’s elimination effect on the profitability of other products via distribution O/H allocation 8. Product’s elimination effect on the fixed and working capital 9. New product potential IO. Reallocation of capital and facilities to other opportunities II. Release of executive time spent on the product 12. Product’s elimination effect on employee relationships 13. Existence of substitutes to satisfy the customer 14. Competitive moves in case the product is eliminated 15. Organized intervention (trade unions) Eigenvalue Cumulative Variance Explained
Mean
Standard Deviation
Financial Considerations
Resources Released & External Pressures Considerations
Factor 3
Factor 4
Marketing Considerations
Managerial Considerations
3.3
1.1
.40
2.5
.2
.64
3.7
.O
.71
3.7
.I
.57
3.6
I.1
.80
3.1
1.2
.76
2.4
I.1
.50
3.1 3.9
I.3 0.9
.40 .42
3.5
I.2
.94
3.2
1
.56
2.3
1.2
.69
3.2
1.3
.49
2.5 1.9
1.3
.63 .69 I .6
I .o 5.3 35.4
.44
45.7
I .4
1.3
54.7
63.3
81
the importance attached to each one of them depends on the particular situation that a product faces at the time of the decision. However, the factor “New Product Potential” appears to be the most important of all, followed by those factors that reflect a consideration of the impact of a product’s removal upon customer relationships and the profitability and sales of the other products in the range. The emphasis placed upon the “New Product Potential” factor substantiates the argument put forward in the preceding section that the intensity and nature of the evaluation process depends, among other things, on whether or not a new product is available to replace the one under evaluation. This finding also implies that the elimination decision is not independent of the new product decision in the companies manufacturing industrial products. As it has been reported elsewhere [4], one of the most frequently occurring problem situations leading to product elimination in the industrial field is the development of a new product. However, apart from the
accounts for a considerable percentage of the company’s resources and sales turnover, no appreciable impact on the corporate image, employee relationships, competitive moves, and organized intervention is usually anticipated as a result of product elimination. Given the above rankings, the responses were factor analysed. Four factors emerged that are interpreted based on factor loadings of .40 and greater (see Table 1) as indicative of four dimensions. Factor 1, Financial Considerations, is heavily loaded, not only on the four evaluation factors that are concerned with the financial implications of a product’s elimination and in particular, with its impact upon the profitability of the other products in the range and the fixed and working capital invested in it, but also on the “New Product Potential” factor. This tends to suggest that in the industrial goods companies, where there is generally a great need to find new products to recover the high fixed costs associated with the equipment and manpower skills, the availability
The elimination decision is not independent of the new product decision. “New Product Potential” factor, sufficient emphasis is also placed on the evaluation factors that are concerned with the financial and marketing implications of a product’s elimination, reflecting as it does, the high product investment costs that industrial goods companies generally incur and the importance of individual orders and/or customers in the industrial field, respectively. There are, however, a number of evaluation factors that were noted as being of slight or little importance by approximately half of the mail survey respondents. These factors are concerned with the product elimination’s effects upon corporate image, employee relationships, competitive moves and organized intervention. One possible explanation for the low importance of these factors is that they tend, as the interview survey findings indicated, to be product-specific, in that the emphasis placed upon them tends to vary with the importance of the product under evaluation, measured in terms of the percentage that it accounts for of the company’s resources and sales. In fact, unless the product under evaluation 82
of a replacement product is (as a number of executives asserted during the interviews) very much a financial consideration. Factor 2, Resources Released and External Pressures Considerations, contains evaluation factors which suggest that considerations regarding the impact of a product’s elimination upon the human, physical, and financial resources assigned to it, as well as upon the customers, tend to incorporate the likely competitive actions and the likely pressures from the Govemment and Trade Unions that elimination may bring about. Factor 3, Marketing Considerations, is composed of evaluation factors which reflect an assessment of the marketing implications of a product’s removal and in particular its impact upon the company’s “full-line” policy and corporate image, customer relationships, and the sales of the other products in the range. Factor 4, Managerial (Alternative Opportunities) Considerations, contains the two evaluation factors that are concerned with the exploration of the possibility of using the funds, transferable facilities, and executive abilities freed by
eliminating the product in other ventures promising better returns. CONTEXTUAL
INFLUENCES
The framework for integrating the evaluation factors germane to evaluation and decision-making stage described by the four dimensions produced by the factoranalytic study, can not be viewed as being applicable to all companies and to all products within a company. It is to be expected that some evaluation factors and/or dimensions are more relevant than others, depending not only on the particular situation each product faces at the time of the decision, but also on the company’s certain contextual factors, including type of industry, product diversity, market competition, and rate of technological change. This was examined by using the factor-scores of each company and performing the analyses shown in Tables 2 and 3 which suggest the following points: 1. The emphasis placed by industrial goods companies on the Financial Considerations dimension varies with the type of product. The machine-tool companies assign greater importance to the financial implications of a product’s removal (probably because of their narrow product ranges which reflect the high level of specialization in the industry) than do the companies in the other engineering sectors surveyed. 2. The emphasis placed by industrial goods companies on the Marketing Considerations dimension TABLE 2 Analysis of Differences
Among the Factor-Score
Means of the 5 Industry Categories Contextual
Dimensions
(Factors)
Financial considerations (Factor I) Resources released and external pressures considerations (Factor 2) Marketing considerations (Factor 3) Managerial (alternative opportunities) considerations (Factor 4) “P < .OOl. ns = not significant
varies with the number of products that they manufacture and the degree of market competition that they experience. Indeed, the emphasis placed upon the marketing implications of the product’s elimination appears to be enhanced by product diversity and market competition. 3. Market competition also exerts a strong positive effect on the emphasis placed upon the Managerial (Alternative Opportunities) Considerations dimension. This finding may well reflect the management’s general tendency to consider alternative opportunities and investment only when it experiences strong competitive pressures that tend to lead to high opportunity costs for the products in the range. 4. The rate of technological change experienced by a company does not seem to exert a significant effect on any of the four dimensions. This may be attributed to the fact that the companies which operate in an innovative environment (that furnishes companies in an industry with a steady stream of new products) tend to treat product elimination as an integral part of their new product development activity [3]. In these cases, the availability of a new or replacement product; its acceptability to the customers; and the timing of its introduction to least inconvenience the customers and dealers who need to be informed about the replacement of the existing product, are the management’s primary concern. This was clearly reflected in the results obtained when the perceived measure of the rate of
Variable-Type
(One-Way
ANOVA)
of Industry
Machine Tools
Pumps, Valves Compressors
Other Machinery
Scientific Instruments & Systems
ElectrIcal Machinery
n = 22
n = 14
n = 19
n = 19
n = 20
.59
.28
-.41
-.37
.31
.I1
-.20
-.I9
.I3
I .4X”
-.30
.22
I .62”~
-.06
-.I4
.16
-.36
-.02
.02
.31
-.ou
F Statistic
-.I5
5.41”
I .X4”’
at the 0.10 level.
83
TABLE 3 Product Moment Correlations of Contextual Variables with Dimensions Underlying the Weak Product Evaluation Process: N = 94 Contextual Variables
Product Diversity
Dimensions (Factors) Financial
Market Competition
Technological Change
agement in making the retention/elimination decision. Instead, interest should be turned to systematic studies of product elimination decision-making within organizations. Such studies should focus on the development of product elimination approaches which recognize that the product elimination decision-making process is dynamic and political and is finely tuned to the product and company circumstances.
considerations
(Factor
.05
I)
.I6
.II
Resources released and external pressures considerations (Factor Marketing (Factor Managerial tunities)
2)
.0X
.I5
.22<’
.l7”
.02
.24<’
-.04
APPENDIX: MEASURES OF THE CONTEXTUAL VARIABLES
considerations 3) (alternative
1. Product Diversify. This variable was measured by asking the respondents to state the number of product types manufactured and marketed by their companies. To minimize idiosyncratic perception on the part of the respondents, product type was defined as “a specific product which is offered in a range of different versions, sizes, or models and which together with other product types may constitute a product line or a product categop or a product group. ’ ’ The range in the sample varied from 4 to 100 product types (Mean = 26, Standard Deviation = 20). 2. Murket Competition. This variable was measured by asking the respondents to rate on five point scales: a) the intensity of each of three types of competition (price, product, delivery/service) in their respective industries, and b) the importance of each of these competitions to their respective company’s profitability. The ratings for the intensity and importance of early type of competition were multiplied and the resulted scores were aggregated to secure a weighted measure of the level of the overall competitive pressures on the company. 3. Technological Change. This variable was measured by asking the respondents to rate on a fivepoint scale the rapidity of technological change resulting in new products in their respective industries. The ratings were on an anchored scale where 1 was represented as “No new products marketed in the past decade” and 5 as “Heavy R & D and/or major market changes result in many new products. ’ ’
.06
oppor-
considerations
(Factor 4) 1~= significant
at the 5% level (sum of both tails).
‘I = significant
at the 10% level (sum of both tails)
IO
technological change experienced by the sample companies was related to the importance attached to the 1.5 original evaluation factors that comprised the 4 dimensions. The contextual factor in question had a significant positive impact on only two of the 15 evaluation factors, namely the “New Product Potential” and “Product’s elimination effects upon the customer relationships” evaluation factors [2, Vol. 2, p. 6251. IMPLICATIONS The most obvious implication of the data obtained from this study is that any attempt to either compile a list of evaluation factors and/or construct a model setting out a procedure that management should follow at the evaluation and decision-making stage, applicable to all companies and to all products within a company, is bound to be fruitless. There are distinct variations in behavior patterns vis-a-vis the evaluation and decision-making stage of the product elimination process, not only among companies operating in different business environments, but also within a company. The findings of the study tend to suggest that the nature and intensity of the weak product evaluation process and the evaluation factors considered by management in making the retention/ elimination decision will always be determined by the environment within which the company operates and the role played by the product within that environment. Consequently, it is little use to keep developing more “general purpose” sophisticated methodologies to assist man84
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a5
J. Avlonitis
This study investigates the evaluation and decision-making stage of the product elimination process. The study revealed the nature and intensity of the process through which “weak” products are evaluated and eliminationlretention decisions are made.
INTRODUCTION One aspect of product management that is currently receiving special attention in industry is product elimination. Yet, product elimination is one of the key “gaps” in the marketing literature. Most contributions to this area have been theoretical in nature, while little research has been undertaken to provide a thorough understanding of the product elimination function (31. However, basic to the theoretical approaches put forward to provide some guidance in this area is the proposition that the product elimination decision is a sequential multiple-stage process. Indeed, on the basis of the material published to date, the following four-stage elimination process may be envisaged: STAGE I-RECOGNITION OF WEAK PRODUCTS. A product failing to meet the company’s objectives comes to the attention of management through one of a variety of product line audit procedures [ 13, 1, 14, 191. Industrial Marketing Management 13, II-85 (1984) 0 Elsevier Science Publishing Co., Inc., 1984
52 Vanderbilt
Ave., New York, New York 10017
STAGE II-ANALYSIS OF WEAK PRODUCTS. Management attempts to find out why the product does not meet the company’s objectives [9], and considers and evaluates alternative corrective actions that, if brought about, will make the deviant product’s performance compatible with the company’s objectives [8, 12, 71. STAGE III-EVALUATION OF WEAK PRODUCTS AND DECISION-MAKING. If management realizes that no corrective action is feasible, then the managerial attention shifts from the product itself to the impact upon the entire company of eliminating the product; certain evaluation factors related to the product elimination decision are considered to determine whether it is in the best interests of the company to eliminate or retain the product [6, 10, 11, 14, 211. STAGE IV-IMPLEMENTATION OF THE ELIMINATION DECISION . If it is decided to eliminate the product, then management determines the most opportune time and method of its disposal to minimize the elimination’s effects upon customers, dealers, and the company’s profit structure [5, 15, 18, 201. This article focuses on the evaluation and decisionmaking stage (Stage III) of the product elimination process where management examines the implications of dropping those products which have been previously identified as “weak” vis-a-vis the company’s objectives 77 0019-8501/84/$03.00
(Stage I) and which cannot be revitalised (Stage II). Two reasons for this choice should be put forth. First, little is known about the extent to which the various sophisticated quantitative approaches put forward in the literature to assist management in making the elimination/retention decision are actually used in business practice; and second, what little empirical evidence has been reported to date regarding the weak product evaluation, is somewhat confusing. More specifically, the studies by Rothe [ 171 and Pletcher [ 16]-which were specifically designed to explore the evaluation and decision-making stage and in
Product
elimination
OF THE STUDY
The overall purpose of this study was to provide a basic understanding of the rudiments of the evaluation and decision-making stage of the product elimination process within industrial goods companies. The more specific purposes are as follows: l
l
To examine the weak product evaluation process that leads to the elimination/retention decision; To determine the evaluation factors considered by
is a multi-stage
particular the evaluation factors considered by management in making the elimination/retention decisionrevealed a number of evaluation factors that are not pertinent to the stage in question. In both of these studies, executives were asked to note in a self-administered questionnaire the relative importance of such factors as profitability, unit sales, product cost, market share, etc. which, according to major contributions to the literature on product management, represent criteria or diagnostic indicators for use in the product line audit and the recognition of weak products stage. In fact, at least half of the 26 variables (deemed to be relevant to the evaluation and decision-making stage) included in Pletcher’s questionnaire (which was mailed to 23 companies in the American Small Home Appliance Industry) could be classified as product line audit criteria. The lack of extensive field work in both of these studies may help to explain the limitations of their test instrument and consequently the somewhat confusing reported results.
DR. GEORGE J. AVLONITIS is a Lecturer in Marketing at Strathclyde Business School, University of Strathclyde. His research interests include product-range policy, industrial innovation, and sales management. Author of numerous journal articles and papers to conferences in Britain, America, France, Holland and Ireland, he is a member of the American Marketing Association and the Marketing Education Group of the U.K.
78
PURPOSES
l
process.
management at this stage and in particular their relative importance and interrelationships; and To examine whether or not the companies’ behavior at this stage of the product elimination process varies, as Rothe [ 17) speculates, with the type and number of products that they manufacture and the magnitude of market competition and technological change that they experience.
METHODOLOGY This article reports evidence from a study of the product elimination decision-making process in the UK engineering industry [2]. The population subject to investigation in this study was restricted to companies employing more than 100 people and engaged in the manufacture of mechanical, instrument and/or electrical engineering products. The study involved two main phases; 20 in-depth company interviews ranging from 2 days to 1 week duration each and 94 completed mail questionnaires constituting a 3 1% response rate from the sample contacted. The 20 in-depth company interviews were made with those companies who agreed to collaborate on the basis of a judgmental sample of 35 companies drawn from a population of 52 companies operating in Scotland. The interviews were conducted with the organizational equivalents of the Managing Director, the Senior Marketing the Financial Director, and the TechExecutive,
nical/Engineering Executive, utilising two somewhat different interview schedules. One of these interview schedules was designed to obtain data about a specific product recently eliminated and to investigate in depth its actual elimination process. Over the sample of 20 companies contacted, 24 specific product case histories were conducted. The findings in the interviews provided the basis for the test instrument used in the mail survey. A single questionnaire was piloted, reworked, and mailed to a request sample of 300 companies drawn from a population of 550 engineering companies listed in the 1977 edition of the Kompass Directory and in the 1977178 edition of the Dun and Bradstreet-Key to British Enterprises Directory and stratified by size (small = 100-499; medium = 500-999; and large = over 1000 employees) and industry/engineering sector (machine tools SIC 332; pumps, valves, compressors SIC 333; other machinery 339; scientific instruments and systems SIC 354; electrical machinery SIC 36 1). A census (complete) coverage was undertaken within the medium and large size strata, while only a portion (40%) of the companies in the small size strata was selected using a random sampling procedure. The 94 usable questionnaires received were all answered by chief executives within the respondent companies. Analyses of the response revealed no significant difference between the type of respondents and the population from which they were drawn.’
FINDINGS The Weak Product Evaluation Process With respect to the evaluation and decision-making stage of the product elimination process, the normative view sees a weak product as entering a detailed, formalized procedure, in which all relevant considerations are tabulated with numerical weights and ratings. At the termination of this procedure an “index” is obtained indicating the degree of product desirability and thus assisting management to make the decision as to whether or not to drop the product [6, 14, 10, 211. However, there was no evidence in the interviews to suggest that a formalized procedure to reach the elimination/retention decision was in operation. This lack of a formal procedure, however, is not to be thought of as being necessarily synonymous with lack of systematic
‘A fuller account of choice of sample frame, selection of the sample and company characteristics at each stage of the study as well as details of research methodology may be found in Avlonitis (2, Vol. 1, pp. 272-316).
thinking. The interview companies appeared to develop more-or-less clear perceptions of what factors need investigation in evaluating a weak product and in making the retention/elimination decision. The Sales Manager of a large manufacturer of automatic control systems stated, “Ensuring capacity released can be absorbed by either the replacement product or the remaining products is our primary consideration. ” The Marketing Director of a medium-sized manufacturer of compressors stated, “Any product that has to be eliminated must be replaced from a financial point of view, or you must double the sales of what is left; if you knock a product you must know where to find money. ” The Marketing Manager of a small manufacturer of electrical equipment stated, “Finding an appropriate substitute for the customer is our main concern in deciding to drop a product.” It is clear that the financial and marketing implications of a product’s removal tend to dominate the management’s thinking, and, as a result, the involvement of the accounting and sales/marketing functions tend to occur most frequently at this stage of the product elimination process. It was in fact the consideration of such implications that had recently forced all but one of the sample interview companies to retain a weak product. Four companies indicated that “customer relationships” was the determinant factor of retaining the product. Six companies mentioned the product’s contribution to overheads as important to retention and 5 companies cited the product’s contribution to the sales of other products in the range. Finally, 4 companies indicated the impact of the product’s removal upon the company’s “full-line” policy was the driving force behind the product’s retention. Further probing into these retention decisions revealed that in most cases such decisions were not based on rational and objective estimates of the impact of the stated factors upon the company’s operations, but rather on subjective opinions, emotions, and uncertainty avoidance grounds. However, the analysis of responses to specific product case histories indicated that the problem situation which triggers the elimination consideration initially is usually more influential toward forming management’s decision rather than the evaluation process itself. This may be attributed to the fact that in 14 of the 24 cases studied a new product had been developed to replace the one under evaluation; while in the remaining 10 cases the product under evaluation was either a low volume, slow-moving item or a “great loser” that “had to go despite internal resistance and customer inconvenience” stated the Marketing Director of a medium-sized manufacturer of scien79
tific measurement instruments. In fact, the intensity and nature of the weak product evaluation process was found to be dependent on whether or not a new product was available to replace the one under evaluation as well as on the importance of the role played by the product within the company’s environment.2 In the 14 cases where a new product was planned to drive-out the one under evaluation, the management’s primary concern was the identification and evaluation of the human, physical, and financial resources committed to it, in order to determine what, how, and when released resources could be shifted to the production and marketing of the new (replacement) product. In addition, man-
the other products in the range without affecting their cost structure. In fact, a budget with revised sales forecasts and production schedules for the other products in the range had to be prepared in these cases. In the remaining 4 product case histories which involved products that accounted for about 15 to 30% of the company’s resources and sales turnover and which played an important role within the company and vis-avis its users, the evaluation process required intensive bargaining and persuasion among the departmental members of the company and between the company and its customers. In these cases the effects of the product’s elimination upon customer relationships and the sales of
For a product of minor importance, the evaluation was simple and straightforward. agement also had to carefully consider the resistance that the sales force and the customers might put forth regarding the replacement of the existing product. A number of instances were reported indicating that in order to preempt the “sales force resistance” management tended to keep the development of the replacement product secret. Attempts to preempt ‘customer resistance’ usually involved “customer consultation” during the development of the replacement product. In the 6 cases where a product of minor importance to the company’s activities was to be dropped completely, the evaluation process was simple and straight-forward and its impact upon the formation of the management’s decision was generally of secondary importance. The subjective opinions of the sales force regarding the possibility of residual customer demand and the marketing implications of the product’s removal were generally sought, while a stock evaluation had to be conducted to assess the product’s inventory, with the objective to clear it out before the product’s elimination. However, like the marketing implications, the financial implications were also minimal in these cases. The amount of overhead defrayed by these products was not significant due to their low sales volume and it could easily be absorbed by
*The importance of the product refers to the percentage resources and sales turnover that it accounts for.
80
of the company’s
other products in the range had to be carefully assessed. The ability of the other products to take its place had to be analyzed and the future employment prospects of the people attached to the manufacture of the product had to be determined. The impact of the elimination upon the fixed and working capital invested had to be analyzed and the company had to decide how previous profit levels could be maintained. This last issue was the most significant and contentious one and involved a budgeting routine. A budget, without the product under evaluation, had to be prepared to provide some guidelines as to how previous profit levels could be maintained. In two of these cases an increase in the sales of the company’s other products was required, while in the other two cases a drastic reduction in the amount of overheads was necessary involving redundancies and early retirements. However, the proposed solutions encountered political impasses that caused temporary delays. In one of the cases where an increase in the sales of the company’s other products was required, the Financial Director was suspicious about the company’s ability to do so and he resisted the elimination efforts until he was actually convinced by the company’s General Manager that the product had to go. In the other two cases which involved redundancies, members of the organization, particularly the engineering and personnel departments, reacted strongly; representatives of the Trade Unions (AUEW) were brought in and lengthy negotiations took place.
It is clear from the foregoing discussion that the more important and contentious the outcome of the elimination decision on the company’s overall activities, the more detailed the analysis of the impact of the product’s removal on the company’s performance and the greater the intensity of the political activity and bargaining at this stage of the product elimination process.
Weak Product Evaluation Factors: Importance and Interrelationships The investigation of the weak product evaluation process within the sample interview companies provided insights into the evaluation factors generally considered TABLE 1 Means, Standard
Deviations
by industrial goods companies in making the elimination/retention decision. Fifteen evaluation factors were uncovered in this investigation and one of the main objectives of the mail survey was to determine their relative importance. The mail survey respondents were asked to rate each evaluation factor on a 5 point scale. A rating of 5 indicated extreme importance while a rating of 1 indicated little or no importance in terms of the factor’s impact upon the elimination decision. The resulting mean-scores (and standard deviations) shown in Table 1 indicate the relative importance of each evaluation factor. It is interesting to note that none of the evaluation factors scored a mean exceeding 3.9, probably because
and Varimax Factor Loadings for Fifteen Evaluation Factors N = 94 FACTOF LOADINGS Factor 2
Factor 1
Evaluation
Factors
1. Product’s elimination effect on “fullline” policy 2. Product’s elimination effect on corporate image 3. Product’s elimination effect on sales of other products 4. Product’s elimination effect on customer relationships 5. Product’s elimination effect on profitability of other products via production O/H allocation 6. Product’s elimination effect on the profitability of other products via selling O/H allocation 7. Product’s elimination effect on the profitability of other products via distribution O/H allocation 8. Product’s elimination effect on the fixed and working capital 9. New product potential IO. Reallocation of capital and facilities to other opportunities II. Release of executive time spent on the product 12. Product’s elimination effect on employee relationships 13. Existence of substitutes to satisfy the customer 14. Competitive moves in case the product is eliminated 15. Organized intervention (trade unions) Eigenvalue Cumulative Variance Explained
Mean
Standard Deviation
Financial Considerations
Resources Released & External Pressures Considerations
Factor 3
Factor 4
Marketing Considerations
Managerial Considerations
3.3
1.1
.40
2.5
.2
.64
3.7
.O
.71
3.7
.I
.57
3.6
I.1
.80
3.1
1.2
.76
2.4
I.1
.50
3.1 3.9
I.3 0.9
.40 .42
3.5
I.2
.94
3.2
1
.56
2.3
1.2
.69
3.2
1.3
.49
2.5 1.9
1.3
.63 .69 I .6
I .o 5.3 35.4
.44
45.7
I .4
1.3
54.7
63.3
81
the importance attached to each one of them depends on the particular situation that a product faces at the time of the decision. However, the factor “New Product Potential” appears to be the most important of all, followed by those factors that reflect a consideration of the impact of a product’s removal upon customer relationships and the profitability and sales of the other products in the range. The emphasis placed upon the “New Product Potential” factor substantiates the argument put forward in the preceding section that the intensity and nature of the evaluation process depends, among other things, on whether or not a new product is available to replace the one under evaluation. This finding also implies that the elimination decision is not independent of the new product decision in the companies manufacturing industrial products. As it has been reported elsewhere [4], one of the most frequently occurring problem situations leading to product elimination in the industrial field is the development of a new product. However, apart from the
accounts for a considerable percentage of the company’s resources and sales turnover, no appreciable impact on the corporate image, employee relationships, competitive moves, and organized intervention is usually anticipated as a result of product elimination. Given the above rankings, the responses were factor analysed. Four factors emerged that are interpreted based on factor loadings of .40 and greater (see Table 1) as indicative of four dimensions. Factor 1, Financial Considerations, is heavily loaded, not only on the four evaluation factors that are concerned with the financial implications of a product’s elimination and in particular, with its impact upon the profitability of the other products in the range and the fixed and working capital invested in it, but also on the “New Product Potential” factor. This tends to suggest that in the industrial goods companies, where there is generally a great need to find new products to recover the high fixed costs associated with the equipment and manpower skills, the availability
The elimination decision is not independent of the new product decision. “New Product Potential” factor, sufficient emphasis is also placed on the evaluation factors that are concerned with the financial and marketing implications of a product’s elimination, reflecting as it does, the high product investment costs that industrial goods companies generally incur and the importance of individual orders and/or customers in the industrial field, respectively. There are, however, a number of evaluation factors that were noted as being of slight or little importance by approximately half of the mail survey respondents. These factors are concerned with the product elimination’s effects upon corporate image, employee relationships, competitive moves and organized intervention. One possible explanation for the low importance of these factors is that they tend, as the interview survey findings indicated, to be product-specific, in that the emphasis placed upon them tends to vary with the importance of the product under evaluation, measured in terms of the percentage that it accounts for of the company’s resources and sales. In fact, unless the product under evaluation 82
of a replacement product is (as a number of executives asserted during the interviews) very much a financial consideration. Factor 2, Resources Released and External Pressures Considerations, contains evaluation factors which suggest that considerations regarding the impact of a product’s elimination upon the human, physical, and financial resources assigned to it, as well as upon the customers, tend to incorporate the likely competitive actions and the likely pressures from the Govemment and Trade Unions that elimination may bring about. Factor 3, Marketing Considerations, is composed of evaluation factors which reflect an assessment of the marketing implications of a product’s removal and in particular its impact upon the company’s “full-line” policy and corporate image, customer relationships, and the sales of the other products in the range. Factor 4, Managerial (Alternative Opportunities) Considerations, contains the two evaluation factors that are concerned with the exploration of the possibility of using the funds, transferable facilities, and executive abilities freed by
eliminating the product in other ventures promising better returns. CONTEXTUAL
INFLUENCES
The framework for integrating the evaluation factors germane to evaluation and decision-making stage described by the four dimensions produced by the factoranalytic study, can not be viewed as being applicable to all companies and to all products within a company. It is to be expected that some evaluation factors and/or dimensions are more relevant than others, depending not only on the particular situation each product faces at the time of the decision, but also on the company’s certain contextual factors, including type of industry, product diversity, market competition, and rate of technological change. This was examined by using the factor-scores of each company and performing the analyses shown in Tables 2 and 3 which suggest the following points: 1. The emphasis placed by industrial goods companies on the Financial Considerations dimension varies with the type of product. The machine-tool companies assign greater importance to the financial implications of a product’s removal (probably because of their narrow product ranges which reflect the high level of specialization in the industry) than do the companies in the other engineering sectors surveyed. 2. The emphasis placed by industrial goods companies on the Marketing Considerations dimension TABLE 2 Analysis of Differences
Among the Factor-Score
Means of the 5 Industry Categories Contextual
Dimensions
(Factors)
Financial considerations (Factor I) Resources released and external pressures considerations (Factor 2) Marketing considerations (Factor 3) Managerial (alternative opportunities) considerations (Factor 4) “P < .OOl. ns = not significant
varies with the number of products that they manufacture and the degree of market competition that they experience. Indeed, the emphasis placed upon the marketing implications of the product’s elimination appears to be enhanced by product diversity and market competition. 3. Market competition also exerts a strong positive effect on the emphasis placed upon the Managerial (Alternative Opportunities) Considerations dimension. This finding may well reflect the management’s general tendency to consider alternative opportunities and investment only when it experiences strong competitive pressures that tend to lead to high opportunity costs for the products in the range. 4. The rate of technological change experienced by a company does not seem to exert a significant effect on any of the four dimensions. This may be attributed to the fact that the companies which operate in an innovative environment (that furnishes companies in an industry with a steady stream of new products) tend to treat product elimination as an integral part of their new product development activity [3]. In these cases, the availability of a new or replacement product; its acceptability to the customers; and the timing of its introduction to least inconvenience the customers and dealers who need to be informed about the replacement of the existing product, are the management’s primary concern. This was clearly reflected in the results obtained when the perceived measure of the rate of
Variable-Type
(One-Way
ANOVA)
of Industry
Machine Tools
Pumps, Valves Compressors
Other Machinery
Scientific Instruments & Systems
ElectrIcal Machinery
n = 22
n = 14
n = 19
n = 19
n = 20
.59
.28
-.41
-.37
.31
.I1
-.20
-.I9
.I3
I .4X”
-.30
.22
I .62”~
-.06
-.I4
.16
-.36
-.02
.02
.31
-.ou
F Statistic
-.I5
5.41”
I .X4”’
at the 0.10 level.
83
TABLE 3 Product Moment Correlations of Contextual Variables with Dimensions Underlying the Weak Product Evaluation Process: N = 94 Contextual Variables
Product Diversity
Dimensions (Factors) Financial
Market Competition
Technological Change
agement in making the retention/elimination decision. Instead, interest should be turned to systematic studies of product elimination decision-making within organizations. Such studies should focus on the development of product elimination approaches which recognize that the product elimination decision-making process is dynamic and political and is finely tuned to the product and company circumstances.
considerations
(Factor
.05
I)
.I6
.II
Resources released and external pressures considerations (Factor Marketing (Factor Managerial tunities)
2)
.0X
.I5
.22<’
.l7”
.02
.24<’
-.04
APPENDIX: MEASURES OF THE CONTEXTUAL VARIABLES
considerations 3) (alternative
1. Product Diversify. This variable was measured by asking the respondents to state the number of product types manufactured and marketed by their companies. To minimize idiosyncratic perception on the part of the respondents, product type was defined as “a specific product which is offered in a range of different versions, sizes, or models and which together with other product types may constitute a product line or a product categop or a product group. ’ ’ The range in the sample varied from 4 to 100 product types (Mean = 26, Standard Deviation = 20). 2. Murket Competition. This variable was measured by asking the respondents to rate on five point scales: a) the intensity of each of three types of competition (price, product, delivery/service) in their respective industries, and b) the importance of each of these competitions to their respective company’s profitability. The ratings for the intensity and importance of early type of competition were multiplied and the resulted scores were aggregated to secure a weighted measure of the level of the overall competitive pressures on the company. 3. Technological Change. This variable was measured by asking the respondents to rate on a fivepoint scale the rapidity of technological change resulting in new products in their respective industries. The ratings were on an anchored scale where 1 was represented as “No new products marketed in the past decade” and 5 as “Heavy R & D and/or major market changes result in many new products. ’ ’
.06
oppor-
considerations
(Factor 4) 1~= significant
at the 5% level (sum of both tails).
‘I = significant
at the 10% level (sum of both tails)
IO
technological change experienced by the sample companies was related to the importance attached to the 1.5 original evaluation factors that comprised the 4 dimensions. The contextual factor in question had a significant positive impact on only two of the 15 evaluation factors, namely the “New Product Potential” and “Product’s elimination effects upon the customer relationships” evaluation factors [2, Vol. 2, p. 6251. IMPLICATIONS The most obvious implication of the data obtained from this study is that any attempt to either compile a list of evaluation factors and/or construct a model setting out a procedure that management should follow at the evaluation and decision-making stage, applicable to all companies and to all products within a company, is bound to be fruitless. There are distinct variations in behavior patterns vis-a-vis the evaluation and decision-making stage of the product elimination process, not only among companies operating in different business environments, but also within a company. The findings of the study tend to suggest that the nature and intensity of the weak product evaluation process and the evaluation factors considered by management in making the retention/ elimination decision will always be determined by the environment within which the company operates and the role played by the product within that environment. Consequently, it is little use to keep developing more “general purpose” sophisticated methodologies to assist man84
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