Question

How does a business determine when to discontinue a product?

What is a make-or-buy decision and what issues must a business consider in this decision?

Answer 1

Determine When to Product Discontinue -

Every Product will go through various stages in its lifetime; Introduction, Growth, Maturity and Decline. When the majority of products in a product line reach the late ‘maturity’ or early ‘decline’ phase, the product manager can do either of the two things. He/She can either decide to launch a new version of it or just discontinue and withdraw it from the market. However, deciding when exactly to discontinue a product line is a tricky matter.

There are several factors to consider before actually discontinuing a product line. It is important to analyze the performance of the product line as a whole as well as the performance of the individual products within that product line.

Profit: A product line may have been around in the marketplace for many years and have been profitable in its initial and growth stages, however, that does not guarantee that it will be so indefinitely. If managers keep continuous track of a product's financial performance, they may discover that its sales and profitability decline over time, sometimes at a very rapid rate. This is the time managers need to start analyzing other factors to see if the product has any positive effect on the business. If it is discovered that the product's only benefit is income, which is no longer coming in, managers may go ahead and discontinue the product.

Resource Utilization: Even if a product line is profitable, it may just drain your resources for very little benefit. Ensuring that resources are utilized by all your product lines optimally is very important. Managers should analyze the margin, overhead cost, labor cost, maintenance cost, marketing expenses, etc., that are spent to keep a product line running. If a product line merely absorbs resources in exchange for minimal return, then it may be better to eliminate it and pave the way for other product lines that can utilize input resources more effectively.

Product Mix: Managers should constantly assess whether the company's product lines have the right depth and breadth to satisfy their customer's needs. It is easier to drop a product line if there is a wide enough product mix, since other product lines will help retain current customers and potentially fill the gap of the dropped product line. While discontinuing a product line, managers can also increase the breadth of other product lines to retain current customers.

Brand Image: Market turbulence never lets a product line succeed for long unless it is continually improved. Every brand needs a makeover eventually. It is important to recognize if a product line no longer fits your brand image. Managers may have to discontinue a product if they can’t take the risk of spoiling the company's overall brand image.

Customer Demand: This is an ever changing factor and the most sensitive and important one to consider when deciding whether or not to continue a product line. If a product line no longer appeals to customers, then it has no value in the market and also in the business. In this case, managers should discontinue or shrink a product line in order to make room for other, more successful lines to flourish. An increasing return rate of products from either retailers or customers could be one tell tale sign of when customer demand is waning. Other indications could be less favorable reviews on eCommerce sites or the need to drastically increase advertising spend to maintain customer demand.   

If the answers for most of these criteria turn out to be negative, then managers can be sure that they should discontinue a product line in order to have a positive effect on their business. If some of the criteria seem positive, while others are negative, this decision could be much harder. In these cases it might be helpful to build a cross functional team across departments to assess from various vantage points what to do about the product line.

Make or buy decision -

The make-or-buy decision is the act of making a strategic choice between producing an item internally (in-house) or buying it externally (from an outside supplier). The buy side of the decision also is referred to as outsourcing. Make-or-buy decisions usually arise when a firm that has developed a product or part—or significantly modified a product or part—is having trouble with current suppliers, or has diminishing capacity or changing demand.

Make-or-buy decisions also occur at the operational level. Analysis in separate texts by Burt, Dobler, and Starling, as well as Joel Wisner, G. Keong Leong, and Keah-Choon Tan, suggest these considerations that favor making a part in-house:

• Cost considerations (less expensive to make the part)
• Desire to integrate plant operations
• Productive use of excess plant capacity to help absorb fixed overhead (using existing idle capacity)
• Need to exert direct control over production and/or quality
• Better quality control
• Design secrecy is required to protect proprietary technology
• Unreliable suppliers
• No competent suppliers
• Desire to maintain a stable workforce (in periods of declining sales)
• Quantity too small to interest a supplier
• Control of lead time, transportation, and warehousing costs
• Greater assurance of continual supply
• Provision of a second source
• Political, social or environmental reasons (union pressure)
• Emotion (e.g., pride)

Factors that may influence firms to buy a part externally include:

• Lack of expertise
• Suppliers' research and specialized know-how exceeds that of the buyer
• cost considerations (less expensive to buy the item)
• Small-volume requirements
• Limited production facilities or insufficient capacity
• Desire to maintain a multiple-source policy
• Indirect managerial control considerations
• Procurement and inventory considerations
• Brand preference
• Item not essential to the firm's strategy

Following are typical barriers faced by a manager while developing strategies.

Level of Decision Making Not Clear
Sometimes, there is ambiguity in the level of power a manager holds, whether he holds the right to make modifications in the existing system. This often leads to confusion in the minds of the manager, especially at a middle-level manager.

Lack of Time
Hasty decisions often lead to disastrous effects. However, businesses are subject to emergencies and often, as a decision making authority, you need to take a call in the limited time available. This can pose a most difficult hurdle for most leaders, however, an effective leader has to go through these testing times.

Lack of Reliable Data
Lack of reliable data can be a major hindrance in making apt decisions. Ambiguous and incomplete data often makes it difficult for them to make an appropriate decision, which may not be the best suited for any organization.

Risk- Taking Ability
Any decision attracts a fair deal of risk of resulting into negative outcome. However, it is necessary to take calculated risks for an effective decision. Also, at the same time, casual attitude and completely ignoring risks will not result in taking appropriate decisions.

Too Many Options
A manager can be in a dilemma if there are too many options for an effective solution. Finding the appropriate one can be very difficult, especially if a particular decision favours a department over the other.

Inadequate Support
A manager, however good he may be, cannot work without an adequate support level from his subordinates. Lack of adequate support either from top level or grass root level employees may result in a great jeopardy for the manager.

Lack of Resources
A manager may find it difficult to implement his decisions due to lack of resources- time, staff, equipment. In these cases, he should look out for alternative approaches which fit in the available resources. However, appropriate steps must be taken in case he feels that lack of resources may stop the growth of the organization.

Inability to Change
Every organization has its own unique culture which describes its working policies. However, some policies are not conducive to managers who are looking out for a change. The rigid mentality of top-level management and the subordinates are the biggest hurdle, wherein a manager cannot make positive amendments even if he wishes to do so.