By Paul F. Taccini
All products have a life span. They are introduced, become successful, grow old and are replaced by new or improved products. At times, companies can become so wedded to a portion of their product line that they allow it to continue even after it has passed it’s ‘sell by’ date. There are many reasons for this situation. It could be a legacy product, one with a large impact on their initial success. Maybe it has become strongly tied to the company name and heritage. For whatever reason, they just can’t let it go.
Why You Can Lose Market Value
While this can happen in well run companies, it most often occurs as the result of poor general or product management and there are a number of consequences. One of the more significant deals with asset value. As part of an inventory becomes stale, it begins to lose its market value. Not dealt with expeditiously, the finished product may have to be written down, sold at a significant discount or even at a loss. In rare cases, finished goods can become a total write-off if you can’t find a buyer. Raw material can at times be re-purposed or sold. If not, it and any work in process may need to be scrapped.
Be On Top Of Your Market
This situation should never occur and there are a number of ways to prevent it. It starts by being on top of your market. At a minimum, you should know: What the key products in the segment are and how your products stack up? You must know everything you can about the competition, the maturity of the market and so on. With this as background, you should prepare and use a sales forecast and track actual performance against it. You may do this as part of your annual planning effort. As part of the process, review the growth rate of current product line. Has the product peaked or is it in decline? Even if the trend is positive, you will need to access whether satisfactory growth can be maintained. Are product improvements in the works to help drive future growth? You must have a good idea how competitive product affect your product’s potential. If growth can’t be sustained, can the product or line be managed as a cash cow? If not, plans should be developed and enacted in order to smoothly transition away from this business.
Bicycles Become Repurposed
A number of years ago, a company in the toy business faced this same dilemma. Bicycles were a large part of its heritage and had been part of the business from the company’s inception. Consumers equated the company with its bicycles. The domestic bike business however was in decline and theirs along with it. Products produced offshore were functionally better and cheaper. It was very difficult for them to face these facts. After due consideration, they were able to wind down the business, but it did require selling at rather steep discounts. A large portion of the raw materials were repurposed, and the rest sold. In 18 months, they carefully managed a $15 million business down to zero. While this was occurring, their product team introduced a number of newly developed products. Within slightly more than 2 years, this company had developed a new business opportunity with over $25 million in sales. The ultimate point to note is the profit margin of the new products was significantly higher than the old bicycle line. More sales and higher profit, a double hit.