Red Zebra Business Centre -Management Memos
November, 2009. Making Measurably More For Your Business Since 1985!

When is a Supermarket not a Supermarket?

Max Williams, Principal Consultant

In analysing survey results during one consulting assignment, we found ourselves asking the question 'What really is the nature of this business'?  Being a supermarket, it might seem that the answer is obvious.

It wasn't. That is the problem!  Although it was a lot like a supermarket, it had accreted a lot of other aspects that just don't suit the supermarket business model and environment.

Obviously, no-one had thought about whether or not these activities should be part of that business. Some things about a business, especially if it has been long established, are so obvious no one thinks about them any more.  It's so easy to get blind-sided, and spend time on things that don't help overall profit and future growth.

We are constantly surprised by the number of businesses we see where almost no thought is given to identifying the core activity of the enterprise. In all of these cases, the reason given is that it is so obvious, it is just not worth spending time thinking about.  Just like that supermarket!

This usually proves to be a big mistake. 
Here are some examples of businesses which did not correctly identify their core activities.

There was the company that described themselves as 'dust control engineers', but acted as if they were sheet metal workers.  The company lost key staff, important contracts, and licences, and finally had to sell its real estate. Just because they spent time on flowery notions, instead of concentrating on their core business.

Consider the computer company that thought it was a software company but actually was an applications engineering business.  Their retail stock was a hodge podge, their market positioning was quite unclear, and even their bookkeeping was confusing.

Then there was the electronics service company that tried to be a retailer as well. It went ahead in leaps and bounds after it had finally abandoned retail product sales, and concentrated on its core strength - service work!

There are many, many more examples, but you get the point.

Non core activities take resources (time, money, attention) that are more profitably applied in the place you have the strongest competitive advantage - the core business! 

Is it time for you to ask again 'What is the core of my business'?

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roduct ranging is known to be a key factor of success for retailers.  But manufacturers need a sound product plan too! And for service providers, there is a real need to develop a service plan, just like a product plan for the manufacturer, and the product range plan for the retailer. In this issue, the focus is on manufacturing. Service providers will be considered after the summer holiday break.

Make no mistake about it. Manufacturers need a sound product plan too.
In one example, a manufacturer boasted a "bigger range than any one else in the business", and proudly offered over a thousand models and variations.  When the range was reduced to just a hundred varieties, sales increased by ten percent within three months, and without any change to the marketing mix.

What happened?  Why did sales increase when instinct suggests sales should go down?  What does it mean for others?

Most small manufacturers have more demands for specials and alternatives than they can handle, and very often each new variation offers a worthwhile volume if everything works out.  More often than not, it doesn't all work out, and the manufacturer does not get the returns from the "special" they expected.

It is a brave decision to stick to a predetermined product strategy and refuse a prospective customer's request for a "special", but sometimes it can be fatal not to take the hard line.

The problem for most of us lies in first having a sound "New Product Strategy," and then striking the proper balance on tailor made "specials" for particular customers. Here are some suggestions to formulate a product strategy that will improve both your sales,  and your Return on Investment.

  1. Begin with a "zero base", and build up from there.
  2. You know what your business does and for which markets. Start with only core products to provide the framework for servicing your key markets.
  3. Only the core products.  Only the key markets.
  4. Add extra products to this core group, only if they satisfy your company's targets for sales value, gross profit and stock turn.

Good sellers, poor sellers! Some of your products sell particularly well, and others just don't.  Examine every product you make.  Does it produce at least your average gross margin, and your average stock turn? (Don't forget component stock holding.)  If not, what possible reason is there for continuing with it?  Why put it in your new, streamlined product range?

Don't fall for the old saw "We need it to keep a full range on offer".  That's not usually true, but it's still a great point with the sales team.  Use activity based costing principles to see if the gross profit dollars generated by these low volume lines cover the full cost of making and holding them.  Include warehouse costs and stocktaking costs, quality certification costs, engineering change updates, and all those incidental costs that usually get overlooked.

Leaving out these low volume lines will free up unexpected resources to be used much more effectively.

Don't forget to check: What price points suit your key markets?  When you know the price points  expected in your market, you can see which product lines fit that pricing pattern.  Some of your favourite products may fail this test, and that means it's time for a new design or a new process that will support market pricing.

[One company had show stopper, award winning products that won acclaim all around the world.  Prices ranged from $1500 to $5500.  While everyone thought the products were wonderful, very few were sold.  A $500 model would have done well.  The managers did not want to compromise their ideal, so would not do an economy version.  When bankruptcy followed, the receivers sold the designs to a successful company, who quickly introduced an economy model.  The product line never looked back.]

What models, or varieties do you have?  For most categories of product, there is benefit in a "good", "better", "best" approach to types and models.  It gives freedom for price segmenting the market, or giving choice to the customers.

Does your new, streamlined product range cater for this approach to the market?  

Do the "good" lines give an easy entry into your product range, and do the "best" lines give significant extra satisfaction?  Check volumes and gross margins, though, to make sure each model is making the required contribution.

Product Updates?  Every product strategy must provide for the continual updating, refreshing and renewal of the product line.

With so many new products coming on stream every day, the items you rely on for your major sales and profit contribution will get stale, and finally die. In addition, each new release will apply something new to give them an edge over older, more established products.  Don't keep pace with these changes, and your products will finally be too expensive, and probably old fashioned too.

Specification, shape, colour, material and size can all be changed, sometimes very easily.  For instance, new international specifications recently gave microwave oven manufacturers a chance to launch a whole batch of new models. Power ratings went up, and new colours and model names made the units new, fresh models.  Some minor additions to the range of features, gave legitimacy to the new model names, and presto!  A fresh model line up, with very little cost.

Make these changes on a planned basis, and there will always be something new happening in your company to keep customers and the sales network alive with interest.

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