A company with an ageing product line doesn’t have to choose between a major new product development project that it may not be able to afford, or doing nothing. Incremental product improvements that can dramatically improve sales can often be completed within months and on a small budget, at relatively low risk.
Many small or medium companies (SMEs) were built on a few – sometimes only one – core products. Typically the founders started with a particular market segment that they understood well, and then developed an offering that met a clear need in that segment. Over time, the company expanded its geographical reach, and increased the number of product flavors, without necessarily developing any truly new product. Sometimes they acquired another small company to add an adjacent product line, or to enlarge their geographical footprint.
These companies have longevity because they are usually good at application engineering and customer service, which forge deep customer relationships yielding a reliable stream of repeat business. They maintain a healthy base of loyal customers whom they know really well. If they also sell to the retail market, they may have a couple of major retailers with whom they have long-standing relationships. Each year, the company is virtually guaranteed 90 percent or more of the previous year’s revenue as long as they just keep doing what they are doing. Gross margins are usually quite healthy.
The problem is that nothing lasts forever. Even long product life cycles come to an end eventually. A decline in the size of the customer segment, new technologies, changing customer needs, regulatory changes, and new entrants can all exert downward pressure on revenues and profits. These declines may be almost imperceptible at first, and too easily ascribed to random events, individual personalities or bad luck. But before too long a pattern of decline emerges. And a slow-motion death spiral is still a death spiral. Or more prosaically, from the dialogue in Ernest Hemingway’s novel, The Sun Also Rises: “How did you go bankrupt?” “Two ways. Gradually, then suddenly.”
Faced with a decline in their traditional business, companies too often make one of two mistakes: They try to hit a home run by developing a revolutionary new product. But an organization that has not done any major innovations in years, sometimes decades, may not have the institutional muscle memory and capabilities to succeed in such an endeavor. Expensive, reputation-damaging mistakes are made, putting the survival of the company in even larger jeopardy. The second mistake is to do nothing, and keep milking the cow for as long as possible. Why would a company do nothing? Sometimes the original owner is close to retirement, or the owners are planning to sell the company. Other times they are simply in denial.
Some years ago, I arrived at an industrial products company that were in the process of making the first mistake. Limitations with their current products had started to lose them sales to the competition. So they set out to develop a highly ambitious, industry-leading new product. Under pressure to create excitement among their clients, they made the additional mistake of marketing the new product before they had been able to make the technology work. Their engineering team front-loaded work on the flashy user-interface so they could demonstrate it, neglecting to do a proper proof-of-concept on the guts of the product, which was a technically very demanding application. The development project went on for two years and missed all its important milestones. The product technology was failing miserably because the architecture was overly complicated, designed by tenured company engineers who were not familiar with the latest processor technologies. In the end, the product launch had to be cancelled, and the lead engineer was duly fired.
As you can imagine, many painfully embarrassing conversations with customers and distributors followed in the wake of this disaster. However, in talking to them, it became clear that while they were not satisfied with the old product, in 80 percent or more of cases they were only looking for one additional important feature called for in new regulations and already offered by the competition. The company’s technical team had falsely assumed that they could not add that feature without designing a completely new product (to which they then wanted to add all sorts of bells and whistle). But it turned out that there was a low-cost chip on the market that could be easily be integrated with the existing design to add the desired feature. I helped them to build, qualify and launch the improved product in only three months. This was all done on a shoe-string budget. The customers were very satisfied with the product and sales rebounded. The company’s product kit was beloved by customers because it was always easier to install than the competition, and with that crucial new feature added customers could go back to buying their preferred product from their preferred vendor. We then set about to add the next new feature, which would further update the product and extend its life cycle.
Sometimes SMEs with well-established product lines, good cash flow, and latent potential for revenue and profitability improvements, are bought by investors like private equity companies. These investors then typically launch aggressive operational and sales effectiveness programs to increase the value of the company in a short period of time. But investors leave money on the table if they do not pursue incremental product improvements that can rejuvenate stale product line-ups. They may even be flogging a dead horse – sales effectiveness initiatives can only go so far in improving sales if the product is losing its appeal. In doing so, they overlook that carefully selected product-line improvements can be completed within about the same time scale as their other value-driving programs.
Here is where to find opportunities for incremental product improvements:
- Missing features. In which cases did we lose sales because our competition offered features or specifications that we could not match? (Or maybe we only won after heavily discounting our product to win against to a superior competitive product.) Are there recent or future regulatory changes to specifications that can make our product less desirable?
- Adjacent market opportunities. In what similar markets could our products be used with minor modifications or upgrades?
- Cost savings opportunities. Is our product cost too high compared to the competition? Are our gross margins always under pressure? (A desired margin improvement of 10 percent or more usually requires some product redesign.)
- New technologies. Is the market moving on to new technologies? For instance, do we need to enable our products for the Internet of Things (IoT) by adding new components and digital communication?
- Competitors. What product updates have our competitors recently made, or are in the process of making? What do we see at trade shows that we don’t, but maybe should, have?
Whether you are the owner or senior management, the strategy you choose to rejuvenate your product lineup is crucially important, and you have to be realistic about the capabilities of your organization. If you start too ambitiously, by wildly swinging for the fences, the odds are that you will miss and get caught out or struck out. But if you go for hitting singles instead, you can dramatically reduce your cost, risks and time to market. And while you are doing that, you are also building up new competencies that enable you to take on gradually more ambitious projects. The product development muscles of your organization get stronger every time you successfully launch a new product, or do even a small enhancement to your current product.
This article was originally posted by the author on LinkedIn.
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