Source: Small Business
Management
In a rapidly changing world, it is
important for owner-managers of small
plants to Improving Your Product Management and Channels of Distribution. Products, in addition to
appealing to customers, must be distributed through channels that make it
easy for customers to buy.
This guide discusses means by which owner-managers can examine their product
management
and their channels of distribution for weaknesses and strengths. The
purpose is to correct the former and exploit the latter.
Keeping a small plant's sales "on target" involves watching trends,
anticipating changes, and acting at the right time. The action may be
making changes in products, in channels of distribution, or in both.
A case in point is provided by poultry processors in one section of the
country. They had to change their product to dried and frozen eggs when the
broiler industry shifted to another section of the Nation. They sell their
"new" products directly to bakeries, schools, hospitals, and other
institutions. Their former distributors were meat wholesalers and retail
grocery stores.
Keeping products and services beamed at customers and prospects is a
combination of looking backward and forward. Examination of present and
past records and practices is needed to determine weaknesses and strengths
in marketing. Looking ahead and planning for the necessary changes help to
correct weaknesses and exploit strengths.
Product Management
- Examining
Records
Some small companies fail to reach their target market because their
owner-managers do not look for weaknesses in their products management. Or if they
look, they do not look soon enough. A product becomes "weak" when it is no
longer suited to its market or when consumers' preferences change.
For example, a brewery owner watched the trend for packaged beer for home
consumption grow, while he continued to make keg beer for taverns. When he
finally tried to sell packaged beer, many stores refused to take on that
line. They were already stocking several established brands. Moreover, that
firm's salespeople lacked experience in getting good shelf space, in
checking packaged stock, and in setting up displays for packaged goods in
retail stores.
Product situations should be examined periodically to determine how well
they are holding up. Your examination should start with your sales records.
They should be kept by product (or product line) and by territory. Sales
expenses should also be recorded in the same manner.
Even when your total sales are ahead of last year's, it can be dangerous to
assume that your products don't have weaknesses. The sales of one or more
of them may be falling off. A product may be in the declining stage of the
product life cycle. That cycle provides a convenient way of thinking about
your products in a market where products come and go.
In checking each product, sales records should help you to answer questions
such as:
Is the percent increase in sales of this product declining? (For example,
an increase last year of 5 percent against an increase of 10 percent, the
year before last.) What is causing this decline? If sales are remaining the
same, is this a good sign in a growing economy?
Are present territories saturated? Should present territories be expanded
before you find new ones?
Did the percent of selling expense (including advertising) for this product
increase? If so, why?
If sales, profits, or prices have slipped, why? Is competition now putting
out a new product that is causing the decline?
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Product Life Cycle
Many products go through a life cycle. The typical product life cycle has
four stages.
Stage 1 is a testing or introductory, period. In it, the new product has
low consumer awareness, low consumer acceptance, and small sales.
Stage 2 is a growth period. In it, sales gains are rapid.
In Stage 3, the product has reached maturity. Unit sales are stable.
In Stage 4, the product is on the decline. Sales fall off.
Not all products go through a complete life cycle. Many never get beyond
Stage 1. They fail to be accepted by customers in this testing period.
In addition, the length of each stage varies according to the nature of the
product. Because of rapid advances in technology, the length of each stage
for electronic products, for example, is growing shorter. Companies using
new technologies tend to introduce an increasing number of new products.
In dealing with product life cycles, part of the skill is in determining
the peak of Stage 3--the maturity period--and being prepared to replace
mature products before they enter Stage 4--the period of declining sales.
Products Management Correcting Weaknesses
How you correct a product's weakness depends on what is causing its sales
to slip. For example, if a competitor's product is eating into your market,
you should compare your product critically with your competitor's. Examples
of questions to ask are:
Is your product of as good quality as your competitor's product?
Is it as easy to use? As attractive?
Is it readily identified by consumers?
Is the competing product priced lower? Or higher? (Higher price sometimes
means higher quality and produces higher sales.) How is it promoted? How is
it distributed?
You may not always be able to answer these questions yourself, especially
those requiring answers from consumers. Market tests may be needed.
One manufacturer of replacement parts made such a comparison when he
discovered that sales were declining and those of a competitors were
apparently rising. What he found was that the competitors had added certain
new items. To bring his product line "on target," he dropped several
slow-moving items and added faster-moving items such as those offered by
the competitors.
He also learned that his retailers and wholesalers were pushing his
competitors' items because they carried an attractive gross margin. He had
to follow suit and meet the competition.
Segmented Markets. Sometimes, the solution for an ailing product lies in
segmented markets. Suppose, for example, that you have a standardized
"mature" product. For years it has brought in--and continues to bring
in--substantial sales. But many companies make your product and, to meet
competition, you have to fight constantly to cut the product's
manufacturing costs.
Often you may think "If only I could take this product back to the years
when only a few companies made it and I sold it easily and at a good
price." Of course, you can't turn time back, but perhaps you can turn to a
different kind of market with a modification of your old standard product.
You can look for an opportunity to aim a more specialized product at a
segment of the general market.
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Food processors provide an example. Some still turn out staple canned or
packaged goods. But many others have changed successfully to specialized
products. Some make baby food. Others sell geriatric food for senior
citizens. Still others push gourmet foods for the epicures. And many others
specialize in preparations such as premixed or frozen foods.
Both opportunity and costs, in segmenting your market, have to be kept in
mind, however. The change would involve expense. Also, since you would
restrict the size of your market, you would need to expect a better price,
a longer lasting market, or some other advantage to compensate you.
One hosiery maker increased sales by disregarding fashion trends, making
warm heavy-denier hose for older women--neglected customers as far as other
hosiery manufacturers were concerned.
Whether segmented markets offer a solution for you depends, of course, on
your situation. The point is to keep the possibility in mind.
Substitute Markets. Established products can sometimes drift "off target"
when a substitute product, with more appeal to consumers, appears on the
market. When this occurs, the sales as well as the profits of established
products decline. The appeal of the substitute product may be in price and
convenience--for example, ballpoint pens, which are inexpensive and
disposable. Or it may be ease of use--for example, decals and press-on
paper finishes which are easier to apply than decorative paint.
The small manufacturer, in some cases, can overcome an established
product's weakness by adopting the substitute. However, some owner-managers
hesitate to use this remedy. Some are sentimental about their old products.
Others are apprehensive about the potential problems and risks in
introducing new products. The longer the hesitation, the more likelihood of
entering the market after the profit potential of the substitute product
has been passed. Although small companies often can't afford to be first in
the market, the point is to get there while the new product still has
steam--growth and profit.
Not always is it necessary to use a substitute when sales of an established
product decline. You sometimes can find a new application for a declining
product. The manufacturers of butyl rubber provide an example. The demand
for their product dropped considerably when producers of automobile tires
introduced tubeless tires. To offset the loss of sales which was due to the
elimination of inner tubes, the butyl rubber people looked for new uses for
their product. They found new applications for it in automobile
manufacturing--for example, hoses and oil resistant insulation.
Examining Channels
of Distribution
A small manufacturer should also check marketing channels
of distribution for weaknesses.
Your channels of distribution may be getting your products to the ultimate
consumer. Or they may be "off target."
Consumer and industrial goods are channeled to their ultimate consumers
either directly or indirectly although some use a combination of both ways.
When a manufacturer uses the direct method, the sale to the user is made by
your sales people, by mail solicitation, by employing house-to-house sales
people, or by operating (direct retail) outlets. When a manufacturer uses
the indirect method, the sale is made through a wholesaler and/or jobber,
and independent agent, a retailer, or any combination of them.
In a changing world, distribution channels can lose their effectiveness.
Consumer buying habits may change; new competition may develop; company
objectives may be altered. As a result, what were once considered the most
effective channels of distribution can become totally inadequate.
Therefore, they should be checked periodically even though facts about
channel effectiveness are difficult to obtain.
Means to an End. Look at your channels of distribution as a means to an
end--a way to get your products to the user. When you go to the heart of
the situation, the questions to answer are:
Who buys my products?
Where do they buy them?
How do they buy them? (in single lots, by the dozen)
When do they buy them? (weekly, monthly)
Are my ultimate product users satisfied in buying through present channels?
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You can get such information from an analysis of your orders. Warranty
cards returned by purchasers provide another way to determine where and
when they bought the product. If you use distributors, they can provide
information. Other sources outside of your company such as trade
associations, trade journals, and Census and other Government publications,
can provide you with helpful information: customer preferences, income
data, and so on. These can all help keep you to be informed about your
consumers.
In addition, a small manufacturer should keep up in a general way with the
many factors that affect distribution. Some of them are business trends,
income and consumption trends.
Examples of Changes
In applying information about your customers and prospective customers to
your channels of distribution, look for changes. For example, does your
information indicate changes in customer's purchasing patterns, changes in
customers' locations, changes in the practices of resellers, or changes in
your competitors' methods?
Changes in customer purchasing. Often a manufacturer has to make major
adjustments in channels of distribution because customers have changed
their buying habits. The growth of convenience foods, such as prepared
potatoes, frozen orange juice, and baking mixes, is an example of this type
of change. As a result of this development, instead of going directly to
the retail store, potatoes, oranges, and flour are channeled through food
processors before they reach the retailer. Similarly, changes in customer
purchasing can cause changes in the type of retail outlets used. For
example, many of the old-line hardware-store items are now sold in drug
stores and supermarkets, and garden furniture and supplies have become a
staple in hardware stores. Such selling is often called "scrambled
merchandising."
Changes in customer locations. People are on the move all the time. And so
are the markets for products. One manufacturer of electrical appliances
formerly needed only farm equipment distributors to market his product.
However, he found that the urban migration made it necessary for him to
recruit a substantial number of dealers in the cities.
Even customers in the cities may change their locations. Many of the large
cities are bracketed with shopping centers that get the suburban customers
who formerly purchased their needs in downtown stores.
Changes in location of customers are not confined to consumer markets. New
firms that may be customers are being created all the time and old firms
are constantly adding new locations. One industrial equipment manufacturer
had to expand channels of distribution because of such changes in customer
locations. Originally sales people sold only to customers in the northeast.
On learning that there were potential customers in the far west, the owner
decided to get that business by using a manufacturer's representative--a
new type of channel.
Resellers' changes. Your sales can rise or fall when your
resellers--wholesalers and jobbers--change their practices. For example,
suppose they decide to reduce inventories of your products and to rely on
you to help them by filling orders promptly. Do you comply? Or do you look
for new channels?
You also need to know when resellers cut back or make other changes in
service, technical help, and the sales efforts that they devote to your
product.
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Competitors' changes. Is your competition changing its channels--adding
different types of outlets or shifting to new resellers? What, if anything,
is competition doing to make its products more attractive to resell? For
example, competitors may be assuming more of the inventory function for
resellers, or more of the service function (such as setting up company
service centers, offering technical help directly to buyers). Or they may
be offering attractive gross margins to their resellers, or extended credit
terms.
You may need to change your distribution policies as your competitors
change theirs. On the other hand, what is best for them may not be best for
you. Be sure that the competitors you observe are similar in size to what
you want your plant to be.
Your company's changes. Because a small manufacturer is closely involved in
the company's day-to-day operations, you may overlook internal changes that
can affect your channels of distribution. For example, you may use your
established channels without considering their suitability to a new product
you are introducing. An industrial chemical company provides an example of
this kind of problem. It tried to distribute a new line of farm and home
fertilizers with the same channels that it used to distribute its
industrial chemicals. When the expected sales volume did not materialize,
the company re-channeled the new product so it would reach small retail
consumers.
Changes in a company's financial resources and its management "know-how"
may also cause changes in distribution. One food processor who had
distributed products through franchised restaurants increased sales
substantially by buying out marginal franchises and opening new
establishments with franchise earnings as the firm acquired "know-how in
restaurant management."
A desire for closer company control of the selling or service functions may
produce changes in channels of distribution. For example, a manufacturer of
outboard motors distributed through marine hardware and sporting goods
wholesalers. These middlemen were interested in sales rather than service.
The manufacturer wanted to get closer to the consumer and strengthen the
market position by opening retail outlets which would offer top-notch
service to customers.
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Improving Channels
of Distribution
Sometimes the sales yield from an existing channel of distribution can be
increased by working more closely with resellers. Some owner-managers don't
realize that they have to earn their resellers' cooperation. They expect
jobbers and wholesalers to "run with" a "no-name" product that needs
much
selling.
Providing resellers with selling tools, such as counter cards and displays,
can help them to promote your products. Dependable items that need little
or no service are easier to move from reseller to customer than items that
need periodic servicing. In addition, gross margins should be in line with
the job you expect your resellers to do.
One company gets better cooperation from distributors by offering them
technical aid and by helping them with inventory control. Another company
finds that competitors are suggesting higher list prices. To compete for
the resellers' attention, this owner-manager had to adjust prices and
resellers, margins.
Seeking New Channels
In some situations, the only way to keep your sales "on target" is by
seeking and using a new channel of distribution. For example, a publisher,
who added paperbacks to the firm's line, could not get mass distribution
from bookstores--the established channel for hardcover books. The firm had
to use new channels--magazine wholesalers who could provide mass
distribution at newsstands, drug stores, and supermarkets. In this example,
the publisher had to answer questions, such as: Where do customers buy
paperback books? How do I get my paperbacks to those retail outlets?
One producer of inexpensive throw-away pens needed broader distribution. By
changing to distribution through tobacco wholesalers, the pen got into many
of the smallest stores and obtained about 70 percent coverage of the
possible outlets.
However, problems can arise in setting up new channels. Old established
relationships may have to be broken. Or moving into new channels may
interfere with relationships already existing there.
Sometimes a manufacturer may set up his or her own organization to overcome
such problems. Such action can be costly. For example, one company in
trying to by-pass the distribution specialists found it didn't have the
necessary know-how to sell directly to retail outlets. The owner learned
this fact only after dropping the firm's distributors. Several years later,
it had to find new distributors.
As market changes persist, they sometimes force a company to change a
long-standing policy on channels. For example, a long standing policy of an
ethical drug company was to refuse to sell to discount houses. "To keep in
step with changes in marketing" the company decided to sell to any retailer
of drugs who had a licensed pharmacist.
Looking Ahead
In keeping your sales "on target," it is vital to look ahead. Planning that
involves product or channel changes requires considerable lead time. How
much lead time depends on your situation.
However, you should keep in mind that new technology has shortened the life
expectancy of many products. Of today's products, 60 percent came on the
market as "new" products within the last 10 years. The rate of change is
apt to be faster in the future with an even shorter life span for some
products. Part of the skill in keeping your product's sales high is timing--knowing
when to make changes and being prepared to make them.
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