WHEN PRODUCT MIX MATTERS


by Donald V. Potter

Consider the case of three competing suppliers:

  • Company A has a product line mix that roughly reflects the industry overall. This company sells about 20% of its volume at the high end, 75% at the middle, and 5% at the low end.

  • Company B has a commanding position at the low end, with some product offerings at the mid-range and none at the high end.

  • Company C is the premium supplier, with 65% of its sales at the high end and the rest in the mid-range.

Which company is best positioned for long-term success, including survival in hostile markets?

The Problem: Fighting the Market

Company A is best positioned because it offers a full and balanced range of products and therefore will be more willing and able to move with the market. Markets are always in motion, as customers enter or leave and as the broader buying patterns shift toward either the high or the low end.

A company's product mix matters in a negative sense. Too often it causes the company to fight against the market direction.

Customers and suppliers both drive changes in the market. Yet companies whose product mixes are skewed sometimes refuse to sell what customers want, either because they have no product available at that price point or because they believe such sales are not as profitable as sales at another price point.

Swimming against the tide is both difficult and dangerous. Many companies that have lost share by trying to force the market to buy what they have to offer:

  • Johns Manville in insulation. At one time, they dominated the insulation business as the "king of rockwool." The company held off its participation in fiberglass insulation because of its high profits in rockwool. Today Owens/Corning Fiberglas dominates the insulation market.

  • Holiday Inns in lodging. This company once set the standard for mid-priced lodging but lost its position to companies such as Marriott, which covered more price points, including those where growth was high.

  • People Express in airlines. This company put low-priced air travel within the reach of the general public. Larger airlines put them out of business.

  • Apple in personal computers. This successful premium-priced supplier found itself gradually losing share to companies that offered price points Apple did not cover.

The Solution: Balanced Product Mix

In hostile markets, winners hold or gain market share (then manage costs to ensure positive contribution in serving those customers). A full and balanced product line is key to attracting customers and discouraging competitors.

A full product line allows you to respond flexibly to changes in the market and offers your best defense against competitors. If the market wants to move either up or down in price point you will have a product to meet the need.

But balance is also important with product mix. If a company puts more emphasis on high-end products, profits may be good but the company is vulnerable to competitive attack and share loss from competitors who are strong at lower price points. If a company's product mix is heavier at the low end, both profits and share are likely to be lower than will be necessary for long-term survival. In either direction, an unbalanced product mix suggests a potential strategic weakness in hostile times. This weakness is largely psychological. A company with full but unbalanced product line can respond to market shifts to price points where the company is not strong. Too often, though, it simply chooses to resist the market, hurting itself in the effort.

Closing Thought

Niche players can, and indeed should, have an unbalanced product mix. Their specialization enables them to discourage intense competition. Still, hostile markets often see them losing share over time.

(Note: This Perspective was written in the context of the economy in 1991. While some of the companies may have changed their policies or indeed no longer exist, the patterns they exhibit still hold today.)


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