Given the great implications, either negatively or positively that product proliferation has on a firm as outlined in this observation it is paramount that firms understand the dynamics resulting from proliferation of their products.
Besides, the concept of product proliferation has other implications related to logistics, marketing and overall product management among others, while opting not to proliferate also has its implications. It is these pros and cons of product proliferation and an analysis of this very concept that this paper intends to discuss; additionally this paper will review the challenges faced by firms during product proliferation in order to arrive at a fair conclusion regarding its suitability.
Product proliferation concept
The concept of product proliferation in business is attributed to three major outcomes; one, it increases the product demand and ultimately boosts sales, secondly, because of increased demand the distributions costs consequently increases as well as other logistics and finally for strategic purposes (Gruca, Sudharshan and Kumar, 2001). This in general summarizes all the implications that product proliferation has on firms and the market at large and is the basis upon which we shall also base our arguments.
Thus, because firms are for one reason or another motivated to undertake proliferation strategy based on these reasons, it is essential that they be aware of the downside of this strategy. In essence product proliferation is portrayed by three key characteristics; “large number of new product introductions, wide product variety, and long product lines” (Bayus and Putsis, 1999).
Most often, product proliferation strategy is largely pursued by firms for two broad reasons; to increase sales and as a barrier to entry strategy for other firms that are interested in entering the industry (Bayus and Putsis, 1999).
Unfortunately in doing so, the flipside of it is increased costs and other managerial challenges that incidentally emanate from that very strategy; thus it becomes necessary for firms to undertake sort of a cost-benefit analysis that analyzes the end benefits that it hopes to reap by considering these other factors. As it would seem, based on current evidence it appears that product proliferation has in fact less benefits than is always thought to be the case; it is this evidence that we shall review in the following section.
Challenges associated with product proliferation
No doubt that one of the critical factors that informs product proliferation is the need by a firm to bar new entrants from entering the market, but in doing so this strategy inherently increases production costs of the same products, which is one of the major determinants that shapes the outcome of competing firms.
Indeed, the empirical evidence to support this has existed for long when this observation was first noted by Hauser and Shugan (1983) who are attributed for developing the Defender Model which addresses the most viable options that firms should pursue in deterring new entrants from their industry (Cited in Gruca et al, 2001).
Not surprisingly, the Defender model suggests a strategy to the incumbent firm that “reduces price and decreases market spending” (Gruca et al, 2001): both these strategies are not consistent with product proliferation concept.
Now this strategy as advanced in this Defender Model makes sense when you consider that lowering product price when faced by a new market threat will influence customer’s choice and thereby spur sales to the disadvantage of the new entrant.
But this is not the case when product proliferation is pursued as a strategy since it increases the overall overhead costs, distribution logistics and a myriad of other costs that emanates from such a strategy such as promotional materials, personnel training, sourcing for variety of raw materials, inventory costs and advertising costs among others (Berman, 2011).
Furthermore, product proliferation most often results to reduced production rates, complicates the process of supply chain management and at times requires customization of the manufacturing process; all these have cost implications. No better is this cost implications exemplified than in Pepsi Company which incurs various costs due to its product proliferation as documented by one study in which it states
“For us, every time we change a flavor let’s say we go from Pepsi to Diet Pepsi to Mountain Dew we have a sanitation process we go through. So, we’re losing between 12 and 15 minutes downtime when we’re doing this. Over a day’s time, if we run eight different flavors, we’re losing two hours of production time” (Berman, 2011).
This implies that firms have to ensure that resulting costs are superseded by the benefits and increased profits that such product proliferation offers. A very recent study by Berman (2011) which sampled a total of 424 CEOs in which it investigated the cost-benefit analysis of product proliferation in their companies concludes that this strategy had “approximately 50% of the respondents stated product portfolio complexity has a ‘negative or somewhat negative’ impact on a firm’s cost competitiveness and lead time”.
This indicates that product proliferation has indeed less benefits overall compared to associated costs; in fact on a comparative basis the study states that product proliferation has “negative or somewhat negative impact on capital efficiency (45%), profitability (35%), product quality (32%), sales effectiveness (29%), and customer service/satisfaction (24%) (Berman, 2011).
While the incumbent firms may justify their product proliferation strategy by deterring new entrants in the market, the long term gains for adopting this strategy maybe lost due to accumulating costs necessary to sustain such a strategy, and because the bottom line for any firm is to maximize profit then this strategy becomes questionable.
In any case, barring new entrants to the industry nurtures oligopolistic market behavior which means that competition is suffocated, this leads to two adverse implications; one, because of the oligopolistic in the market, lack of competition results which means that such firms can increase prices on their products beyond what can be considered normal since there are no other players in the market to guide against such price hikes.
Secondly, because such firms even if not oligopolistic constantly require to sustain their strategy of product proliferation means that they have to pass the resulting costs to customers through their products pricing which means customers do not benefit from fair prices.
So in essence the customer neither benefits from low price gains nor product quality that they will expect by paying more. Additionally, as much as the firms may also justify the need for product proliferation on satisfying customer’s diverse tastes and unique requirements, current evidence indicates that there is a limit upon which such gains can be made, beyond which customer confusion occurs.
At least two research studies by Drummond and Rule (2005) and Soo et al (2004) documents the evidence of confusion and stress caused by product proliferation where both studies observes that increased variety of product choice translates to customer confusion and is a source of stress to sizable number of customers who get torn between products and are thereby unable to make a definite choice finally.
In conclusion, of all the benefits that firms expect to reap from the strategy of product proliferation, it would appear that only minimal gains can be achieved while related costs can only soar with each addition of product type.
Considering that product proliferation is in fact half the time not even motivated by profit or even the need to secure market, then the use of this strategy by firms as a long term business strategy becomes even more questionable. This is because factors such as inability to prune products and manage product life cycles for instance which in one way or another also lead to product proliferation are actually organizational weaknesses that are not based on the need to boost a firm’s sales or profits.
In fact of the three major categories of factors that facilitate product proliferation i.e. competition based, channel based and internal organization based (Berman, 2011) only one category of Channel based that is not defensive or pressured by other factors which is the only one that can justify product proliferation.
The other two are either defensive or ill informed since they are motivated by factors such as deterring new entrants which should be healthy and encouraged in a liberalized market and the need for instance to avoid layoffs, prune products, occupy sizable shelf space and as a response to other firm internal pressures all of which are not good reasons to undertake product proliferation.
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Gruca, T., Sudharshan, D. & Kumar, R. 2001. Marketing mix response to entry in segmented markets. Intern. J. of Research in Marketing, 18: 53–66.
Soo, S., Rottenstreich, Y., & Brenner, L. (2004). On decisions that lead to decisions: Direct and derived evaluations of preference. Journal of Consumer Research, 31(1): 17-25.