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Product Development, Manufacturing Expansion

and Community Prosperity

Dr. Fred ZimmermanUniversity of St. Thomas

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Manufacturing Growth Occurs When

• Market needs exist.

• Distribution systems are accommodating.

• Manufacturing companies are low-cost.

• Products are differentiated.

• Suppliers are efficient, well-equipped and responsive.

• Communities appreciate industry.

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Product Development Realities

• Low-cost trumps product features & benefits.

• Supplier capability is as important as product development expertise.

• Successful product development involves developing products appropriate to or slightly ahead of market needs.

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Strategic Positioning for Survival

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Strategic Path to Survival

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Tactics of Low-Cost Operation

• Operational Efficiency

• Inventory Efficiency

• Modest Overhead

• Low Cost through Design

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Tactics of Product Differentiation

• Distinguishing Features

• Reliability and Performance

• Product Quality

• Market Continuity

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Leadership Tactics

• Focus on Operations

• Managerial Stability

• Experience in the Industry Being Served

• Technical Experience

• Knowledge Exploration

• Incremental Changes

• Fair Play

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Payroll18.6%

Est Materials59.4%

Est G & A22.0%

Manufacturing Costs

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Low-cost operation

• Provides a strategic advantage far more enriching than the simple preservation of needed cash.

• Enables the funding of better product quality, more differentiated products, and better customer service.

• Disciplines and conditions the organization for international competition, and forms a bond that brings members of the typical company together and promotes commitment.

• Is absolutely essential to the survival of the typical firm.

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Three principal side effects for High-cost operation

• Excess or unnecessary costs reduce profit, cash flow, and the availability of resources.

• Unnecessary costs result in operational inefficiency.

• Unnecessary costs reduce commitment.

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Breakeven chart

• The following breakeven chart illustrates some theoretical concepts useful to the manager.

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Important Questions Regarding Cost

• 1. Are variable costs sometimes much greater as a percentage of revenue than we may have suspected?

• 2. Are variable cost rates constant over short-range changes in revenue or are they higher when revenue is increasing than when revenue is falling off?

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Possible breakeven chart for a typical firm.

How profitability changes as revenue changes is wholly dependent upon the behavior of variable cost and the presence or absence of upside and downside efficiency. The typical dilemma of the inefficient firm is that when revenue increases, costs increase by nearly as much, thus limiting the effectiveness of the revenue expansion strategy. Correspondingly, when revenue falls, expenses are not proportionately reduced. For profitability to be improved, efficiency moves must precede strategic moves.

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Operational Efficiency

• Successful firms concentrate on efficiency first, products second, and then on marketing and sales. Revenue expansion based upon inefficient operations results in severe operating losses.

• Successful companies reduce cost to present revenue levels. Unsuccessful companies attempt to increase revenue to cover existing costs.

• Successful companies implement proven efficiencies immediately but work through people.

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Operational Efficiency (Cont.)

• Successful firms achieve scale economies at the component or process level and not at the level of the overall business unit.

• Top managers who know how to achieve efficiencies in the particular industry being served.

• Successful companies work productively with suppliers to reduce product cost.

• Successful managers make investments to sustain and improve efficiency but understand processes well enough to know what really pays off.

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Lowering Cost through Design

Ford Motor Company’s philosophy:

70 % of cost reductions are achieved through design.

30% through manufacturing efficiencies.

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Four Strategic Difficulties leading to Poor Product Development

1. Development activities focused on the past rather than emerging trends.

2. Development activities focused on products for new unfamiliar markets rather than for familiar markets.

3. Development activities focused on gadgetry rather than on product features and benefits that more accurately reflect user requirements.

4. Development activities that are inefficiently executed and take too long to satisfy the market being served, often resulting in products which are insufficiently tested and refined.

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Practical Lesson in Distinguishing Product Features

Successful firms focus on emerging trends in the marketplace. They provide features and benefits ahead of or in sync with major market trends.

Unsuccessful firms lag behind market trends or over-anticipate market trends.

Successful firms provide meaningful features and benefits, not gadgets and they avoid development of the unessential.

Successful firms manage development tasks very well. Unsuccessful firms often take too long.

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Practical Lesson in Distinguishing Product Features (Cont.)

Successful firms produce reliable new products. New products from unsuccessful firms are often poorly tested and unreliable.

Successful chief executives are supportive of development staffs. Unsuccessful CEOs interfere with limited information and too much ego.

Both successful and unsuccessful companies spend ample money on product development, but successful companies accomplish much more for the money.

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Product Quality

Both successful and unsuccessful companies believe their products to be of high quality, but credibility varies. Successful companies constantlycheck to ensure that products meet or exceed customer requirements.Unsuccessful companies presume that quality is high but do not check.

Successful companies quickly take action on quality problems.Unsuccessful companies gather more evidence.

Discipline in operations is prevalent among successful companies. Quality is maintained because precision is expected at every link in the value chain, and when quality is not forthcoming, changes are made. Unsuccessful companies lack discipline.

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Product Quality (Cont.)

Successful companies improve the product even when it is better than competing products. Unsuccessful companies become satisfied when quality is about the same as that of weaker competitors.

In-process quality is the major emphasis at successful companies. At unsuccessful companies, more emphasis is on end product quality.

Top managers at successful companies are emotional about quality and other issues. Top managers at unsuccessful companies display less emotion and are hard for people to read.

Top managers at successful companies instill pride in company and product by clearly articulating, through words and actions, what isimportant and by supplementing these articulations with outstandingtechnical knowledge. The combination of pride, technical competence,fairness, and experience helps organization members to believe that theyare part of a class act.

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Market ContinuitySuccessful companies nurture, protect, and develop products for historical markets before moving into new markets. Unsuccessful companies often leave historical markets unprotected.

Successful companies actively preserve product identifiers, such as names, product colors, advertising, or product attributes, that retain continuity with historical markets. Unsuccessful companies frequently change product identifiers.

Successful companies assume that markets are captured on the basis of merit arising from better products and service. Unsuccessful companies overestimate the importance of the strategic selection of markets.

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Market Continuity (Cont.)

Successful companies are able to more accurately gauge the rate of change in markets and provide products that are in phase with changes. Unsuccessful companies are frequently out of phase.

In order to preserve investment and field a wide variety of products to cover different circumstances, successful companies are less inclined to totally discard products. Instead, they adroitly stash products and features that they believe will be useful at other times or extend product lines inother ways. Unsuccessful companies time product announcements poorly.

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Strategic positioning for survival

Strategic positioning for survival. Survival is most likelywhen a company is a low-cost provider of differentiated products or services.

Survival is least likely when undifferentiated products are expensively produced.

A firm’s survival position is enhanced if either product differentiation or low-cost operation is present, but both attributes are necessary to ensure success.

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Strategic positioning for survival (Cont.)

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Strategic profiles — successful cases

Successful operations often first achieve low-cost operation and then enhance product differentiation in a two-step process. Charles Nash had the clearest perception: become highly efficient at manufacturing and then use some of the savings to differentiate the product by adding quality andfeatures.

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Successful Profile (Cont.)

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Strategic profiles — unsuccessful cases

Unsuccessful firms are seldom able to exhibit a favorable strategic profile involving low-cost operation and product differentiation. Costs remain high while productquality, features, and benefits remain poor.

Under these conditions, failure is an almost universal outcome.

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Unsuccessful Profiles (Cont.)

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Differences in the Differentiation of Products

Successful companies make small, incremental improvements to produce differentiated products. Unsuccessful firms often fail to incrementally improve existing products even when product shortcomings are widely perceived.

Unsuccessful companies often make significant and abrupt changes in the positioning of their products in the market. Successful firms avoid abrupt changes in market position.

Successful firms put greater emphasis on product quality. Unsuccessful firms often neglect quality issues.

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Relating to Strategy

Successful firms more accurately gauge their ability to implement fully theirstrategic plans. Unsuccessful firms often have strategic plans that are eitherinternally inconsistent or inconsistent with the company's resource base.

Successful firms concentrate on internal operational issues such as product quality, organizational productivity, product differentiation, and day-to-day sales.

Unsuccessful firms often focus on external expansion, acquisitions, or financial restructuring or some obscure view of business strategy.

The managers at successful firms often have extensive industrialexperience in the particular industry being served or in a closely related industry. Top managers at unsuccessful firms often have less experience in the industry being served.

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Recommendation Regarding Public Policy

• Focus on tangible production.• Formulate policy on the basis of

input/output economics – strengthen the supplier base.

• Improve the competitive edge of present industries.

• Improve everybody’s quality and productivity.

• Push for similar benefits, reasonable compensation levels, and more work.

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Recommendation Regarding Public Policy (Cont.)

• Seek solutions to individual problems, not class solutions.

• Resist the temptation to solve problems by spending more.

• Obtain an adherence to sound management principles in exchange for economic assistance.

• Set the example by applying efficiency principles to governmental performance.

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Outsourcing

Outsourcing is the gradual process of educating future partners or

future competitors.

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Growth

• Growth can happen.

• Everybody wants it.

• Making growth happen is work.

• Many people are working at it now.

• Making growth happen is work on the part of managers, suppliers, employees and the communities within which the companies reside.

• Now!