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As businesses add more and more products to their portfolios, they face diminishing returns on variety and more costs in bringing their products to market.1 As a result, managers must balance the costs and benefits of variety in determining their product line-ups. Experiences at Hewlett-Packard Co. and elsewhere indicate that effective variety management can lead to bottom-line improvements of up to 20% of operating profit over a less systematic approach.2
One of the biggest challenges to effective variety management is obtaining a good understanding of the costs of variety. It is necessary to invest time up front to understand these costs and develop a set of guidelines that allow the business to make the right cost-benefit trade-offs. Then these guidelines can be incorporated into a comprehensive business process for managing variety on an ongoing basis. By applying the principles and the process described below, organizations can walk away with a clearer understanding of how product variety affects costs, enabling them to make smarter decisions not just for their current product line but also for future product launches.
We worked with a wide range of businesses (see “About the Research.”) with products ranging from computers to laboratory filtration equipment, all struggling with the difficulties of exploding product variety, and discovered that despite sometimes intense efforts on the part of the businesses, their approaches exhibited several common pitfalls. In particular, a widespread approach to managing product variety is to cut low-volume products. This is also known as “trimming the tail.” Trimming approaches vary: Products can be discontinued when volumes fallbelow a threshold, a hurdle can be set on forecasted volumes for new product introductions, or a cap may be set on the total number of product variants in a product line. Regardless of the method used, these approaches are only partially effective and can often be too simplistic to truly enable decisions that are in the best interest of a company.
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1. For related discussion and examples see M. Draganska and D. Jain, “Product Line Length as a Competitive Tool,” Journal of Economics & Management Strategy 14, no. 1 (Spring 2005): 1–28; M. Gottfredson and K. Aspinall, “Innovation Versus Complexity: What Is Too Much of a Good Thing?” Harvard Business Review (November 2005); and M. George and S. Wilson, “Conquering Complexity in Your Business,” (New York: McGraw Hill, 2004).
2. Based on Hewlett Packard’s projections of potential impact. For additional examples, see George and Wilson, “Conquering Complexity in Your Business.”