Challenge: You are the product manager for a leather goods manufacturer in Ottawa, Canada. Leadership has called a meeting to determine if we can profitably vend a line of leather wallets to teenagers 90 days from now. How do you prepare for this meeting? (the preliminary meeting is in fifteen minutes).
** Reader: you may wish to take fifteen minutes to jot down your analysis of how you would prepare for the meeting, with emphasis on the types of questions you would ask, which assumptions you would challenge, etc. The following analysis is roughly fifteen minutes of preparation for the meeting. **
Challenge Accepted: When accepting a challenge like the above, it is useful to take a few moments to break down the question and size up what constitutes a meaningful outcome; if you rush to solutions, or even methods to solve, it will draw your focus away from the specifics that need to combine in your answer.
Without profit, no business can survive for long
Here is the basic breakdown:
- the goal of this business, err, any business, is to generate a profit. Without profit, no business can survive for long. The goal of the meeting is to determine if profit is possible, i.e. should we make the investment and plan for a reasonable return.
- the targeted delivery is 90 days
- the company is a leather goods manufactuer
- the product is a line of leather wallets
- the target market is teenagers
- the company’s home location (or is it targeted distribution?) is Ottawa.
Let’s continue our approach of breaking things down from the ground up. Where do we start? It is a good idea to start (and finish) with profit. A quick reminder that profit margin is determined by A] price and B] cost, and that net income (that which we seek) is that margin multiplied by the volume of units sold, which is dependent on C] market share and D] size. So in order to solve for profit, we’ll need to consider price, cost, market share, and market size, and it will be hard to focus on what matters most without clarifying a few assumptions. The strategy the business employs will guide our tactics.
A price strategy addresses product innovation, product quality and marketing effort
A cost strategy addresses process innovation, functional efficiencies and discretionary spending.
A share strategy addresses marketing effort, customer value and barriers to entry.
And a market size strategy addresses new products, new markets, more usage occasions, more usage per occasion.
A new product introduction for leather wallets might be a cue that market size is our desired tactic for this case. This would be a fortuitous error – leather wallets are not in fact a new product (when we clarify this, we learn that the leather manufacturer already sells wallets to existing demographics), but by placing our focus on our target market segment of teenage customers, we learn that our current market segmentation targets sales to men and women aged 18-65 – therefore revealing that this initiative involves targeting a new market segment. (If you completed this exercise on your own, you get points for whatever assumption you made to move you forward here). Selling existing products to new customers is an approach called ‘market development‘ – leveraging our current assets, e.g. our leather goods manufacturing capability and retail outlets, in new arenas to create cost advantages in both current and new markets. Now if we were selling a new product to a new market, this would be an approach called ‘diversification’, but as mentioned above, this would be an error. So, these are the kinds of assumptions you might make to guide your analysis, or questions you might clarify.
Selling existing products to new customers is an approach called ‘market development‘
The key issues in pursuit of size are as follows:
What is the source of new users? — word of mouth processes or market development activities? Teens will not just walk through the door the moment we offer the wallet, our customers must be convinced we can address their need. We need to get their attention.
What is the source of advantage versus incumbent technologies? – is it our market position? i.e. can our image/reputation with 18-65 translate to the younger demographic? Is the customer loyalty we experience with our typical market applicable to teenagers? is our distribution network and sales appropriate for the new teenage market (at this point, you analyse and learn that we have a distribution network of 50 stores across Canada, a wider possibility than originally posited in the question).
– is it our product/technology? i.e. our scale or scope of operations, efficiency of our systems, the quality of our research and development in how to make the most compelling leather products.
– does our advantage come from somewhere else? i.e. financial strength (the brute force approach to entering new markets), management strength, proximity to market, etc.
How good is the fit selling wallets to teenagers and our existing business?
Our management experience, style and attitudes, along with our existing products, services and technical capabilities are no doubt aligned given the similarity in the product — but are our marketing systems really tailored to this younger demographic – can we really drive awareness, distribution and pricing to teens in the same way we have with our existing 18-65 market? Probably not!
Once you have worked through the questions above, you need to assess the total market opportunity, and to do this we will adopt a lot of knowledge from our existing market share and reach (a further opportunity to clarify assumptions). Just how many teens do we think we can reach, and how do we intend to reach them. If we wanted to dive deeper into the question of profitability, we could now tackle the challenge of market share and competition to understand just what kind of impact our moves would make, and what would constitute a reasonable expectation for profitability given current competitive conditions. And keep in mind, while we are assessing the answers above to determine size and volume, we are also going to impact the cost structure of vending this product. In the Ottawa space, there are a number of retailers with a similar offering, the most well-known being Danier Leather. Competition always depends on expenditure – the question is if the expenditure constitutes cost or value.
So that is a first crack at the underlying issues behind size and volume. And we will still need to assess price and cost – by my clock we still have under 11 minutes to go. Let’s start with cost, and attempt to understand this by listing the product development steps our firm will follow for the next ninety days:
Product Development Process for Production of Leather Wallet
Kick-off: Our leather goods firm kicks of product development for the new wallet design.
Perform market research: Our overall company strategy lead us in developing a marketing plan. Because we haven’t tackled this yet, we should try to understand how we compete, where we play, where we win — which operating model do we employ? Differentiation, low-cost producer or specialization? The marketing plan should address the vital consumer needs, and importantly how our teenage target market infers quality – if these are not understood (it is a new market segment, after all), then market research will be required. Here we highlight details of the cost structure that will support this research, and along with contribution to the overall budget.
We should try to understand how we compete, where we play, where we win
Line Planning: Organize / coordinate design activities, people and if necessary machines for the entire line. With the aim of compressing product development time, we build a schedule (linked to the marketing calendar) — the goal is for the timeline to be as short as possible to be totally responsive to the wants/needs of the target consumer. At this point, we analyse point-of-sale data with sales and marketing teams in order to forecast the right style at the right time.
Leather Selection: Commercial evaluation and selection of appropriate leather for the target market, no doubt from our existing stock, and ensuring we have the capacity to produce the quantities needed for line production, in the right timline, with the quality required. At this stage of the process, we add an additional check to make certain the calendar can be met.
Concept Development: Use concept generation to create design concept for the wallet, with techniques like concept boards, and rough physical samples. The key task for this step is the direction of the design team. Failure or re-work required at any subsequent step returns to this concept development stage.
Quick costing: We prepare a rough estimate of materials and labor required to produce a concept — For the purpose of preparing for the profitability meeting, we would perform a preliminary cost estimate in anticipation of this stage, using data from previous analagous lines (i.e. wallets produced for the 18-65 market).
Sampling: Create a prototype of the final product to demonstrate capability and concept.
Specification Development: Create production-related tools, e.g. specifications, cut directions, pattern measurements and quality expectations. We ensure unity/quality of specifications.
Produce Salable Leather Wallet: Our in-house manufacturing team cuts and sews the leather according to specification as well as verification that garment meets specification. At this stage, we keep the designers on track and on time.
Final Costing: At this stage, we perform our final calculations to ensure salability and profitability. Though, we have sought to produce a profitability analysis in anticipation of the entire effort, during Final Costing, we confirm that our efforts are on track based on what has actually occured in practice up to this stage. Final Costing is performed after sampling and before the Line Review.
Line Review: We avoid the impact of late adds/changes through regular executive line reviews. We mitigate product development risk through line direction and line adoption meetings.
Post-Line Review: Executing the marketing plan, we guide the sales force in how best to clearly present these concepts to buyers with a clear vision of the teenage market purchasing the wallet. It is also important to consider that the primary buyer may be an older person, e.g. a parent or family member, who already shops with our brand — these considerations should be built into the packaging for the Wallet.
The primary buyer may be an older person, e.g. a parent or family member, who already shops with our brand
With the Product Management Process clearly understood, we can deduce the basis for the 90-day cost structure. Because leather goods are our primary line of business, and wallets are an existing offering, the firm’s assets can be better utilized and the cost of manufacturing the new line of wallets will likely be limited strictly to the variable cost associated with the marketing budget. It is not important to discuss how cost accounting is managed, but one approach might spread fixed costs associated with manufacturing across the line, potentially expanded with the addition of the wallet for teenagers.
With historical information and the preliminary analysis above, we can initiate our investigation of pricing. The first thing we can clarify is the method of pricing we typically apply in our company. For example, Cost-Plus Pricing, MSRP, Competitive Pricing, Pricing Below Competition, or another variation for apparel goods — the main point is that the pricing for the new leather wallet will match the existing pricing model. Taking the model of Cost-Plus Pricing as an example, we simply calculate the full costs, add an appropriate margin for profitability, adjust for competition and strategy, and set the price. The risks with cost-plus pricing include poor cost data, the costs include waste, it is a form of “after-the-fact marketing”, and the method ignores lifecycle costs.
Before we go any further, let’s sum up – we have discussed the market size tactic aimed at developing the market and expanding our offering to the younger demographic; we have detailed the outline of a product development process, and explained how this can help us analyse a preliminary cost estimate; and, we have touched briefly on price.
One of the most important considerations of the entire exercise is the realisation that market development to a new teenage segment involves convincing the segment that we are somehow relevant to their needs, and this convincing will require a budget for marketing that will certainly impact the opportunity for profit. The way we ensure we are accumulating value and not simply costs is focus on the aspects of real or perceived quality that are revelant to the teenage market we seek to target — what benefit does our wallet provide to them, and how can they willingly adopt our brand associations as their own by enjoying our product in their pocket. As leather goods manufacturers, when we introduce differentiation into our products, our customers gain this differentiation when they buy our products. Sometimes, with a young demographic, diffentiation is as simple as collaboration with the fresh, young designer or celebrity. To reach this audience will require product design and campaign management, two details we could usefully hint at for our preliminary meeting. Marketing to a new customer segment is a big change; in particular, the biggest change is for the customers themselves, and the way we respect this is by understanding the customer and the nature of the change they face.
We encourage a young audience to join us so they may one day enjoy our products and services as future buyers for our other lines – children are the future. Our challenge is to reward our customers’ future loyalty with a warm welcome and quality experience, and to succeed in this, our method must be thorough, intelligent and profitable. The above suggestions constitute one means of preparing for the preliminary meeting, and this author’s contention is we are now sufficiently prepared to determine if we can profitably vend a line of leather wallets to teenagers 90 days from now.
What do you think? Did we ask the right questions and did we make the right assumptions? What works particularly well, and where could our method be improved?