Strategies for Mitigating Product-Line Expansion Risk in Manufacturing

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The human world functions most efficiently when everyone does that which he or she does best. This simple idea is so prevalent that the average business student cannot help but acquire it as though through osmosis when attending classes at business school, whether or not said average business student also happens to learn the name for this idea, the “law of comparative advantage.” Yet in spite of the sound economic sense behind such a law, when it is that law to which one strictly adheres, the possibilities for growth become stifled, decaying and stagnating as resources are diverted from areas in which a business is known to be successful to areas never before explored. How can any entity know in advance whether it will be best at manufacturing a new product? To learn, by definition, is to fail at first. Thus, particularly in the case of a mid-sized company, which may be more vulnerable to failure than a larger one, the only prudent path is to ensure that the successful areas of business continue to flourish while new ventures are undertaken. In the case of a hypothetical motorcycle manufacturing company looking to move from solely producing middleweight motorcycle cruisers to also tapping the market for touring class motorcycles, this means selecting an appropriate project organization structure, a method for balancing long-term needs as well as short-term needs, project managerial leadership style, and risk-management strategy. For this particular case, due the challenges of the manufacturing industry, the best organizational structure is the aggregate style, long-term and short-term needs can be balanced via preliminary research, the best leadership style is transformational leadership, and to manage risk, safeguards must be implemented from the start.

The aggregate style of project organization gives great benefits in terms of assessing overall risk versus reward, as the one individual responsible for overseeing the entire endeavor has access to data from diverse departments and is thus well-informed enough to make decisions on how resources from the rest of the company should be allocated, as well as whether it might become necessary at some point to, as is said in informal speech, “pull the plug” on the project. Thus a project organizer working from the aggregate model is in the best position to both balance short-term and long-term needs and to manage risk. As described by Middleton (1967, p. 75), an individual project organization is out of the question for this particular case—the project is simply too large, and involves too many different areas, from research and development to testing and quality control to marketing and sales. A staff or intermix solution would be too diffuse, placing some of the responsibility elsewhere than on the shoulders of the project manager by giving it to individual department heads (Middleton, 1967, p. 75). When undergoing a risky venture, needs must place accountability on a single person who has the authority to decide that the project has become too risky. Indeed, in this case, it makes sense to use methods that have been around for quite some time without ever becoming irrelevant.

At first, it may seem that by choosing a conservative route, the motorcycle manufacturing company only reinforces such negative stereotypes of manufacturing as the least agile of business types, a lumbering behemoth outmaneuvered by less cumbersome businesses, but rather, it is the case that caution guards against the pitfall only too common in the manufacturing industry of investing time and resources into a doomed venture. In the past, companies have found it difficult to transition from nearly mono-product mass production to multi-product flexibility, but this need not be the case when due caution combines with more modern methods of organization. As Milgrom and Roberts (1990) speak to this change to a new way of manufacturing: “The mass production model is being replaced by a vision of a flexible multiproduct firm that emphasizes quality and speedy response to market conditions while utilizing technologically advanced equipment and new forms of organization” (p. 511). Needless to say, it is these “new forms of organization” which are of most interest here. Unfortunately, development as described by Milgrom and Roberts has apparently been woefully slow since the article was written, for manufacturing companies still struggle with the challenge of expanding to new product lines without simply folding under the heightened pressure. Indeed, it is for this very reason that a preliminary analysis can work wonders in ensuring none of the old products are left behind.

Naturally, it will by necessity be required that those in the company in high-up managerial positions determine what portion of the current resources may be spared for new development without hindering continuing production of the middleweight motorcycle cruisers that are known to already be selling well. This can best be thought of as a means of balancing short-term and long-term needs. It would be folly itself to divert completely necessary core essential personnel and other resources from the manufacture of proven products to unproven ones, and yet depending on how great profits are, it may be the case that to advance into a new area, the only way forward is through reducing typical operations to more or less a skeleton crew compared to what they used to be. New hiring will probably also need to be performed, naturally, but as hiring can be a long drawn-out process requiring much attention from human resources, existing personnel require less up-front investment and, furthermore, are proven entities known both to work well and to work well together. Indeed, one of the challenges to leading such a project can be to make sure there is a smooth, well-functioning integration between old staff and new staff, for the two may not automatically find interactions to be the most transparent between them. Yet such challenges will become increasingly common in the manufacturing industry in years to come, as illustrated by Sethi and Sethi (1990): “. . . [T]he concept of flexibility in manufacturing has become a key consideration in the design, operation, and management of manufacturing systems” (p. 290). Of greatest interest to the product operations manager, of course, is the focus on the management of manufacturing systems. This is the point at which excellent leadership skills become extremely relevant and play an indisputably important role in moving the company forward.

Much has been said about transformational leadership in recent years, such that there exist a plethora of academic articles on the topic, and yet perhaps the amount of data is so great that a business professional might automatically assume transformational leadership is superior to any other kind without determining the factors which instead make it particularly ideal for the case here described, but not, of course, the perfect option for every single situation imaginable. However, in the case of starting down a new path perhaps with many new employees, it can be said that the situation is ideal for just the sort of unifying force that transformational leadership can bring. The relationship between transformational leadership and employee motivation is evident. For example, in Bass and Avolio (1994): “Transformational leadership is seen when leaders: . . . generate awareness of the mission or vision of the team and organization” (p. 2; emphasis in original). In the case of a new project, this awareness is to a certain extent automatic, but a transformational leader can bring it to light in quite impactful ways through stating missions explicitly. Again, the aggregate style of project organization serves as a benefit, though here for novel reasons. If one person is responsible for the outcome of the entire new project—in this case, the development, manufacture, and marketing of a different variety of motorcycle—then everyone who reports to that one person may find it easier to relate to a transformational leadership style. Indeed, even in the case that the project manager does not choose transformational leadership as a style, individual divisions within the company may find that those portions of their teams devoted to the new project have a certain solidarity that lends itself to fuller participation in and identification with the project. In other words, staff may, in a sense, create the outcome of transformational leadership with or without a leader who actually demonstrates the transformational style. Indeed, it may be that the project could succeed even without implementing ideal strategies—though of course, that would be far from recommended. Still, the market for the new motorcycles does seem to be potentially of value.

Of course, needless to say, the benefits of going forth into the unknown by expanding in this particular case to the manufacture of a new breed of motorcycle—or rather, a breed new to the company, which had previously focused on a separate concept entirely—are potentially extremely lucrative. For one thing, there is a strong possibility that the target income range of the people in the new market of fifty-five thousand dollars per year to one hundred thousand dollars per year is greater than the income range of those who bought the type of motorcycles already being manufactured. This means the new motorcycles can be set at a higher price-point, with the allure, of course, being the combination of aesthetics and quality that such customers might feel they’ve earned in their toys by the time they reach such an income bracket. As well and not to be too quickly discounted, the motorcycle rider who intends to ride his or her motorcycle for long distances on highway road trips will, of necessity, require repairs in a shorter period of time than the rider who intends to use the vehicle mostly within city limits. More repairs mean the company garners more business from manufacturing replacement parts, though of course the quality of the product must never be satisfied in an effort to make it less expensive or higher-maintenance lest customers become alienated. Indeed, customer alienation can be a potential problem in more ways than one, and not only in terms of the new customers aiming to try the new products.

Great care must be taken not to drive away old customers in the process of expanding to new areas, particularly in the example of a motorcycle company, where consumers are buying what is essentially a luxury vehicle as in most cases simply buying a car would have more utility than buying a motorcycle. In addition, motorcycles inspire great passion in their users, as well as whole separate cultures and sub-cultures away from the mainstream. Does the average user of a middleweight, fuel-efficient motorcycle have much regard for males between the ages of thirty-five and sixty looking to reignite the vigor of their youths with long road trips astride a gas-guzzling titan with an engine well over eleven hundred cubic centimeters? Probably not. In fact, an attempt by the motorcycle company to diversify away from the engine size range of five hundred cubic centimeters to one thousand cubic centimeters may lead to the impression that old customers are not valued. This idea must be fought with effective marketing, so the project organizer must demonstrate effective communication with the marketing and sales teams still working on the existing products. This manager must emphasize that the message is that the company still cares about its bread-and-butter customers, perhaps through words like “original” or “authentic” when referring to the company’s old style of motorcycles. Yet these concerns can come later in the development of the product, for in many ways, there are entirely necessary steps that must be undertaken before the first eleven-hundred-cubic-centimeter-plus engine can be placed in the first touring-class motorcycle.

Particularly in the case of a company that it seems has seen little recent development, in fact funds, equipment, office space, and support personnel may have to be allocated to hiring new personnel in research and development, as such personnel may previously have been working in temporary contract positions and may have since left the company and dispersed when their contracts expired. If this is indeed the case, one of the roles of the project manager will be to recruit these people back to the company or find new staff for these positions. Such an endeavor will require defalcation—purely in the benign sense of the word—of funds normally used for departments other than research and development.

In colloquial terms, the single most important risk-management strategy for a mid-sized company such as this looking to expand into a new area might be referred to as an “eject button.” Just as important as the question, “How do we know we are succeeding?” is the question, “What will tell us we are failing so abysmally that all resources hitherto must be considered sunk costs and our best strategy moving forward is simply to abandon the endeavor?” This simple undertaking will help ensure that if things do go wrong, higher-ups do not fall prey to the well-known fallacy of sunk costs, as of course, they will ahead of time have agreed when it is time to abort the project as a lost cause. Ideally, several such systems and marker points would be implemented into the system so that the decision could be made at multiple points, e.g., if the first warning point is reached, an arbitrary designation ahead of time might be assigned that there is a fifty percent chance canceling the project is the right call. Subsequently, at the next point, the arbitrarily assigned chance might rise to seventy-five percent, cautioning leaders that they should tip their decisions strongly toward discontinuing regardless of personal feelings. The final checkpoint, of course, would be assigned a number of one hundred percent—if measures show that things are going this poorly, the project must halt immediately.

Through an aggregate project organization style, a reasonable evaluation of risks and rewards that takes into account all relevant factors, a firm use of transformational leadership, and systems that ensure risks are mitigated in the event of the project not going as well as planned or hoped, the motorcycle company will be able to expand gradually and smoothly into serving not just one market, but two. Ultimately, though of course not every company can do every task well, it pays for businesses to expand in this manner, cautiously and with an awareness that the learning curve early on in the process of expansion will naturally slow profits until that point at which the company can become the best at not just one thing, but two things. Indeed, for such a company, the day might even come when it becomes best not at what it did originally, but at what it has since learned. At this point, of course, the business must switch courses and demonstrate the ultimate flexibility of completely abandoning that which no longer serves the company to its highest and best abilities. Truly, even individuals can learn from the world of business about transformation and finding that which a person excels at the most.

References

Bass, B. M., & Avolio, B. J. (1994). Improving Organizational Effectiveness Through Transformational Leadership. United States of America: Sage Publications, Inc.

Middleton, C. J. (1967). How to set up a project organization. Harvard Business Review, 45(2), 73-82.

Milgrom, P., & Roberts, J. (1990). The economics of modern manufacturing: Technology, strategy, and organization. The American Economic Review, 80(3), 511.

Sethi, A. K., & Sethi, S. P. (1990). Flexibility in manufacturing: A survey. The International Journal of Flexible Manufacturing Systems, 2, 289-328.