Inorganic Growth through Product Change

To create more revenue, we need to sell more products.  And if we have more products to sell…

Sounds logical, but of course the real goal (more profits) might get lost in the implementation.  If you’re rich with infrastructure and expanding products is merely a matter of adding a source vendor or producer (or even better, just ordering more stuff from existing vendors), then this formula may indeed be readily implemented.  This is partly the reason that Amazon and Walmart can (and do) offer “billions and billions” (said in my best Carl Sagan impression) of products.

But those of us who produce our products–such as manufacturers, farmers, and (like me) software developers–have to take into consideration the effort it takes to bring a product to market.  We have to determine if we have the resources to create the new product, from raw materials to expertise, and we have to determine if the product’s life cycle will result in covering those costs–and when.  We have to consider whether the production, logistics, marketing, etc. processes we are currently using will need to be changed for the new product–and whether those changes will adversely affect the new product’s potential to create money for us.

But let’s take a step back for a moment and think about ways we can make sure the changes brought about by our new product aren’t overly disruptive, in other words let’s try to affect product change that (like Amazon and Walmart) leverages our current infrastructure and resources.  First, let’s categorize product change in two ways: horizontal and vertical.  Let’s call a change to our products that extends our appeal to new customers of the same type but of different demographics a vertical product change.  We see frequently in the software industry a company that grows by selling to the Fortune 500 market, then moves down market to appeal to mid-sized companies, and we see middle-market companies like Volkswagen attempt to move up market by offering a luxury vehicle like the Phaeton.

In contrast, a horizontal product change is one that adds completely new functionality to our product mix that will appeal to entirely new markets that we’re not already selling to.  In the software industry this would be adding a new module to an accounting or human resources product suite, or creating an entirely new suite; Disney made a horizontal product move with the acquisition of ABC.  A horizontal product change can be either incremental or radical; adding a new cash management module to your existing financial software suite is certainly incremental, but an automobile manufacturer retooling to produce coffee makers would be radical.

Not surprisingly we don’t see too many examples like this latter one, since radical horizontal change will almost certainly result in the most disruption to our processes and require the most change to our resources.  A vertical product change might only result in the use of a few different materials (ala Ford vs. Mercury) or the addition of a few minor features to appeal to the new market (adding public stock ledger features to your accounting system).  While a horizontal product change, an incremental change to be exact, implies the use of more resources, the cost of those resources might be cheaper than the cost of corresponding process changes and therefore more appealing in the long run (U-Haul utilizing existing retail facilities to sell boxes and packing materials).

To summarize, product strategists might indeed be able to affect inorganic growth by “simply” adding new products, but the entire impact of the product change must be considered.  Resources and materials, and process impact must be evaluated across the product life cycle, as short or long as it may be.  Vertical product changes, with only modest resource and material impact and minimal process impact, are usually the most appealing and bear the least risk.  Horizontal changes might gain the most new market exposure, but likely demand more investment in new resources and change to current processes; hence incremental horizontal change is always preferred over radical horizontal change.

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