A business unit may offer a standard or a custom-designed product to each individual customer. The decision about whether to offer a standard or a customized product can be simplified by asking these questions, among others: What are our
Customized Products capabilities? What business are we in? With respect to the first question, there is a danger of overidentification of capabilities for a specific product. If capabilities are overidentified, the business unit may be in trouble. When the need for the product declines, the business unit will have difficulty in relating its product's capabilities to other products. It is, therefore, desirable for a business unit to have a clear perspective about its capabilities. The answer to the second question determines the limits within which customizing may be pursued.
Between the two extremes of standard and custom products, a business unit may also offer standard products with modifications. These three strategic alternatives, which come under the product-design strategy, are discussed below.
Offering standard products leads to two benefits. First, standard products are more amenable to the experience effect than are customized products; consequently, they yield cost benefits. Second, standard products can be merchandised nationally much more efficiently. Ford's Model T is a classic example of a successful standard product. The standard product has one major problem, however. It orients management thinking toward the realization of per-unit cost savings to such an extent that even the need for small changes in product design may be ignored.
There is considerable evidence to suggest that larger firms derive greater profits from standardization by taking advantage of economies of scale and long production runs to produce at a low price. Small companies, on the other hand, must use the major advantage they have over the giants, that is, flexibility. Hence, the standard-product strategy is generally more suitable for large companies. Small companies are better off as job shops, doing customized work at a higher margin.
A standard product is usually offered in different grades and styles with varying prices. In this manner, even though a product is standard, customers have broader choices. Likewise, distribution channels get the product in different price ranges. The result: standard-product strategy helps achieve the product/market objectives for growth, market share, and profitability.
Customized products are sold on the basis of the quality of the finished product, that is, on the extent to which the product meets the customer's specifications. The producer usually works closely with the customer, reviewing the progress of the product until completion. Unlike standard products, price is not a factor for customized products. A customer expects to pay a premium for a customized product. As mentioned above, a customized product is more suitable for small companies to offer. This broad statement should not be interpreted to mean that large companies cannot successfully offer customized products. The ability to sell customized products successfully actually depends on the nature of the product. A small men's clothing outlet is in a better position to offer custom suits than a large men's suit manufacturer. On the other hand, GE is better suited to manufacture a custom-designed engine for military aircraft than a smaller business.
An innovative aspect of this product strategy is mass customization, making goods to each customer's requirements. One company that practices mass customization is Customer Foot. It makes shoes that meet individual tastes and size requirements, yet does so on a mass-production basis, at slightly lower prices than many premium brands sold off the shelf.17 This requires a flexible manufacturing system that anticipates a wide range of options. Many companies can find an important competitive edge in mass customization. If Company X offers a one-size-fits-all product and Company Y can tailor the same product to individual tastes without charging much more, the latter will be more successful. It is a powerful tool for building relationships with customers, since it requires a company to gather information, often of a very personal nature, about customers' tastes and needs.
Over and above price flexibility, dealing in customized products provides a company with useful experience in developing new standard products. A number of companies have been able to develop mass market products out of their custom work for NASA projects. The microwave oven, for example, is an offshoot of the experience gained from government contracts. Customized products also provide opportunities for inventing new products to meet other specific needs. In terms of results, this strategy is directed more toward realizing higher profitability than are other product-design strategies.
The strategy of modifying standard products represents a compromise between the two strategies already discussed. With this strategy, a customer may be given the option to specify a limited number of desired modifications to a standard product. A familiar example of this strategy derives from the auto industry. The buyer of a new car can choose type of shift (standard or automatic), air conditioning, power brakes, power steering, size of engine, type of tires, and color. Although some modifications may be free, for the most part the customer is expected to pay extra for modifications.
This strategy is directed toward realizing the benefits of both a standard and a customized product. By manufacturing a standard product, the business unit seeks economies of scale; at the same time, by offering modifications, the product is individualized to meet the specific requirements of the customer. The experience of a small water pump manufacturer that sold its products nationally through distributors provides some insights into this phenomenon. The company manufactured the basic pump in its facilities in Ohio and then shipped it to its four branches in different parts of the country. At each branch, the pumps were finished according to specifications requested by distributors. Following this strategy, the company lowered its transportation costs (because the standard pump could be shipped in quantity) even while it provided customized pumps to its distributors.
Among other benefits, this strategy permits the business unit to keep in close contact with market needs that may be satisfied through product improvements and modifications. It also enhances the organization's reputation for flexibility in meeting customer requirements. It may also encourage new uses of existing products. Other things being equal, this strategy can be useful in achieving growth, market share, and profitability.
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