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October 10, 2008

Too Many Products?

Large consumer-products firms are able to offer consumers a broad range of tailored choices across markets, but may end up marketing too many product varieties.


A few multinational firms, such as Procter & Gamble, Unilever and Nestlé, control much of the global consumer-products manufacturing market. Although these firms and their products’ logos are recognizable worldwide, finding identical product varieties in different countries often isn’t easy.

That’s because firms often tailor their products to meet the demands and preferences of varied consumer bases in different countries and regions. A product as quotidian as laundry detergent may be manufactured in dozens of variations in size, packaging and forms: in southern Europe consumers prefer standard powder detergents, while consumers in northern Europe prefer newer forms like liquids, capsules or tablets. In some countries consumers may have older washing machines that require traditional products, or they may have smaller kitchens that don’t accommodate storage of large detergent containers. 

To meet local demand for tailored products in different regions, most firms use some form of decentralized decision making, in which regional brand managers decide what to offer locally and how to market and advertise the product. “An executive in the company headquarters in Brussels,” Professor Catherine Thomas says, “can’t make the best decisions on what to offer in various European markets because that person doesn’t know the local markets well enough to understand preferences.” 

Many consumer products are produced at and distributed from the same factory, which allows firms to produce large volumes of the same product and thereby decrease costs. Tailoring products regionally, however, limits the ability of companies to exploit these opportunities. Decentralized decision-making about local product ranges reduces a firm’s ability to take advantage of economies of scale because of reduced coordination across countries leading to the production of too many product varieties overall.

“The benefit of being a multinational and having a brand is that a company can take advantage of economies of scale by producing the same product in bulk selling it everywhere, minimizing unit cost and increasing profits. But acting against that are differing market demands,” Thomas explains. “So, if a company were to sell the same product range in each country, it may well lose brand-level market share.”

Firms can try to address this by working to shape consumer preferences over time. They can also look for opportunities to standardize production: different makes of car offered by a firm often have the same basic body but are customized inside and out to cater to different consumer segments.

To determine if consumer-products firms were producing too many product varieties for different regions, Thomas analyzed sales data for laundry-detergent varieties across four European countries: Germany, Italy, Spain and the United Kingdom. Detergent made for an ideal case study because there is substantial product variety across Europe even within a given brand, despite the fact that production and distribution of laundry detergent is relatively centralized, coming from a handful of manufacturing plants in the region.  Thomas created a model to simulate market demand for different products when localized products were taken out of the market and replaced with another, more standardized version of the product. Thomas found that the detergent manufacturers could in fact produce fewer product varieties (as many as eight in the case of two large detergent brands).

So why do the firms tend to decentralize decision making about product range if it leads them to produce and sell too many product varieties? The findings are consistent with the idea that decentralized decision making may be the best such firms can do given the large volumes of local information required to decide on the ideal product range in each country. Making these decisions centrally to try to increase coordination may well reduce firm profits because it may result in too few products on the market that are adapted to local tastes.

“Multinational consumer product firms operating in complex product markets should stick with some form of decentralized decision making as the best way to ensure their products are aligned with the local preferences of customers,” Thomas says. “But understand that a decentralized organizational design includes an inbuilt bias towards the manufacture of too many products.”

Catherine Thomas is assistant professor of Finance and Economics at Columbia Business School.

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