MODULE 19: SELECTION OF PRODUCT

OVERVIEW

Product choice is more complex and selecting the right products is key to running a
successful and profitable business. This part of the module envisions you on the stages of
product selection and criteria involved in it. Furthermore, you will also get to know regarding
the government policies and objectives.

LEARNING OBJECTIVES

• State the importance of product selection process

• Identify criteria involved in product selection
• Enumerate the steps followed in product selection
• Assess the impact of decision of product selection

19.1 INTRODUCTION

A Strategic Decision:
Product selection is a strategic long-term decision to which the organization commits itself
for a long time. Product decision is the base for every other decision like the technology used,
the capacity of the productive system, the location of the production facilities, the
organization of the production function, and the planning and control systems.

The competitiveness and profitability of a firm depend upon the products and services that
it produces, and on the cost of production. The design of a product or service determines its
cost. Similarly, a change in design may result in the production of the same product less
expensively, using the existing capacity. It involves marketing, research and development and
operations management functions.

Producibility:
In the product selection process, product function, cost, quality and reliability are some of the
vital inputs. It is important to look at the complete range of products produced because, a
new product may either use the capacity of processes/sub-processes already established or
may require the establishment of capacity of some processes/sub-processes. This decision
is made on the current and future value provided by the product.

19.2 THE PRODUCT SELECTION PROCESS

As the environment changes, as new technology is developed and as new tastes are formed,
the product should benefit from these developments. This decision is based on the current
and future value provided by the product.

Product Selection Stages:

Output possibilities are generated from many sources:
a) Through' market research from the field by conducting consumer surveys, dealer surveys,
opinion polls etc.

b) Through research laboratories which develop a breakthrough idea by pure research or

applied research for new knowledge.

These ideas can be generated by using techniques like brainstorming, panel discussions,
scenario building, technology forecasting etc.

The output ideas thus generated will be screened to find its match with corporate objectives
and policies and their market viability. A detailed economic analysis is then performed to
determine the probable profitability of the product or service. For non-profit organisations,
this takes the form of a cost-benefit analysis. Development of the product or service from a
concept to a tangible entity and by design and testing is performed.

Product selection is not a sequential process. Steps may overlap each other. New ideas or
product/ process improvements become an ongoing process.

New ideas keep entering the output selection process. This product selection process
therefore ensures a continuous match between what is demanded and what is produced. The
production process has also to be designed along with the product or service. It may become
necessary to establish a large capacity for the production process right from the beginning.

19.3 SELECTION OF THE PRODUCTS

At the research stage, the priority should be generation of new ideas. Consideration of one
new idea, may generate a better idea. Some techniques for idea generation, like
brainstorming, do not permit criticism of suggested ideas at the idea generation stage.

Once a number of potential new product or service ideas have been generated, the process
of screening them to evaluate and select the 'best' idea is considered.

This happens in two phases:

1. A qualitative phase where the new product idea is studied in terms of suitability to
corporate objectives.

2. Quantitative phase where the potential costs and revenues (or benefits) generated by new
product are quantified and economic viability of the new product or service idea is evolved
at.

Screening:
The new product or service idea is assessed to establish its market viability so as to add it to
the current outputs of the organization. A product or service has to have sufficient demand.
Sufficient demand is a relative term that differs from one organization to another.
The demand for a product or service is dynamic. The current demand for a product or service
may be low. But, an organization may still decide to retain the new output idea if it assesses
that the demand will grow in future. New product or service ideas should capitalize on the
strengths of the organization and reduce the weaknesses.

In product selection, many organizations try to get synergistic results by exploiting one or
more of the following four factors that is familiarity with:

1. Similar products or services

2. The same or similar production or transformation process to produce the product

3. The same or similar markets or market segments

4. The same or similar distribution channels.

Any new idea for a product or service should be seen in relation to the effect on the existing
products or services. A new product may find a market for itself by cannibalising one of the
existing products. Competition is also a major determinant of choice of new product idea.

For totally new products or services, even if there is no competition presently, very soon
competition will perhaps develop and it is the desire to remain ahead of the competition that
provides the motivation for continuous inflow of new product ideas.

Sometimes a new product or service idea having very poor match with the existing strengths
and weaknesses of the organisation will be adopted. This is possible when the organisation
feels that the existing products or services have reached the decline phase of their product
life-cycles either on their own or due to some changes in the environment like government
policy, introduction of better and cheaper substitutes, changes in prices of some inputs etc.

Economic Analysis:
For commercial organisations, economic analysis becomes synonymous with profitability
analysis. The cash flows generated as well as consumed, if the new product or service idea
is implemented, have to be estimated for the life of the project. However, since there is a time
value of money these cash flows cannot be directly added or subtracted. So, the cash flows
are discounted to take care of the time value of money and the net present value of all cash
flows is obtained-or else the cash flows are used to find an internal rate of return.

Non-Profit Organizations:
For non-profit organisations, there may not be a cash inflow at all or else the cash inflows
may occur at externally fixed prices. For such organisations economic analysis means a cost
benefit analysis. The benefit means an addition of resources to the society as a whole
whereas the costs means using up real resources. Wherever free market conditions exist, the
market prices can be used to value the costs and benefits. Otherwise, economic prices are
first estimated and then used to value those costs and benefits. Economic analysis is, more
difficult for non-profit organizations than for organisations because of this factor.
19.4 CRITERIA FOR PRODUCT SELECTION

Factors considered for selection of product are discussed as follows:

Gap in Demand and Supply:

The size and scope of the potential and unsatisfied market demand, will determine the need
to for choice of a particular product. One rule of thumb in developing a product selection
criteria template is that the product with the most demand possesses the greater chance of
business success. There must be existing demand for the chosen product, in simple terms.

Availability of Finance:
Adequate funding is required to carry out pre-launch activities such as development,
production, promotion, marketing and distribution amongst others, of the selected product.
Hence, the quantum of funds that the product idea can attract to the project, remains a major
determinant.

Access to Required Materials:

Factors like the source of the materials, the quality and the quantity of the raw materials are
key management decisions. Continuous availability of materials, access to location of
availability, availability of alternative sources of materials are very important in finalizing a
product decision.

Technical Considerations:
The technical dynamics of the chosen product on the existing production line should be
invested against factors such as available technology, power requirement and automation of
processes and use of labour. The product may warrant new equipment or refurbishing of
used machinery. The product must also be deemed technically satisfactory to the user.

Profit Viability/Marketability:
The product should give optimum return on investment. It should also utilize ideal capacity
or help with the sales of existing products.

Qualified and Skilled Personnel:

Qualified personnel will be required to handle the production and marketing, on an ongoing
basis. The cost associated with manufacturing the product must be low. This requires
employment of skilled labour who will mitigate damages and wastages.

Government Policies and Objectives:

The thrust of government policies on economics and commerce, over time, is usually in the
national interest, which may or may not be at odds with the objectives of the business.
However, this will influence the decisions of a business with regard to what product should
be introduced in the market.

The potential of the product can be assessed by considering the impact of the following
dimensions:
I. Demographic and Physical Environment:

Size of the population should be adequate

Distribution of the population should be suitable

Climate and weather conditions should be appropriate

Communication and transport infrastructure should be up to the mark.

Distribution network should be strong.

II. Political Environment:

The political environment should be analyzed by considering the following factors:

The government should be conducive to the conduct of business

Government involvement in the private business transactions should be comfortable.

Government’s attitude towards imports / exports should be conducive.

Political system should be stable

Whether the government quotas, and other trade barriers can be eased.

III. Economic Environment:

The economic environment considers the following factors:

Predicted economic growth levels.

Gross national product and the balance of payment position of the country.

Percentage share of exports and imports in the overall economy.

The country’s import to export ratio.

Rate of inflation, and foreign currency or the exchange regulations.

The per capita income of the country

The discretionary income spent on the consumer goods

IV. Social and Cultural Environment:

Socio-cultural environment of a country affects the demand pattern of people in the country.
Some of these factors are as follows:

The proportion of the literate population.

The average educational level of the people.

The percentage of the population with disposable income.

Characteristics of the target market.

Requirement for product modification or adaptation.

V. Market Access:

The following factors define the level of market access for a product in a country:

Legal aspects of distributorship in the foreign market,

The documentary requirements, and the technical, or environmental import regulations

covering the product.

Is the market free and open?

The intellectual property protection laws

Judicial system to settle disputes.

The tax laws

VI. Trade Restrictions:

A country may impose restrictions on the import of products from other countries in the form
of licensing or other quantitative restrictions. There may be certain regulations aimed at
protecting environment, child law, public health, public safety, and such. Certain countries
may impose anti-dumping duties or the countervailing duties.

VII. Incentives/Facilities Offered for Export:

It is quite possible that the exporting country offers various incentives or facilities to promote
the exports. These incentives relate to the duty drawback, facility of duty free import of raw
materials and other inputs required for the manufacture of the export products, import of
capital goods for the promotion of exports at concession rates of import duties.

VIII. Quality and Niche Marketing:

For sustained increase in their sales and overall profits, niches should be concentrated.

SUMMARY

The module has presented the basic concepts towards product selection various criteria is
involved in product selection, steps to be followed in product selection and the impact of
product selection decision

LEARNING OUTCOMES

At the end of this module, the learner will be able to:

• Recognise the principles which is guiding the product selection

• Examine the criteria involved in product selection and subsequent strategies
• Enumerate the detailed procedures adopted in product selection
• Critically analyse the impact of product selection decision on other functions of a
business.