If you sell products, you may be looking at your Profit & Loss statement - and seeing a lot of manufacturing costs sitting on it - and may be coming to the conclusion that you are in "Product Business".
But there is a different perspective. The fact is that your customers use your products along with a lot of services and it is quite possible that they may be buying these services from elsewhere. Your sales and profits can actually improve if you recognize that your customers' satisfaction comes out of a combination of your products and someone else's services.
Let us say you are making and selling diesel engines. Does that mean to you that you are in a "Product Business"? Banish the notion and see what your customer is buying and you will realize that he is almost always buying your product along with some services . For example, your diesel engine will not get sold to a fisherman for his boat unless there is someone to explain to him what type of engines are available, which of these are suitable for his needs, why a specific model is better, answer his queries, to take down his order, to deliver the engine, to help him install it, to be there to take his call in case repairs are needed, to go and repair it…etc . All of these are services ! Without these services your engine will not sell.But there is a different perspective. The fact is that your customers use your products along with a lot of services and it is quite possible that they may be buying these services from elsewhere. Your sales and profits can actually improve if you recognize that your customers' satisfaction comes out of a combination of your products and someone else's services.
It is possible you do not see the service delivery activity on your P&L account because you have chosen not to undertake the service directly - instead you may be paying the trade (or someone else) to conduct the pre-sales, sales and after-sales service activities for you. It may not be on your P&L account but it does not mean you are not responsible for the service delivery. As far as your customers are concerned, you are responsible for the service because you are selling to them under your name and hence must be responsible for all the services they need to purchase, install and use your product. Many companies see the service as a hassle, an activity that generates nothing but complaints. They prefer to operate manufacturing in one central location where everything can be planned and controlled nicely. Service is not so nice. It is spread-out, demand for it is unpredictable and it is very difficult to please the customers and also to retain and motivate trained employees. But, when it is becoming increasingly difficult for marketers to differentiate their physical product, service is emerging as the next frontier.
A LOOK AT HUL THROUGH ITS P&L LENS
But let us go back to our original thread : why do companies remain under the notion that they are in "Product Business" ? Let us take the example of Hindustan Unilever Limited. Most people, including probably the company executives themselves, may be under the impression that HUL is in “product business”.
Their P&L shows that ,for the 12 month period ending December 31, 2007, its Income was Rs 14106 Crores and its Operating expenses were Rs 11797 Crores . The accounting policy of HUL shows that sales are net of taxes and also net of the trade commission paid - generally 8% to the distributors and 12% to the retailers. Let us recast the P&L account of HUL from the customer perspective and it will be seen that the turnover of HUL is, at consumer prices, actually Rs 18760 Crores and this pie splits as follows.
Trade Commissions : Rs 3250 Crores ( Service * ) : 17% of consumer spending ( Rs 18760 Crores )
Taxes : Rs 1400 Crores ( Government ) : 7% of consumer spending
Materials : Rs 7414 Crores ( Bought out ) : 40% of consumer spending
Machine Depreciation : Rs 138 Crores ( Book Charge ) : 1% of consumer spending
Services ** : Rs 4409 Crores ( Service ) : 24% of consumer spending
* service to the consumer and trade is compensated by way of commissions
** employees, ad & promotion, freight
In other words, when consumers spend on HUL products, 80% of it gets almost equally split between buying of services and buying of materials : HUL is as much a service organization as a product organization.
The misconception that HUL is in “Product Business” comes from the narrow interpretation of what costs are seen on the books of HUL. What is missed is the fact that HUL’s products will not sell unless they are widely available, widely seen and widely known. HUL has to do all this - it has no option! But HUL does not do this under its own banner - but gets it done through their sales force (which is on their P&L ), their distributors, their retailers and their ad agency. During the year under discussion as above, they incurred Rs 3250 Crores of trade commissions and Rs 1400 Crores of advertising – a whopping Rs 4650 Crores worth of services - and they do not include other services like travel, sales force salaries, sales offices, godown rents etc. If they too are taken into account, the figure will come close to what they are spending on manufacturing activities.
Ultimately it is HUL which is the wellspring of the service activity : the sales force which contacts its distributors which appoints and services them, the salesmen and delivery boys of the distributors who contact the retailers and sell to them, the merchandisers who put up the shop displays, the billboard contractors who put up HUL ads on their sites, the ad agency which creates ads and releases them in media. They are all services.
Whys is this important? Because many companies are acting under the wrong notion that they are in the "Product Business" whereas, in reality, they are - and should be acting as if they are - in "Service Business". Is there a difference in these two in terms of action ? Yes - and huge !
"Product Business" people tend to get occupied with materials and machines and related stuff like sourcing, purchasing, plant layout, supply chain, cycle time, down time, preventive maintenance etc. "Service Business" people tend to get occupied with things like organization, competencies, motivation, performance tracking, training, culture etc.
Those who think who are in product business must learn to go through the following SARP sequence to understand what business you really are in
- what are you selling ( vacuum cleaner )
- what application your product enables (cleaning )
- what result comes form the application ( good impression )
- what payoff is acheived in the end ( favorable customer perception )
You understand what business you are in only when you can answer all the 4 SARP questions.
