An orphan product line is any product that is in a company’s portfolio that is not viewed as strategic from an investment perspective. Investment can come in many forms including investment in product development, channel or go-to-market. At the point the product line is unable to compete for additional investment within a company the product line transitions to orphan status.
Orphan products can be very strategic for a company and can also be very profitable. In fact, many are highly profitable in the beginning as investments in the product line have been reduced while the product remains reasonably competitive in the marketplace. These types of products are traditionally characterized as “cash cows” in a company’s portfolio with the earnings from these orphans being used to fund initiatives intended to drive future corporate growth.
Unfortunately, over time the lack of investment often results in the orphan product line becoming dilutive to company performance expectations and this is when companies begin to grossly underestimate the adverse impact of these orphan products on the core business. Reasons for retaining an underperforming orphan product are varied but the most common reason cited by successful company executives is the fear of losing revenue and/or operating profit.
When an orphan product serves a company’s core customer base the challenges become even more acute. In these cases, the customer relationships are valued to a point where the product line cannot be discontinued, but ongoing operations are not of sufficient value to justify the necessary investment needed to continue. The reasons differ from company to company but the challenges of such product lines are similar and the outcomes are predictable and reproducible.
Orphan product lines follow a predictable path towards under-performance. The only significant difference is the perceived impact on customer relationships.
If a product line is deemed “critical” to customer workflows and the discontinuation would lead to significant disruption in the sale of other company products, the “Vicious Cycle” begins and the only variable is the rate at which customers become disenfranchised with the product line and potentially the company brand.
It is at this point that the underperforming product line begins to significantly impact its parent with below average returns while requiring continued investment and resource allocations to maintain those below average returns. When a product line reaches this stage it is extremely difficult to recover without doing the one thing the company was trying to avoid – damaging valued customer relationships.
Recognizing when to undertake the disposition of an orphan product is challenging, particularly in larger more complex organizations. Orphan products typically get nominal executive attention and as a result, investment decisions are highly influenced by mid-level product managers and business unit leadership. Orphan product lines “at-risk” for falling into the vicious cycle value-trap are those that serve highly valued customers who also purchase other more mainstream product lines within the parent company. While important to customers, these product lines typically cannot consistently compete for incremental investment and companies are faced with balancing customer satisfaction with shareholder returns. Product managers and business unit leaders often overweight customer satisfaction when evaluating options.
Orphan product lines can originate in a variety of ways including:
- Product lines that were once core to the business but due to changes in strategy are no longer core.
- Successful innovation in other parts of the business give rise to more attractive investment opportunities resulting in reduced investment capacity for existing product lines.
- New technologies that are valued enough to compete for internal funding but over a sustained period have not received sufficient resources or channel focus to answer the critical customer/market questions justifying additional investment.
- Product lines that are viable but have never achieved the success contemplated in early business plans.
- Small operations that achieved a modest level of success focusing on markets of interest to the company but whose growth prospects are dilutive or below company expectations.
At the point an organization begins to consciously reduce investment in a product line the risk of that product line becoming dilutive to company performance increases substantially. Depending on a number of factors that decline may take years to occur. Without a firm understanding of the strategy for managing the product line, lack of recognition of the orphan and the consequent inconsistent approach in the later years can lead to significant unrecognized costs (e.g. defocused management, inconsistent focus in R&D, sales and marketing and opportunity costs) that can wipe out the investment return on the product line while also damaging customer confidence in the company brand.
IOI Partners works with executive leadership to identify orphan product lines early and develop strategic alternatives for those lines whose future growth prospects are below company expectations and likely to become dilutive to overall top line performance.
Possible outcomes for these product lines are varied and IOI Partners experience gives us unique insight into how to best maximize the value of these assets for the business while ensuring valuable customer relationships are maintained and oftentimes enhanced.