Making History/ Breaking History : The Dynamics of Organizational Transformation || The Changing...

The Changing Logics of Product-Mix Management: The Fazer Confectionery CaseAuthor(s): Päivi ErikssonSource: International Studies of Management & Organization, Vol. 21, No. 4, Making History/Breaking History : The Dynamics of Organizational Transformation (Winter, 1991/1992), pp.66-77Published by: M.E. Sharpe, Inc.Stable URL: http://www.jstor.org/stable/40397193 .

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Int. Studies ofMgt. & Org.t Vol. 21, No. 4, pp. 66-77 M.E.Shaipe, Inc., 1991

Päivi Eriksson

The Changing Logics of Product-Mix Management The Fazer Confectionery Case

This study provides evidence of the contested and changing nature of managerial logics of action. It describes the evolution of the product variety, or "product mix," of the Finnish confectionery firm Fazer over a period of forty years. The trends and changes identified in the product mix are then analyzed in terms of the logics of action used by the managers of this firm to determine the product mix during different subperiods.

The picture emerging out of this historical analysis is one of constant tensions between distinct managerial perspectives and groups. During the forty years investigated, the product mix has passed through various phases of renewal and rationalization. Each of these phases has been produced by an interplay of distinct dominant and subordinate managerial groups, each with its own beliefs on how the product mix should be managed. Here, we will pay particular attention to how the different functionally organized specialists in marketing, production, and product development have been involved in the process of product-mix definition.

Long-term dynamics of product-mix management

The question of what to produce and sell is of vital concern for any individual firm. Most companies have numerous product variants and their managers have to decide continuously on the extensiveness and renewal rate of this variety. The analysis of this issue is a core concern in such fields as economics, marketing, and strategic management. While there exists a substantial body of research concerned with the optimal product mix, this literature has certain biases.

The bulk of this research has limited itself to considering the imperatives imposed by the external environment, that is, market demand and technological

The author is Research Fellow at the Department of Business Administration, Helsinki School of Economics and Business Administration, Runeberginkatu 14-16, SF-00100 Helsinki, Finland.

66



PRODUCT-MIX MANAGEMENT 67

development, on the product mix. Factors intrinsic to the firm have been gener- ally neglected. In addition, relatively little empirical research has so far been devoted to the way in which firms actually determine the product mix. Pro- cessual analyses are conspicuous by their absence. Finally, the long-term dynamics of product-mix development have received little, if any, attention in the relevant fields. This study seeks to correct the imbalances in the existing literature by providing an analysis of the internal dynamics of product-mix management from a long-term perspective.

If we question the assumption that industry context determines the product variety of individual firms, then we need to develop new perspectives on the internal dynamics of product-mix management. This article uses the notion of "managerial logics of action" to analyze how managerial processes influence the development of the product mix. According to Karpik (1981, p. 387), a logic of action is constituted by "the principles of action around which . . . groups orga- nize their attitudes and behavior." This logic is defined from an outside observer's point of view, and it must be distinguished from the accounts given by individual actors themselves. In other words, a logic is a certain "rationality" adopted by a collective actor (Prahalad and Bettis, 1986; Räsänen, 1986; Lilja et al., 1987).

The existence of various managerial logics of action have, in fact, been pointed out by some previous studies. One basis of these logics has been found in managers' functional expertise. Marketing managers and production managers are often argued to possess different and even contradictory logics in product- mix issues: marketing management is said to act according to the principles of market demand while production management act according to the principles of technological efficiency (Shapiro, 1977; Weinrauch and Anderson, 1982). Prahalad and Bettis (1986) have suggested that a firm may also develop a logic of operation based on a certain distinctive competence, for example, the high quality of products.

In the Fazer Confectionery case, we will analyze how the product mix has evolved over a lengthy period of time and what kind of managerial logics have directed these developments.

i

The confectionery industry

The confectionery industry has characteristics that make it an appropriate choice for the purpose of studying product-mix changes. It has a well-defined popula- tion of consumer-product firms. In such firms, product-mix decisions are vitally important because viable product-strategy alternatives do exist. In principle, managers can lead the development of the product mix into various directions. Because it is relatively easy to differentiate by branding, a company can adopt the strategy of an extensive and frequently renewed product mix. At the same time, brand loyalty and mass markets make a very restricted and stable mix also



68 ERIKSSON (FINLAND)

possible. This latter property in respect of consumer products is present in food processing and, most particularly so, in the internationalized confectionery busi- nesses (Child and Smith, 1987).

The Finnish confectionery industry was already well established in the 1950s. Fazer has been one of the four largest domestic producers throughout the research period, 1950-90. Within this strategic group of "market leaders" (Porter, 1976), Fazer Confectionery's distinctive feature has been in its emphasis on high quality. When the other firms segmented their products by quality and special- ized in narrower sets of product groups in the early and mid-1970s, Fazer continued with a nearly full range of product groups and less segmented markets (Porter, 1980).

The distinctiveness of Fazer's product strategy was one reason why it was selected for study. Another reason was the quality of research access afforded. It has been possible to use both intensive interviews and original archive sources to obtain a detailed and many-sided picture of Fazer's history since the Second World War. The exceptional time-series data (for forty years) on Fazer's product mix has been collected from their product catalogs. This base provides an opportunity to analyze long-term tendencies in product-mix changes (Eriksson, 1991).

Fazer Confectionery, a tradition of excellence: the institutional details

Fazer Confectionery is a division of Oy Karl Fazer Ab, a third-generation family company founded in 1919. Oy Karl Fazer Ab, in its turn, is the main company of Fazer Companies. The Fazer Companies were founded by Karl Fazer in 1891 under the original name of "French Russian Pastry Shop." In the mid-1980s, Fazer Confectionery was divided into several profit centers. Inside this structure, the Chocolate Group and the Sugar Confectionery Group manufactured and sold products for domestic and Scandinavian consumer markets.

For more than forty years, Fazer Confectionery has been the largest confectionery product manufacturer in Finland and a market leader in the domestic markets. The largest domestic production unit is situated in Vantaa, Finland, where both sugar and chocolate confectionery production were located until the beginning of 1990, since which time all sugar confectionery has been produced abroad.

Traditionally, the high quality of the products has been the keynote image of the company both within the firm and on the markets. This reputation was first created by Karl Fazer who brought the first chocolate recipes from Russia. Subsequently, this reputation was sustained for a lengthy duration by other members of the family, which still owns the company today. This traditional logic of quality continued to occupy a strong position in the company for a long time after the Second World War. It was gradually contested, however, by other rationalities.




Changing brands, changing logics? Product-mix changes in Fazer Confectionery

Defining product mix: the units of analysis

According to Kotler's (1984, p. 469) définition: "a product mix is the set of all product lines and items that a particular seller offers for sale to buyers.*' Fazer Confectionery's product mix consists of two product lines: chocolate confectionery and sugar confectionery. These break into ten different product groups. Fazer Confectionery has offered a nearly full range of product groups during the period from 1950 to 1990.

Each product group includes a great variety of items that are either individual brands or brand variants. One brand may be produced in different sizes, flavors, and package variations. Brand is used as the unit of analysis in this study because different brands can be considered in terms of different products: each has its own design, taste, and consistency.

The major dimensions of the product mix considered in this article are its extensiveness and its rate of renewal. Extensiveness can be measured by the number of brands and all items sold in each year. The rate of renewal can be measured by the proportion of new brands in the product mix each year. In a broader historical analysis these quantitative dimensions have been complemented with a description of qualitative changes in the nature of the product mix (Eriksson, 1991).

Five periods of revitalization and rationalization, 1950-90

After the postwar expansion in the 1950s, the extensiveness of the product mix declined for more than twenty years (Figure 1). The number of brands decreased from 140/150 brands in the late 1950s to 65/75 brands in the early 1980s. This tendency was broken in the mid-1980s when Fazer's management started to extend the mix again.

Within this overall development, there are several minor turning points (in 1961, 1975, 1980, and 1984) that define the shorter periods with a broadening or contracting product mix. The same turning points serve to mark out the distinct periods in terms of rate of renewal (Figure 2).

This analysis uncovers the following five periods of product-mix change over the period 1950-90 (for details, see Eriksson, 1991):

Period 1: 1950-61: The number of brands and all items in production grows at first heavily and stays then at a high but varying level. During the first four years, the growth is primarily composed of the reintroduction of old brands. Thereafter, the percentage of new brands is high but varying year by year.

Period 2: 1962-74: The number of brands and all items decreases slowly but continuously. The rate of renewal is lower but more constant than in the previous period.




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Figure 1. Number of brands and all items, 1950-90

Period 3: 1975-79: The number of brands and all items increases slightly. The percentage of new brands in each year is higher than during the previous period.

Period 4: 1980-83: A great number of brands are dropped from production and only a few new ones are introduced.

Period 5: 1984-90: The number of brands increases again, and in particular the number of brand variants grows considerably. The rate of renewal is also increased.

The whole period 1950-85 includes two periods of product-mix "rationalization" and three periods of product-mix "revitalization." Each period of product- mix revitalization is followed by a period of product-mix rationalization.

How can we understand the existence of these different periods in the history of Fazer Confectionery? Why did Fazer's product mix develop in this particular way? To answer these questions, we must examine how Fazer's management operated during the five periods identified through the analysis of product-mix change.

Period-specific and contested logics of managerial action

In the 1940s and 1950s production managers were working both on manufacturing problems and product-development problems. At the very beginning of the




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Figure 2. Percentage share of new brands in the product mix, 1950-90

1960s, these two activities became increasingly differentiated. Thereafter, production personnel became troubled with the decreasing cost efficiency of the extensive, varying product mix, which was being constantly renewed. Following developments in other confectionery companies, they sought to speed up the shift toward a more mechanized production system. They insisted therefore that the product mix should be rationalized radically. A Swedish company served as an example of this new product strategy, which rested on cost advantages over the competitors (cf. Porter, 1980).

With support from the owners, the production director was able to start the rationalization activities when shifting to mechanized production technology. However, the rationalization development proved to be sticky. Any overly radical rationalization attempts were resisted both by the quality-minded owners and

by the staff of the new marketing department. The owners were still not ex-

tremely troubled by company performance, although it had already turned in to a decline. People at the newly formed marketing department were able to back their arguments by reference to certain changes in the markets and in the distri- bution channels. Indeed, it was precisely because of this pattern of change that they had obtained a formal position in the company organization.

Confectionery markets were being fragmented increasingly in the 1960s. Consumers preferred cheaper brands and competitors were introducing brands with a lower quality level to satisfy this need. This was the case particularly




within the children's segment of the market, which was growing fast. Fazer's marketing managers also suggested quality and price differentiation for different segments. The implementation of this idea would have revealed the cost pres- sures caused by the broadness of the product mix. However, the owners and a part of the production-management group were strongly against the idea of providing lower-quality brands with Fazer's brand name. Therefore, the slow rationalization of the product mix continued. This was a compromise between the production managers' desire for a radical restriction in the number of brands, and the marketing managers' desire for the maintenance of variety to serve all the emerging market segments with a strategy of differentiation (cf. Porter, 1980). In this contradictory situation, product development activities could only be based on the imitation of competitors' number-one brands.

In the mid-1970s, Fazer's managers faced two serious challenges; first, their product mix did not include enough successful brands that fitted with the new preferences of the more fragmented consumer groups. Their market share had decreased from about 60 percent in the 1950s to about 30 percent in the 1970s. Second, their production technology was becoming outdated. New technologies together with changes in the world market of cocoa and cocoa butter were wiping out their earlier "know-how" advantage: they were no longer in the position of being able to produce a higher-quality product than their competitors. The owners again supported the production management's solution of adopting new production technology and they were able to launch a large and very intensive program of technological changes. In this connection, they broke the dominance of the traditional concept of high quality and finally completed the product-rationalization process. In the years 1983 and 1984, the firm was in a crisis related to performance. The immediate reasons for this lay in certain diffi- culties with the new production system and in the highly "rationalized" but poorly performing product mix. The owners' response to the crisis was to replace several managers. The new management group was given a free hand to con- struct the product mix on a totally different basis. The sugar and chocolate confectionery, which had always been considered a single business, was now separated into two distinct business areas with their own product-mix types. In both lines, product-mix variety was developed more efficiently than before; through extending brand over product groups and by buying well-established brands from other international producers. With this new approach, the product mix was made more extensive and capable of faster renewal.

This abbreviated history of product-mix management in Fazer Confectionery illustrates how traditional logics of managerial action come to be complemented and replaced by new ones. Table 1 summarizes the development in this respect.

In Fazer Confectionery, changes in the market demand and production technology have triggered the building up of functional- that is, marketing- and production-based- logics of action beside the previously dominant high-quality logic. The professional experts in production and marketing brought in their own




Table 1 Abbreviated history of product-mix management

Years Product mix Managerial Management changes logics fragment leading

product development

1960- Revitalization High quality logic Owners/production 1961 management

1962- Rationalization Efficiency logic (Production management/ 1974 High quality logic owners)

Segmentation and Marketing management specialization logic

1975- Revitalization Efficiency logic Marketing management 1979 High quality logic

Segmentation and specialization logic

1980- Rationalization Efficiency logic Production management 1983

1984- Revitalization Business Business management 1990 strategy logic icam

functional recipes for the improvement of the company performance, which in both cases included an altered quality concept. In spite of the continuously declining performance, the contest between these two logics was not properly resolved until the mid-1980s, when a new, more general rationality of business management was introduced and made dominant in the company. Within this new scheme, marketing and production were subordinated to a definite business strategy that defined specific roles for marketing, production, and product-development activities. This framework also enabled managers to see the contradic- tions between the two major product groups: they had to be managed independently. Thus, in this family-controlled firm, the transformation from the traditional logic to the business management logic took about thirty years and it involved a long phase of contest between a range of alternative logics.

There is a clear relationship in each period between the pattern in the development of the product mix and the logics of managerial action. In the 1950s the product mix was expanded' under the old high-quality logic, which included also the image of the company as the domestic market leader in all confectionery groups. In the second (1962-74) and third period (1975-79), this logic retained its dominance but first the production director with his rationalization ideas and then marketing managers with their specialization and segmentation ideas were able to bend the product mix somewhat in their own direction. The product mix was respectively first rationalized slowly and then revitalized again. In the fourth period (1980-83), the production logic finally assumed a dominant position, the




quality of the products was finally adjusted downwards, and the product mix was radically contracted. In the fifth period (1984-) the product mix was revitalized strongly, but separately in the two major business areas, under the direction of the new team of business managers.

Changing lead in product development activities

The changes in the logics of product-mix management can be elaborated further by an analysis of product-development activities in the firm. It is precisely in these activities that the managerial logics of action have a direct impact on the product mix, and in this arena alternative perspectives and priorities have to be reconciled. Victories in this arena can also strengthen the overall position of a particular group within the managerial structure.

Untili the 1960s product-development activities were carried out under the strong lead of the owner-CEO. The CEO was highly interested and experienced in the product-development work. Old traditional confectionery recipes of Rus- sian origin formed the base for both the core brands and the rapidly introduced experimental brands. Products were actually developed by "master confection- ers" who made the best high-quality samples with their own hands. They were formally working in the production department. This fact gave the production manager a ready base of authority over product development when he started to rationalize the product mix and decrease the rate of renewal in the early 1960s.

In 1965 a new Group vice president with a sales and marketing background was appointed. The marketing function was at the same time extended by two product managers. The new top manager of the confectionery group separated formally product development from production by establishing a more autono- mous product-development department that reported directly to him. A Labora- tory and Product Development manager was appointed to lead this department. Two product development specialists were also transferred from the production department to this unit in 1966 and 1967.

Now product development was carried out in a team, which was composed of the product managers and the product developers. This team operated in close contact with the marketing department, and, after a few years, production management was left out of the meetings. The product development team systema- tized development work and gained an increasing influence over the acceptance and rejection of product ideas. However, influential members of the owner-family and the production manager retained the final say in these issues through a "taste panel" that evaluated the taste, consistency, and quality of the new brands.

In 1975, the owner-family again appointed a new Group vice president to lead the confectionery business. This time the new person had experience and skills in manufacturing. He was chosen as a response to the obvious need to increase efficiency in production. One of his first moves was to appoint a full-time Prod- uct Development manager. One intention behind this move was to diminish the




strong influence of marketing personnel on product development In 1977 the Group vice president suddenly died. His work in the project for the improvement of production efficiency was continued by the new production director - "hand selected" by the Group vice president before his death.

The intention to weaken the influence of marketing people on product development was not realized in the late 1970s. In the years 1977 and 1978, the product managers introduced the idea of product families, that is, the same brand in many different shapes, packages, and sizes. The "Geisha" product family was so successful that it tripled sales in two years. The marketing department made plans for two more product families that were to be introduced in the following years. This idea, however, was successfully resisted by the production management. They demanded that resources should be allocated to the major project of technological change.

During the production-technology project, in the early 1980s, the production manager led product-development activities with a firm hand; the introduction of new products was frozen. The primary purpose of product-development work was to develop new brands "for the shelf' - that is, to provide a stock of options for future production rather than for immediate production.

In 1984 and 1985, product development was again totally reorganized. In the chocolate confectionery unit, it was subordinated formally to the technical director and in the sugar confectionery unit to the group general manager.

To summarize, there were clearly distinguishable periods when either production or marketing managers had the lead in product development issues. In some periods, this had clear consequences for the development of the product mix. There were also times, however, when the formal position of authority did not guarantee actual dominance.

For a long time, in the late 1960s and early 1970s, the group of marketing managers had a powerful position in the product-development activities. They also had expert knowledge of consumer preferences and other market developments. Nevertheless, the product mix was not developed to a great extent according to the specialization and segmentation logic that they preferred. The traditional logic of high quality, supported by the owner-family, and the production-efficiency logic, supported by the production engineers, persisted over this period in spite of the weakening financial and market performance. The production logic even occupied, albeit temporarily, a dominant position in the early 1980s, when management had to redefine their concept of quality. Only the greater performance crisis in the mid-1980s resulted in the dismantling of the functional logics.

Conclusion: retaining a tradition, a Russian recipe

This article describes how the product mix of Fazer Confectionery has developed over forty years. It also describes how managerial processes and their




development over time have generated the specific tendencies of product- mix change. This historical case study supports the argument that our understanding of the long-term dynamics of product-mix change can be advanced by an analysis of the contested and changing logics of managerial action. The development of the product mix is not determined directly by changes in such contextual factors as market demand and available technological alternatives.

The findings of this study suggest that more attention should be focused on two basic issues. First, when we try to understand how such organizational outcomes as the product mix are actually produced, we cannot assume that management is a unified agent with a single dominant rationality. It seems that organizational outcomes are, at least in certain historical conditions, shaped by several logics of action at the same time (Karpik, 1981). The trends in the development of the product variety in the case company were results of contests between two or more distinct rationalities, supported by different managerial and owner groups. Both the emergence and the outcomes of these struggles are certainly conditioned by changes in the business conditions as the actors utilize the "external imperatives" to advance their own line of reasoning.

Second, we cannot assume that the logics of managerial action evolve in a certain way. The sequence in which the dominant configurations of logics follow each other seem to be genuinely historical and páth-dependent. Previ- ous descriptions of how firms move from a "production orientation" to a "sales orientation" and eventually to a "marketing orientation" oversimplify the history of management (Fullerton, 1988). In forty years, the managerial logics of Fazer Confectionery went through significant qualitative changes, but the direction and timing of these changes did not follow any simple pattern.

Particularly striking in this case was the long endurance of the owner- management's high-quality logic in spite of its poor business performance and the fact that consumers were not so much for quality as they were for low price. The root tradition of the family-controlled firm, dating back to the era when Finland was a grand duchy in the Russian empire, remained operative, although more or less radical changes in the business practice were required by the changes in production technologies and in the market, and they were also suggested by the new logics of professionalized managers. Changes in the "strategic contingencies" of the environment did not lead so easily to changes in the power positions of organizational subunits as the studies of organizational adaptation would suggest (Fullerton, 1988; Hickson et al., 1971). This was because there seemed to be a strong tendency of prior power position to effect the future power position of the subunits. Top management's (owners') visions on the importance of certain tasks and skills played an important role in this process. This finding emphasizes the need to




pay much more attention to the mechanisms of breaking old practices and logics of action by restructuring the power positions of the subunits.

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