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strategy and business
 / Summer 2007 / Issue 47(originally published by Booz & Company)


Recent Research

On remanufactured products, inaccurate forecasts, misunderstood meetings, and more.

Remaking It
Miklos Sarvary ([email protected]), Luk N. Van Wassenhove ([email protected]), and Atalay Atasu ([email protected]), “Remanufacturing as a Marketing Strategy,” INSEAD Working Paper No. 58. 

Photograph by Opto
Most of us return printer cartridges and other products so that they can be reused. Indeed, such remanufacturing is a growing and increasingly lucrative industry. The practice of recovering value from used products by replacing components or reprocessing used parts to bring the product to like-new condition is worth more than $53 billion in the United States alone, with such companies as Kodak, BMW, IBM, and Xerox earning profits from the activity.

For consumers, the attraction is clear. Remanufactured items provide a low-cost alternative to new products and usually work just as well. Moreover, they’re better for the environment because they reuse materials.

For companies, however, the value is more ambiguous, argue Miklos Sarvary, an associate professor of marketing, Luk N. Van Wassenhove, the Henry Ford Chaired Professor of Manufacturing and professor of operations management, and Atalay Atasu, a Ph.D. student, all at INSEAD. When considering remanufacturing, companies must carefully assess product life cycles and market growth, and they must forecast to what degree remanufactured products can eat into their own and their competitors’ market share.

Indeed, environmental issues, competition, and product life cycles are the primary interlinked elements in deciding whether to pursue remanufacturing, according to the researchers, who created a mathematical model to examine the interplay of these factors.

The most interesting outcome of their research was the conclusion that remanufacturing is likely to be more profitable in marketplaces that are more competitive. This is because remanufactured products help the manufacturer target price-conscious and environmentally concerned consumers, two lucrative segments that are often difficult to attract.

The researchers also confirmed concerns that remanufactured products would cut into the higher-priced market sectors of the original products. Consequently, this downside must be managed with smart pricing strategies. If customers are indifferent to the distinction between new and remanufactured products, a higher-priced strategy for both items may be possible.

This model suggests that remanufacturing is a balancing act. In other words, the authors say, remanufacture with care, as Bosch Tools in the United States has: The company remanufactures certain products but only because it has relatively small market shares in these items and remanufacturing represents extremely high cost savings.

Biases in Forecasting

Rogelio Oliva ([email protected]) and Noel Watson ([email protected]), “Managing Functional Biases in Organizational Forecasts: A Case Study of Consensus Forecasting in Supply Chain Planning,” Harvard Business School Working Paper No. 07-024.

How many products will your company sell in the next budget period? Ask the sales manager and you will get one answer. Ask the CEO and you’ll likely get another. The marketing VP? The head of manufacturing? Still different answers.

Forecasting of sales figures is prone to biases, many of which are caused by differences in organizational or individual incentives. What’s good for the CEO is not necessarily what’s good for the factory chief. And when personal prejudices are not at fault, planning can be adversely influenced by problems with the flow of information or in the processes that created the forecasts in the first place.

To better understand the potential trouble spots that underlie such a fundamental facet of business life, Rogelio Oliva, an associate professor at the Mays Business School of Texas A&M University, and Noel Watson, an assistant professor at Harvard Business School, examined forecasting at an anonymous California-based electronics firm. Through 25 interviews with people involved in the sales forecasting process, they sought to understand the elements of power (such as formal role-based authority, charisma, and external reputation), processes, and politics involved.

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