As mentioned in the Fisher’s paper, based upon the demand patterns of a product we can categorize it

either a Functional or Innovative Product. In order to decide whether a product is Functional or

Innovative, we need to consider many aspects such as, Demand Predictability, Product Variety, Product
Life Cycle, and Profit Margins etc.

After overviewing all these aspects w.r.t each of the two product categories, I have documented one
example of an Indian Company that manufactures a Functional Product and also I’ve presented my
rationale behind categorizing the selected product as a Functional.

Company Name: - Hindustan Pencils Pvt. Ltd. (Acronym HP)

Functional Product: - Pencils

“Pencils” whether
Characteristics of Features of product
Demand Aspect qualify or not as a
Functional Product “Pencils”
Functional Product
Daily 8 million pencils are
produced by HP. Live
Demand Predictable
Production update is also
there in HP’s website
Very Few Variants are there
Low (10 to 20
Product Variety (Pencils, Professional Pencils
variants)
and Colour Pencils)
PAT margin of HP for FY17
was very low (0.6%) Highest
Low (5% to 20%
Profit Margin Net Profit margin of the
Contribution margins)
industry is also very low (6%
for Doms Ind. in FY18)
Nataraj 621 HB wood-cased
pencil with red-and-black
Product Life Cycle More than 2 years
stripe design is running
since past many decades

Based upon above tabulated aspects, it’s rational to qualify pencils as a Functional Product.

As mentioned profit margins of this industry are very low (PAT Less than 1%). So in order to gain profit
margins in the industry having pencil as a functional product, firms need to focus on minimizing Physical
Costs, which includes cost of production, transportation and inventory storage. Since HP is a 6 decades
old firm it would be a safe assumption that firm has already aligned its resources to minimize the
Physical Costs. So what other as a firm HP needs to do to gain profit margins? What I can infer is that the
target consumers of this product are divided into two categories, one is average or low salaried parents
and other is high salaried parents. And price sensitivity of both these groups is entirely different.
Companies need to focus on affordability towards former consumer group to retain the volumes and
can focus on hedonic part of the product towards later consumer group to gain more profit margins. So
for a company, in Pencil industries, to run with high profit margins need to launch few innovative
products as well, although pencil being a functional product, so that one segment of the consumer can
be targeted with innovative SKUs for high profit margins at the same time other segment of the
consumer can be retained to enjoy high volumes of having in commodity product business.
In similar lines, I’ve explored one company that produces an innovative product. I’ve also shared my
reasons and critiques of categorizing the product as Innovative.

Company Name: - Intel

Innovative Product: - PlayStation