1. Part 4 PRODUCT AND PRICE DECISIONS

2. 10: Product, Branding, and Packing Concepts
11: Business Markets and Buying Behavior
12: Developing and Managing Prices
13: Marketing Channels and Supply-Chain Management
14: Retailing, Direct Marketing, and Wholesaling

3. Chapter 11 Developing and Managing Goods and Services
Professor Jason C. H. Chen, Ph.D.
School of Business Administration
Gonzaga University
Spokane, WA 99258

4. Learning Objectives
Understand how companies manage existing products through line extensions and product modifications
Describe how businesses develop a product idea into a commercial product
Know the importance of product differentiation and the elements that differentiate one product from another
Explain product positioning and repositioning

5. Learning Objectives
Understand how product deletion is used to improve product mixes
Understand the characteristics of services and how these characteristics present challenges when developing marketing mixes for service products
Be familiar with organizational structures used for developing and managing products

6. Managing Existing Products
Organizations can benefit by capitalizing on existing products
Weaknesses and gaps can be identified by assessing the composition of the current product mix
Analysis can lead to improvement of the product mix through:
Line __________
Product ____________
extensions
modifications

7. Line Extensions
A line extension is development of a product closely related to existing products but designed specifically to meet different customer needs.
Less _____ and less _____ than introducing a new product
Line extensions may:
Focus on a different market segment
Increase sales within the same market segment
Success of a line extension is enhanced when a:
Parent brand has a high-quality brand ______
Good fit between the line extension and its parent exists
risky
costly
image

8. Product Modifications
A product modification means changing one or more characteristics of a product
Differs from a line extension because the original product ______ from the product line
Improves a firm’s product mix under certain conditions
Product must be modifiable
Customers must recognize the modification
Modification should be consistent with customers’ desires
drops

9. Types of Product Modifications
Changes relating to a product’s dependability and durability (increase leg room in the seating area)
_________ modifications
Quality
Changes that affect a product’s versatility, effectiveness, convenience, or safety (Bing search from M/S to make searching more “social”.
___________ modifications
Functional
Changes the sensory appeal of a product (pros: product _____________; cons: ___________value; eg., Louis Vuitton)
Aesthetic modifications
differentiation
subjective

10. Developing New Products
Developing new products enhances product mix and adds depth to a product line
A new product can be:
An innovative product that has never been sold by any organization
A modified product that existed previously
A product a specific company has not marketed previously
Viewed as new when it is brought to one or more markets from another market
Introducing new products can be expensive and risky
New product failures often occur and can create major financial problems for an organization
However, _________ to introduce new products is also risky
Companies can lose market share with failure to innovate and keep up with competitive products
Failing

11. Figure 11.1 - Phases of New-Product Development
Idea generation
Idea generation
Screening
New-product development process is a seven-phase process for introducing products
A product can be viewed as new when it is brought to one or more markets from another market (e.g., Daimler brought its Smart Car to US had been out in Europe for years)
Screening
Concept testing
Concept testing
Business analysis
Business analysis
Product development
Product development
Test making
Test marketing
Commercialization
Commercialization

12. 1. Idea Generation Ideas can come from several sources Internal
Marketing managers
Researchers
Sales personnel
Engineers
Other organizational personnel
External
Customers
Competitors
Advertising agencies
Management consultants
Research organizations
3M post-it Notes came from an employee – a church choir member, he used slips of paper to mark songs in his hymnal.

13. 2. Screening
Screening means selecting ideas with greatest potential for further review
Ideas are analyzed to determine whether they match the organization’s objectives and resources
Keeping the product idea in focus and on track by understanding consumer needs and wants is the key to success
A checklist is often used encouraging evaluators to be systematic
Most new products are rejected during this phase

14. 3. Concept Testing
Concept testing is presenting potential buyers with a product idea
To determine their attitudes and initial buying intentions regarding the product
Low-cost procedure
The result of concept testing can help marketers understand which attributes and benefits are most important to potential customers

15. 4. Business Analysis
Business analysis involves evaluating a product idea to determine its potential contribution to the firm’s sales, costs, and profits
Marketers ask a series of questions
Results supply the specifics needed to estimate potential sales, costs and profits
Analysis based on estimates (for return on investment)
___________ analysis
Payback analysis
Breakeven
For example, when HP launched its TouchPad tablet computer, the business analysis did not signal to the company that the competitive environment and profit margins would cause the firm to withdraw this product shortly after its launch.

16. 5. Product Development
Product development is determining if producing a product is technically feasible and cost effective
Idea is converted into a test _________
Overall functioning of the prototype is tested
Determining the quality to be built into the product
This phase is lengthy and expensive so a small number of product ideas are put into development
prototype

17. 6. Test Marketing
Test marketing is a limited introduction of a product in geographic areas chosen to represent the intended market
Aims to determine the extent to which potential customers will buy the product
Exposes a product in a natural marketing environment to measure its sales performance
Measures the extent of brand _________
Risks
Expensive and Competitors may try to ________
awareness
interfere
Clearly, not all products that are test-marketed are launched. At times, problems discovered during test marketing cannot be resolved.

18. 7. Commercialization
Plans for full-scale manufacturing and marketing are refined and settled, and budgets are prepared
Marketers analyze results of test marketing
Necessary changes to the marketing mix are made
Decisions on warranties, repairs and replacement parts are made
Rollout - Product is introduced in stages
Starting in one geographic area and gradually expanding into adjacent areas

19. Stages of Commercialization
Introduction in test cities
Market coverage of the states where the test cities are located
Marketing efforts be extended into adjacent states
Remaining states be covered in stage

20. Figure 11.2 - Stages of Expansion into a National Market During Commercialization

21. PRODCUT DIFFERENTIATION THROUGH QUALITY, DESIGN, AND SUPPORT SERVICES

22. Product Differentiation
Product differentiation is a process of creating and designing products that are perceived as different from other products
Three aspects to be considered when creating and offering products for sale
Product quality
Product design and features
Product support services

23. Product Quality
Quality refers to the overall characteristics of a product that allow it to perform as expected in satisfying customer needs
Concept of quality varies between consumer and business markets
Dimensions of quality
_______ of quality: Amount of quality a product possesses (customer satisfaction was ranked)
___________ of quality: Degree to which a product has the same level of quality over time (FedEx delivers more than 99 percent of overnight packages on time)
Level
Consistency

24. Product Design and Features
How a product is conceived, planned and produced.
Good design (more than just appearance) is one of the best competitive advantages any brand can possess.
Styling: Physical appearance of a product
Product design
Specific design characteristics that allows a product to perform certain tasks
By adding or subtracting features, a company can differentiate its products from their competitors.
Product features
For a brand to have a __________ competitive advantage, marketers must determine the product designs and features that customers desire.
sustainable

25. Product Support Services
Customer services: Human or mechanical efforts or activities a company provides
Adds value to a product
Differentiates a company’s products from competitors’
Profoundly affects customer satisfaction
Consumers infer a higher level of quality from the availability of add-on services
Examples include:
Delivery/Installation
Financing
Customer training
Warranties/Guarantees
Repairs
Layaway plans
Convenient hours
Adequate parking
Toll-free numbers
Websites

26. PRODUCT POSITIONING AND REPOSITIONING

27. Product Positioning
Product positioning refers to the decisions and activities intended to create and maintain a certain concept of the firm’s product in customers’ minds
Product is positioned so that it appears to have the characteristics that the target market most desires
Perceptual maps (Fig. 11.3) are created by questioning a sample of consumers about their perceptions of products, brands and organizations with respect to two or more dimensions
For example, how customers perceive selected pain relievers in regard to price and type of pain for which the products are used) .

28. Figure 11.3 - Hypothetical Perceptual Map of Pain Relievers

29. Bases for Positioning Head-to-head Avoid competition
Product’s performance characteristics are equal to those of competitive brands and if the product is priced lower (PepsiCo vs. Coca-Cola); or even the price is higher (Samsung vs. Apple)
Head-to-head
Brand has unique characteristics that are important to some buyers (Volvo positioned itself for its safety)
Product’s performance characteristics do not differ significantly from those of competing brands.
Avoid competition
Product attributes and features (iPhone’s attributes such as its unique shape, easy-to-use touchscreen and its access to iTunes)
Specifically based
Price
Quality level
Benefits
Other bases

30. Repositioning Evaluating the positions of existing products
Brand’s market share and profitability may be strengthened
2013 Ford Fusion was repositioned as a sporty-looking, sporty-handling, mid-sized care with gas savings.
Repositioning can be accomplished by:
Physically changing the product, price, or distribution
Changing product image through promotional efforts
Aiming at a different target market.
When introducing a new product into a product line, one or more existing brands may have to be repositioned to minimize cannibalization of established brands and thus ensure a favorable reposition for the new brand.

31. Product Deletion
Product deletion means eliminating a product from the product mix
Systematic review allows an organization to improve a product or delete a product
Declining products reduce profitability and drain resources
A dying product may lose favor with customers and negative feelings may transfer to a company’s other products
Three ways of product deletion
_______-out: Allows a product to decline without a change in marketing strategy
_____-out: Exploits any strengths left in the product
It is commonly taken for technologically obsolete products such as older models of computer and CD players.
Often, the price is reduced to get a sales spurt.
Immediate drop: Used when losses are too great
Phase
Run

32. Product Deletion Process
Copyright © 2014 South-Western, Cengage Learning. ALL RIGHTS RESERVED.

33. MANAGINING SERVICES

35. Service
An intangible product that involves a deed, a performance, or an effort that cannot be physically possessed
A service is not the same as customer service
Homesourcing
A practice whereby customer contact jobs are outsourced into workers’ homes
Copyright © 2014 South-Western, Cengage Learning. ALL RIGHTS RESERVED.

36. Services as Products
Services are of increasing importance to U.S. economy
Represent 70% of U.S. GDP
Long-term economic growth and lifestyle changes have encouraged service sector expansion
Business services have grown as the business environment becomes more complex
Copyright © 2014 South-Western, Cengage Learning. ALL RIGHTS RESERVED.

37. Characteristics of Services
Service is not physical and cannot be touched
_____________
Intangibility
Shared responsibility between the customer and service provider in giving and receiving the service
Inseparability of production and consumption
Unused service capacity of one time period cannot be stored for future use (important topic for Revenue Management)
____________
Perishability

38. Characteristics of Services
Variation in quality
Heterogeneity
Interactions that result in satisfied customers who use a service repeatedly over time
Client-based relationships
Level of interaction between provider and customer needed to deliver the service
Customer contact

39. Customer Contact
The level of interaction between provider and customer needed to deliver the service
The look of facilities plays an important role in high-contact industries
Well-trained, satisfied employees are essential
Level of Contact
High Health Care
Real Estate
Spa Services
Low Tax Filing
Auto Repair
Dry Cleaning
Copyright © 2014 South-Western, Cengage Learning. ALL RIGHTS RESERVED.

40. Development of Services
The characteristics of services create marketing challenges and opportunities
Services generally come in a bundle:
_____ Service – The basic service experience a customer expects to receive (tutoring)
______________ Services – One or more supportive services used to differentiate the service bundle from competitors’ (outlines, handouts and online practice questions)
Heterogeneity allows for customization, which creates a competitive advantage
Core
Supplementary

41. Pricing of Services
Pricing should consider consumer price sensitivity, nature of the transaction, and costs
Prices can be based on performance of specific tasks, time, and level of demand
Services can be offered at one price, separately, or a combination of the two
How about perishable products/services:
Customers rely on price as an indicator of quality
Marketers must decide whether to bundle options and how to price bundles

42. Distribution of Services
Marketers deliver services in a variety of ways
At the service provider’s facility (health-care)
At customer’s home or business (carpet cleaning)
With no face-to-face contact (at “arm’s length”)
Electric, Internet, Cable TV, Phone services
They can be costly but essential in keeping customers satisfied and maintaining market share)
Marketing channels for services are usually short and direct
Some services use intermediaries (travel and insurance agents)
Inventory management is a serious concern for services

43. Promotion of Services
Tangible cues are a typical way to promote services
Intangibility results in promotion-related challenges
Advertisements for services show pictures of facilities, equipment, and service personnel
Personal selling can help customers visualize the service experience
Word-of-mouth communication is important

44. Organizing to Develop and Manage Products
Responsible for a product, a product line, or several distinct products that make up an interrelated group within a multiproduct organization.
Product manager
Responsible for a single brand
Brand manager
Responsible for all aspects of developing a product
Research and development
Production and engineering
Finance and accounting
Marketing
Venture team
Both product and brand managers operate cross-functionally to coordinate the activities, information, and strategies involved in marketing an assigned product.

45. Video Case 11.1
DO AXE PRODUCTS MAKE MEN MORE DESIRABLE?

46. Do AXE Products Make Men More Desirable?
Discussion Point
Do AXE Products Make Men More Desirable?
To effectively manage the brand, Unilever has regularly developed new products
AXE’s product features are both tangible and psychological
Love them or hate them, AXE commercials leave an indelible impression
Take a look at the website
Copyright © 2014 South-Western, Cengage Learning. ALL RIGHTS RESERVED.

47. Summary
AXE is the number one male grooming brand in both the United States and Canada. The company’s advertisements feature women who are very attracted to men who wear AXE body spray. AXE believes the provocative ads are important because they get the attention of men years old, the company’s target demographic. AXE has extended their product line to include other grooming products such as shower gel to continue to meet the needs of young men. However, the ads and the products also appeal to pre-teens who want to feel more confident, which could damage AXE’s “sexy” perception.

48. 1. How has AXE managed its product mix?
AXE’s product mix must satisfy its target market—men between the ages of 18 and 24.
When they first entered the American market, the company needed to get young men to purchase body spray. Once AXE body spray was successful, the company engaged in line extensions and product modifications in order to keep existing customers and attract new ones. AXE’s products help young men develop an “AXE Lifestyle.”

49. 2. How has AXE used line extensions to increase its reach among consumers?
AXE uses line extensions in several ways. It release new scents every year, and it has introduced hairstyling, aftershave, skin care, and shower gel products.
AXE has also developed products for women that compliment its men’s products.

50. 3. Why are younger generations attracted to AXE products?
During preadolescence many young men become more conscientious of their appearance and how attractive they are to the opposite sex.
AXE provides a way for them to feel more confident about their body image.

51. PORTER’S FIVE COMPETITIVE FORCES MODEL
Threats
NEW MARKET ENTRANTS
SUBSTITUTE PRODUCTS & SERVICES
Switching cost
Access to distribution channels
Economies of scale
Redefine products and services
Improve price/performance
Selection of suppler
Threat of backward integration
Buyer selection
Switching costs
Differentiation
Cost-effectiveness
Market access
Differentiation of product or service
THE FIRM
INDUSTRY COMPETITORS
According to Porter, there are five competitive forces in any industry, and the attractiveness of the industry depends on the strength of each force (Porter, 1985). Under the perspective of market structure, Porter’s competitive forces model (Porter, 1985; Applegate et al., 1999) has been broadly adopted as the underpinning for investigating the effect of information technology on the relationships between suppliers, customers, and other potential threats.
Contemporary strategic planning frameworks
-- 1) too narrow and pessimistic
-- 2) they are based on projections of market share and market growth
COMPETITIVE FORCES that SHAPE strategy
-- depends on the type of the industry
The ability to manage complexity and responsiveness has become a powerful source of competitive advantage.
Internal Forces: 1.customer focus, 2.communication, 3.core competencies, 4.complexity, 5.Quality
Due to characteristics of the instability of the markets in e-Commerce, Downes and Mui (1998) show that there are three forces that must be added to Porter’s five forces model: globalization, digitalization, and deregulation.
digitalization – the improvement and cost reductions in digital technology have had significant impact in business for many years now. The Internet has simply accelerated much of what was already happening and spread it into other industries across the world (esp. the information-based industries).
Deregulation and liberalization – it opened up new opportunities for many firms, and recent years have seen an increase in the number of related diversifications. (e.g., UK companies in the energy sector have branched out into related markets such as other forms of energy or telecommunications, making use of their physical distribution networks).
Globalization – an international level of many industries and liberalization of many markets (e.g., Eastern Europe) have opened up new foreign markets for Western firms while bringing Western firms into competition with multinationals based in other countries.,
Such international competition is likely to accelerate following political moves, such as the signing of the General Agreement on Trade and Tariffs by the leading industrial nations which promise to reduce barriers to international trade. Concept of “glocalization” where organizations must be a part of the local environmental setting. That is to think global and act according to local customs to survive and thrive in local conditions.
SUPPLIERS
CUSTOMERS
Bargaining power N
Dr. Chen, The Trends of the Information Systems Technology
TM -51

52. Generic Strategies Framework
Michael Porter describes how businesses can build a sustainable competitive advantage
“fundamental basis of above-average performance in the long run is sustainable competitive advantage.”
He identified three primary strategies for achieving competitive advantage:
______ leadership - lowest-cost producer
_____________ - product/service is with unique feature
_______ - limited scope; occupy narrow market niche where the products/services can stand out by virtue of their cost leadership or differentiation.
Cost
Differentiation
Focus

53. Competitive Advantage Focus
Figure 1.2: Porter’s Generic Strategy Framework –
3 Strategies for achieving Competitive Advantage
Competitive Advantage
Uniqueness
Perceived by
Customer
Lower Cost
Position
Industrywide (Broad Target)
Overall Cost Leadership
Differentiation
Competitive Scope
Three generic strategies
Cost leadership
differentiation (internal differentiation [e.g., stock option, bonus, salary increase] is good for building performance culture within the organization) From PRODUCT differentiation to SERVICE differentiation (BLUE OCEAN)
Focus (focused strategy is to develop a new market niches for specialized products/services where a target area better than its competitors) means an appropriate position/market
a. cost or
b. differentiation
PRODUCT differentiation  SERVICE differentiation  INNOVATION (BLUE OCEAN STRATEGY)
Core concept of this strategy are two basic principles:
1. Competitive advantage is believed to be the GOAL of any strategy
2. It is to be believed that a firm must define the TYPE of CA it seeks to attain and the scope within which it will be attained.
From “all things to all people” (a below-average performance) to a focus on core competencies.
Particular Segment only (Narrow Target)
Focus
Competitive Mechanism N
Dr. Chen, The Trends of the Information Systems Technology
TM -53

54. Business Strategies and its Competitive Advantage Innovation Alliance
Uniqueness
Perceived by
Customer
Lower Cost
Position
Industrywide (Broad Target)
Cost Leadership
Differentiation
Alliance
Innovation
Growth
Competitive Scope
Particular Segment only (Narrow Target)
Three generic strategies
Cost leadership
differentiation (internal differentiation [e.g., stock option, bonus, salary increase] is good for building performance culture within the organization) From PRODUCT differentiation to SERVICE differentiation (BLUE OCEAN)
Focus (focused strategy is to develop a new market niches for specialized products/services where a target area better than its competitors) means an appropriate position/market
a. cost or
b. differentiation
PRODUCT differentiation  SERVICE differentiation  INNOVATION (BLUE OCEAN STRATEGY)
Core concept of this strategy are two basic principles:
1. Competitive advantage is believed to be the GOAL of any strategy
2. It is to be believed that a firm must define the TYPE of CA it seeks to attain and the scope within which it will be attained.
From “all things to all people” (a below-average performance) to a focus on core competencies.
Cost Focus
Differentiation Focus
Knowledge-based economy
Industrial economy
Competitive Mechanism N
Dr. Chen, The Trends of the Information Systems Technology
TM -54

55. Dynamic Environment Strategies
Porter’s model is useful for diagnostics, or understanding how a business seeks to profit in its chosen marketplace, and for prescriptions, or building new opportunities for advantage
Porter model was developed at a time where the rate of change in any given industry was relatively _____ and _________. (i.e., stable)
Newer models were developed to take into account the increasing turbulence and velocity of the marketplace
slow
manageable