CH-11-12 Competitive Dynamics – Marketing Management: A South Asian Perspective : Chapter Notes

This Document Contains Chapters 11 to 12 Chapter 11 Competitive Dynamics LEARNING OBJECTIVES In this chapter, we will address the following questions: How can market leaders expand the total market and defend market share? How should market challengers attack market leaders? How can market followers or nichers compete effectively? What marketing strategies are appropriate at each stage of the product life cycle? How should marketers adjust their strategies and tactics for an economic downturn or recession? SUMMARY A market leader has the largest market share in the relevant product market. To remain dominant, the leader looks for ways to expand total market demand and attempts to protect and perhaps increase its current share. A market challenger attacks the market leader and other competitors in an aggressive bid for more market share. There are five types of general attack; challengers must also choose specific attack strategies. A market follower is a runner-up firm willing to maintain its market share and not rock the boat. It can play the role of counterfeiter, cloner, imitator, or adapter. A market nicher serves small market segments not being served by larger firms. The key to nichemanship is specialization. Nichers develop offerings to fully meet a certain group of customers’ needs, commanding a premium price in the process. As important as a competitive orientation is in today’s global markets, companies should not overdo the emphasis on competitors. They should maintain a good balance of consumer and competitor monitoring. Because economic conditions change and competitive activity varies, companies normally must reformulate their marketing strategy several times during a product’s life cycle. Technologies, product forms, and brands also exhibit life cycles with distinct stages. The life cycle stages are usually introduction, growth, maturity, and decline. Most products today are in the maturity stage. Each product life cycle stage calls for different marketing strategies. The introduction is marked by slow growth and minimal profits. If successful, the product enters a growth stage marked by rapid sales growth and increasing profits. There follows a maturity stage in which sales growth slows and profits stabilize. Finally, the product enters a decline stage. The company’s task is to identify the truly weak products, develop a strategy for each, and phase them out in a way that minimizes impact on company profits, employees, and customers. Like products, markets evolve through four stages: emergence, growth, maturity, and decline. In a recession, marketers must explore the upside of possibly increasing investments, get closer to customers, review budget allocations, put forth the most compelling value proposition, fine-tune brand and product offerings. OPENING THOUGHT This chapter adds the additional element of the complexity of marketing—competitive analysis. Care should be taken not to over dramatize the importance of monitoring competition, however, many firms do not give competitors the attention they merit so some emphasis is needed. A key concept introduced in this chapter is that of market nicher—a specialist in small markets underserved by larger corporations. Many large firms today started out as “nichers” and many large firms of tomorrow are our “nichers” today. The concept of “nichers” and the potential of growing them into larger firms can be exciting. TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS At this point in the semester-long project, students should be prepared to present their competitive analysis. Who are the market leaders for their chosen product or service? What niche have they identified for their product/service? Is their product or service going to be a leader, follower, or challenger to well-established products or brands? Michael Porter’s Five Forces model is as applicable today as it was when it was introduced. Have the students select a market or market segment (jeans, mobile phones, etc.) and using Michael Porter’s model, completely define these five forces for the market or market segment. Who are the potential entrants, who are the suppliers (and how much power do they have), who are the buyers (and what sort of buying power do they have), what are the substitutes and how is the industry segmented (market share is a good indicator of segmentation for this project)? Student’s analysis and answers should be comprehensive. Marketing Plan: Competitive strategy analysis is an important part of two areas within the marketing plan. First, in assessing the current situation, businesses need to identify key competitors and learn about each rival’s strengths and weaknesses. Second, competitive intelligence and analysis shapes the competitive strategy that is supported by the marketing mix. Each student groups’ product or service is a new entrant in an established industry that has competitors with relatively high brand identity and strong market positions. Get students to consider the following key issues that will affect their ability to introduce their product or service successfully: Which firm is the market leader, and what are its objectives, strengths, and weaknesses? What additional competitive intelligence is needed to answer the question about the market leader more completely, and how will each group go about getting the information? Which competitive strategy would be most effective for them? Students should enter their answers in a written marketing plan or enter them into the Competition, SWOT Analysis, and Critical Issues sections of Marketing Plan Pro. ASSIGNMENTS Identify the major competitors in the blue jeans market. Who has the leading market share, whose shares have declined? What segmentation is (has) occurring/occurred in the blue jeans market and why? Did demographic changes affect the market (from baby boomers to Gen X or Gen Y)? What competitive signs, symbols, events, or occurrences did Levi-Strauss miss? What current shifts in competition and channel power is occurring and what can Levi-Strauss do to minimize the impact from these changes? Have the students read “Emerging Asian Companies Take a Larger Cut in Fortune 500 Rankings” on www.2point6billion.com, July 12, 2011, and comment on the emerging competition from the “Third World” such as India and China on companies in the United States. Specifically, ask the students to comment on whether or not they believe that this (i) competition will increase in the future, and (ii) how a U.S. company should respond to this threat. For a market leader, increased sales must come from expanding the total market through adding new customers or increasing the usage of the product. Picking a market leader in an industry (Dell computers for example) explain how your market leader can expand the total market by adding new customers or increasing the usage of the product. Be as specific as possible. In challenging a market leader, the challenger has a number of differing strategies to employ. Choosing the right one (or wrong one) could result in a larger market share and increased profits (or disaster) for the challenger. In choosing a specific attack strategy, the challenger must go beyond and develop specific strategies of price, lower price goods, value priced goods and services, and so on. Students should explore these strategies and come prepared to identify one company (or brand) that has chosen each of these strategies to implement and defend their selection(s). Market-nichers avoid large markets and try to be the leader in a small market or niche. Nichers have three tasks: creating niches, expanding niches, and protecting niches. Multiple niching is preferable to single niching. Students should identify three “nichers” (firms and/or brands) and explain why they have identified these as “nichers” based upon the criteria in the chapter. END-OF-CHAPTER SUPPORT MARKETING DEBATE—Do Brands Have Finite Lives? Often, after a brand begins to slip in the marketplace or disappears altogether, commentators observe, “All brands have their day.” Their rationale is that all brands, in some sense, have a finite life and cannot be expected to be leaders forever. Other experts contend, however, that brands can live forever, and their long-term success depends on the skill and insight of the marketers involved. Take a position: ‘Brands cannot be expected to last forever’ versus ‘There is no reason for a brand to ever become obsolete’. Pro: Brands can last forever as evidenced by a number of brands that are entering their one hundredth year of existence. For a brand to have immortality, it must continue to have a competitive advantage in its product differentiation dimensions (product, services, personnel, channel, and symbols). The management of the brand, how well brand management monitors changes in the environment, customer preferences, strategies, and technology to continue to equip the brand with point-of-differences and/or points-of-parity is the key to the brand’s ongoing success in the marketplace. Con: Brands meet specific consumer needs and wants and provide specifics for these needs and wants. As consumer needs and wants change, evolve, or disappear, brands must also change, evolve, and finally expire. The loss of the brands point-of-difference in the marketplace or its lack of point-of-parity with other brands will cause its demise. Firms can be best served to understand and accept the inevitability of brand declines and plan for the creation of and marketing of newer brands to replace declining brands quickly. If a brand is designed to perform a specific function, the change in technologies may render that brand obsolete and see its market decline. Consider the case of the IBM Selectric® typewriter as an example where the new technology of computers rendered this brand obsolete. Every manufacturer or service provider must be on the lookout for threats to their brand’s ongoing effectiveness and applicability and develop appropriate replacement strategies. MARKETING DISCUSSION Pick an industry. Classify firms according to the four different roles they might play: leader, challenger, follower, and nicher. How would you characterize the nature of competition? Do the firms follow the principles described in the chapter? Suggested Response: Student answers will differ according to the industries picked and the role the firms play in that industry. All answers should contain some of the following: Leaders: largest market share, leads on price changes, new-product introductions, distribution coverage, and promotional intensity. Have products that generally hold a distinctive position in the minds of the consumers. Can use strategies that expand the total market demand: (new customers—marketpenetration strategies, new-market segment strategies, geographic-expansion strategies). More usage (level of quantity or frequency of consumption). Protect its current market share through good defensive action (position defense, flank defense, preemptive defense, counteroffensive defense, mobile defense, contraction defense). Challengers, followers: can attack the leader for increased market share, (challengers), or followers (“not rock the boat”), through: Frontal attack. Encirclement attack. Flank attack. Bypass attack. Guerrilla warfare. In the smartphone industry: Apple is a leader, Samsung is a challenger, Xiaomi is a follower, and OnePlus is a nicher. Competition is characterized by innovation from leaders and challengers, price competition among followers, and specialized features from nichers. Firms generally follow principles of differentiation, market share expansion, and targeted positioning to maintain their roles. Marketing Lesson: LG VS SAMSUNG Why do you think LG lost its lead in the consumer electronics sector in India to Samsung? Suggested Answer: LG underestimated the Indians’ appetite for consumer electronics like mobile handsets and digital cameras. Samsung on the other hand invested heavily in innovation and focused intently on mobile phones, which Indians changed almost every year. This was a shrewd move considering the mobile handset market is more than double the size of all consumer electronics and appliances put together. LG lost its lead to Samsung in India's consumer electronics sector due to Samsung's aggressive marketing strategies, superior product innovation, and effective distribution network, which resonated better with evolving consumer preferences and demands. What should LG do to regain its leadership? Suggested Answer: Student answers will be opinionated. Some may say LG should invest in R&D for its mobile handsets; change its brand image to match Samsung’s premium one but at the same time capture the mass market; LG should continue to localize its products, strategies, and organizations to adapt to the different business environment there. LG should focus on revitalizing its product innovation pipeline, enhancing brand visibility through targeted marketing campaigns, and strengthening its distribution and service network to regain leadership in India's competitive consumer electronics market. What should smaller players like Onida do to gain a larger market share? Suggested Answer: Onida should build a strong connect with its consumers by stressing a “home grown” appeal while making products that are both globally competitive and of global standards of quality as well. Smaller players like Onida can gain a larger market share by focusing on niche segments or underserved markets, investing in product differentiation and innovation, and leveraging digital marketing and e-commerce platforms to increase visibility and reach among tech-savvy consumers. Marketing Lesson: SHANDA At what stage of the product life cycle do you think (i) the Chinese online gaming industry is in? (ii) Shanda is in? Suggested Answer: The Chinese online gaming industry is in the “growth stage” of the product life cycle as it can grow at an annual rate of 12 percent, higher than the global average of 5 percent. Shanda is likely to be entering the “maturity stage” as competition has intensified and the company has had to increase its portfolio. (i) The Chinese online gaming industry is likely in the growth or maturity stage of the product life cycle, characterized by rapid expansion and increasing competition. (ii) Shanda, a prominent player in the Chinese online gaming industry, is likely in the maturity stage, focusing on sustaining market share through innovation and diversification of its gaming portfolio. What can Shanda do to extend its product life cycle? Suggested Answer: As mentioned, Shanda has had to increase its portfolio of new product offerings; improve its customer service; Finally, Shanda is pushing its games overseas by entering into license and distribution agreements in Vietnam, Hong Kong, Macau, and the U.S and is in acquisition talks with social and mobile gaming firms in the U.S. and Asia as it wants to make a concerted effort into social and mobile gaming. Shanda can extend its product life cycle by continuously innovating with new game releases, expanding into emerging gaming markets like mobile and esports, and enhancing user engagement through community-driven features and in-game events. DETAILED CHAPTER OUTLINE To be a long-term market leader is the goal of any marketer. Today’s challenging marketing circumstances, however, often dictate that companies reformulate their marketing strategies and offerings several times. Economic conditions change, competitors launch new assaults, and buyer interest and requirements evolve. Different market positions can suggest different market strategies. This chapter examines the role competition plays and how marketers can best manage their brands depending on their market position and stage of the product life cycle. Competition grows more intense every year—from global competitors eager to grow sales in new markets, and online competitors seeking cost-efficient ways to expand distribution, to private-label and store brands providing low-price alternatives and brand extensions by mega-brands moving into new categories. For these reasons and more, product and brand fortunes change over time, and marketers must respond accordingly. COMPETITIVE STRATEGIES FOR MARKET LEADERS A market leader has the largest market share and usually leads in price changes, new-product introductions, distribution coverage, and promotional intensity. We can gain further insight by classifying firms by the roles they play in the target market: Leader Challenger Follower Nicher Although marketers assume well-known brands are distinctive in consumers’ minds, unless a dominant firm enjoys a legal monopoly, it must maintain constant vigilance. Marketing Insight: When Your Competitor Delivers More for Less States that too many companies search within the conventional boundaries of industry competition (“do battle”) instead of finding unoccupied market positions that represent real value innovation. Differentiation Marketers need to protect areas where their business models give other companies room to maneuver. Execution To compete effectively, firms may instead need to downplay or even abandon some market segments. The low-cost operation must be designed and launched as a moneymaker in its own right, not just as a defensive play. To stay number one, the firm must first find ways to expand total market demand. Second, it must protect its current share through good defensive and offensive actions. Third, it should increase market share, even if market size remains constant. EXPANDING TOTAL MARKET DEMAND When the total market expands, the dominant firm usually gains the most. New Customers Every product class has the potential to attract buyers who are unaware of the product or are resisting it because of price or lack of certain features. A company can search for new users among three groups: 1. those who might use it but do not (market-penetration strategy), 2. those who have never used it (new-market segment strategy), 3. those who live elsewhere (geographical-expansion strategy). More Usage Marketers can try to increase the amount, level, or frequency of consumption. They can sometimes increase the amount of consumption through packaging or product redesign. Larger package sizes increase the amount of product consumers use at one time. Consumers use more of “impulse” products such as soft drinks and snacks when the product is made more available. Increasing frequency of consumption, on the other hand, requires either (1) identifying additional opportunities to use the brand in the same basic way or (2) identifying completely new and different ways to use the brand. Additional Opportunities to Use the Brand A marketing program can communicate the appropriateness and advantages of using the brand. Another opportunity arises when consumers’ perceptions of their usage differs from reality. New Ways to Use the brand The second approach to increasing frequency of consumption is to identify completely new and different applications. PROTECTING MARKET SHARE While trying to expand total market size, the dominant firm must continuously defend its current business. The most constructive response is continuous innovation. The leader leads the industry in developing new products and customer services, distribution effectiveness, and cost cutting. Comprehensive solutions increase its competitive strength and value to customers. Proactive Marketing A) In satisfying customer needs, we can draw a distinction between responsive marketing, anticipative marketing, and creative marketing. B) A responsive marketer finds a stated need and fills it. An anticipative marketer looks ahead to needs customers may have in the near future. A creative marketer discovers and produces solutions customers did not ask for but to which they enthusiastically respond. Creative marketers are proactive market-driving firms, not just market-driven ones. Many companies assume their job is just to adapt to customer needs. They are reactive mostly because they are overly faithful to the customer-orientation paradigm and fall victim to the “tyranny of the served market.” Successful companies instead proactively shape the market to their own interests. Instead of trying to be the best player, they change the rules of the game. H) A company needs two proactive skills: responsive anticipation to see the writing on the wall, as when IBM changed from a hardware producer to a service business creative anticipation to devise innovative solutions, as when PepsiCo introduced H2OH (a soft drink-bottled water hybrid). Note that responsive anticipation is performed before a given change, while reactive response happens after the change takes place. Proactive companies create new offers to serve unmet—and maybe even unknown— consumer needs. Proactive companies may redesign relationships within an industry, like Toyota and its relationship to its suppliers. Or they may educate customers, as Body Shop does in stimulating the choice of environmental friendly products. Companies need to practice “uncertainty management.” Proactive firms: Are ready to take risks and make mistakes Have a vision of the future and of investing in it Have the capabilities to innovate Are flexible and non-bureaucratic Have many managers who think proactively Marketing Insight: Sun Tzu Bing Fa: Modern Strategy Insights from Ancient China In Asia, 20 centuries ago, in a treatise called The Art of War, the famed Chinese military strategist, Sun Tzu, told his warriors: “One does not rely on the enemy not attacking, but on the fact that he himself is unassailable”. Defensive Marketing Even when it does not launch offensives, the market leader must not leave any major flanks exposed. The aim of defensive strategy is to reduce the probability of attack, divert attacks to less threatened areas, and lessen their intensity. Speed of response can make an important difference to profit. A dominant firm can use the six defense strategies summarized in Figure 11.2. Position Defense—Position defense means occupying the most desirable market space in consumers’ minds, making the brand almost impregnable. Flank Defense—The market leader should erect outposts to protect a weak front or support a possible counterattack. Preemptive Defense—A more aggressive maneuver is to attack before the enemy starts its offense. Counteroffensive Defense—In counteroffensive defense the market leader can meet the attacker frontally, hit its flank, or launch a pincer movement so it will have to pull back to defend itself. Mobile Defense—In mobile defense, the leader stretches its domain over new territories through market broadening and market diversification. Market broadening shifts focus from the current product to the underlying generic need. Market diversification shifts into unrelated industries. Large companies sometimes recognize that they can no longer defend all of their territory. The best course of action then appears to be planned contraction (also called strategic withdrawal): giving up weaker territories and reassigning resources to stronger territories. INCREASING MARKET SHARE Market leaders can improve their profitability by increasing their market share. In some markets, one share point is worth tens of millions of dollars. Because the cost of buying higher market share through acquisition may far exceed its revenue value, a company should consider four factors first: The possibility of provoking antitrust action. Frustrated competitors are likely to cry “monopoly” and seek legal action if a dominant firm makes further inroads. Economic cost. Figure 11.3 shows that profitability might fall with market share gains after some level. In the illustration, the firm’s optimal market share is 50%. The cost of gaining further market share might exceed the value if holdout customers dislike the company, are loyal to competitors, have unique needs, or prefer dealing with smaller firms. The danger of pursuing the wrong marketing activities. Companies successfully gaining share typically outperform competitors in three areas: new-product activity, relative product quality, and marketing expenditures. The effect of increased market share on actual and perceived quality. Too many customers can put a strain on the firm’s resources, hurting product value and service delivery. OTHER COMPETITIVE STRATEGIES Firms that occupy second, third, and lower ranks in an industry are often called runnerup, or trailing firms. These firms can adopt one of two postures. Each can attack the leader and others in an aggressive bid for further market share (market challengers), or they can play ball and not “rock the boat” (market followers). MARKET-CHALLENGER STRATEGIES Many market challengers have gained ground or even overtaken the leader. Defining the Strategic Objective and Opponents(s) A market challenger must first define its strategic objective. The challenger must decide whom to attack: It can attack the market leader It can attack firms of its own size that are not doing the job and are underfinanced C) It can attack small local and regional firms Choosing a General Attack Strategy We can distinguish among five attack strategies: Frontal Flank Encirclement Bypass Diversifying into unrelated products. Diversifying into new geographical markets. Technological leapfrogging into new technologies. Guerrilla Warfare Guerrilla attacks consist of small, intermittent attacks to harass and demoralize the opponent and eventually secure permanent footholds. Choosing a Specific Attack Strategy Any aspect of the marketing program can serve as the basis for attack, such as lower-priced or disconnected products, new or improved products and services, a wider variety of offerings, and innovative distribution strategies. A challenger’s success depends upon combining several strategies to improve its position over time. MARKET-FOLLOWER STRATEGIES Product imitation might be as profitable as product innovation. Many companies prefer to follow rather than challenge the market leader. A) “Conscious parallelism”. A market follower must know how to hold current customers and win a fair share of new customers. Each follower tries to bring distinctive advantages to its target market—location, services, and/or financing. Four broad strategies can be distinguished: Counterfeiter Cloner Imitator Adapter Marketing Insight: Counteracting Counterfeiting What can marketers do to combat counterfeiters? Here are some strategies (Refer to Pg 391). MARKET-NICHER STRATEGIES An alternative to being a follower in a large market is to be a leader in a small market, or niche. Firms with low shares of the total market can be highly profitable through smart niching. Such companies tend to offer high value, charge a premium price, achieve lower manufacturing costs, and shape a strong corporate culture and vision. C) Why is niching so profitable? The main reason is that the market nicher ends up knowing the target customers so well that it meets their needs better than other firms selling to this niche. The nicher achieves high margin, whereas, the mass marketer achieves higher volume. D) Nichers have three tasks: 1) Creating niches Expanding niches Protecting niches Marketing Memo: Niche specialist roles The key idea in successful nichemanship is specialization and some roles are: end-user specialist; vertical-level specialist; customer-size specialist; specific-customer specialist; geographic specialist; product or product-line specialist; job-shop specialist; qualityprice specialist; service specialist; and channel specialist. PRODUCT LIFE-CYCLE MARKETING STRATEGIES A company’s positioning and differentiation strategy must change as the product, market, and competitors change over the product life cycle (PLC). A) Products have a limited life. Product sales pass through distinct stages, each posing different challenges, opportunities, and problems to the seller. Profits rise and fall at different stages of the product life cycle. Products require different marketing, financial, manufacturing, purchasing, and human resource strategies in each life-cycle stage. Product Life Cycles The product life cycle is divided into four stages: Introduction Growth Maturity Decline The PLC concept can be used to analyze a product category, a product form, a product, or a brand. Figure 11.5 (a) shows a growth-slump-maturity pattern. Figure 11.5 (b) shows a cycle-recycle pattern. Figure 11.5 (c) shows a common pattern called scalloped pattern. STYLE, FASHION, AND FAD LIFE CYCLES A style is a basic and distinctive mode of expression appearing in a field of human endeavor. A fashion is a currently accepted or popular style in a given field. Fashions pass through four stages: Distinctiveness Emulation Mass-fashion Decline The length of a fashion cycle is hard to predict. Fads are fashions that come quickly into public view, are adopted with great zeal, peak early, and decline very fast. Fads do not survive because they do not normally satisfy a strong need. MARKETING STRATEGIES: INTRODUCTION STAGE AND PIONEER ADVANTAGE Profits are negative or low in the introduction stage. Promotional expenditures are at their highest ration to sales because of the need to: Inform potential consumers. Induce product trial. Secure distribution in retail outlets. Companies that plan to introduce a new product must decide when to enter the market. To be first can be rewarding, but risky and expensive. To come in later makes sense if the firm can bring superior technology, quality, or brand strength. Speeding up innovation time is essential in an age of shortening product life cycles. Most studies indicate that the market pioneer gains the most advantage. What are the sources of the pioneer’s advantage? Early users will recall the pioneer’s brand name if the product satisfies them. The pioneer’s brand also establishes the attributes the product class should possess. The pioneer’s brand normally aims at the middle of the market and so captures more users. There are producer advantages: Economies of scale. Technological leadership. Patents. Ownership of scarce assets. Other barriers to entry. The pioneer’s advantage is not inevitable. Steven Schnaars studied industries where imitators surpassed the innovators. He found several weaknesses among the failing pioneers: New products were too crude. Were improperly positioned. Appeared before there was a strong demand. Product-development costs were high. Lack of resources to compete. Managerial incompetence or unhealthy complacency. Golder and Tellis raise further doubts about the pioneer advantage. They distinguish between an: Inventor: first to develop patents in a new-product category. A product pioneer: first to develop a working model. A market pioneer: first to sell in the new-product category. Golder and Tellis’s five factors underpinning long-term market leadership: Vision of a mass market Persistence Relentless innovation Financial commitment Asset leverage MARKETING STRATEGIES: GROWTH STAGE The growth stage is marked by a rapid climb in sales. Early adopters like the product, and additional consumers start buying it. New competitors enter, attracted by the opportunities. Prices remain where they are or fall slightly. Companies maintain their promotional expenditures at the same or at a slightly increased level to meet competition and to continue to educate the market. C) Sales rise much faster than promotional expenditures. Profits increase. Manufacturing costs fall faster than price declines owing to the producer learning effect. During this stage, the firm uses several strategies to sustain rapid market growth: It improves product quality and adds new product features and improved styling. It adds new models and flanker products. It enters new market segments. It increases its distribution coverage and enters new distribution channels. It shifts from product-awareness advertising to product-preference advertising. 6) It lowers prices to attract the next layer of price-sensitive buyers. By spending money on product improvement, promotion, and distribution, it can capture a dominant position. MARKETING STRATEGIES: MATURITY STAGE At some point, the rate of sales growth will slow, and the product will enter a stage of relative maturity. This stage normally lasts longer than the previous stages and poses big challenges to marketing management. Many products are in the maturity stage of the life cycle. A) The maturity stage divides into three phases: Growth, where the sales growth rate starts to decline Stable, where sales flatten on a per capita basis because of market saturation Decaying maturity, where the absolute level of sales starts to decline, and customers begin switching to other products B) The third phase poses the most challenges. The sales slowdown creates overcapacity in the industry, which leads to intensified competition. Weaker competitors withdraw. A few giants dominate—perhaps a quality leader, a service leader, and a cost leader— and profit mainly through high volume and lower costs. Surrounding these dominant firms is a multitude of market nichers, including market specialists, product specialists, and customizing firms. Market Modification The company might try to expand the market for its mature brand by working with the two factors that make up sales volume: Volume = number of brand users × usage rate per user as in Table 11.1—Alternate Ways to Increase Sales Volume’. Product Modification Managers also try to stimulate sales by modifying the product’s characteristics through quality improvement, feature improvement, or style improvement. Quality improvement increases functional performance by launching a “new and improved” product. Feature improvement aims at adding new features that expand the product’s performance, versatility, safety, or convenience. 1) This strategy has several advantages: New features build the company’s image as an innovator. Wins the loyalty of market segments that value these features. Provide an opportunity for free publicity. Generate sales force and distributor enthusiasm. Style improvement aims at increasing the product’s aesthetic appeal. Marketing Program Modification Product managers might also try to stimulate sales by modifying other marketing program elements—price, distribution, and communications in particular. They should assess the likely success of any changes in terms of effects on new and existing customers. MARKETING STRATEGIES: DECLINE STAGE Sales decline for a number of reasons, including technological advances, shifts in consumer tastes, and increased domestic and foreign competition. All lead to overcapacity, increased price-cutting, and profit erosion. As sales and profits decline, some firms withdraw from the market. Those remaining may reduce the number of products they offer. In handling aging products, a company faces a number of tasks and decisions. If the company were choosing between harvesting and divesting, its strategies would be quite different. Harvesting calls for gradually reducing a product or business’s costs while trying to maintain sales. When a company decides to drop a product, it faces further decisions. If the product has strong distribution and residual goodwill, the company can probably sell it to another firm. If the company cannot find any buyers, it must decide whether to liquidate the brand quickly or slowly. It must also decide on how much inventory and service to maintain for past customers. EVIDENCE FOR THE PRODUCT LIFE-CYCLE CONCEPT Based on the above discussion, Table 11.2 summarizes the characteristics, marketing objectives, and marketing strategies of the four stages of the PLC. The PLC concept helps marketers interpret product and market dynamics, conduct planning and control, and do forecasting. New consumer durables show a distinct takeoff, after which sales increase by roughly 45% a year, but they also show a distinct slowdown, when sales decline by roughly 15% a year. Slowdown occurs at 34% penetration on average, well before most households own a new product. The growth stage lasts a little over eight years and does not seem to shorten over time. Informational cascades exist, meaning people are more likely to adopt over time if others already have, instead of by making careful product evaluations. One implication is that product categories with large sales increases at takeoff tend to have larger sales declines at slowdown. CRITIQUE OF THE PRODUCT LIFE-CYCLE CONCEPT PLC theory has its share of critics, who claim life-cycle patterns are too variable in shape and duration to be generalized, and that marketers can seldom tell what stage their product is in. A product may appear mature when it has actually reached a plateau prior to another upsurge. Critics also charge that, rather than an inevitable course, the PLC pattern is the self fulfilling result of marketing strategies, and that skillful marketing can in fact lead to continued growth. Marketing Memo: How to Build a Breakaway Brand Here is a summary of their 10 tips for building a breakaway brand (refer to p. 403). Market Evolution Because the PLC focuses on what’s happening to a particular product or brand rather than the overall market, it yields a product-oriented rather than a market-oriented picture. Firms need to visualize a market’s evolutionary path as it is affected by new needs, competitors, technology, channels, and other developments and change product and brand positioning to keep pace. MARKETING IN AN ECONOMIC DOWNTURN Given economic cycles there will always be tough times, like 2008–2010 were in many parts of the world. Despite reduced funding for marketing programs and intense pressure to justify them as cost effective, some marketers survived—or even thrived—in the recession. Here are five guidelines to improve the odds for success during an economic downturn: Explore the Upside of Increasing Investment Get Closer to Customers Review Budget Allocations Put Forth the Most Compelling Value Proposition Fine-Tune Brand and Product Offerings Chapter 12 Setting Product Strategy LEARNING OBJECTIVES In this chapter, we will address the following questions: What are the characteristics of products, and how do marketers classify products? How can companies differentiate products? Why is product design important and what factors affect a good design? How can a company build and manage its product mix and product lines? How can companies combine products to create strong co-brands or ingredient brands? How can companies use packaging, labeling, warranties, and guarantees as marketing tools? CHAPTER SUMMARY Product is the first and most important element of the marketing mix. Product strategy calls for making coordinated decisions on product mixes, product lines, brands, and packaging and labeling. In planning its market offering, the marketer needs to think through the five levels of the product: the core benefit, the basic product, the expected product, the augmented product, and the potential product, which encompasses all the augmentations and transformations the product might ultimately undergo. Products can be nondurable goods, durable goods, or services. In the consumer-goods category, products are convenience goods (staples, impulse goods, emergency goods), shopping goods (homogeneous and heterogeneous), specialty goods, or unsought goods. The industrial-goods category has three subcategories: materials and parts (raw materials and manufactured materials and parts), capital items (installations and equipment), or supplies and business services (operating supplies, maintenance and repair items, maintenance and repair services, and business advisory services). Brands can be differentiated on the basis of a number of different product or service dimensions: product form, features, performance, conformance, durability, reliability, repairability, style, and design, as well as such service dimensions as ordering ease, delivery, installation, customer training, customer consulting, and maintenance and repair. Design is the totality of features that affect how a product looks, feels, and functions. A well-designed product offers functional and aesthetic benefits to consumers and can be an important source of differentiation. Most companies sell more than one product. A product mix can be classified according to width, length, depth, and consistency. These four dimensions are the tools for developing the company’s marketing strategy and deciding which product lines to grow, maintain, harvest, and divest. To analyze a product line and decide how many resources should be invested in that line, product-line managers need to look at sales and profits and market profile. A company can change the product component of its marketing mix by lengthening its product via line stretching (down-market, up-market, or both) or line filling, by modernizing its products, by featuring certain products, and by pruning its products to eliminate the least profitable. Brands are often sold or marketed jointly with other brands. Ingredient brands and co-brands can add value assuming they have equity and are perceived as fitting appropriately. Physical products have to be packaged and labeled. Well-designed packages can create convenience value for customers and promotional value for producers. Warranties and guarantees can offer further assurance to consumers. OPENING THOUGHT Students will be familiar with the “idea” of a tangible product—the physical manifestation—a cell phone or a pair of favorite jeans or shoes. However, students may have trouble understanding the “totality” of the product physically demonstrated—the core benefit, the basic product, expected product, augmented, and potential product. The instructor is encouraged to use the class period to allow the students to try to uncover or explore these additional components of the “product” concept so that the students will begin to understand these dimensions better. Students should have no problems understanding the concepts of durability and reliability, nor should they have problems with brands differentiation or product line depth and breadth. Perhaps, the most challenging concept of the chapter is the concept of line stretching, and/or line filling. Again, the instructor is encouraged to use examples from manufacturers’ and/or personal experience to communicate these concepts successfully. Finally, the labeling of a product includes both advertising copy and governmental regulations. This will be new material for many students. TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS At this point for the semester-long project, students should have set their group project’s product or service strategy. Instructors are to evaluate their submissions on the product (or services) features, quality, and price and the other considerations of “product” found in this chapter. In planning its market offering, the marketer needs to address five product levels: core benefit, basic product, expected product, augmented product, and potential product. Students should select a firm within an industry and through research (Internet and other formats) outline the firm’s five product levels for its products. In their research, students should be challenged to discover the firm’s perception of the customer’s value hierarchy and total consumption system. Marketing Plan decisions about products are critical elements of any marketing plan. During the planning process, marketers must consider issues related to product mix and product lines. Product marketers distinguish five levels of product, each adding more customer value: core benefit, basic, expected, augmented, and potential. In assessing product strategy: Define the core benefit for your product or service Define the augmented product or service Get students to write their answers to the questions in a written marketing plan or enter it in the Product Offering and Marketing Mix sections of Marketing Plan Pro. ASSIGNMENTS Convenience items and capital good items can be seen as two ends of the “product continuum.” Convenience items are purchased frequently, immediately, and with minimum effort. Capital goods are those items that last a long period of time and are purchased infrequently by consumers. Students should select a convenience good and a capital good of their choice and compare and contrast the consumers’ value hierarchy and users total consumption system for each item using the concepts presented in this chapter. When the physical product cannot easily be differentiated, the key to competitive success may lie in adding valued services and improving their quality. Examples of adding value in the service component of a product include computers, education, and pizzas. Each student is to select a product in which they think that the additional value present lies in the service and quality components. Students should be prepared to defend their selections using the material presented in this chapter. In the Marketing Memo entitled, Product-Bundle Pricing Considerations, the authors list six guidelines for implementing a bundling strategy. As a group, students should collect examples of product bundling and examine these examples versus the six guidelines stated in the memo. Students should be able to argue for or against their product bundling examples. Product differentiation is essential to the branding process. In choosing to differentiate a product, a marketer has the choice of form, features, performance quality, conformance quality, durability, reliability, repairability, and style. Collect examples of currently produced products that have been differentiated and branded for each of these design parameters. END-OF-CHAPTER SUPPORT MARKETING DEBATE— Are Line Extensions Good or Bad? The “form versus function” debate applies to many arenas, including marketing. Some marketers believe that product performance is the be all and end all. Other marketers maintain that the looks, feel and other design elements of products are what really make the difference. Take a position: Product functionality is the key to brand success versus Product design is the key to brand success. Suggested Response: Pro: Consumers buy products to satisfy a need. A consumer uses products and decides on a product based upon their own consumption system—the way the product is by the consumer (getting the product, using the product, and disposing of the product). Additionally, the customer value hierarchy (core benefit, basic product, expected product, augmented product, and potential product) enters into the decision-making process for a consumer. Therefore, a product must perform to an acceptable level according to the consumer’s perception of benefits in their customer value hierarchy. A low price, low function product, like a disposable razor must at least perform the task to which it was created. A more expensive product, an electric razor, must meet the function to which it was created, although these functions are at a higher level than the disposable razor. If either product does not perform to the consumer’s basic product definition then the product will be discarded and not repurchased. Con: Products have unique characteristics and specific brand identifications that meet consumers’ needs that are not related to functionability. Such needs as status, selfactualization, and style appeal to a wide audience. For example, most automobiles will perform the task of taking a person from point A to point B. However, it is the design of the automobile (specific make/type: i.e., sports car, luxury car) that appeals to the buyer. For many consumers style plays a more important role, for some, the only role in their buying decision. A well-designed product can also be a point-of-difference in the marketplace aiding consumer acceptance through its ease of use, durability, reliability, or packaging. A well-designed product can be a competitive advantage for smaller firms. Whatever, the design, however, the product must at least meet the consumers’ definition of a basic product. Once that definition is met, design can be a powerful marketing asset. Product functionality is key to brand success because it ensures that the product effectively meets consumer needs and delivers on its promises, which drives satisfaction and loyalty. However, product design also plays a crucial role by enhancing user experience and aesthetic appeal, making it important to balance both elements for overall brand success. MARKETING DISCUSSION Consider the different means of differentiating products and services. Which ones have the most impact on your choices? Why? Can you think of certain brands that excel on a number of these different means of differentiation? Suggested Answer: Student answers will differ according to the product/services chosen. However, student answers should encompass the following distinctions: Products differentiation includes: Form Features Performance quality Conformance quality Durability Reliability Repairability Style Services differentiation includes: Ordering ease Delivery installation Customer training Customer consulting Maintenance and repair Brand differentiation methods such as quality, innovation, and customer service have the most impact on my choices due to their influence on product reliability and user experience. Brands like Apple and Tesla excel in these areas, offering high-quality products, cutting-edge technology, and exceptional customer support that strongly influence consumer preferences. Marketing Lesson: JIM THOMPSON THAI SILK COMPANY How would you describe how JTTS extended its product line? Do you think JTTS has extended too much? Suggested Answer: JTTS extended its product line to facilitate cross-selling. JTTS’ product portfolio includes scarves, handbags, and home furniture accessories. Its home furnishing line includes sofas, armchairs, dining and coffee tables, and lamps—finished products for the home. Students answers may vary for the second question. Thai silk is not suitable for garments but ideal for home furnishing accessories. Thus, JTTS sells picture frames, toiletry bags, and purses in Thai silk, while garments are sold in other fabrics. Today, about half of its products come in handwoven silk, and the other half in other materials. JTTS likely extended its product line by diversifying into related categories or introducing variations of existing products to cater to different consumer needs or preferences. Whether JTTS has extended too much depends on market demand, operational efficiency, and brand coherence; if managed well, diversification can strengthen market position, but excessive extension could dilute brand identity and strain resources. Do you think JTTS is differentiated sufficiently from other lifestyle brands? Suggested Answer: Yes. JTTS is strongly linked to Thai culture, it appeals to tourists who want to take a piece of Thai experience back with them. It is cognizant of maintaining a high quality for its products. JTTS also relies on below-the-line communication such as fairs and exhibitions to create awareness of its brand; Mass communication channels such as advertising are used sparingly while favorable word of mouth regarding its brand is highly relied upon. Finally, JTTS uses its museum to promote the legend behind its founder. All the aforementioned ensure that the JTTS brand is not overexposed but has equity based on quality and differentiation. JTTS may differentiate sufficiently if it emphasizes unique design aesthetics, quality craftsmanship, and a distinct lifestyle narrative; however, sustained differentiation relies on consistent innovation and effectively communicating its unique value proposition compared to competitors in the crowded lifestyle brand market. Marketing Lesson: TOYOTA Toyota has built a huge manufacturing company that can produce millions of cars each year for a wide variety of consumers. Why was it able to grow so much bigger than any other auto manufacturer? Suggested Answer: Toyota has built a huge manufacturing company that can produce millions of cars each year for a wide variety of consumers and has products for different price points demanded by consumers. The firm is the master of lean manufacturing and continuous improvement. Its plants can make as many as eight different models at the same time, bringing huge increases in productivity and market responsiveness. Designing these different products means listening to different customers, building the cars they want, and then crafting marketing to reinforce each make’s image. Toyota is integrating its assembly plants around the world into a single giant network. The plants will customize cars for local markets and shift production quickly to satisfy any surges in demand from markets worldwide. Toyota's growth was fueled by its pioneering approach to lean manufacturing and continuous improvement through methods like Toyota Production System (TPS), enabling high efficiency, quality, and responsiveness to consumer demand, which surpassed competitors in scalability and operational excellence. Has Toyota done the right thing by manufacturing a car brand for everyone? Why or why not? Suggested Answer: Student answers will vary but one opinion is that yes, Toyota has done the right thing by manufacturing a car brand for everyone. It has been successful because has products for different price points demanded by consumers. And Toyota understands that each country defines perfection differently—for example in its Lexus Division. Toyota's strategy of offering a broad range of vehicles caters to diverse consumer preferences and global markets, enhancing market penetration and profitability; however, focusing on a universal brand may dilute specialization and brand identity compared to niche competitors. Did Toyota grow too quickly as Toyoda suggested? What should the company do over the next year, 5 years, and 10 years? How can growing companies avoid quality problems in the future? Suggested Answer: Student’s answers will vary but to be consistent with this chapter’s subject, student answers should refer to Toyota’s need to keep their product’s selection and quality superior to their competition and to deliver to the consumer, the consumer’s definition of potential product. Toyota's rapid growth did lead to quality issues, as acknowledged by Toyoda. Over the next years, Toyota should focus on enhancing quality control processes, investing in R&D for sustainable technologies, and strengthening global supply chains to ensure consistent growth without compromising quality. Growing companies can avoid future quality problems by prioritizing scalability in operations, investing in workforce training, and implementing robust quality assurance measures across all stages of production and service delivery. DETAILED CHAPTER OUTLINE At the heart of a great brand is a great product. Product is a key element in the market offering. To achieve market leadership, firms must offer products and services of superior quality that provide unsurpassed customer value. Marketing planning begins with formulation of an offering to meet target customers’ needs or wants. The customer will judge the offering by three basic elements: product features and quality, services mix and quality, and price. PRODUCT CHARACTERISTICS AND CLASSIFICATIONS A product is anything that can be offered to a market to satisfy a want or need. A) Products that are marketed include: Physical goods Services Experiences Events Persons Places Properties Organizations Information Ideas Product Levels: The Customer Value Hierarchy In planning its market offering, the marketer needs to address five product levels (See Figure 12.2). Each level adds more customer value, and the five constitute a customer value hierarchy. The fundamental level is the core benefit: The service or benefit the customer is really buying. Marketers must see themselves as benefit providers. At the second level, the marketer has to turn the core benefit into a basic product. At the third level, the marketer prepares an expected product, a set of attributes and conditions buyers normally expect when they purchase this product. At the fourth level, the marketer prepares an augmented product that exceeds customer expectations. At the fifth level stands the potential product that encompasses all the possible augmentations and transformations the product or offering might undergo in the future. Here is where companies search for new ways to satisfy customers and distinguish its individual offer. Differentiation arises on the basis of product augmentation. Product augmentation also leads the marketer to look at the total consumption system: the way the user performs the tasks of getting and using products and related services. a. Each augmentation adds costs. Augmented benefits soon become expected benefits and necessary points-ofparity. As companies raise the price of their augmented product, some competitors offer a “stripped-down” version at a much lower price. PRODUCT CLASSIFICATIONS Marketers have traditionally classified products on the basis of characteristics: durability, tangibility, and use. Each product type has an appropriate marketing-mix strategy. Durability and Tangibility Products can be classified into three groups, according to durability and tangibility: A) Nondurable goods: tangible consumed in one or a few uses. Durable goods: tangible that normally survives many uses. Durable goods require more personal selling and service, command a higher margin, and require more seller guarantees. Services: intangible, inseparable, variable, and perishable products that require more quality control, supplier credibility, and adaptability. Consumer-Goods Classification The vast array of goods consumers buy can be classified on the basis of shopping habits. Convenience goods are purchased frequently, immediately, and with a minimum of effort. Staples Impulse goods Emergency goods Shopping goods are goods that the consumer, in the process of selection and purchase, characteristically compares on such basis as suitability, quality, price, and style. Homogeneous shopping goods are similar in quality but different enough on price to adjust shopping comparisons. Heterogeneous shopping goods differ in product features and services that may be more important than price. Specialty goods have unique characteristics or brand identification for which a sufficient number of buyers are willing to make a special purchasing effort. Unsought goods are those that the consumer does not know about or does not normally think of buying. The classic examples of known but unsought goods are life insurance and cemetery plots. Industrial-Goods Classification We classify industrial goods in terms of their relative cost and how they enter the production process: materials and parts, capital items, and supplies and business services. Materials and parts These are goods that enter the manufacturer’s product completely. They fall into two major groups: Raw materials include: Farm products—commodity characteristics. Natural products—are in limited supply. great bulk low unit value must be moved from producers to user b. Manufactured materials and parts fall into two categories: Component materials. Component parts. Capital items are long-lasting goods that facilitate developing or managing the finished product. They include: Installations. 2) Equipment. Supplies and business services are short-term goods and services that facilitate developing or managing the finished product. There are two kinds of supplies: Maintenance and repair items (including business advisory services such as legal, consulting, and advertising). Operating supplies. Business services include maintenance and repair services and business advisory services are usually purchased on the basis of the supplier’s reputation and staff. PRODUCT DIFFERENTIATION To be branded, products must be differentiated. Physical products vary in potential for differentiation. Here the seller faces an abundance of differentiation possibilities, including form, features, customization, performance quality, conformance quality, durability, reliability, repairability, and style. Product Differentiation Form: Many products can be differentiated in form—the size, shape, or physical structure of a product. Features: Most products can be offered with varying features that supplement its basic function. A company can identify and select appropriate features by surveying buyers and then calculating customer value versus company cost for each feature. To avoid “feature fatigue,” the company must prioritize features and tell consumers how to use and benefit from them. Each company must decide whether to offer feature customization at a higher cost or a few standard packages at a lower cost. Customization: marketers can differentiate products by making them customized to an individual. Mass customization is the ability of a company to meet each customer’s requirements. Performance Quality: Most products are established at one of four performance levels: low, average, high, or superior. Performance quality is the level at which the product’s primary characteristics operate. The manufacturer must design a performance level appropriate to the target market and competitors’ performance levels. A company must mange performance quality through time. a. Quality is becoming an increasingly important parameter for differentiation as companies adopt a value model and provide higher quality for less money. Conformance Quality: Buyers expect products to have a high conformance quality— the degree to which all the product units are identical and meet the promised specifications. Durability: A measure of the product’s expected operating life under natural or stressful conditions. Reliability: Buyers normally will pay a premium for more reliable products. Reliability is a measure of the probability that a product will not malfunction or fail within a specified time period. Repairability: Is the measure of the ease of fixing a product when it malfunctions or fails. Style: Describes the product’s look and feel to the buyer. Complexity and decoration—Asians love the display of multiple forms, shapes, and colors. This feature is most pronounced in Chinese, Thai, Malay, and Indonesian aesthetics. Balancing various aesthetic elements—Harmony in aesthetic expression is viewed as a particularly important goal. Naturalism—In China, symbols and displays of natural objects such as mountains, rivers, dragons, and phoenixes are frequently found in packaging, advertising, and on logos (e.g., Dragonair and Tiger Beer). In Japan, gardens, trees, and flowers are objects of aesthetic symbolism. SERVICES DIFFERENTIATION When the physical product cannot easily be differentiated, the key to competitive success may lie in adding valued services and improving quality. The main service differentiators are ordering ease, delivery, installation, customer training, customer consulting, and maintenance and repair. Ordering Ease: Ordering ease refers to how easy it is for the customer to place an order with the company. Delivery: refers to how well the product or service is brought to the customer. Installation: Refers to the work done to make the product operational. Customer Training: Refers to the training the customer’s employees undergo to use the vendor’s equipment properly and efficiently. Customer consulting: Refers to data, information systems, and advice services that the seller offers to the buyers. Maintenance and Repair: Describes the service program for helping customers keep purchased products in good working order. Returns: An unavoidable reality of doing business Controllable returns Uncontrollable returns DESIGN As competition intensifies, design offers a potent way to differentiate and position a company’s products and services. Design is the totality of features that affect how a product looks and functions in terms of customer requirements. To the company, a well-designed product is one that is easy to manufacture and distribute. As holistic marketers recognize the emotional power of design and the importance to consumers of how things look and feel as well as work, design is exerting a stronger influence in categories where it once played a smaller role. In an increasingly visually oriented culture, transmitting brand meaning and positioning through design is critical. Design can shift consumer perceptions to make brand experiences more rewarding. Design should penetrate all aspects of the marketing program so that all design aspects work together. Given the creative nature of design, it’s no surprise that there isn’t one widely adopted approach. Some firms employ formal, structured processes. Design thinking is a very data-driven approach with three phases: observation, ideation, and implementation. Design is often an important aspect of luxury products. “Marketing Insight: Marketing Luxury Brands” describes some of the broader marketing issues luxury brands face. Marketing Insight: Marketing Luxury Brands Table 12.1 summarizes some key guidelines in marketing luxury brands. PRODUCT AND BRAND RELATIONSHIPS Each product can be related to other products to ensure that a firm is offering and marketing the optimal set of products. The Product Hierarchy The product hierarchy stretches from basic needs to particular items that satisfy those needs. We can identify six levels of the product hierarchy. Need family Product family Product class Product line Product type Item, also called stockkeeping unit (SKU) or product variant PRODUCT SYSTEMS AND MIXES A product system is a group of diverse but related items that function in a compatible manner. A product mix consists of various product lines. A company’s product mix has a certain width, length, depth, and consistency. These concepts are illustrated in Table 12.2 for selected Lion consumer products from Japan. The width of a product mix refers to how many different product lines the company carries. The length of a product mix refers to the total number of items in the mix. The depth of a product mix refers to how many variants are offered of each product in the line. The consistency of the product mix refers to how closely related the various product lines are in end use, production requirements, distribution channels, or some other way. These four product-mix dimensions permit the company to expand its business in four ways. It can add new product lines, thus widening its product mix. It can lengthen each product line. It can add more product variants to each product and deepen its product mix. Finally, a company can pursue more product-line consistency. PRODUCT-LINE ANALYSIS In offering a product line, companies normally develop a basic platform and modules that can be added to meet different customer requirements. Product-line managers need to know the sales and profits of each item in their line in order to determine which items to build, maintain, harvest, or divest. Sales and Profits Figure 12.3 shows a sales and profit report for a five-item product line. Every company’s product portfolio contains products with different margins. Market Profile The product-line manager must review how the line is positioned against competitors’ lines. Figure 12.4 shows the location of the various product-line items of company X and four competitors, A, B, C, and D. The product map shows which competitors’ items are competing against company X’s items. The map also reveals possible locations for new items. Another benefit of product mapping is that it identifies market segments. Product-line analysis provides information for two key decision areas—product-line length and product-mix pricing. PRODUCT-LINE LENGTH Company objectives influence product-line length. One objective is to create a product line to induce upselling. A different objective is to create a product line that facilitates cross selling. Still another objective is to create a product line that protects against economic ups and downs. Product lines tend to lengthen over time. A company lengthens its product line in two ways: by line stretching and line filling. Increasingly, consumers are growing weary of dense product lines, over-extended brands, and feature-laden products (see “Marketing Insight: When Less Is More”). Marketing Insight: When Less Is More Line Stretching Line stretching occurs when a company lengthens its product line beyond its current range. Down-market stretch is when a company positioned in the middle market may want to introduce a lower-priced line for any of three reasons: The company may notice strong growth opportunities as mass retailers such as WalMart, Carrefour, and others attract a growing number of shoppers who want valuepriced goods. The company may wish to tie up lower-end competitors who might otherwise try to move up-market. If the company has been attacked by a low-end competitor, it often decides to counterattack by entering the low end of the market. Mercedes introduced the A-Class model after Toyota entered the higher end with the Lexus. The company may find that its market is stagnating or declining. A company faces a number of choices in deciding to move a brand down-market: Use the parent name on all offerings Use a sub-brand name Introduce lower-price goods under a different brand name Moving down-market carries risk. It can cannibalize its core brand. Up-Market stretch Companies may wish to enter the high end of the market for: More growth Higher margins Simply to position themselves as a full-line manufacturer Two-way stretch Is where companies serving the middle market might decide to stretch the line in both directions. Line Filling A product line can also be lengthened by adding more items within the present range. There are several motives for line filling: Reaching for incremental profits. Trying to satisfy dealers who complain about lost sales because of missing items in the line. Trying to utilize excess capacity. Trying to be the leading full-line company. Trying to plug holes to keep out competitors. Line filling is overdone if it results in self-cannibalization and customer confusion. The company needs to differentiate each item in the consumer’s mind with a just noticeable difference. The company should also check that the proposed item meets a market need and is not being added simply to satisfy an internal need. Line Modernization, Featuring, and Pruning Product lines need to be modernized. In rapidly changing product markets, modernization is continuous. Companies plan improvement to encourage customer migration to higher-valued, higher-priced items. The product-line manager typically selects one or a few items in the line to feature. Product-line managers must periodically review the line for deadwood that is depressing profits. PRODUCT-MIX PRICING Marketers must modify their price-setting logic when the product is part of a product mix. Product-mix pricing is when the firm searches for a set of prices that maximizes profits on the total mix. Pricing is difficult because the various products have demand, cost interrelationships, and are subject to different degrees of competition. We can distinguish six situations involving product-mix pricing: A) Product-line pricing Companies normally develop product lines rather than single products and introduce price steps. The seller’s task is to establish perceived-quality differences that justify the price differences. B) Optional-feature pricing Many companies offer optional products, features, and services along with their main product. Pricing is a sticky problem, because companies must decide which items to include in the standard price and which to offer as options. C) Captive-product pricing Some products require the use of ancillary or captive products. If the captive product is priced too high in the aftermarket, counterfeiting and substitutes can arise, eroding sales. D) Two-part pricing 1) Service firms often engage in two-part pricing, consisting of a fixed fee plus a variable usage fee. E) By-product pricing 1) The production of certain goods often results in by-products. If the by-products have value to a customer group, they should be priced on their value. F) Product-bundling pricing Sellers often bundle product and features. Pure bundling occurs when a firm only offers its products as a bundle (tied-in sales). In mixed bundling, the seller offers goods both individually and in bundles. When offering a mixed bundle, the seller normally charges less for the bundle than if the items were purchased separately. Some customers will want less than the whole bundle. Marketing Memo: Product-Bundle Pricing Considerations As promotional activity increases on individual items in the bundle, buyers perceive less savings on the bundle and are less apt to pay for the bundle. Research suggests the following guidelines for implementing a bundling strategy (refer to p. 438). CO-BRANDING AND INGREDIENT BRANDING Products are often combined with products from other companies in various ways. A) Co-branding is also called dual branding or brand bundling. Is in which two or more well-known existing brands are combined into a joint product and/or marketed together in some fashion. One form of co-branding is same-company co-branding. Still another form is joint-venture co-branding. Another form of co-branding is called multi-sponsor co-branding. Finally there is retail co-branding where two retail establishments use the same location to maximize sales. The main advantage to co-branding is that a product may be convincingly positioned by virtue of the multiple brands involved. Co-branding can generate greater sales from the existing target market as well as open additional opportunities with new consumers and channels. Co-branding can also reduce the cost of product introduction because two well-known images are combined, accelerating potential adoption. I) The potential disadvantages of co-branding are: The risks and lack of control from becoming aligned with another brand in the minds of consumers. Consumer expectations about the level of involvement and commitment with co-brands are likely to be high, so unsatisfactory performance could have negative repercussions for the brands involved. Risk of overexposure if the other brand has entered into a number of cobranding arrangements. It may also result in a lack of focus on existing brands. J) For co-branding to succeed, the two brands separately must have brand equity— adequate brand awareness and a sufficiently positive brand image. The most important requirement is that there is a logical fit between the two brands to maximize the advantages of each while minimizing disadvantages. There must be the right kind of fit in values, capabilities, and goals and an appropriate balance of brand equity. Ingredient Branding Ingredient branding is a special case of co-branding. It creates brand equity for materials, components, or parts that are necessarily contained within other branded products. An interesting take on ingredient branding is “self-branding” in which companies advertise and even trademark their own branded ingredients. Ingredient brands attempt to create sufficient awareness and preference for their product such that consumers will not buy a “host” product that does not contain the ingredient. What are the requirements for successful ingredient branding? 1. Consumers must perceive that the ingredient matters 2. Consumers must be convinced that not all ingredient brands are the same 3. A distinctive symbol or logo must clearly signal to consumers 4. A coordinated “pull” and “push” program must help consumers understand the importance and advantages of the branded ingredient. PACKAGING, LABELING, WARRANTIES, AND GUARANTEES Many marketers have called packaging a fifth P, along with price, product, place, and promotion. Warranties and guarantees can also be an important part of the product strategy and often appear on the package. Packaging Packaging includes all the activities of designing and producing the container for a product. A good package draws the consumer in and encourages product choice. In effect, they can act as “five-second commercials” for the product. Various factors have contributed to the growing use of packaging as a marketing tool: Self-service Consumer affluence Company and brand image Innovation opportunity Protecting intellectual property rights D) Packaging must achieve a number of objectives: Identify the brand. Convey descriptive and persuasive information. Facilitate product transportation and protection. Assist at-home storage. Aid product consumption. To achieve the marketing objectives and satisfy consumers’ desires, the aesthetic and functional components of packaging must be chosen correctly. Aesthetic considerations relate to a package’s size and shape, material, color, text, and graphics. Table 12.3 summarizes the beliefs of some visual marketing experts about its role. Functionally, structural design is crucial. The packaging elements must harmonize with each other and with pricing, advertising, and other parts of the marketing program. After packaging is designed, it must be tested. Engineering tests are conducted to ensure that the package stands up under normal conditions. Visual tests are used to ensure that the script is legible and the colors harmonious. Dealer tests are performed to ensure that dealers find the packages attractive and easy to handle. Consumer tests ensure favorable consumer response. LABELING The label may be a simple tag attached to the product or an elaborately designed graphic that is part of the package. The label might carry only the brand name or a great deal of information. Even if the seller prefers a simple label, the law may require additional information. A) Labels perform several functions: The label identifies the product or brand The label might also grade the product The label might describe the product Finally, the label might promote the product through attractive graphics C) Labels eventually need freshening up. As Asian countries develop, they are likely to embrace stricter labeling standards. Additional labeling laws may require: Open dating Unit pricing Grade labeling Percentage labeling WARRANTIES AND GUARANTEES All sellers are legally responsible for fulfilling a buyer’s normal or reasonable expectations. Warranties are formal statements of expected product performance by the manufacturer. Warranties, whether expressed or implied are legally enforceable. Many sellers offer either general guarantees or specific guarantees. A company can promise general or complete satisfaction without being more specific: “If you are not satisfied for any reason, return for replacement, exchange, or refund.” Guarantees reduce the buyer’s perceived risk. They suggest that the product is of high quality and that the company and its service performance are dependable. They can be especially helpful when the company or product is not well known or when the product’s quality is superior to that of competitors. Instructor Manual for Marketing Management: A South Asian Perspective Philip Kotler, Kevin Lane Keller, Abraham Koshy, Mithileshwar Jha 9789810687977, 9780132102926