CH-11 Developing and Managing Goods and Services – Foundations of Marketing : Book Guide

Chapter 11 Developing and Managing Goods and Services TEACHING RESOURCES QUICK REFERENCE GUIDE Resource Location Purpose and Perspective IRM, p. 262 Lecture Outline IRM, p. 263 Discussion Starters IRM, p. 276 Class Exercises IRM, p. 278 Chapter Quiz IRM, p. 280 Semester Project IRM, p. 281 Answers to Issues for Discussion and Review IRM, p. 282 Answers to Marketing Applications IRM, p. 288 Answers to Internet Exercise IRM, p. 290 Answers to Developing Your Marketing Plan IRM, p. 291 Comments on Video Case 11 IRM, p. 292 PowerPoint Slides Instructor’s website Note: Additional resources may be found on the accompanying student and instructor websites at www.cengagebrain.com. PURPOSE AND PERSPECTIVE This chapter examines several ways to improve an organization’s product mix, including managing existing products through line extensions and product modifications. It also examines how companies develop new products, from idea generation to commercialization. After development of new products, the process of product differentiation through quality, design, and support services is discussed. It also discusses when a product should be deleted from the product mix and how this sometimes improves the product mix. It also covers product positioning and repositioning. It addresses the unique characteristics of services that differentiate them from goods—intangibility, inseparability of production and consumption, perishability, heterogeneity, client-based relationships, and customer contact. Next, it presents issues associated with developing marketing mixes for services. Finally, it explores how organizational structures are used in managing products, including the product manager, market manager, and venture team approaches. LECTURE OUTLINE I. Managing Existing Products A. By assessing the composition of the current product mix, a marketer can identify weaknesses and gaps in its existing product mix. 1. This analysis then can lead to improvement of the product mix through line extension and product modification. B. Line Extensions 1. A line extension is the development of a product closely related to one or more products in the existing product line but designed specifically to meet somewhat different customer needs. 2. Many of the so-called new products introduced each year are, in fact, line extensions; line extensions are more common than new products because they are a less expensive, lower-risk alternative for increasing sales. 3. A line extension may focus on a different market segment or may be an attempt to increase sales within the same market segment by more precisely satisfying the needs of people in that segment. C. Product Modifications 1. Product modification means changing one or more characteristics of a product; it differs from a line extension because the original product does not remain in the line. 2. Like line extensions, product modifications entail less risk than developing new products. 3. Product modification can improve a firm’s product mix, but only under certain conditions: a. The product must be modifiable. b. Customers must be able to perceive a modification has been made. c. The modification should make the product more consistent with customers’ desires so that it provides greater satisfaction. 4. One drawback to modifying a successful product is that the consumer who had experience with the original version of the product may view a modified version as a riskier purchase. 5. There are three major ways to modify products—quality, functional, and aesthetic modifications. 6. Quality Modifications a. Quality modifications are changes relating to a product’s dependability and durability; the changes usually are executed by altering the materials or the production process. b. Reducing a product’s quality may allow an organization to lower its price and direct the item at a different target market. c. In contrast, increasing the quality of a product may enable a company to charge a higher price by creating customer loyalty and lowering customer sensitivity to price. d. Some firms are finding ways to increase quality while reducing costs. 7. Functional Modifications a. Changes that affect a product’s versatility, effectiveness, convenience, or safety are called functional modifications; they usually require that the product be redesigned. b. Such modifications can make a product useful to more people and enlarge its market. c. Functional modifications can help an organization achieve and maintain a progressive image. d. Such modifications are sometimes made to reduce the possibility of product liability lawsuits, such as adding a kill switch on a machine. 8. Aesthetic Modifications a. Aesthetic modifications change the sensory appeal of a product by altering its taste, texture, sound, smell, or appearance. b. Aesthetic modifications attempt to minimize the amount of illegal product counterfeiting that occurs through constant change in design and quality. c. Aesthetic modifications can help a firm differentiate its product from competing brands and thus gain a sizable market share. d. The major drawback in using aesthetic modifications is that their value is determined subjectively; although a firm may strive to improve the product’s sensory appeal, customers actually may find the modified product less attractive. II. Developing New Products A. A firm develops new products as a means of enhancing its product mix and adding depth to a product line. 1. Developing and introducing new products is frequently expensive and risky. 2. However, failure to introduce new products is also risky. 3. The term new product can have more than one meaning. a. A genuinely new product offers innovative benefits. b. However, products that are different and distinctly better are often viewed as new. c. A radically new product involves a complex developmental process, including an extensive business analysis to determine the potential for success. d. A new product can also be a product that a given firm has not marketed previously, although similar products have been available from other companies. e. A product can be viewed as new when it is brought to one or more markets from another market. B. Before a product is introduced, it goes through the seven-phases of the new-product development process—idea generation, screening, concept testing, business analysis, product development, test marketing, and commercialization. C. A product may be dropped at any stage of development. 1. Idea Generation a. Businesses and other organizations seek product ideas that will help them to achieve their objectives; this activity is idea generation.. b. New-product ideas may come from internal sources—marketing managers, researchers, etc. (1) Brainstorming and incentives or rewards for good ideas are typical intrafirm devices for stimulating development of ideas. c. New-product ideas also may arise from sources outside the firm, such as customers, competitors, etc. (1) As more global consumers become interconnected through the Internet, marketers have the chance to tap into consumer ideas by building online communities with them. 2. Screening a. In the process of screening, the ideas with the greatest potential are selected for further review. b. During screening, product ideas are analyzed to determine whether or not they match the organization’s objectives and resources. c. If a product idea results in a product similar to the firm’s existing products, marketers must assess the degree to which the new product could cannibalize the sales of current products. d. The company’s overall abilities to produce and market the product are also analyzed. e. Other aspects of an idea to be weighed are the nature and wants of buyers and possible environmental changes. f. Most new product ideas are rejected during the screening phase. 3. Concept Testing a. In concept testing, a small sample of potential buyers is presented with a product idea through a written or oral description to determine their attitudes and initial buying intentions regarding the product. b. For a single product idea, an organization can test one or several concepts of the same product. c. Concept testing is a low-cost procedure that allows a company to determine customers’ initial reactions to a product idea before it invests considerable resources in research and development. d. During concept testing, the concept is described briefly, and then a series of questions is presented. (1) The questions vary considerably depending on the type of product being tested. 4. Business Analysis a. During the business analysis stage, the product idea is evaluated to determine its potential contribution to the firm’s sales, costs, and profits. b. In the course of a business analysis, evaluators ask various questions. c. It is crucial that a firm determines whether its research, development, engineering, and production capabilities are adequate to develop the product; whether new facilities must be constructed, how quickly they can be built, and how much they will cost; and whether the necessary financing for development and commercialization is on hand or is obtainable based upon terms consistent with a favorable return on investment. d. In the business analysis stage, firms seek market information. (1) The results of consumer polls, along with secondary data, supply the specifics needed to estimate potential sales, costs, and profits. (2) For many products in this stage (when they are still just product ideas), forecasting sales accurately is difficult; this is especially true for innovative and completely new products. (3) Organizations sometimes employ breakeven analysis to determine how many units they would have to sell to begin making a profit. 5. Product Development a. Product development is the phase in which the organization determines if it is technically feasible to produce the product and if it can be produced at costs low enough to make the final price reasonable. (1) To test its acceptability, the idea or concept is converted into a prototype, or working model. (2) The prototype should reveal tangible and intangible attributes associated with the product in consumers’ minds. (3) The product’s design, mechanical features, and intangible aspects must be linked to wants in the marketplace. (4) Through marketing research and concept testing, product attributes that are important to buyers are identified. b. After a prototype is developed, its overall functioning must be tested. (1) Its performance, safety, convenience, and other functional qualities are tested both in a laboratory and in the field. (2) Functional testing should be rigorous and lengthy enough to test the product thoroughly. (3) Manufacturing issues that come to light at this stage may require adjustments. c. A crucial question that arises during product development is how much quality to build into the product. (1) Higher quality often calls for better materials and more expensive processing, which increase production costs and, ultimately, the product’s price. (2) In determining the specific level of quality, a marketer must ascertain approximately what price the target market views as acceptable. (3) In addition, a marketer usually tries to set a quality level consistent with that of the firm’s other products. d. The development phase of a new product is frequently lengthy and expensive; thus a relatively small number of product ideas are put into development. (1) If the product appears sufficiently successful during this stage to merit test marketing, then, during the latter part of the development stage, marketers begin to make decisions regarding branding, packaging, labeling, pricing, and promotion for use in the test marketing stage. 6. Test Marketing a. A limited introduction of a product in geographic areas chosen to represent the intended market is called test marketing. b. The aim of test marketing is to determine the extent to which potential customers will buy the product. c. Test marketing is not an extension of the development stage; it is a sample launching of the entire marketing mix. d. Test marketing should be conducted only after the product has gone through development and initial plans regarding the other marketing mix variables. e. Companies use test marketing to lessen the risk of product failure. f. Test marketing provides several benefits. (1) It lets marketers expose a product in a natural marketing environment to measure its sales performance. (2) The company can strive to identify weaknesses in the product or in other parts of the marketing mix. (3) Test marketing also allows marketers to experiment with variations in advertising, pricing, and packaging in different test areas and to measure the extent of brand awareness, brand switching, and repeat purchases resulting from these alterations in the marketing mix. g. Selection of appropriate test areas is very important because the validity of test market results depends heavily on selecting test sites that provide accurate representations of the intended target market. (1) The criteria used for choosing test cities depend upon the product’s attributes, the target market’s characteristics, and the firm’s objectives and resources. h. Test marketing is not without risks. (1) It is expensive, and competitors may try to interfere. (2) A competitor may attempt to “jam” the test program by increasing its own advertising or promotions, lowering prices, and offering special incentives, all to combat the recognition and purchase of the new brand. (3) Any such tactics can invalidate test results. (4) Sometimes, too, competitors copy the product in the testing stage and rush to introduce a similar product. i. Not all products that are test marketed are launched. (1) At times, problems discovered during test marketing cannot be resolved. 7. Commercialization a. During the commercialization phase, plans for full-scale manufacturing and marketing must be refined and settled and budgets for the project prepared. b. Early in the commercialization phase, marketing management analyzes the results of test marketing to find out what changes in the marketing mix are needed before the product is introduced. c. During the early part of this stage, marketers not only must gear up for larger-scale production but also must make decisions about warranties, repairs, and replacement parts. d. The type of warranty a firm provides can be a critical issue for buyers, especially for expensive, technically complex goods such as appliances or frequently used items. e. The product enters the market during the commercialization phase. (1) When introducing a product, a firm may spend enormous sums for advertising, personal selling, and other types of promotion, as well as for plant and equipment. f. Products are not usually launched nationwide overnight but are introduced through a process called a rollout. (1) Through a rollout, a product is introduced in stages, starting in one geographic area and gradually expanding into adjacent areas. (2) Gradual introduction reduces the risk of introducing a new product and provides additional benefits. (3) Gradual product introductions do not always occur state by state; other geographic combinations, such as groups of counties that cross state borders, are sometimes used. (4) Products destined for multinational markets also may be rolled out one country or region at a time. g. Gradual product introduction is desirable for several reasons. (1) It reduces the risks of introducing a new product; if the product fails, the firm will experience smaller losses if it introduced the item in only a few geographic areas than if it marketed the product nationally. (2) Gradual introduction allows for fine-tuning of the marketing mix to better satisfy target customers. h. Despite the good reasons for introducing a product gradually, marketers realize that this approach creates some competitive problems. (1) A gradual introduction allows competitors to observe what the firm is doing and to monitor results, just as the firm’s own marketers are doing. III. Product Differentiation through Quality, Design, and Support Services A. Product differentiation is the process of creating and designing products so that customers perceive them as different from competing products. 1. Customer perception is critical in differentiating products. 2. Perceived differences might include quality, features, styling, price, and image. 3. A crucial element used to differentiate one product from another is the brand. 4. Three aspects of product differentiation that companies must consider when creating and offering products for sale are product quality, product design and features, and product support services. B. Product Quality 1. Quality refers to the overall characteristics of a product that allow it to perform as expected in satisfying customer needs. a. Quality usually means different things to different customers. 2. The concept of quality also varies between consumer and business markets. a. For business markets, technical suitability, ease of repair, and company reputation are important characteristics. 3. One important dimension of quality is level of quality, the amount of quality a product possesses. b. The concept is a relative one because the quality level of one product is difficult to describe unless it is compared with that of other products. 4. A second important dimension is consistency. a. Consistency of quality refers to the degree to which a product has the same level of quality over time. B. Product Design and Features 1. Product design refers to how a product is conceived, planned, and produced; it involves the total sum of all the product’s physical characteristics. 2. One component of design is styling, or the physical appearance of the product; most consumers seek products that both look good and function well. 3. Product features are specific design characteristics that allow a product to perform certain tasks. a. By adding or subtracting features, a company can differentiate its products from those of the competition. b. Product features also can be used to differentiate products within the same company. c. In general, the more features a product has, the higher is its price, and often, the higher is the perceived quality. 4. For a brand to have a sustainable competitive advantage, marketers must determine the product designs and features that customers desire. a. Information from marketing research efforts and from databases can help in assessing customers’ product design and feature preferences. C. Product Support Services 1. Many companies differentiate their product offerings by providing support services. a. Usually referred to as customer services, these services include any human or mechanical efforts or activities a company provides that add value to a product. b. Examples of customer services include delivery and installation, financing arrangements, customer training, warranties and guarantees, repairs, etc. 2. Whether as a major or minor part of the total product offering, all marketers of goods sell customer services. a. Providing good customer service may be the only way that a company can differentiate its products when all products in a market have essentially the same quality, design, and features. b. The level of customer service a company provides can profoundly affect customer satisfaction. IV. Product Positioning and Repositioning A. Product positioning refers to the decisions and activities intended to create and maintain a certain concept of the firm’s product (relative to competitive brands) in customers’ minds. B. When marketers introduce a product, they try to position it so that it appears to have the characteristics that the target market most desires. C. Perceptual Mapping 1. A product’s position is the result of customers’ perceptions of the product’s attributes relative to those of competitive brands. 2. To avoid a continuous reevaluation of numerous products, buyers tend to group, or “position,” products in their minds to simplify buying decisions. 3. Rather than allowing customers to position products independently, marketers often try to influence and shape consumers’ concepts or perceptions of products through advertising. 4. Marketers sometimes analyze product positions by developing perceptual maps (Figure 11.3). a. Perceptual maps are created by questioning a sample of consumers about their perceptions of products, brands, and organizations with respect to two or more dimensions. b. To develop a perceptual map, respondents would be asked about their preferences for product features to establish “ideal points” or “ideal clusters,” which represent a consensus about a specific group of customers’ desires in terms of product features. c. Then marketers can see how their brand is perceived compared with the ideal points. D. Bases for Positioning 1. A firm can position a product to compete head-on with another brand. a. Head-to-head competition may be a marketer’s positioning objective if the product’s performance characteristics are at least equal to those of competitive brands and if the product is priced lower. b. Head-to-head positioning may be appropriate even when the price is higher if the product’s performance characteristics are superior. 2. Positioning to avoid competition may be best when the product’s performance characteristics do not differ significantly from competing brands. a. Positioning a brand to avoid competition may also be appropriate when that brand has unique characteristics that are important to some buyers. b. Avoiding competition is critical when a firm introduces a brand into a market in which the company already has one or more brands. (1) Marketers usually want to avoid cannibalizing sales of their existing brands, unless the new brand generates substantially larger profits. 3. A product’s position can be based on specific product attributes or features. a. Style, shape, construction, and color help to create the image and the appeal. b. If buyers can easily identify the benefits, they are more likely to purchase the product. c. When the new product does not offer certain preferred attributes, there is room for another new product. 4. Other bases for product positioning include price, quality level, and benefits provided by the product. 5. The target market can be a positioning basis caused by marketing; this type of positioning relies heavily on promoting to the types of people who use the product. E. Repositioning 1. Evaluating the positions of existing products is important because a brand’s market share and profitability may be strengthened by product repositioning. 2. 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 ensure a favorable position for the new brand. 3. Repositioning can be accomplished by physically changing the product, its price, or its distribution. a. Rather than making any of these changes, marketers sometimes reposition a product by changing its image through promotional efforts. 4. A marketer may reposition a product by aiming it at a different target market. V. Product Deletion A. Product deletion is the process of eliminating a product from the product mix, usually because it no longer satisfies a sufficient number of customers. 1. A declining product reduces an organization’s profitability and drains resources that could be used to modify other products or develop new ones. 2. Most organizations find it difficult to delete a product. a. A decision to drop a product may be opposed by managers and other employees who believe that the product is necessary to the product mix. b. Salespeople who still have some loyal customers are especially upset when a product is dropped. c. Considerable resources and effort are sometimes spent trying to change a slipping product’s marketing mix to improve its sales and thus avoid having to eliminate it. 3. Some organizations delete products only after the products have become heavy financial burdens. a. A better approach is some form of systematic review in which each product is evaluated periodically to determine its impact on the overall effectiveness of the firm’s product mix. B. There are three basic ways to delete a product—phase it out, run it out, or drop it immediately (Figure 11.4). 1. A phase-out allows the product to decline without a change in the marketing strategy; no attempt is made to give the product new life. 2. A run-out exploits any strengths left in the product; intensifying marketing efforts in core markets or eliminating some marketing expenditures, such as advertising, may cause a sudden jump in profits. 3. An immediate drop of an unprofitable product is the best strategy when losses are too great to prolong the product’s life. VI. Managing Services as Products A. Nature and Importance of Services 1. All products—whether goods, services, or ideas—are to some extent intangible. 2. Services are usually provided through the application of human and/or mechanical efforts directed at people or objects. 3. The increasing importance of services in the U.S. economy has led many people to call the United States the world’s first service economy. 4. In most developed countries, services account for about 70 percent of the gross domestic product (GDP). 5. A practice that has gained popularity among a number of U.S. businesses is home sourcing, in which customer-contact jobs, especially at call centers, are outsourced into the homes of workers. B. Characteristics of Services 1. Intangibility a. Intangibility means a service is not physical and therefore cannot be touched. b. Services cannot be physically possessed. c. Figure 11.5 depicts a tangibility continuum from pure goods (tangible) to pure services (intangible). 2. Inseparability of Production and Consumption a. Another important characteristic of services that creates challenges for marketers is inseparability, which refers to the fact that the production of a service cannot be separated from its consumption by customers. b. Services are often produced, sold, and consumed at the same time. c. The manufacturer of the good may never see an actual customer; customers, however, often must be present at the production of a service and cannot take the service home. d. Because of inseparability, customers not only want a specific type of service but expect it to be provided in a specific way by a specific individual. e. Training programs for employees in the service sector should stress the importance of the customer in the service experience so that employees understand that the shared responsibility exists. 3. Perishability a. Services are characterized by perishability because the unused service capacity of one time period cannot be stored for future use. b. Service marketers cannot handle the supply-demand problems through production scheduling and inventory techniques. (1) They can, however, plan for demand which fluctuates according to day of the week, time of day, or season. 4. Heterogeneity a. Services delivered by people are susceptible to heterogeneity, or variation in quality. b. Quality of manufactured goods is easier to control with standardized procedures, and mistakes are easier to correct. c. Because of the nature of human behavior, however, it is very difficult for service providers to maintain a consistent quality of service delivery. d. The variation in quality can occur from one organization to another, from one service person to another within the same facility, and from one service facility to another within the same organization. e. Heterogeneity usually increases as the degree of labor intensiveness increases. f. People-based are often prone to fluctuations in quality from one time period to the next. 5. Client-Based Relationships a. The success of many services depends on creating and maintaining client-based relationships, interactions that result in satisfied customers who use a service repeatedly over time. b. Some service providers call their customers clients and develop long-term relationships with them. (1) For such service providers, it is not enough to attract customers; they are successful only to the degree to which they can maintain a group of clients who use their services on an ongoing basis. (2) The service provider must take steps to build trust, demonstrate customer commitment, and satisfy customers so well that they become very loyal to the provider and unlikely to switch to competitors. 6. Customer Contact a. Customer contact refers to the level of interaction between the service provider and the customer that is necessary to deliver the service. b. Employees of high-contact service providers are part of a very important ingredient in creating satisfied customers. c. A fundamental precept of customer contact is that satisfied employees lead to satisfied customers. d. To minimize the problems that customer contact can create, service organizations must take steps to understand and meet the needs of employees by training them adequately, empowering them to make more decisions, and rewarding them for customer-oriented behavior. C. Creating Marketing Mixes for Services 1. The characteristics of services create a number of challenges for service marketers. a. These challenges are especially evident in the development and management of marketing mixes for services. b. Although such mixes contain the four major marketing-mix variables—product, distribution, promotion, and price—the characteristics of services require that marketers consider additional issues. 2. Development of Services a. A service offered by an organization is generally a package, or bundle, of services consisting of a core service and one or more supplementary services. b. A core service is the basic service experience or commodity a customer expects to receive. c. A supplementary service is a supportive service related to the core service and is used to differentiate the service bundle from that of competitors. d. Heterogeneity results in variability in service quality and makes it difficult to standardize services. (1) However, heterogeneity provides one advantage to service marketers—it allows them to customize their services to match the specific needs of individual customers. e. Customized services can be expensive for both provider and customer, and some service marketers therefore face a dilemma—how to provide service at an acceptable level of quality in an efficient and economic manner and still satisfy individual customer needs. (1) To cope with this problem, some service marketers offer standardized packages. f. The characteristic of intangibility makes it difficult for customers to evaluate a service prior to purchase. (1) The customer is forced to place some degree of trust in the service provider to perform the service in a manner that meets or exceeds those promises. g. The inseparability of production and consumption and the level of customer contact also influence the development and management of services. (1) The fact that customers are present during the production of a service means that other customers can affect the outcome of the service. 2. Pricing of Services a. Services should be priced with consumer price sensitivity, the nature of the transaction, and its costs in mind. b. Prices of services can be established on several different bases. (1) The prices of some services are based on the performance of specific tasks. (2) Other service prices are based on time. (3) Some services use demand-based pricing; when demand for the service is high, the price is also high; when demand for a service is low, so is the price. (a) The perishability of services means that when demand is low, the unused capacity cannot be stored and is therefore lost forever. (b) Some services are very time-sensitive because a significant number of customers desire the service at a particular time; this point in time is called peak demand. (4) When services are offered to customers in a bundle, marketers must decide whether to offer the services at one price, price them separately, or use a combination of the two methods. (a) Some service providers offer a one-price option for a specific bundle of services and make add-on bundles available at additional charges. c. Because of the intangible nature of services, customers rely heavily at times on price as an indicator of quality. (1) If customers perceive the available services in a service category as being similar in quality, and if the quality of such services is difficult to judge even after these services are purchased, customers may seek out the lowest-priced provider. 3. Distribution of Services a. Marketers deliver services in various ways. (1) In some instances, customers go to a service provider’s facility. (2) Some services are provided at the customer’s home or business. (3) Some services are delivered primarily at “arm’s length,” meaning that no face-to-face contact occurs between the customer and the service provider. b. Marketing channels for services are usually short and direct, meaning that the producer delivers the service directly to the end user. (1) Some services, however, use intermediaries. c. Service providers are less concerned with warehousing and transportation than are goods marketers. (1) They are very concerned, however, about inventory management, especially balancing supply and demand. (2) The service characteristics of inseparability and level of customer contact contribute to the challenges of demand management. (3) In some instances, service marketers use appointments and reservations as approaches for scheduling the delivery of services. (4) To increase the supply of a service, marketers use multiple service sites and also increase the number of contact service providers at each site. d. To make delivery more accessible to customers and to increase the supply of a service, as well as reduce labor costs, some service providers have decreased the use of contact personnel and replaced them with equipment. (1) In other words, they have changed a high-contact service into a low-contact one. 4. Promotion of Services a. Because it may not be possible to depict the actual performance of a service in an advertisement or to display it in a store, explaining a service to customers can be a difficult task. b. Promotion of services typically includes tangible cues that symbolize the service. (1) Although the symbols have nothing to do with the actual services, they make it much easier for customers to understand the intangible attributes associated with the service. (2) To make a service more tangible, advertisements for services often show pictures of facilities, equipment, and service personnel. c. Compared with goods marketers, service providers are more likely to promote price, guarantees, performance documentation, availability, and training and certification of contact personnel. (1) When preparing advertisements, service marketers are careful to use concrete, specific language to help make services more tangible in the minds of customers. (2) Service companies are also careful not to promise too much regarding their services so that customer expectations may do not rise to unattainable levels. d. Through their actions, service contact personnel can be directly or indirectly involved in the personal selling of services. e. Because of the heterogeneity and intangibility of services, word-of-mouth communication is important in service promotion. VII. Organizing to Develop and Manage Products A. Managing products is a complex task; often, the traditional functional form of an organization does not fit a company’s needs. 1. In this case, management must find an organizational approach that accomplishes the tasks necessary to develop and manage products. 2. Alternatives to functional organization include the product or brand manager approach and the venture team approach. B. A product manager is responsible for a product, a product line, or several distinct products that make up an interrelated group within a multiproduct organization. 1. A brand manager is responsible for a single brand. 2. Both product and brand managers operate cross-functionally to coordinate the activities, information, and strategies involved in marketing an assigned product. 3. The product or brand manager approach to organization is used by many large, multiple-product companies. C. A venture team creates entirely new products that may be aimed at new markets. 1. Unlike a product or market manager, a venture team is responsible for all aspects of developing a product. 2. In working outside established divisions, venture teams have greater flexibility to apply inventive approaches to develop new products that can take advantage of opportunities in highly segmented markets. DISCUSSION STARTERS Discussion Starter 1: Product Line Extensions Dr. Pepper created a product line extension called Dr. Pepper Cherry. Below is a YouTube clip incorporating Gene Simmons (from Kiss) to promote this new product. Ask students to identify other product line extensions that have proven to be successful since the turn of the millennium. http://www.youtube.com/watch?v=W_6bPjB5lD8 Discussion Starter 2: New Product Ideas ASK: What two groups of people know the most about your products and services? The answer is your employees and customers. ASK: If you are an online content provider, who knows the most about your service and what consumers want from the site? The answer is the providers of the content. YouTube realized the best information about other YouTube products and services was offered by the people who were most successful at generating content for specific audiences. YouTube brought together a panel of these content providers and discussed what made them successful and where they thought YouTube might go in the future. (Special Note: This clip is rather lengthy at 17 minutes, but does a good job promoting new product ideas.) http://www.youtube.com/watch?v=p70jVmR24eE Discussion Starter 3: Making the Most of Intangibility ASK: How many of you have ever heard of a town called Winslow, Arizona? Most of the students have probably never heard of Winslow, but it has a claim to fame. It was mentioned in the Eagles song, “Take It Easy,” which contains the line: “I was standin’ on the corner in Winslow, Arizona….” ASK: How could Winslow Arizona capitalize on this brush with fame? Winslow, which is about 100 miles from the Grand Canyon, was located on the main road to California, Route 66. In the 1970s an interstate highway was built, which did not run through Winslow. Winslow nearly became a ghost town, until 1997 when the city decided it was time to capitalize on its one intangible asset: “Take It Easy.” In 1999 Standin’ on the Corner Park was officially opened. Billboards were installed, inviting travelers to have their picture taken in Standin’ on the Corner Park with a girl in a flatbed Ford, just as the song lyrics suggested. Winslow was also lucky to be located on the now legendary Route 66, which recently has experienced a resurgence of interest. Discussion Starter 4: Concept Testing ASK: How do organizations know whether or not consumers will respond to a new concept? As the textbook states, for new products there is a tool called concept testing. Concepts are put before consumers to gauge their reactions. This same technique is used to test advertisements. When an organization is looking for a new concept to reposition or strengthen an existing brand, a concept ad is developed and shown to consumers so their response can be gauged. The following link is a concept ad clip for Mr. Clean. Notice how the product is positioned and how the ad splices animated with live content. The animation will be replaced by live actors if consumers like the concept and feel it reinforces the brand values. (Special Note: This 30 second clip concisely communicates to students a nice example of a nice product concept test ad.) http://www.youtube.com/watch?v=aQZ2BaK4K-c CLASS EXERCISES Class Exercise 1: Product Positioning and Product Categories The goal of this exercise is to help students understand product positioning—that is, customers’ perceptions of a product’s attributes—by considering the position of several products. Prompt for students: Describe the following brands’ relative positioning in their product categories: Question Answers 1. Volvo automobiles safe 2. Keds athletic shoes inexpensive, simple comfort 3. Mont Blanc writing instruments more expensive 4. Diet Coke superior taste 5. Hampton Inn for business travel 6. Dom Perignon champagne premium taste 7. Sony television sets better quality 8. Avis Rent-A-Car more responsive 9. Just For Men hair color for men only 10. Subway sandwiches alternative fast food Class Exercise 2: Keeping Products Relevant In this chapter, students learned about developing and managing products. In this exercise, they will examine how products remain relevant to consumers. Prompt for students: For each of the following product categories, you are to: (1) list a brand, (2) list the products stage within the product life cycle, (3) list any product or brand extensions familiar to you, and (4) brainstorm possible next-generation products for this brand. 1. MP3 players 2. Bicycles 3. Frozen pizza Answers: Students’ answers will vary based on the brands that they choose. They may want to answer the questions in a table to make comparisons easier. Class Exercise 3: New Product Concept In this exercise, students will examine the process of devising a new product concept for an established product. Step 1: Backpacks have been used without innovation for decades. List features common to all backpacks. Step 2: List known innovations in backpack technology. How did these innovations improve the backpack’s functionality or user enjoyment? Step 3: Brainstorm a list of the common complaints associated with backpacks. Brainstorm a list of the desirable features. Step 4: Design a new backpack. What features did you include? How do these features add value to the backpack user? CHAPTER QUIZ 1. Product ideas are analyzed to determine whether they match the company's objectives and resources during the __________ phase of new-product development. a. concept testing b. idea generation c. business analysis d. product development e. screening 2. The expectation that a bean burrito at one Taco Bell will be the same as a bean burrito at another Taco Bell several weeks later demonstrates a. level of quality. b. customer service. c. consistency of quality. d. product differentiation. e. standardization. 3. An important aspect of many products such as clothing, furniture, shoes, and cars is their physical appearance or a. features. b. product design. c. positioning. d. aesthetics. e. styling. 4. A phase out approach can be best described as a. allowing the product to decline without a change in the marketing strategy. b. exploiting any strengths left in the product. c. immediately dropping the product from the product mix. d. intensifying marketing efforts in core markets. e. stopping production to get rid of material surplus. Answers to Chapter Quiz: 1. e; 2. c; 3. e; 4. e. SEMESTER PROJECT In the last Semester Project exercise, you were asked to describe your product, you, and to define what value you offer the marketplace. In this exercise, further examine your product, including any product innovations you intend to undertake. Step 1: In thinking about you as a product, were there any aspects of your product you wish to modify? Aesthetics, for example, might transition your look from student to professional employee. How would these modifications impact you, the product? Step 2: New products often include plans for brand extensions or next generation products. Think about what a next generation you, the product, would be like. Would you return to graduate school? Would you change positions within your organization to diversify your experience? How would you position you to introduce the next generation of you, the product? Step 3: Organizations often test market new products before they go to market. This allows developers to identify flaws prior to a full launch. What opportunities are available to test market your product? How would you use these opportunities to better your product? ANSWERS TO ISSUES FOR DISCUSSION AND REVIEW 1. What is a line extension, and how does it differ from a product modification? A line extension is development of a product closely related to existing products in the line, but the product meets different customer needs. A product modification means changing one or more characteristics of a product. A product differentiation differs from a line extension in that the original product does not remain in the line. 2. Compare and contrast the three major approaches to modifying a product. Any product modification changes one or more of a product’s characteristics. The three major ways to modify a product are to alter its quality, function, or aesthetics. Changes affecting a product’s dependability and durability are quality modifications. Functional modifications are those which affect a product’s versatility, effectiveness, convenience, or safety. Quality modifications usually can be made by altering materials or the production process. Functional modifications usually require product redesign. Aesthetic modifications are less tangible than either quality or functional modifications because they change the way a product tastes, sounds, smells, or looks rather than how it actually works. Although consumers usually perceive quality and functional changes as improvements, aesthetic modifications are more subjective and therefore more risky. 3. Identify and briefly explain the seven major phases of the new-product development process. The seven major phases of new-product development are idea generation, screening, concept testing, business analysis, product development, test marketing, and commercialization. Idea generation is the activity in which businesses and other organizations look for product ideas which will help them accomplish their objectives. New product ideas can come from internal sources, such as marketing managers, researchers, sales personnel, engineers, or other organizational personnel. They can also be generated outside the company from customers, competitors, advertising agencies, management consultants, and private research organizations. In the screening phase, products with the greatest potential are selected for further consideration. Product ideas are analyzed to determine whether they fit the organization’s objectives and resources and whether or not the organization can produce and market the product. Concept testing is a low-cost procedure to determine consumers’ initial reaction to a product idea. During concept testing, a small sample of potential buyers is presented with a product idea through a written or oral description to discover their attitudes and initial buying intentions regarding the product. Concept testing is followed by the business analysis phase, in which the product idea is evaluated to determine its potential contribution to the firm’s sales, costs, and profits. Marketers evaluate how well the product fits with the existing product mix, the strength of market demand for the product, the types of environmental and competitive changes to be expected, and how these changes might affect the product’s future sales, costs, and profits. Product development is the phase in which the organization discovers the technical feasibility of producing the product and whether or not it can be produced at costs, resulting in a reasonable final price. The company creates a prototype and then performs laboratory tests on performance, safety, convenience, and other functional qualities. If the tests indicate the product merits test marketing, marketers begin to make decisions regarding branding, packaging, labeling, pricing, and promotion. Test marketing involves a limited introduction of a product in geographic areas chosen to represent the intended market. The goal is to determine the reactions of probable buyers. The last phase of product development is commercialization, the stage in which plans for full-scale manufacturing and marketing are refined and settled, and budgets for the product are prepared. 4. Do small companies that manufacture just a few products need to be concerned about developing and managing products? Why or why not? Any manufacturing firm, regardless of size or number of products, must be concerned about developing and managing products. This may be especially critical to a firm with just a few products, because the firm’s profits (and sales) are derived entirely from this product. To maintain its current position, the firm must continuously seek ways to improve its product and thus remain competitive; otherwise, customers will turn to substitute products which provide similar benefits. Managing the product involves more than product modification; it also includes designing appropriate promotion, pricing, and distribution strategies that are based on an appraisal of environmental factors such as economic, technological, social, consumer, and legal/political forces. 5. Why is product development a cross-functional activity within an organization? That is, why must finance, engineering, manufacturing, and other functional areas be involved? Long-range strategic planning strengthens the firm’s commitment to product development. Such commitment involves various functional areas in the process of commercializing a product idea. To develop the product successfully, an organization typically needs several years and considerable resources (which is a capital budgeting problem). The financial commitment for developing product prototypes, acquiring appropriate production equipment, testing the product in the market, and launching the product may be substantial; thus, the financial function is necessary to obtain needed capital and maintain proper cash flows. Engineering needs to develop the product idea into a product customers want (based on marketing information) and to validate that the organization is capable of producing (production) the product. 6. What is the major purpose of concept testing, and how is it accomplished? Concept testing allows an organization to determine consumers’ initial reactions to a product idea before investing considerable resources in R&D. To determine initial attitudes and buying intentions about a product, marketers present a small sample of potential buyers with the product idea, either in written or oral form. Concept tests consist of a brief description of the concept followed by a series of questions on the product’s attractiveness, benefits, advantages over competitors, price, and possible improvements. Product development personnel use test results to identify those product characteristics potential customers find most valuable. 7. What are the benefits and disadvantages of test marketing? Benefits: • Marketers can expose a product in a natural environment to gauge its sales performance. • Marketers can identify perceived weaknesses in the product or other parts of the mix. • Marketers can experiment with variations in advertising, price, and packaging. • Marketers can measure the extent of brand awareness, brand switching, and repeat purchases, which result in marketing-mix variations. Disadvantages: • Test marketing can be expensive. • Test marketing can delay new product introduction. • Competitors may emerge with similar products as a result of a new product test. • Competitors may skew the results of the marketing measurements by offering sales and promotions or by increasing the advertising on their own current product line. • Test markets may yield erroneous results and cause full-fledged introductions of unsuccessful new products. 8. Why can the process of commercialization take a considerable amount of time? Organizations usually launch a product in stages, beginning in a limited geographic area and gradually expanding to include other areas. Using this process, known as a roll-out, often means taking years to market a product on a national scale. For example, a product may first be marketed in only one city, then in the state in which the city is located, then in adjacent states, and eventually in remaining states. At any time during this process, the company may decide to make changes which slow the operation even more, such as packaging, advertising, or price changes. Gradual product introduction is often necessary because it takes time to establish a system of wholesalers and retailers, to develop a distribution network, and to manufacture the product in required quantities. 9. What is product differentiation, and how can it be achieved? Product differentiation is the process of creating and designing products so customers perceive them differently from competing products. The issue of customer perception is critically important in differentiating products. Product differentiation can be achieved through the use of product quality, product design and features, and product support services. These are areas where companies can focus their attention to create real differences between their products and other companies’ products. In terms of quality, the level and consistency of quality are important. In terms of product design and features, the styling, or physical appearance of the product, or the product features are important. In terms of product support services, customer service is important. 10. Explain how the term quality has been used to differentiate products in the automobile industry in recent years. What are some makes and models of automobiles that come to mind when you hear the terms high quality and poor quality? People have heard the phrase “Quality is Job 1” in commercials for Ford automobiles and references to “commitment to quality” in Chrysler commercials. While the term “quality” has varied definitions, people usually associate high quality with Volvo, Mercedes-Benz, Infiniti, Lexus, Cadillac, or Lincoln and low quality with the ill-fated Yugo. 11. What is product positioning? Under what conditions would head-to-head product positioning be appropriate? When should head-to-head positioning be avoided? Product positioning refers to the decisions and activities intended to create and maintain a certain concept of the firm’s product (relative to competitive brands) in customers’ minds. When marketers introduce a product, they try to position it so that it appears to have the characteristics that the target market most desires. 12. What types of problems does a weak product cause in a product mix? Describe the most effective approach for avoiding such problems. Weak products reduce an organization’s profitability in several ways: • They drain resources which could be used to modify stronger products or develop new ones. • Because fewer marginal products are manufactured, per-unit production costs increase. • The negative feelings customers may develop toward a weak product may be transferred to other company products, thereby reducing sales. The most effective approach for avoiding such problems is to employ a periodic systematic review in which each product is evaluated to determine its value to the organization’s product mix. The review analyzes not only a product’s contribution to current sales, but includes projections of future sales, costs, and profits. It considers the merits of changing the marketing strategy to improve the product’s performance and provides an organization with the information it needs to determine when to delete a product. Once a decision is made to delete a product, a firm can use a phase-out approach, a run-out approach, or can immediately drop the product. 13. How important are services in the U.S. economy? Services are very important to the U.S. economy, leading some people to call the United States the world’s first service economy. In most developed countries, including Germany, Japan, Australia, and Canada, services account for about 70 percent of the gross domestic product (GDP). More than one-half of new businesses are service businesses, and service employment is expected to continue to grow. These industries have also absorbed much of the influx of women and minorities into the workforce. 14. Identify and discuss the major characteristics of services. Services are intangible, inseparable, heterogeneous, and perishable, have client-based relationships, and involve customer contact. Intangibility causes problems, such as impossibility to store, inability to protect through patents, inability to display or readily communicate, and pricing difficulty. Inseparability means the consumer is involved in production, and centralized mass production is difficult. Heterogeneity makes it difficult to standardize or control the quality of the service produced. Perishability means that the service cannot be stockpiled or inventoried. The success of many services depends on creating and maintaining client-based relationships, which result in satisfied customers who use a service repeatedly over time. For most services, there is a high level of customer contact. 15. For each marketing mix element, which service characteristics are most likely to have an impact? For the marketing mix elements of creation, distribution, promotion and pricing, the service characteristics of intangibility, inseparability of production and consumption, perishability, heterogeneity, client-based relationships, and customer contact would relate in these ways. For service development, heterogeneity results in variability in service quality and makes it difficult to standardize service delivery. However, heterogeneity provides one advantage to service marketers, in that they can customize their services to match the specific needs of individual customers. The characteristic of intangibility makes it difficult for customers to evaluate a service prior to purchase. Intangibility requires service marketers like hair stylists to market promises to customers. Marketers employ tangible cues to help assure customers about the quality of the service, such as neat, clean, professional-looking contact personnel. Inseparability of production and consumption and the level of customer contact also influence the development and management of services. The fact that the customers take part in the production of a service means that other customers can affect the outcome of a service. Service marketers attempt to reduce this problem by encouraging customers to cooperate in sharing the responsibility of maintaining an environment that allows all participants to receive the intended benefits of the service. Distribution of services is influenced by the service characteristics of inseparability and level of customer contact. In some instances, service marketers use appointments and reservations as approaches for scheduling the delivery of services. To increase the supply of a service, marketers use multiple service sites and increase the number of service providers at each site. Customer contact can also be a problem, especially when a business changes a high-contact service into a low-contact service. Changes such as this can negatively impact customer service. Promotion of services is influenced by the service characteristic of intangibility because this characteristic results in several promotion-related challenges. Because it may not be possible to depict the actual performance of a service in an advertisement or display in a store, explaining the service to customers can be difficult. This results in promotion of price, guarantees, performance documentation, availability, and use of specific, concrete language. Customer contact can also be affected because service contact people can be directly or indirectly involved in the personal selling of a service. Intangibility makes experiencing a service prior to purchase difficult, making promotion more difficult. Heterogeneity also can make promotion challenging. Pricing of services is affected by the perishability of services. Because services cannot be stored, pricing often fluctuates to account for lack of or too much demand. The inseparability of services is also a concern, leading to bundled services. Marketers must decide when to bundle and when not to bundle services based on customer desires. The intangible nature of services also leaves customers relying heavily at times on price as an indicator of quality. Many customers view higher-priced products as having higher quality. 16. What type of organization might use a venture team to develop new products? What are the advantages and disadvantages of such a team? The venture team approach is appropriate for new products, especially those designed for markets with which the company is unfamiliar. A venture team offers several advantages. The responsibility for all product development remains with a group that develops the product from inception to commercialization. Usually, the organizational chart is horizontal rather than vertical; this cuts across all formal organizational lines. Finally, all functional areas are involved. Disadvantages of the venture team are that it disrupts the formal organizational system and does not offer complete continuity. After the product is developed, team members may return to their functional areas, or they may join a new or existing division to manage the product. ANSWERS TO MARKETING APPLICATIONS 1. A company often test-markets the proposed product in a specific area or location. Suppose you wish to test-market your new revolutionary SuperWax car wax, which requires only one application for a lifetime finish. Where and how would you test-market your new product? The aim of test marketing is to determine the extent to which potential customers will buy the product. It is not an extension of the development stage but a sample launching of the entire marketing mix. Students will have a variety of suggestions for test markets, including geographic areas with more extreme weather conditions to reduce the risk of failure in larger markets. They should keep in mind that they should be testing other elements of the marketing mix, not just the product. 2. Select an organization that you think should reposition itself in the consumer’s eye. Identify where it is currently positioned, and make recommendations for repositioning. Explain and defend your suggestions. Students answer will vary. Students should focus on high-profile products which failed to match up to their expectations in the market. 3. Identify a familiar product that recently was modified, categorize the modification (quality, functional, or aesthetic), and describe how you would have modified it differently. Students’ answers will vary by product. Students should focus on a product that has high-profile modifications, such as the latest iPhone. 4. The characteristics of services affect the development of marketing mixes for services. Choose a specific service and explain how each marketing mix element could be affected by these service characteristics. Services have six basic characteristics—intangibility, inseparability of production and consumption, perishability, heterogeneity, client-based relationships, and customer contact. Students’ answers will vary based on the services they choose. 5. Identify three service organizations you have seen in outdoor, television, or magazine advertising. What symbols do these organizations use to represent their services? What message do the symbols convey to potential customers? Students’ answers will vary, but they should be encouraged to think beyond the obvious answers. 6. Visit a retail store in your area, and ask the manager what products he or she has had to discontinue in the recent past. Find out what factors influenced the decision to delete the product and who was involved in the decision. Ask the manager to identify any products that should be but have not been deleted, and try to ascertain the reason. Students’ answers will vary based on their interviews. Students may also choose to conduct interviews via phone or e-mail if it is more convenient for retail managers. 7. Develop your analytical and communication skills using the Role-Play Exercises Online at www.cengagebrain.com. Students can visit the website and develop their analytical and communication skills. ANSWERS TO INTERNET EXERCISE Merck Merck, a leading global pharmaceutical company, develops, manufactures, and markets a broad range of health-care products. In addition, the firm’s Merck-Medco Managed Care Division manages pharmacy benefits for more than 40 million Americans. The company has established a website to serve as an educational and informational resource for Internet users around the world. To learn more about the company and its research, visit its award-winning site at www.merck.com. 1. What products has Merck developed and introduced recently? Answers will vary depending on Merck’s current products. Look on the Research tab under Pipeline to see what products are currently in development, and check the Newsroom for new product releases. 2. What role does research play in Merck’s success? How does research facilitate new-product development at Merck? Companies such as Merck must invest heavily in research and development in order to ensure that they always have new products in the pipeline. Merck provides the following summary of the importance of the research process: “The process of identifying and developing medicines is long and challenging. It begins by exploring the roots of a disease or condition. Which aspect of a disease should we target, and with what type of molecule? If a candidate molecule proves promising, it then continues through years of rigorous testing and must obtain regulatory approval before it reaches the market. A very small fraction of the candidates that begin evaluation will ultimately survive the tough process of research, development and testing to finally become medicines.” 3. Find Merck’s mission statement. Is Merck’s focus on research consistent with the firm’s mission and values? According to the website, “We have made it our mission to provide innovative, distinctive products and services that save and improve lives, satisfy customer needs and to be recognized as a great place to work.” Research helps the company to meet all of these goals. ANSWERS TO DEVELOPING YOUR MARKETING PLAN The information obtained from these questions should assist you in developing various aspects of your marketing plan found in the Interactive Marketing Plan exercise at www.cengagebrain.com. 1. Identify whether your product will be a modification of an existing one in your product mix or the development of a new product. Students’ answers will vary, but they should remember that product modification means changing one or more characteristics of a product. A product modification differs from a line extension in that the original product does not remain in the line. 2. If the product is an extension of one in your current product mix, determine the type(s) of modifications that will be performed. A product modification is changing one or more characteristics of a product. Students should be wary of making excessive modifications because loyal customers tend to be upset when their product changes too much. 3. Using Figure 11.1 as a guide, discuss how your product idea would move through the stages of new-product development. Examine the idea, using the tests and analyses included in the new-product development process. Answers to this question will vary depending on the product. Students should be aware that all products move through these phases, and therefore they should be prepared to discuss each phase and how it relates to their specific products. 4. Discuss how the management of this product will fit into your current organizational structure. Students’ answers will vary. COMMENTS ON VIDEO CASE 11: DO AXE PRODUCTS MAKE MEN MORE DESIRABLE? 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 18-24 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. Questions for Discussion 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.” 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. 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. Solution Manual for Foundations of Marketing William M. Pride, O. C. Ferrell 9781305361867, 9781305405769, 9780357033760