Chapter 5

1. Chapter 5 New Product Development, Management, and Strategy

2. Chapter Outline • Product Strategy in Business Marketing • Product Lines Defined • Business New Product Development • Organization of the New Product Effort • Product Life-Cycle Analysis • Determinants of the Product Mix • The Product Adoption–Diffusion Process • Product Portfolio Classification, Analysis, and Strategy • Product Deletion Strategy • Marketing of Business Services • Important Characteristics of Business Services • Business Service Marketing—Challenges and Opportunities

3. Product Lines Defined • Proprietary or catalog:Standard products offered to many customers and usually inventoried in anticipation of sales orders. For example, the DoAll Company keeps a large inventory of model No. C916A Band Saws to ensure quick delivery to customers. • Custom-built:Different variations of accessories and options to complement proprietary or catalog products offered. For example, the DoAll company fills a request from a major company for a custom, made-to-order saw with a larger motor size, larger table size, and automatic indexing. • Custom-designed: Products designed for (and usually only for) a particular user. For example, DoAll designed a unique band saw with a custom-fixtured table and remote-control operation for U.S. Army to use to cut up live ammunition. • Industrial services: Intangibles, i.e., maintenance, machine repair, consulting. For example, DoAll provides a saw and coolant specialist who makes courtesy inspections at customers’ plants to assist in using DoAll in product applications.

4. Custom Product Versus Proprietary Standard Line Manufacturers • Custom: BMW designs a windshield washer fluid container for their new model and sends part prints to a custom plastics component manufacturer. Manufacturer must build production equipment but BMW owns molding dies and rights to product. Supplier sales build relationship, work with customer on design, finalize terms of sale. • Standard line: BMW picks a standard wheel bearing for its new model and orders it directly from manufacturer. Manufacturer sells same wheel bearing to others. Supplier sales build relationship, work with customer on application, finalize terms of sale.

5. S1 S5 S6 S25 S3 S4 S8 S7 S9 S2 S1 S2 S3 S4 SellingStrategy Varies by Type of Relationship Customerpurchases from many suppliers. Customer Customer Customer purchases from bid list of a few suppliers. Customer purchases from one supplier for that product category. S1 Customer

6. Typical Organization Chart Showing Sales Reporting Relationships President VP Marketing VP Engineering VP Mfg. VPAcct. Marketing Mgr. Sales Mgr. Product Development Mgr. Customer Service Mgr.

7. Does R&D Believe in the Marketing Concept? • It may depend on how long ago researchers graduated from college. Within past five years, some technical schools have begun teaching importance of studying customer’s needs as a first step in design process—following tenets of TQM. • Still, most technical departments aren’t known for their customer orientation.

8. Product Manager/Marketing Manager Role Old View: Organize, coordinate, and control. New View: Calculated chaos and controlled disorder Communicate—Communicate—Communicate: Make things happen. • Questions: • What companies purchase products from these producers? • What would a Product Manager do to facilitate these transactions and relationships?

9. New Product Approaches • Technology push: When perceived value of particular technology is great; firm has only a vague notion of possible applications, and usually not much more. • Market pull: Primarily the result of marketing research methodologies of interviewing potential users about their needs, then developing solutions to those perceived market needs.

10. Phases of New Product Development Idea and concept generation Screening and evaluation Business analysis Product development Product testing Product commercialization and introduction

11. Marketing Activities at Each Phase 1. Idea and concept generation: involves the search for product ideas and concepts that meet company objectives 2. Screening and evaluation: involves analysis to determine which ideas submitted are pertinent and merit a more detailed study of potential feasibility and market acceptance 3. Business analysis: return-on-investment criteria are examined along with competition and the potential for market entry 4. Product development: involves taking the product from an idea generated during a brainstorming session to a state of readiness for product and market testing 5. Product testing: involves conducting commercial experiments necessary to verify earlier business judgements 6. Product commercialization and introduction: includes launching the new product through full-scale production and sales and committing the company's reputation and resources to the product's success

12. Organization of the New Product Effort • Product manager: Individuals responsible for four P’s marketing mix decisions for specific product line as it travels through life cycle; responsibility often extends to new product development. • New product committee: Part-time interdisciplinary management group reviews new product proposals; advantages outweigh disadvantages because committee is most common form of organizational structure for managing new products. • New product department: Specific department generates and evaluates new product ideas, directs and coordinates development work, and implements field testing and precommercialization of new product; allows for maximum effort in new product development, but at expense of major overhead costs. • New product venture team: Task force representing various departments responsible for new product development and implementation; normally dissolved once new product is established in market.

14. ProductLife Cycle IntroductionGrowthMaturityDecline As a strategy planning tool, a “PLC” diagram is a visual representation of a tendency (many nonbusiness systems tend to same shape, such as to show income and height). On one level, it is a reminder to planner of what is coming—if an inflection point is reached, you should know what is coming (even though you only have actual life cycle to that point). In business, PLC is often driven by experience curve, economies of scale, competitive attraction to market opportunities, rate of diffusion factors, and eventual market saturation. Planners must adjust for actual impact of these factors on a particular product. (continued)

15. IntroductionGrowthMaturityDecline ProductLifeCycle On another level, marketers continuously monitor and adjust their strategy and tactics as product’s cycle progresses. As a reference, they can refer to standard mix strategies for each PLC stage (usually represented in a table directly under PLC diagram on most texts). Marketer’s objective is to adjust strategy to changing life cycle situation to maximize the results. As maturity approaches, marketer often decides to attempt a PLC extension by (1) finding ways to increase current market’s usage, (2) finding totally new uses, (3) finding new target segments, (4) developing new distribution, or (5) perhaps a major product improvement and repositioning. (continued)

16. Product Life Cycle Actual PLC curves can be any shape—from product that doesn’t sell at all, to fad that grows fast but has short life, to seasonal product, etc. Company depends on its marketers to understand what factors determine success and to make appropriate strategic decisions. It is often tempting for new students to want to learn PLC superficially, but in real world many people depend on in-depth understanding.

17. Stages in Adoption Process • Awareness: Buyer learns of new product or service, but lacks information. • Interest: Buyer seeks out or requests additional information. • Evaluation: Buyer (or member of buying team) considers/evaluates usefulness of product/service; consideration might be given to value-analysis project or make-buy situation. • Trial: Buyer adopts product or service on limited basis. • Adoption: If trial purchase worked, then buyer decides to make regular use of product/service.

18. Factors InfluencingRate of Adoption-Diffusion • Diffusion: Spread of new product, innovation, or service throughout an industry over time. • Diffusion speed varies among industries—fast in electronics, slow in domestic steel. • As the marketer you must know, evaluate impact of, monitor, and where possible affect factors that influence adoption/diffusion rate.

19. BCGSBUPortfolioBusinessStrategy High Business strength, Growth rate, Cash use Low High Low Industry attractiveness, Market share, Cash generation (continued)

20. BCG Business SBU Portfolio Strategy High Use cash to make into star Defend position Business strength, Growth rate, Cash use Low Nurture to feed cash to? Fix or abandon High Low Industry attractiveness, Market share, Cash generation (continued)

21. BCG Business SBU Portfolio Strategy (as might appear in your strategic planning documents) High Growth rate Cash use Low Computers Printers Modems Telephones High Low Market share Cash generation Note: Size can indicate amount of sales. (continued)

22. GE Strategic Planning Grid High Medium Low High Business strength axis Self-defined as a function of: size, growth, share, profitability, image, position, people, and other factors of business strength or weakness Medium Low High Medium Low Industry attractiveness axis Self-defined as a function of: size, market growth, strength of competitors, industry profitability, technical strength, and positive acting market environmental factors. (continued)

23. Problem#1:SBUs Can Be Repositioned by Redefining Axes HighMedium Low High Medium Businessstrength axis Low Coca-Cola* as a part of the cola market HighMedium Low *Coca-Cola does not sell directly to consumers Industryattractivenessaxis (continued)

24. Problem#1:SBUs Can Be Repositioned by Redefining Axes High Medium Low High Business strength axis Medium Low Coca-Cola as a part of the soft drink market High Medium Low Industry attractiveness axis (continued)

25. Problem#1:SBUs Can Be Repositioned by Redefining Axes High Medium Low High Medium Business strength axis Low Coca-Cola as a part of the all types of drinks market High Medium Low Industry attractiveness axis (continued)

26. Problem#1:SBUs Can Be Repositioned by Redefining Axes Bottom line: SBU market share and market strength change as market is redefined; also possible that industry attractiveness changes. Note: Coca-Cola slides are for the purpose of demonstrating the concept of SBU position shifting as axes are redefined; they do not represent actual strategic position of Coca-Cola.

27. Problem #2:Doing What the Grid Position Indicates • When portfolio models were first introduced, marketers did what the grid position indicated rather than using them as a tool to help visualize company’s mix of SBUs, interrelationships, relative strengths, etc. • If a larger percentage of business is in products in which company is not strong, margins are low, and market is not attractive, they may still be providing important coverage of fixed overhead. Don’t automatically get rid of “dog”-quadrant products. • Bottom line: Two-factor portfolio models are not decision models; they are tools to help marketers with their thinking. Even with multiple-factor computer decision support systems, the decision is still the marketer’s.

28. Important Characteristics of Business Services • Intangibility: Freight forwarding, consulting, repair, etc. can seldom be tried out/tested in advance of purchase; instead, buyers must view advertising copy, listen to sales presentation, or consult current users to gain insight into expected performance. • Heterogeneity: A service is an experience and thus cannot be duplicated; difficult to standardize and thus output quality may vary. • Perishability and fluctuating demand: Services cannot be stored and markets fluctuate by day, week, or season; idle service capacity is business that is lost forever—no inventory buffer. • Simultaneity: Production and consumption of services are inseparable; this typically puts marketer in very close contact with customer, requiring them to be highly professional.

29. Chapter 6 Price, Planning, and Strategy

30. Chapter Outline • Business Pricing: An Overview • Major Factors Influencing Price Strategy • Pricing Methods • Demand Assessment and Strategy • Life-Cycle Costing • Price-Leadership Strategy • Competitive Bidding in the Business Market • Leasing in the Business Market • Pricing Discount Strategies

32. Different Companies, Different Pricing Objectives CompanyObjective Alcoa 20% ROI American Can Maintain market share General Foods 33% gross margin National Steel Match the market U.S. Steel 8% ROI after taxes DuPont Target ROI, cost-plus (continued)

33. Different Companies, Different Pricing Objectives • Take three different products and produce them by exactly the same process in three different companies. • Because companies use different pricing calculations (1) product prices will most likely vary by company and (2) price difference usually will not be consistent. • Obviously, this is true if marketers use different strategic markups, but it also true of estimated cost (or even cost in production). • For example: One cost element would be fixed cost. How does each company determine how much fixed cost should be allocated to each product? • Moral: Competitors’ prices may be very different from yours. Study their historical patterns of bidding.

34. Internal factors Company objectives Marketing mix value Costs Impact on other products Product differentiation External factors Buyers Demand Economic considerations Ethical considerations Competition Suppliers Government/legal Major Factors Influencing Price Decision

35. Pricing Methods • Marginal pricing (contribution pricing): Attempts to maximize profits by producing number of units at which marginal cost is just less than or equal to marginal revenue. • Economic value to the customer: A higher price will be paid by buyers who perceive a greater value or benefit to them than what they would receive from buying a competitive product. • Break-even analysis: The point at which a firm’s revenue will equal its total fixed and variable costs at a given price. • Target return on investment pricing: An annual ROI target (i.e., ROI of 20% over cost). Typically done by a mix of individual product markups over cost that average the target ROI. • Cost-plus pricing: A version of target ROI pricing in which all products are marked up by the same percentage.

36. Zero-Based Pricing • Zero-based pricing (ZBP):Actuallynot a pricing method as much as it is the accounting of the method to the customer, and the resulting requirement to maintain consistency. • With ZBP, buyers do not accept that an increase in price of one cost element will necessarily justify a price increase. Supplier is required to show actual cost of every element (from base zero)—perhaps other elements have gone down in cost; perhaps supplier has allowed some controllable costs to increase and should not pass those along to customer; perhaps supplier’s profit margin is already too high.

37. Pricing Across Product Life Cycle(Life-Cycle Costing) • Introduction phase: • Price skimming: Introductory price set relatively high, thereby attracting buyers at top of product’s demand curve. • Market penetration pricing: Low price is used as an entering wedge. • Growth phase • Maturity phase • Decline stage

38. Price-Leadership Strategy • Price-leadership strategy: One or a very few firms initiate price changes, with most or all the other firms in the industry following suit. • When price leadership prevails, price competition does not exist. The burden of making critical pricing decisions is placed on leading firm(s) and other simply follow the leader.

39. Competitive Bidding • Competitive bidding: Buyer sends inquiries (requests for quotations or RFQs) to firms able to produce in conformity with requested requirements. • Requests for proposals (RFPs) involve the same process, but here buyer is signaling that everything is preliminary and that a future RFQ will be sent once specifics are determined from the best proposals.

41. Pricing Decision A To: Marketing Manager (you) Fr: Field Sales Re: New price for XYZ Company Part #45367 Rev. C As you know, Therese Garcia, our buyer, is under a lot of pressure to reduce purchasing costs by 10%. The current price of the above referenced product is $10.00. The projected quantity is 1,000,000 units/year. What price can we offer her for next year? (continued)

42. Pricing Decision A Assignment A: You call up the part number on your computer and note that the price and quantity are correct. The cost system states that the direct cost is $5.00/unit, and the overhead is $2.00/unit. The marketing information system suggests weak competitive activity with no other internal or external factors to be considered. Make a price decision and formally respond to the field salesperson.

43. Pricing Decision B To: Marketing Manager (you) Fr: Manufacturing Manager Re: New cost for XYZ Company Part #45367 Rev. C Because of strict cost controls and production improvements, the cost will be reduced from $5.00/unit to $4.95/unit. (continued)

44. Pricing Decision B Assignment B:Calculate the annual cost savings and send manufacturing a note of congratulations and appreciation. Also, decide how much of this savings (if any) to pass on to the customer.

45. Pricing Decision C To: Marketing Manager (you) Fr: Field Sales Re: Customer need— XYZ Company Part #45367 Rev. C XYZ is still plating each of our parts received to protect them from rust. It is a messy job and it costs them $1.00/unit. XYZ is requesting that we put this issue at the head of our value analysis projects. (continued)

46. Pricing Decision C Assignment C: Compose an e-mail to R&D requesting assistance and provide priority and spending guidelines.

47. Pricing Decision D To: Marketing Manager (you) Fr: R&D Manager Re: Rust resistance, XYZ Company Part #45367 Rev. C Good news! We have just invented a rust preventative material additive that will meet XYZ’s requirements. We can add it when we produce the part, and it will increase our cost by only $.01/unit; therefore, the cost will now be $4.96/unit. (continued)

48. Pricing Decision D Assignment D: Calculate the savings based on alternative prices such as $11.00/unit, $10.51/unit, and $10.01/unit. Develop and justify a final price and proposal for XYZ.

49. Leasing in the Business Market • Advantages to buyer • No down payment • No risk of ownership • Advantages to seller • Increased sales • Ongoing business relationship with lessee • Residual value retained

50. Ten Don’ts of Successful Selling 1. Don’t discuss with customers the price your company charges others. 2. Don’t attend meetings with competitors at which pricing is discussed (not even professional association meetings). 3. Don’t give lower prices to your company’s own subsidiaries. 4. Don’t enter into gentlepersons’ understandings with competitors on prices, terms of sale, discounts, market share, intent to bid, or customer terminations. 5. Don’t use one product as bait for selling another. 6. Don’t require a customer to buy a product only from you. 7. Don’t forget that individual states and other countries have antitrust laws. 8. Don’t disparage a competitor’s product without proof. 9. Don’t require reciprocal purchases. 10. Don’t hesitate to consult your company’s lawyer if you are unsure.