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Product Markets

Product Markets. BA 6324: Fundamentals of Marketing Professor Dillon Lecture Notes: Set #3. Product Markets. 1. Product Markets Defined 2. Estimating Long Run Market Share Repeat Purchase and Market Share Product Line Decisions 5. Strategic Growth Models 6. Practice Problems.

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Product Markets

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  1. Product Markets BA 6324: Fundamentals of Marketing Professor Dillon Lecture Notes: Set #3

  2. Product Markets • 1. Product Markets Defined • 2. Estimating Long Run Market Share • Repeat Purchase and Market Share • Product Line Decisions • 5. Strategic Growth Models • 6. Practice Problems

  3. Product Markets Theodore Levitt (HBS Professor): People don’t want to buy a quarter inch drill. They want to buy a quarter inch hole.

  4. Ice cream Video rentals Baseball cards Fast food Coffee Beer Juices Diet-Rite cola Diet Cola Wine Regular cola Lemon limes Bottled Water Diet lemon limes Fruit Flavored colas Diet Pepsi Brand form competition: Diet colas Budget competition: Food and entertainment Product form competition: Soft drinks Generic competition: Beverages Product Markets 1. Product Markets Set of products judged to be substitutes within those usage situations in which similar patterns of benefits are sought and the customers for whom such usages are relevant Defining the Competitive Set 3

  5. Product Markets 1.1 Job-Based View of Products/Brands > Consumers hire brands to do specific jobs in their lives. > These jobs have functional, social and emotional dimensions to them. > Understanding the job provides essential guidance to product design and to marketing/communication strategy. • Example: Arm & Hammer-The Jobs: • Helps my mouth stay fresh and clean. • Deodorize my refrigerator. • Deodorize me. • Clean and freshen my carpets. • Deodorize my kitty litter. • Make my clothes smell fresh.

  6. Laundry Detergent Liquid Powder Wisk Tide Wisk Tide Arm & Hammer Laundry Detergent Tide Arm & Hammer Wisk Liquid Liquid Powder Powder Powder Product Markets 1.2 The Importance of Identifying Product Markets

  7. Instant Coffee Caffeinated Decaffeinated Regular Regular Freeze Dried Nescafe (Nestlé) Nescafe (Nestlé) Freeze Dried Maxwell House (General Foods) Brim (General Foods) Sanka (General Foods) Sanka (General Foods) High Point (Procter & Gamble) Folgers (Procter & Gamble) Tasters Choice (Nestlé) Maxim (General Foods) Tasters Choice (Nestlé) Product Markets 1.2.1 A Hypothetical Illustration of the Product Hierarchy for the Instant Coffee Market a. Attribute-based hierarchy

  8. Nestlé Procter & Gamble Instant Coffee General Foods Decaffeinated Decaffeinated Decaffeinated Caffeinated Caffeinated Caffeinated Freeze Dried Freeze Dried Freeze Dried Freeze Dried Regular Regular Regular Regular Regular Regular Tasters Choice Tasters Choice Maxwell House Brim Sanka High Point Maxim Nescafe Sanka Nescafe Folgers Product Markets 1.2.1 A Hypothetical Illustration of the Product Hierarchy for the Instant Coffee Market b. Brand-based hierarchy

  9. A Hypothetical Illustration of the Product Hierarchy for the Instant Coffee Market Instant Coffee Caffeinated Decaffeinated Freeze Dried Regular Freeze Dried Regular Nescafe Brim Nescafe Maxim Tasters Choice High Point Sanka Folgers Maxwell House Tasters Choice Sanka Product Markets 1.3 What Competes Against What?

  10. Brand Bought on Occasion 2 A B C Total 137 47 19 203 41 179 12 232 22 10 46 78 200 236 77 513 A B C Total Brand Bought on Occasion 1 Product Markets 2. Estimating Long Run Market Share 2.1 Switching Tables fij (a) Purchasers of brands A, B, and C over two purchase occasions: 137 of the N = 513 people bought brand A on both purchase occasions.

  11. Brand Bought on Occasion 2 A B C Total 0.267 0.092 0.037 0.396 0.080 0.349 0.023 0.452 0.043 0.019 0.090 0.152 0.390 0.460 0.150 1.000 A B C Total Brand Bought on Occasion 1 Brand Bought on Occasion 2 A B C Total 0.674 0.232 0.094 1.00 0.177 0.772 0.051 1.00 0.283 0.125 0.592 1.00 Pij Pj Pi|j= A B C Brand Bought on Occasion 1 Product Markets Pij= fij/N = 179/513 (b) Joint-probability matrix: 137 of 513, or .267 of the population, bought brand A on both purchase occasions. = 19/203 (c) Conditional-probability matrix: of the 203 people who bought brand A on the first purchase occasion, 137 or .674 (137/203) bought it on the second occasion.

  12. Product Markets 2.1.2 Illustration Segment Level Transition (Conditional) Probabilities Size Transition (Conditional) Probabilities: Segment (%) Brand PL Bounty Brawny Scott Viva 1 23.41 PL 0.2076 0.1009 0.1835 0.4489 0.0591 Bounty 0.0192 0.9555 0.0091 0.0110 0.0052 Brawny 0.0995 0.0495 0.6381 0.1706 0.0422 Scott 0.0456 0.0394 0.0382 0.8518 0.0250 Viva 0.0520 0.0091 0.1045 0.0443 0.7901 2 41.05 PL 0.8687 0.0278 0.0555 0.0444 0.0036 Bounty 0.1100 0.8689 0.0137 0.0063 0.0011 Brawny 0.1807 0.1121 0.6797 0.0100 0.0175 Scott 0.0411 0.0010 0.0091 0.9213 0.0275 Viva 0.0394 0.0008 0.0356 0.0099 0.9143 3 35.54 PL 0.4412 0.1699 0.1900 0.0983 0.1006 Bounty 0.0523 0.9307 0.0099 0.0007 0.0064 Brawny 0.2110 0.0577 0.6789 0.0199 0.0325 Scott 0.3299 0.0345 0.0445 0.4999 0.0912 Viva 0.1445 0.1134 0.0466 0.1933 0.5022 Interpret 10

  13. MSa. = market share brand a time 1 MS.a = market share brand a time 2 paa = probability of buying brand a at time 2 given purchase of brand a at time 1:pr(a a) pba = probability of buying brand a at time 2 given purchase of brand b at time 1:pr(a b) Product Markets 2.2 Estimation: Conceptual Framework X Probability of buying the brand a again MS of brand a at t *MS of brand a = X Probability of switching to brand a from brand b MS of brand b at t + Conditional (transition) table: Notation Convention: Time 2 Brand a Brand b paapabMSa. pbapbbMSb. MS.aMS.b Brand a Brand b Time 1

  14. Product Markets 2.2.1 Estimation: Illustration Time 2 MS.a = MSa. x paa + MSb. x pba MS.b = MSb. x pbb + MSa. x pab MS.a = .67(.5) + .33(.4) = .467 MS.b = .33(.6) + .67(.5) = .533 MS.a = .467(.5) + .533(.4) = .4467 MS.b = .533(.6) + .467(.5) = .5533 MS.a = .4467(.5) + .5533(.4) = .4447 MS.b = .5533(.6) + .4467(.5) = .5553 Brand a Brand b 100 100 200 40 60 100 140 160 300 Brand a Brand b Time 2 Time 1 Time 3 Form conditional table: Time 4 Time 2 Brand a Brand b paa = .5 pab = .5 MSa. = .67 pba = .4 pbb = .6 MSb. = .33 MS.a = .467 MS.b = .533 Brand a Brand b Time 1

  15. Product Markets 3. Repeat Purchase and Market Share > High market share brands have disproportionate high repeat purchase rates. WHY? 1. High share brands have more buyers than low share brands. (GREATER MARKET PENETRATION) 2. Buyers of high share brands purchase these brands more frequently. (HIGHER PURCHASE FREQUENCY) > Implications for Niche Brands?

  16. The Relationship Between Market Share and Repeat-Purchase Probability for Eight Japanese Biscuit Brands 0.4 0.3 0.2 0.1 • • Repeat Purchase Probability P(i|i) • • • • • • 0.00 0.05 0.10 0.15 0.20 0.25 The Relationship Between Market Share and Repeat-Purchase Probability for Eight Japanese Yogurt Brands 0.6 0.5 0.4 0.3 • Repeat Purchase Probability P(i|i) • • • • • • • Product Markets Market Share MSi 0.00 0.05 0.10 0.15 0.20 Market Share MSi

  17. Product Markets 4. Product Line Decisions 4.1 Product Line Analysis > % of Total Sales from Each Item in Line > How is Line Positioned vis-à-vis Competition - Major Attributes of Paper Board are: Paper Weight & Finish Quality  Create a Product Line Map in Weight vs. Finish Quality Space and see how Your Line Compares with Competitors’  Also Helps to Identify Gaps in market Offerings

  18. Product Markets 4. Product Line Decisions (Contd..) > Product Line Length - Optimal Number of Items in Line > Line Stretching Decision - Downward Stretch….Line Filling vs. Cannibalization - Upward Stretch….Price/Quality Imputations - Two-Way Stretch

  19. Strategic Market Planning - Revenue Growth - Financial Performance - Strategic Market Position Offensive Marketing Strategies Defensive Marketing Strategies Protect or Reduce Focus Within Existing Markets Harvest or Divest Existing Markets Penetrate or Grow Existing Markets Enter or Develop New Markets Offensive vs. Defensive Strategic Marketing Plans Product Markets 5. Strategic Growth Strategies

  20. Very Attractive Offensive (Grow) Offensive (Grow) Defensive (Protect) Offensive (Entry) Market Attractiveness Offensive (Grow) Defensive (Hold/Harvest) Offensive (Grow) Defensive (Hold/Focus) Offensive (Grow) Defensive (Protect) Defensive (Divest or Harvest) Defensive (Divest or Harvest) Defensive (Hold or Harvest) Very Unattractive Very Weak Very Strong Competitive Position Product Markets 5.1 Selecting Between Offensive and Defensive Marketing Strategies

  21. Growth-Oriented Offensive Marketing Strategies Existing Markets Existing Customers New Customers Existing Customers New Customers New Markets Grow Demand Segment/Market Enter New Segments Related New Market Entry Diversified New Market Entry Grow Emerging Market Demand Develop Untapped Market Potential Market Share Penetration Grow Purchase Amount Product Markets 5.2 Growth-Oriented Offensive Strategies

  22. Stars Offensive or Defensive Problem Kids Offensive or Defensive High Average Market Growth Cash Cows Defensive Dogs Defensive Low 2.0 1.0 0 Relative Market Share Product Markets 5.3 Growth-Share Strategic Market Planning Matrix Strategic Market Planning Cash Cows - Invest to protect important strategic market position and key source of cash flow. Dogs - With minimal investment, maximize cash flow with protect, reduce scope, harvest, or exit strategies. Problem Kids - Invest to grow market position and harvest/divest to minimize drain on resources. Stars - Invest to defend important strategic market position and/or invest to grow market at a faster rate.

  23. Product Markets 5.4 Brand Management: 2 Dimensions, 4 Strategies Premium Category Value Category Your Brand’s Best Strategy Vishwanath & Mark HBR 1997 high low Relative Market Share

  24. Product Markets 6. Practice Problems 6.1The Springs Mills company produced a line of textiles sold to the healthcare and hospitality industries. The company was founded in 1910. Presently, Springs is the market leader in both industries. A major issue discussed during the marketing planning meeting was how could they grow. Both the healthcare and hospitality industries were growing at about 50% of GNP. GNP was growing at 5% per year. They were very cash rich, and therefore decided to grow by acquiring a new company. Two consulting firms were provided with an RFP and asked to recommend a company that Springs should try to acquire. Their recommendations are provided below. Consulting firm 1 recommended company XXX and consulting firm 2 recommended company YYY. Each company had four SBUs. Market shares for the company and its three major competitors and growth rates of the industries are provided below. Company XXX SBU Growth US Market Shares Competitor Rate XXX I II III A 4% 20% 5% 25% 10% B 10% 30% 10% 15% 20% C 7% 40% 25% 5% 30% D 11% 25% 10% 30% 10% Company YYY SBU Growth US Market Shares Competitor Rate YYY I II III A 4% 25% 20% 15% 10% B 14% 40% 20% 5% 10% C 3% 35% 20% 15% 10% D 4% 25% 5% 10% 20% a. Which do you recommend? [ ] XXX [ ] YYY b. Justify your choice. 28

  25. Product markets 6.2Franken Pumps, Inc. manufactures and installs pumps for hydroelectric facilities in the United States. Company executives have begun to analyze the firm's competitive position in the hydroelectric industry for the purpose of targeting growth opportunities. Industry dollar sales volume had reached $100 million annually and were projected to remain at this level for the next three years. inspection of trade association data indicate that 60% of the industry sales volume occurs west of the Mississippi River; 40% of industry sales volume occurs east of the Mississippi River. Furthermore, 20% of total industry sales are for new installations-- the 20/80 split in new and replacement sales volume exists irrespective of geographical location. Franken Pumps has recorded annual sales of $10 million annually with company sales split evenly between regions east and west of the Mississippi River. Thirty percent of all company sales were for new pumps; 70% were for replacement pumps. However, 60% of Franken Pumps sales east of the Mississippi River were for new pumps. Firms that purchased replacement pumps for a particular hydroelectric facility typically purchased these replacement pumps from the same company that manufactured and installed the new pumps for the hydroelectric facility. This practice existed because of the ease of installing these replacement pumps. Franken Pumps, Inc. sales data indicated that the gross profit margin on the installation of new pumps was 35%. The gross profit margin on the installation of replacement pumps was 20 %. (Source: based on "Franken Pumps, Inc." HBS #9-520-205) a. Given this information, how should the market for pumps in the hydroelectric industry be structured? (Hint: Draw a market structure map). b. Which segment of the hydroelectric industry should be Franken Pumps, Inc. primary target for growth? Why? (Hint: You will need to first show how Franken Pumps performs in each product-market). c. What "product-market strategy" is indicated from your choice of market target for Franken Pumps, Inc.?

  26. Product Markets 6.3 Brand purchases among three leading brands of laundry detergent were recorded for a panel of 1000 households for the months of May and June. The brand switching table is provided below. a. Compute the brand market shares for each month. b. Compute the conditional brand switching table and interpret. c. Would you consider the market to be brand or attribute-based (draw the appropriate structure)? d. If Bold wanted to introduce a Tablet form of laundry detergent and target only one of the other brands which brand would you recommend they target? e. Forecast brand shares in July. Interpret. Any idea as to long-run market shares?

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