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MGT301 - Principles of Marketing - Lecture Handout 45

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Learning objectives:

A. A NEW PRODUCT DEVELOPMENT
B. PRODUCT LIFE CYCLE STRATEGIES
C. PRICING STRATEGIES
D. PLACING STRATEGIES
E. PROMOTION STRATEGIES
F. CREATING COMPETITIVE ADVANTAGE
G. GLOBAL MARKET PLACE
H. MARKETING AND SOCIETY

A. New Product Development

Organizations must develop new products and services. A company has to be good at developing new products. It also must manage them in the face of changing tastes, technologies, and competition. As a reason to change, the company must realize that products face limited life spans and must be replaced by newer products. In addition, new products can fail. The risks of innovation can be as great as the rewards.
The key to successful innovation is in a total-company effort, strong planning, and a systematic new-product development process. The new-product development process consists of eight stages: idea generation, idea screening, concept development and testing, marketing strategy development, business analysis, product development, test marketing, and commercialization. At each stage, a decision must be made as to whether the idea should be further developed or dropped. The company wants to minimize the chances of poor ideas moving forward or good ideas being
rejected.
Each product has a life cycle marked by a changing set of problems and opportunities. The sales of a typical product follow an S-shaped curve made up of five stages.
These stages include:

  • the product-development stage
  • the introduction stage
  • the growth stage
  • the maturity stage
  • and the decline stage

As the product passes through these stages, the marketing planner must adjust the organization’s strategies and be aware of changing problems, threats, and opportunities. The planner must adjust the firm’s marketing mix to these changes and be able to predict when significant changes will occur. Managing change is a true marketing management art and is necessary for the organization to be successful in the long-term.

New Product development Process
1. Idea Generation

The first step in the new-product development process is idea generation, which is the systematic search for new product ideas. For every one hundred new product ideas, only a very few ever make it to commercialization. The search for these ideas should be systematic not haphazard. There are many sources for new product ideas.
Among the most significant are:

  1. Internal sources where formal research and development, company scientists and engineers, company executives, and company salespeople can contribute ideas based on their formal and informal research and experience.
  2. Customers can also produce good new-product ideas (simply by watching and listening to them). Customers often create new products and uses on their own.
  3. Competitors are another source of new-product ideas. It is a good idea to watch competitor’s ads and other communications to get clues about new products. In addition, the organization can buy competing products, take them apart, analyze the business processes used to sell the product, and then decide whether to make a similar
    product themselves.
  4. Distributors, suppliers, and others in the distribution chain can be sources of information. Resellers are close to the market and can pass along information about consumer problems and new-product possibilities. Suppliers can tell about new concepts, techniques, and materials that can be used to develop new products. Other sources can be trade magazines, trade shows, seminars, government agencies, consultants, university and commercial laboratories, etc.
    • The search for new-product ideas should be systematic rather than haphazard.
    • Top management can avoid many problems by adopting an idea management system that directs the flow of new ideas to a central point where they can be collected, reviewed, and evaluated. The idea manager:
      • Helps to create an innovation-oriented culture.
      • Yields a larger number of ideas.

2. Idea Screening

The second step in the new-product development process is idea screening which involves screening new product ideas in order to spot good ideas and drop poor ones as soon as possible. Because product-development costs rise dramatically in later stages, companies must proceed only with product ideas that will turn into profitable products. One way to keep information organized is to have executives write up new-product ideas on a standard form that can be reviewed by a new-product committee. A well-designed system for rating and evaluating new-product ideas prevents problems at latter stages.

3. Concept Development and Testing

The third stage in the process is concept development and testing. Concepts may take on several forms:

  1. A product idea is an idea for a possible product that the company can see itself on the market.
  2. A product concept is a detailed version of the new-product idea stated in meaningful consumer terms.
  3. A product image is the way consumers perceive an actual or potential product.
    • Concept development involves developing product ideas into some alternative product concept, finding out how attractive each concept is to consumers, and choosing the best one.
    • Concept testing involves testing the concepts with a group of target consumers to find out if the concepts have strong consumer appeal. Concepts may be presented to consumers either symbolically or physically. Marketers are always trying to find new ways to make product concepts more real to concept-test subjects.
      • For some concept tests, a word or picture description might be sufficient.
      • Virtual reality tests are becoming popular.
      • It is routine to test concepts before consumers before attempting to turn them into actual products.

4. Marketing Strategy Development

  1. The fourth step is marketing strategy development which involves designing an initial marketing strategy for a new product based on the product concept.
  2. A marketing strategy statement should be produced. This is a statement of the planned strategy for a new product that outlines the intended target market, the planned product positioning, the sales, market share, and profit goals for the first few years.
    • The statement also outlines the product’s planned price, distribution, and marketing budget for the first year.
    • Lastly, the marketing strategy statement describes the planned long-run sales, profit goals, and marketing mix strategy.

5. Business Analysis

The next step is business analysis, which is a review of the sales, costs, and profit projections for a new product to find out whether these factors satisfy the company’s objectives. To estimate sales, the company should look at the sales history of similar products and should survey market opinion.

6. Product Development

The sixth step is product development, which involves developing the product concept into a physical product in order to ensure that the product idea can be turned into a workable product. This step calls for a large jump in investment.

  1. The R&D department will develop one or more physical versions of the product concept and these prototypes can take varying lengths of time to develop.
  2. When ready, these prototypes must be tested.
  3. The prototype must have the required functional features and convey the intended psychological characteristics.

7. Test Marketing

The seventh step is test marketing, which is the stage at which the product and marketing programs are introduced into more realistic marketing settings. Test marketing lets the marketer get experience with marketing the product.

  1. The basic purpose is to test the product itself in real markets.
  2. The amount of test marketing varies with each new product.
    • Not all products are test marketed.
    • Simple line extensions and copies of competitor products are often not test marketed.
  3. The test marketing costs can be high but they are often small when compared to with the costs of making a major mistake.
  4. Using test marketing doesn’t guarantee success, however.

8. Commercialization

The eighth and final step in the new-product development process is commercialization. This step is introducing a new product into the market. The company bringing out a new product must make the following decisions:

  1. When? When is the time right (timing) to introduce the new product?
  2. Where? The company must decide whether to launch the new product in a single location, a region, several regions, the national market, or the inter-national market. Sometimes a market rollout works best where introduction is phased in. Global rollout may also be done.

B. Product life Cycle Strategies

Product life Cycle Strategies

After launching a new product, management hopes it will enjoy a long and profitable life. Management, however, is also
aware of that each product will have a life cycle. The product lifecycle (PLC) is the course of a product’s sales and profits over its lifetime. It involves five distinct stages:

  1. The product development stage begins when the company finds and develops a newproduct idea. During product development, sales are zero and the company’s investment costs mount.
  2. The introduction stage is a period of slow sales growth as the product is being introduced in the market. Profits are nonexistent in this stage because of heavy expenses of product introduction.
  3. The growth stage is a period of rapid market acceptance and increasing profits.
  4. The maturity stage is a period of slowdown in sales growth because the product has achieved acceptance by most potential buyers. Profits level off or decline because of increased marketing outlays to defend the product against competition.
  5. The decline stage is the period when sales fall off and profits drop.

1. Introduction Stage

Because the product-development stage of the PLC was examined at the beginning of the chapter, the first stage to explore in more detail at this point is the introduction stage. This stage is when the product is new and first distributed and made available for purchase.

  1. In this stage, profits are negative or low because of the low sales and high distribution expenses.
  2. Prices tend to be on the high side because of low output, production problems, high promotion, and other expenses.
  3. There are usually few competitors.
  4. The focus is on buyers who are the most ready to buy.
  5. The market pioneer must launch its product with a strategy that is consistent with a long-term focus on the market rather than a quick profit gain. Retaining market leadership may be difficult, but is desirable.

2. Growth Stage

The growth stage is the product life-cycle stage during which a product’s sales start climbing quickly.

  1. Early adopters will continue buying and later buyers will start following their lead.
  2. New competitors may enter the market and introduce new product features.
  3. The market will expand.
  4. Prices will remain where they are or fall only slightly.
  5. Companies keep their promotion spending at the same or at a slightly higher level.
  6. Educating the market remains a goal, but the company must also meet the competition.
  7. Profits increase.
  8. The firm faces a trade-off between high market share and high current profit

3. Maturity Stage

The maturity stage is that stage in the product life cycle where sales growth slows or levels off. Product managers may have to do more than simply defend their products. Most products are in their maturity stage, and therefore, management has the most experience with this stage.

  1. Market modification is an approach in which the company tries to increase the consumption of the current product. It looks for new users and market segments. It tries to increase usage among present customers. It may also reposition the brand to appeal to a larger or faster-growing segment.
  2. Product modification is an approach to change product characteristics. This can be accomplished by quality improvement, feature improvement, or style improvement.
  3. Marketing mix modification is an approach in which the product manager tries to improve sales by changing one or more marketing mix elements.

4. Decline Stage

The decline stage is the stage in the product life cycle in which a product’s sales decline. This can occur for several reasons:

  1. Technological advances.
  2. Shifts in consumer tastes.
  3. Increased competition

Firms must be aware that carrying a weak product past its useful life can be very costly to the firm in many ways. Companies need to pay more attention to their aging products. Decisions that need to be made are:

  1. The firms may decide to maintain a brand without change in the hope that competitors will leave the industry.
  2. Managers may decide to harvest the product (which means reducing various costs and hoping that sales hold up).
  3. Managers may decide to drop the product from the line (sell it or liquidate it at salvage value).

C. Price

“The amount of money charged for a product or service, or the sum of the values that
consumers exchange for the benefits of having or using the product or service”.

Price goes by many names in our economy. In the narrowest sense, price is the amount of money charged for a product or service. This meaning, however, has been broadened. Today, despite the increased role of non-price factors in the modern marketing process, price remains an important element in the marketing mix.
Many internal and external factors influence the company’s pricing decision. Internal factors include the firm’s marketing objectives, marketing mix strategy, costs, and organizational factors. External factors that influence pricing decisions include the nature of market and demand, competition, and other environmental factors like the economy, reseller needs, and government actions. In the end, the consumer decides whether the company has set the right price. The consumer weighs the price against the perceived value of using the product. If the price exceeds the sum of the value, consumers will not buy the product. Consumers differ in the values they assign to different product features and marketers often vary their pricing strategies for different price segments.
Because pricing is a dynamic process, companies must design a pricing structure that covers all their products and a variety of constantly changing conditions (such as changes that occur as the product progresses through the stages of the product life cycle).
The marketer wishing to explore pricing strategy options will find a wealth of alternatives from which to choose. The first major option will be pricing with respect to the product mix. Numerous forms of product-mix pricing strategies are examined within the context of the competitive environment. Examples include product-line pricing, optional-product pricing, captive-product pricing, by-product pricing, and product-bundle pricing. The average marketer does not use all of these methods; however, by studying the options available, the marketer enhances his or her ability to be creative with respect to pricing within the context of the product mix.
Sometimes, however, the firm must make adjustments in their pricing process and strategy. These adjustments are made to account for differences in consumer segments and changing situations. Adjustments can occur through discounts and allowances or by the desire to segment markets by price. Additionally, price has a psychological aspect that allows for adjustments just as geographical, promotional, and international relationships can alter pricing methods and strategies.

Break-Even Analysis

Break-Even Analysis

Break-even pricing (target profit pricing) is an approach to setting price to breakeven on the cost of making and marketing products or to make the target (desired) profit It uses a break-even chart that shows the total cost and total revenue at different levels of sales volume.

  1. Although break-even analysis and target profit pricing can help the company to determine minimum prices needed to cover expected costs and profits, they do not take the price-demand relationship into account.
  2. When using this method, the company must also consider the impact of price on the sales volume needed to realize target profits and the likelihood that the needed volume will be achieved at each possible price.

D. Place

Distribution channels have been identified as being a set of independent organizations involved in the process of making a product or service available for use or consumption by the consumer or business user. Making decisions involving distribution channels are among the most complex and challenging decisions facing the firm. Each channel system (and there can be several) creates a different level of sales and costs. Unlike flexible elements of the marketing mix (price decisions for example), once a distribution channel has been chosen, the firm must usually stick with their choice for some time. In addition, the chosen channel strongly affects, and is affected by, the other elements in the marketing mix.

Place

A strategic planner limits their options if they consider only one channel choice. Each firm needs to identify alternative ways to reach its market. There are many means available. Some of the choices include the range of direct selling to multiple intermediary levels (which may involve several distribution relationships). Each of these options has advantages and disadvantages associated with them. Vertical and horizontal systems are more sophisticated than the basic channel alternatives and each is explained in context with contemporary usage. E-commerce and the use of the Internet have also impacted channel choice and strategy in a profound way.

Place1

Channel design begins with assessing customer channel-service needs and company channel objectives and constraints. The company then identifies the major channel alternatives in terms of the types of intermediaries, the number of intermediaries, and the channel responsibilities of each. No system, no matter how well it has been planned, is without conflict. If quality service and low cost is to be delivered, management of distribution conflict is a necessity. Because
distribution relationships tend to be long-term in nature, the choice of channel partners is very important and should be taken very seriously. In today’s global marketplace, selling a product is sometimes easier than getting it to customers.
Therefore, marketing logistics and supply chain management is receiving increased attention from strategic planners. The task of marketing logistics systems is to minimize the total cost of providing a desired level of customer services although bringing those services to the customer with the maximum amount of speed. Major logistics functions of warehousing; inventory management, transportation, and logistics information management are discussed and explored.

Retailing and Wholesaling

Retailing and wholesaling consist of many organizations bringing goods and services from the point of production to the point of use. Retailing by definition includes all the activities involved in selling goods and services directly to final consumers for their personal, non-business use. Retailers can be classified as store retailers and non store retailers. Store retailers can be further classified by the amount of service they provide, the product line sold, relative prices charged, and retail organization format (control of outlets). Non store retailers are described as being in direct marketing, catalogs, telephone, home TV shopping shows, home and office parties, door-to-door contact, automatic vending, online services and the Internet, and other direct retailing approaches.

Retailing decisions involve the constant search for new marketing strategies to attract and hold customers. Considerations are the target market and positioning decision, the product assortment and services decision, the price decision, the promotion decision, and the place decision. All of these decisions are examined closely in the chapter. Numerous examples provide explanations of several options that are available in all the aforementioned areas.

Retailers operate in a harsh and fast-changing environment, which offers threats as well as opportunities. New retail forms continue to emerge to meet new situations and consumer needs, but the life cycle of new retail forms is getting shorter. In addition to the traditional forms of retailing, consumers now have an array of nontraditional alternatives to choose from including mail order, television, phone, and online shopping. The last major trend that seems to be of interest to business strategists and marketers is the rise of huge mass merchandisers and specialty superstores. These forms will have a pronounced effect on the way retailing is conducted in the future. Wholesaling, unlike retailing, deals with the sale of goods and services that will be resold by and/or used by the business customer itself. One way to study and understand wholesaling is to examine the functions that are performed by the wholesalers. These functions include selling and promoting, buying and assortment building, bulk-breaking, warehousing, transportation, financing, risk bearing, supplying market information, performing management services, and providing advice for customers. Wholesalers can be divided into numerous groups. Three primary types of wholesalers are merchant wholesalers, agents and brokers, and manufacturer and retailer sales branches and offices. Each of these general types (and their numerous subdivisions) are explained and detailed.

E. Promotion

Modern marketing calls for more than just developing a good product, pricing it attractively, and making it available to target customers. Companies must also communicate with their customers and there should be controlled direction to those communications. Promotion provides the primary communication function. As one of the four major elements of the marketing mix, promotion uses advertising, sales promotion, public relations, personal selling, and direct marketing to achieve the company’s communication objectives.
During the past several decades, companies around the world have perfected the art of mass marketing. The companies must recognize that the face of marketing communications is constantly changing and, to be effective in the future, the marketer must learn to utilize the new emerging communication techniques. The growth and challenges of the electronic promotional communication form are great. The use of computer technology, a desire to get close to the consumer, and an increased use of direct marketing databases has set the stage for increased integrated marketing communications. Under this concept, the company carefully integrates and coordinates its many communication channels—mass media advertising, personal selling, sales promotion, public relations, direct marketing, packaging, and others—to deliver a clear, consistent, and compelling message about the organization and its products. Integrated marketing communications produce better communications consistency and greater sales impact. Integrated marketing communications involves identifying the target audience and shaping a wellcoordinated promotional program to elicit the desired audience response. Too often, marketing communications focus on overcoming immediate awareness, image, or preference problems rather than managing the customer relationship over time.
Building on the aforementioned communications model, describes the steps in developing effective communication. One of the most important decisions to be made by the organization is how much to spend on promotion. This discusses several approaches to the organization of a promotional budget and a mix of tools to accomplish the organization’s promotional objectives. There are various strategies that can be considered by the promotional planner. The primary
strategies of push and pull are described. In addition, the buyer-readiness stage and the product life-cycle stage are also considered.
Three of the promotional mix elements (advertising, sales promotion, and public relations) are mass communication tools. Advertising is described as being any paid form of non-personal presentation and promotion of ideas, goods, and services by an identified sponsor. There are four important decisions to be accomplished as the marketer attempts to organize and direct the advertising function. Each of these decisions (setting objectives, budget decisions, advertising
strategy [message decisions and media decisions], and evaluating advertising campaigns) is discussed in detail and explained within the context of building an advertising campaign. In addition, several forms of advertising, various advertising strategies, and descriptions of the mass media are presented to the reader. The marketing firm can undertake the advertising function themselves or they can contract with an advertising agency to accomplish their advertising objective, planning, and implementation.
Sales promotion is a process of providing short-term incentives to encourage purchase or sales of a product or service. Sales promotion offers the buyer reasons to buy now. In addition, sales promotion is also intended to stimulate reseller effectiveness. Sales promotion has grown rapidly in the recent past because of pressure to increase sales, increased competition, and the declining efficiency of the other mass communication methods.
Public relations, the final mass communication tool described in this chapter, is an attempt to build good relations with the company’s various publics by obtaining favorable publicity, building up a good “corporate image,” and handling or heading off unfavorable rumors, stories, or events. The organization has a variety of tools at their disposal for accomplishing this feat. One of the overriding tasks of public relations is to control the exposure and relationship with the mass media. By focusing on consumer attitudes, awareness, and knowledge of the organization, the company is better prepared to succeed. Public relations has even been extended to the Internet and companies are beginning explore ways to increase its effect in the newly emerging world of e-commerce.

Advertising

A paid form of non-personal communication about an organization and/or its products to a target audience through a mass medium.

Personal Selling

A paid form of non-personal communication about an organization and/or its products to a target audience through a mass medium.

Sales Promotion

Demand-stimulating activity designed to supplement advertising and facilitate personal selling.

Public Relations

A planned communication effort by an organization to contribute to generally favorable attitudes and opinions toward an organization and its products.

Direct Marketing

Direct connections with carefully targeted individual consumers to obtain an immediate response and cultivate lasting customer relationship

F. Creating Competitive Advantage

Two key trends in marketing for the twenty-first century are: (a) the trend toward the use of relationship marketing to improve customer satisfaction; and (b) the trend toward in-depth competitor analysis as a means of identifying the company’s major competitors (using both an industry and market-based analysis) and closely examining and formulating strategies to deal with competitors’ objectives, strategies, strengths and weaknesses, and reaction patterns.
To be successful, a company must consider its competitors as well as its actual and potential customers. In the process of performing a competitor analysis, the company carefully analyzes and gathers information on competitors’ strategies and programs. A competitive intelligence system helps the company acquire and manage competitive information. The company must then choose a competitive marketing strategy of its own. The strategy chosen depends on the company’s
industry position and its objectives, opportunities, and resources. Several basic competitive strategies are outlined in the chapter. Some of these are time-tested and some are relatively new. The first is that of the market leader which faces three challenges: expanding the total market, protecting market share, and expanding market share. The market leader is interested in finding ways to expand the total market because it will benefit most from any increased sales. The leader must also have an eye toward protecting its share. Several strategies for accomplishing this protection task are presented. Aggressive leaders also try to expand their own market share. The second position is that of the market challenger. This is a firm that aggressively tries to expand its market share by attacking the leader, other runner-up firms, or smaller firms in the industry. The third position is that of the market follower which is designated as a runner-up firm that chooses not to rock the boat (usually out of fear that it stands to lose more than it might gain). Lastly, the market niche is a position option open to smaller firms that serve some part of the market that is not likely to attract the attention of the larger firms. These firms often survive by being specialists in some function that is attractive to the marketplace. The competitive analysis of the four competitive position options presented. This information can be used by every mid-level strategic planner who seeks insight into competitive strategy dynamics.

G. Global Market Place

The world is shrinking rapidly with the advent of faster communication, transportation, and financial flows. In the twenty-first century, firms can no longer afford to pay attention only to their domestic market, no matter how large it is. Many industries are global industries, and those firms that operate globally achieve lower costs and higher brand awareness. At the same time, global marketing is risky because of variable exchange rates, unstable governments, protectionist tariffs and trade barriers, and other prohibitive factors.
Given the potential gains and risks of global marketing, companies need a systematic way to make their international marketing decisions. Decision areas that must be addressed are: (1) How to look at the global market environment; (2) Deciding whether to go international; (3) Deciding which markets to enter; (4) Deciding how to enter the market; (5) Deciding on the global marketing program; and, (6) Deciding on the global marketing organization. Each of these decisions must be seriously considered and answered if success is to be achieved in the international competitive arena. All markets and industrial bases around the world are not the same. There are varying degrees of economic sophistication. The marketer must make plans for operations in subsistence economies, raw-material-exporting economies, industrializing economies, and established industrial economies separately if true marketing success is to be achieved. It would be easier on the decision maker if all the economies were like the United States. They, however, are not. Global marketing requires an extensive amount of learning and, in some instances, adaptation of the marketing mix to fit the particular situation and economy.
In addition to global challenges with consideration of the marketing mix, the marketer that wishes to go global must also consider a variety of options on how to align the organization with international partners. These considerations are different than those that the marketer faces in its own domestic environment. The end result of making these new global decisions is not only improvement in marketing skills, but improvement toward attaining a truly global organization.

H. Marketing and Society

In working to meet the consumer’s needs, marketers may take some actions that are not approved of by all the consumers or publics within the social sector. Marketing managers must understand the criticism that the marketing function may encounter. By understanding the criticism, the manager is better prepared to respond to it in a proactive manner. Some of the criticism is justified; some is not.
The primary criticisms of the marketing function with respect to the impact on individual consumers have been categorized as being: (1) high prices; (2) deceptive practices; (3) highpressure selling; (4) shoddy or unsafe products; (5) planned obsolescence; and (6) poor service to disadvantaged consumers. These criticisms have come from a failure to meet individual consumer welfare needs.

A separate set of criticisms is directed toward the marketing function by society in general. Criticism from this larger public body includes comments on creating: (1) false wants and too much materialism; (2) too few social goods; (3) cultural pollution; and (4) too much political power. In addition, critics have also pointed out that marketing’s impact on businesses may not be good either. Marketing is accused of harming competitors and reducing competition by acquisition
of competitors, creating barriers to entry, and using unfair marketing practices.
Concerns about the marketing function have led action groups to participate in consumer and environmental movements and to form protest organizations. Marketing’s response to action groups and social criticism has largely been positive and proactive. Many companies that were originally opposed to social movements and legislation that was created to address consumer complaints have now recognized a need for positive consumer information, education, and protection.

THE END

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