Chapter 10 - Setting Product Strategy
I. Learning Objectives
After reading this chapter, students should:
q Know the characteristics of products and how they can be classified
q Know how a company can build and manage its product mix and product lines
q Know how companies can use packaging, labeling, warranties, and guarantees as marketing tools
q Know the main stages in developing and managing new products and the best way to manage the new-product development process
q Know the appropriate marketing strategies at each stage of the product life cycle

II. Chapter Summary

Marketers need to think through five levels of the product, each of which adds value: the core benefit, basic product, expected product, augmented product, and potential product. Products can be classified in terms of durability and reliability. Consumer goods can comprise convenience goods, shopping goods, specialty goods, or unsought goods. Industrial goods can include materials and parts, capital items, or supplies and business services.

A product mix can be classified in terms of width, length, depth, and consistency. These four dimensions are the tools for developing the firm’s marketing strategy and deciding which product lines to grow, maintain, harvest, and divest.

Product-line managers look at sales, profits, and market profile when analyzing a product line and deciding how much to invest in it. The product component of the marketing mix can be changed by line stretching, line filling, modernizing its products, featuring certain products, and pruning.

Physical products must be packaged and labeled; well-designed packages create convenience value for customers and promotional value for producers. Warranties and guarantees offer further assurance to customers.

The eight stages of the new-product development process are idea generation, screening, concept development and testing, marketing-strategy development, business analysis, product development, market testing, and commercialization. New products fail for many reasons: ignoring or misinterpreting market research; overestimating market size; high development costs; poor design; incorrect positioning, ineffective advertising or wrong price; insufficient distribution support; and competitors who fight back hard.

The general sequence of stages in the product life cycle is introduction, growth, maturity, and decline; most products are in the maturity stage.

Each stage calls for different marketing strategies. The introduction stage is marked by slow growth and minimal profits. Next, the product enters a growth stage characterized by rapid sales growth and increasing profits, followed by a maturity stage in which sales growth slows and profits stabilize. Finally, the product enters a decline stage, where the challenge is to identify weak products; develop a strategy for each; and phase out unsustainable products while minimizing the hardship to company profits, employees, and customers.

III. Chapter Outline

I. Product Characteristics and Classifications
A product is anything that can be offered to a market to satisfy a want or a need
A.  Product Levels - five levels that represent a customer value hierarchy
1. Core benefit - fundamental benefit (hotel room offers shelter for rest and sleep)
2. Basic product – (hotel room includes a bed, bathroom, and towels)
3. Expected product - attributes normally expected (clean bed, bathroom, and towels)
4. Augmented product - exceeds customer expectations (turned down bedspread, candy mints/flowers/fruit, extra linen, bathrobes and slippers, and complimentary staple goods)
5. Potential product - prototype, experimental (one-of-a-kind luxurious suite)
B. Product Classifications
1. Durability and tangibility
a) Nondurable goods - consumed quickly, purchased frequently. Strategy - wide market coverage, smaller margins, induce to try
b) Durable goods - longer use, less frequently purchased, greater consumer investment (i.e. financial, searching, and understanding). Strategy - more intensive personal selling, guarantee offerings, higher margins
c) Services - intangible, inseparable (i.e. produced and consumed simultaneously), variable, perishable. Strategy - quality control, flexibility, build trust with consumer
2. Consumer goods classification (classified by consumer shopping habits)
a) Convenience goods - frequent purchase with minimal effort (e.g. newspapers, coffee, milk)
b) Shopping goods - requires some research and decision making (e.g. home furnishings, clothing) 
c) Specialty goods - usually unique characteristics or brand identification (e.g. automobiles, jewelry)
d) Unsought goods - (e.g. smoke detector)
3. Industrial goods classification (materials and parts that enter the manufacturer’s product completely)
a) Raw materials - farm (soybean) or natural (oil) products
b) Manufactured materials and parts - component materials (iron) or component parts (small motor)
c) Capital items - long-lasting goods that facilitate manufacturing, including installations (factory) and equipment (trucks) with much personal selling involvement

II. Product relationships
Product mix is the set of all products and items that are offered for sale. A product mix can be described in terms of width (number of product lines), length (total number of items in the mix), depth (number of product variants), and consistency (product line similarity regarding end use)
A. Product Line Analysis - develop a basic platform and modules that can be changed to meet different customer requirements
B. Product Line Length
1. Line stretching - increase offering of a product line in either or both directions relative to current line in terms of value to the customer (e.g. more expensive product offerings such as Lexus by Toyota or more moderately priced ones such as Four Points by Sheraton)
2. Line filling - add more offerings within current range
C. Line Modernization, Featuring, and Pruning
1. Modernize - adjust to rapidly changing markets
2. Line featuring - showcase one or more higher selling items to help boost sales of lower selling items
3. Pruning - eliminate weak offerings, reduce offerings in market slowdowns or low production capacity

III. Packaging, Labeling, Warranties, and Guarantees
A. Packaging
1. All activities of designing and producing a product’s container
2. Container can have primary package (package as a product may appear on a shelf) and secondary package (box that primary package sits inside)
3. Package is becoming more important to the marketing effort
a) In self-service scenarios, an attractive package can influence an impulse decision or stand out in a crowded offering
b) Increasing consumer affluence has created a demand for more convenience, attractiveness, dependability, and prestige in packaging
c) The package supports brand recognition and can help build awareness
d) Innovative packaging can add benefits to value chain members as well as consumers
B. Labeling (can be simple or complex)
1. Identifies the product or brand
2. Demonstrates product grading (e.g. A, B, C)
3. Describes the product, defines use and precautions as well as origin
4. Can facilitate promotion through attractive design
5. Complies with regulations on “open dating,” unit pricing, ingredient percentage 
C. Warranties and Guarantees
1. Warranty - formal or implied promise of product performance by manufacturer with remedy to resolve nonperformance
2. Guarantee - reduces buyer’s perceived risk, used to differentiate, and can also be applied to nonproduct resolution, such as competitor price match, delivery, installation, etc.

IV. Managing New Products - six categories of new products are: 1) new to the world (address entirely new market), 2) new product lines, 3) additions to existing product lines, 4) improvements and revisions of existing products, 5) re-positioning, 6) cost reductions (similar performance at lower cost)
A. Why New Products Fail and Succeed
1. 95% failure rate in the United States (Europe rate is 90%)
2. Failures - ignoring or misinterpreting market research, market size  overestimations, sub-optimal distribution performance, poor design, incorrect positioning, development costs, ineffective advertising, pricing issues, and competition fighting back
3. Successes - better understanding of customer needs, higher performance-to-cost ratio, head start against competition, contribution margin, budget, internal teamwork, top management support, technological and marketing synergy, execution and market attractiveness
B. New-Product Development - eight-stage process
1. Idea generation - ideas come from a variety of sources. Idea-generating techniques include attribute listing, forced relationships, morphological analysis, need/problem identification, brainstorming, and synectics
2. Idea screening - not all ideas can be pursued, but must be sent to a committee where they are considered either promising, marginal, or are rejected. At this stage, the company runs the risk of either accepting a bad idea or rejecting a good one
3. Concept development - attractive ideas must be refined into testable product concepts. A product concept is an elaborate version of the idea expressed in meaningful consumer terms
4. Concept testing - product concepts should be presented to an appropriate group of target consumers to gauge their reactions. Customer-driven engineering is an engineering effort that attaches high importance to incorporating customer preferences in the final design. Customer preferences can be measured through conjoint analysis
5. Marketing strategy three-part preliminary plan
a) Describe target market size, structure, and behavior
b) Product positioning
c) Long-run sales and profit goals, marketing mix
6. Business analysis
a) Performing sales, cost, and profit projections on the proposed product to determine satisfaction of company objectives
b) Estimating total sales - sum of three different types of sales (first-time, replacement, and repeat) must yield a satisfactory profit
c) Estimating costs and profits - break-even analysis and risk analysis 
7. Product development
a) Represents a substantial jump in investment
b) Determine feasibility
c) Translate requirements into prototype - quality function deployment (QFD) is a methodology used to generate a list of engineering attributes from a list of desired customer attributes
d) Alpha testing - test the product within the organization, refine where appropriate, and prepare for consumer testing
e) Beta testing -  have consumers test refined output from alpha testing
f) Market testing - products passing alpha and beta tests that meet functional, psychological, and feasibility requirements are “dressed up” with branding and packaging and used in market tests to assess four variables: trial, first repeat purchase, adoption, and purchase frequency. Four methods of testing include:
(1) Sales-wave research - consumers try product at no cost and then are offered the product (or a competitor’s product) again at a reduced price for as many as three to five times (sales waves). Metric is repeated and level of satisfaction standardized.
(2) Simulated test marketing - consumers are asked questions about brands, then exposed to brand advertising, and given money to purchase products. Product purchases as well as repeat purchase intentions  are evaluated
(3) Controlled test marketing - product distributed to select outlets. Product mix as well as purchase activity are evaluated
(4) Test markets - select geographic areas, usually cities that are a representation of the targeted market, are used to evaluate marketing mix and consumer purchase activity
g) Commercialization (the last step)
(1) Marketing mix strategy for product rollout is defined
(2) Market entry timing is planned (first, parallel, or late entry)
(3) Methodologies such as critical path scheduling (CPS) are used to manage product implementation
8. Techniques for measuring consumer preferences - simple rank-order method, paired comparison, and monadic rating

VII.       Marketing Through the Product Life Cycle

A. Product Life Cycles
1. Stages in the product life cycle - introduction, growth, maturity, and decline
B. Marketing Strategies:  Introduction stage and the pioneer advantage
1. Marketing strategies in the introduction stage - rapid skimming, slow skimming, rapid penetration, and slow penetration
2. Market pioneers - research shows those first in the market gain the greatest advantages, both consumer- and producer-oriented
3. Competitive cycle - sole supplier, competitive penetration, share stability, commodity competition, and withdrawal
C. Marketing Strategies:  Growth stage - A wide variety of strategies available
D. Marketing Strategies:  Maturity stage
1. Market modification
2. Product modification
3. Marketing mix modification
E. Marketing Strategies:  Decline stage
1. Identifying the weak products and determining decline marketing strategies
2. Increasing investment, maintaining investment, decreasing investment, harvesting, divesting, and the “drop” decision
F. Critique of the Product Life Cycle Concept
1. Good for planning control but less so for forecasting 
2. Difficult to determine stage in product life cycle

VIII.      Summary

IV. Opening Thought
Students will be familiar with their idea of a tangible product—the physical manifestation—for example, their cell phone or the shoes they are wearing. However, students may have trouble understanding the “totality” of the product physically demonstrated—the core benefit, the basic product, expected product, augmented product, and potential product. The instructor is encouraged to use class time to allow students to uncover or explore these additional components of the “product” concept so that they will begin to understand such dimensions better.

Students should have no problems comprehending the concepts of durability and reliability, nor should they face difficulties with brand differentiation or product line depth and breath. Perhaps, the most challenging concepts of this chapter are line stretching and line filling. Again, the instructor is encouraged to use examples from manufacturers’ or personal experiences to communicate these concepts successfully. Finally, the labeling of a product includes both advertising copy and governmental regulations, which will be new material for many students.

Students will be challenged in understanding the new-product process if they are new to the science of marketing. Like the general population, they probably believe that new products are just “thought-up” and created! Therefore, to outline and detail the new-product process will help overcome this first barrier to effective learning. Instructors can use examples from their experience in the creation of new products or they can set up a class experiment on the “creation” of a new product to facilitate learning.

The third challenge presented in this chapter is to understand that products and markets have a life cycle and undergo changes throughout that process. Again, the use of product or service examples familiar to the students is encouraged to communicate the different stages of this life cycle.

V. Teaching Strategy and Class Organization

1. At this point for the semester-long marketing plan project, students should have set their group’s product or service strategy. Instructors are to evaluate their submissions on the product (or service) features, quality, price, and the other considerations found in this chapter.

2. In planning its market offering, the marketer needs to address five product levels: core benefit, basic product, expected product, augmented product, and potential product. Students should select a firm within an industry and through research, outline the firm’s five product levels for its products. Students should also be challenged to discover the firm’s perception of the customer’s value hierarchy and total consumption system.

ASSIGNMENTS
Small Group Assignments
1. This chapter case details Toyota’s success in delivering a superior product. There are numerous examples of companies delivering offerings that meet the target customers’ needs or wants. In this assignment, students are challenged to compile a list of at least three other examples of company products performing at exceptional levels despite intense competition. Students’ reports should not only identify the products and companies in terms of the definition of “product” in this chapter, but also delineate the salient characteristics of their selected products.

2. Convenience goods and capital goods can be seen as two ends of the “product continuum”. Convenience goods are purchased frequently, immediately, and with minimal effort. Capital goods are items that last a long time and are purchased infrequently by consumers. Students should select a convenience good and a capital good of their choice, and compare and contrast the consumers’ value hierarchy and users’ total consumption system for each item. 

3. New products fail at a disturbing rate. Recent studies put the rate at 95% in the United States and 90% in Europe. In small groups (five students suggested as the maximum), find three products that have “failed” (been introduced to the market then withdrawn by the company) and suggest the cause(s) of these product failures. A listing of some reasons for why new products fail can be found in the chapter.

4. 3M is noted for being one of the most innovative U.S. companies. Other innovative companies exist as well. In small groups, find at least three Asian companies that have introduced numerous new products into the marketplace over the last two years. What characteristics do all these companies share? What has been their success rate?

5. To prepare case studies based on the following materials from Chapter 10 and to present these:
• Mini case: Benz
• Innovative Marketing: Disney
• Innovative Marketing: Sony 

Individual Assignments

1. Assign the following readings to students: Robert Bordley, “Determining the Appropriate Depth and Breadth of a Firm’s Product Portfolio,” Journal of Marketing Research, 40 (February), 2003, pp. 39–53 or Peter Boatwright and Joseph C. Nunes, “Reducing Assortment: An Attribute-Based Approach,” Journal of Marketing, 65 (July), 2001, pp.50–63. After reading each article, students should submit a paper summarizing their findings and illustrating the concepts discussed in them to the material covered in this chapter.

2. When the physical product cannot be easily differentiated, the key to competitive success may lie in adding valued services and improving their quality. Examples of products where value has been added in the service component include computers, education, and pizzas. Students are to select products which they think the additional value present lies in the service and quality components. They should be prepared to defend their selections using the material presented in this chapter.

Think-Pair-Share
Product differentiation is essential to the branding process. In choosing to differentiate a product, a marketer has the choice of form, features, performance quality, conformance quality, durability, reliability, repairability, and style. Collect examples of currently produced products that have been differentiated and branded for each of these design parameters.

END-OF-CHAPTER SUPPORT

MARKETING  DEBATE

Product functionality is the key to brand success versus Product design is the key to brand success.

Whom Should You Target with New Products?

VI. Case Study

1. Marketing in China: Vimicro
1) How does Vimicro position itself as an innovative product?
2) What are the major lessons we can learn from Vimicro’s success in developing the global market?

2. Marketing in China: Develop Products Suitable for China’s Market  
1) Try to discover more cases similar to above-mentioned ones, and share more new products which suit China’s market. For example, “Refine MPV”, “Color Ring”, and “Chery QQ Auto”
2) Discuss how to capture the features of local consumers’ needs, and develop or improve a new product which is suitable for a specific segment market.

Chapter Case:  TOYOTA  
1) What have been the key success factors for Toyota?
2) Where is Toyota vulnerable? What should it watch out for?
3) What recommendations would you make to senior marketing executives going forward? What should they be sure to do with its marketing

VII. Main Topic(s)
A. “Product Characteristics and Classifications”
This section of the chapter focuses on the dynamics of consumer product perception and product categorization. An organization’s product strategy should incorporate consumer behavior relative to product innovation. 
Teaching Objectives
· Stimulate students to recognize how consumers perceive products in terms of hierarchy.
· Gain an understanding of how organizations define products in terms of general categories.
· Awareness of the need for a positioning policy and strategy.  
Discussion
Product Levels
By thinking of their products in terms of levels, organizations may enhance their efforts in product innovation. The automobile industry is a good example of demonstrating the relationships between product levels and product innovation.
· Core benefit of an automobile is transportation.
· The basic product should contain lights, heat, brakes, seat belts, manual transmission, “donut” spare tire, etc.
· The expected product also contains a radio, air conditioning, automatic transmission, power windows and locks, ABS, power driver seat, etc.
· The augmented product in addition may contain a navigation system, five-CD changer, six speakers, full spare tire, deluxe sound system, halogen lights, remote start-up, heated seats, etc.
· A potential product may include automatic speed governor tied to sensors that indicate predetermined safe proximity to other automobiles, wireless access to support automatic payment in parking garages, fast-food drive-ups, etc.
Discuss how auto manufacturers know exactly which level should contain which features in the consumer’s mind and how they place certain features as options in different levels. The natural progression of feature movement through levels is also an interesting discussion point. For example, features that are augmented tend to migrate to the expected, and then to the basic offering.    
[Note to the Instructor: Have students define a similar level breakdown for another product type and challenge them to identify natural level migration. Also, have them explain why the migration takes place. Homes, appliances, cell phones/landlines are potential products.]  

PRODUCT CLASSIFICATIONS
A product’s classification can be a starting point for understanding basic product strategies. Convenience goods navigate to price strategy, shelf positioning, outlet location, and available inventory. There can be a tendency to commoditize so there is always the pressure of determining how to best differentiate. Differentiation plays a more important role with shopping or specialty goods. The latter probably requires more personal selling than the former but both benefit. A shopping good can take advantage of nonpersonal selling activity such as promotional material, in-depth information on the organization’s website, good keywords to optimize consumer Web searches using search engines, and presence on popular product comparison sites such as buy.com.
[Note to the Instructor: Have students categorize their recent purchases into respective product classification areas.]

B. “A NEW LOOK AT PACKAGING”
Introduction - Packaging: The Five-Second Commercial
A point increasingly driven home to marketers of food, health, and beauty product lines, and over-the-counter drugs, is that the package is the brand. Once the brand has done everything possible to make the product taste good, work effectively, or cost less, it is still possible to distinguish it with a package that no competitors can copy.
As products and media channels proliferate, prospective customers split into increasingly more difficult-to-reach audience, market, and readership segments. Without an impressive return on investment from mass media advertising, the role of packaging as a key influencer on the customer, especially during the moments before and during purchase, has expanded dramatically.
THE VALUE OF PACKAGING
Many marketers are paying more attention to package design because the products increasingly are more alike in the marketplace. This is the argument of some marketing professionals who point out that when differentiation through taste, color, and other product elements has reached parity, packaging makes the critical difference.
An example of this is found in the PepsiCo reaction to Coca-Cola’s plasticization of its hallowed curved bottle. Pepsi found that it could not follow suit, but they responded in a manner designed again to level the playing field. Pepsi set out to create a new package, as they do every few years. As a Pepsi executive has noted, operationally it is very complicated to make a major shift like this, but clearly in this type of product category, it is necessary occasionally. Pepsi and other similar companies can build business on distribution and price, but packaging is a way for them to build excitement without changing the formula or adding products that will cannibalize the rest of their product line. That is the challenge.  
The result is that Pepsi is building a whole new round of designs based on themes such as: “Fast Break,” a 20-oz. resellable, curved bottle; “Big Slam,” a one-liter bottle geared to convenience stores. “Pepsi Junior” is a resellable 12-oz. plastic can; and “Block Party” is a 30-oz. can version of Coke’s “The Cube”. Pepsi has turned the 24-can multipack into a promotional tool, carrying coupons from Breyer’s (a Nabisco label), Thermos, and Spalding.
Other examples include:   
· Perrier - The firm made its distinctive package the centerpiece of promotion, shrink-wrapping original artwork onto bottles sold through restaurants. 
· McDonald’s - Licensees are cashing in on the recognizability of McDonald’s packages by selling neckties in mock fries and burger boxes in department stores.
Beyond good looks, the best designs extend the brand and its image by adding some intrinsic value to the product itself. As many marketers look at it, it is a constant dance to balance identity and utility; brands want to be different and to offer benefit to the consumer.
Packaged goods marketers are paying special attention these days to delivery systems. That is prompted in part by the success of club stores (Sam’s Club, B.J. Wholesale Club, etc.) whose giant packs sell better when they are resellable. A unique delivery system, like Mentadent toothpaste’s double pump, can cement a brand’s image. And designs that take into account how consumers use the product and the package make consumers feel like the manufacturer cares about them. 
Other companies also have capitalized on this as they fight off private labels: 
· Procter & Gamble has an easy-to-open yet child-proof cap on its Aleve analgesic.
· Tylenol touts its Fast Cap, designed for older adults. This is a convenience move that adds value. If a competitor can copy it, it is more of a tactical move than a strategic brand protection. It ends up being a bonus for container makers, though, by giving them a ready market for innovative packages that may have required expensive retooling to produce. 
Proprietary packaging, especially patented designs, prevents knockoffs. As a result, it has become common practice for marketers to patent a specific design, and then build a moat around that design by copyrighting several similar designs.
Consumer concerns for the environment now pressure marketers to avoid wasteful packaging. While these moves cut down the surface area for graphics, it is better for marketers in the long run. Greater ecological pressure may even reawaken interest in proprietary shapes. The most likely candidates are jarred and bottled items like condiments; glass is easy to shape, and a distinctive jar means an added value for consumers. Cartons, on the other hand, are more expensive to shape and more difficult to protect from infringement.
However, ecological advances come at a cost. When Hanes dropped the plastic egg for L’eggs hosiery in l991 and moved to a gabled box, there was no question they lost something. The egg structure had been tied to a function; without the function, it is not clear whether the shape was relevant to the future equity of the brand. And the question is, how do you capture the shape graphically?
Companies tend to adjust the graphics more often than product structure because it is a cheaper and faster way to update a brand. Category leaders often use well-recognized graphics to extend their clout into new categories. For example, Sun Diamond Growers of California developed new packaging for Sun-Maid dried fruits that uses the Sun-Maid woman and bright red used by the No. l raisin brand.  Frito-Lay (under PepsiCo) took the same approach by using the Taco Bell name and graphics with its supermarket line of Taco Bell-branded food. 
In sum, package design has to be very carefully integrated with product, distribution, and service design. Brand name companies cannot just slightly modify the package to fend off private-label marketing. There has to be a more systematic design change that adds some intrinsic value. Without this, the brand will end up competing in some very small consumer niches, generating interest with either very rich or very naive consumers.