BUAD 307 PRODUCT Lars Perner, Instructor 1 DEVELOPING AND MANAGING PRODUCTS Products and product lines New products: Development, successes and failures

BUAD 307 PRODUCT Lars Perner, Instructor 1

DEVELOPING AND MANAGING DEVELOPING AND MANAGING PRODUCTSPRODUCTS

Products and product lines

New products: Development, successes and failures

The Product Life Cycle and Diffusion of Innovations

Branding


Learning Objective #1Learning Objective #1The choices firms need to make on new

product introductions

PRODUCTDECISIONS

TESTMARKETING COMPETITIVE

RESPONSE

IDEASAND

EVALUATIONS

DIFFEREN-TIATION

RISKCHOICES

BRANDEXTENSIONS

BRANDING

DISTRIBUTION

PRODUCTLINES

IMAGE/POSITIONING


Learning Objective #2Learning Objective #2Steering the product through the Product

Life Cycle

PRODUCT

DIFFUSION

AWARENESS-CATEGORY

-BRAND

IMAGE/POSITIONING

PRICE

BRANDSTRUCTURE

SUBSTITUTES PARTNERSHIPS

FEATURES

COMPETITION

DIFFEREN-TIATION


The Product Life Cycle (PLC)The Product Life Cycle (PLC)Products will generally be invented and start

with low use. With decreased costs and improved

technology, more people tend to adopt.The product life cycle can reach:

◦ Plateau◦ Decline◦ Revitalization

Peak (Maturity)

Plateau

Revitali-zation


Some PLC Stage ExamplesSome PLC Stage ExamplesColor TVs: DeclineBlack and white

TVs: DeclineHDTVs: GrowthVCRs: DeclineDVD players:

Decline. Jeans: MaturityFast food:

Growth/maturityTraditional

photography: Decline

Digital photography: Growth/maturity

Fax machines: Decline

Travel agencies: Decline

Cranberry juice: Revitalization


The Product Life Cycle (PLC) The Product Life Cycle (PLC) involves ________ over timeinvolves ________ over time

Demand for the product

Awareness of the product

Competition in supplying the product◦ Price◦ Features◦ Differentiation

ProfitabilityAlternatives

available to the product

Investment opportunities (Boston Consulting Group model)

Appropriate strategies


Types of InnovationsTypes of Innovations Continuous--same product,

just small improvements over time--e.g., typical automobile/stereo system model changes

Dynamically continuous--product form changed, but function and usage are roughly similar--e.g., jet aircraft, ball point pen, word processor

Discontinuous--entirely new product; usage approach changes (e.g., fax)


The Chicken-and-Egg The Chicken-and-Egg ProblemProblemSome programs require two

components, each of which must be present before the other can be attracted◦ E.g., an online auction site needs

both buyers and sellers. Buyers are less motivated to come when there are few sellers, but buyers are needed to attract sellers.

A “jump start” may be needed—e.g., period of free service in return for early signup


Examples of “Chicken-and-Egg” Examples of “Chicken-and-Egg” Vulnerable VenturesVulnerable VenturesPersonals sitesAuction sitesText messaging

systems“Wiki” projectsCarpool systemsElectric carsComputers and

softwareFashion


Some Diffusion ExamplesSome Diffusion Examples ATMs (*)

◦ Easy observability◦ Significant relative

advantage Credit cards (*)

◦ “Chicken-and-egg” problem◦ “Jump-starting the cycle”

Faded, torn jeans◦ Fads◦ Innovations do not have to

be high tech

Fax machines (*)◦ Network economies

Rap music◦ Low barriers to

entry

◦ Spread to a new consumer group

Hybrid corn (*)◦ Trialability

◦ Imitation

*You should be able to discuss these case histories on the final


Diffusion ThemesDiffusion Themes Observability:

Products that can be seen being used to others tend to spread faster

“Chicken-and-egg” problem: A certain infrastructure is needed to make adoption attractive, but motivation to provide the infrastructure depends on market size—e.g.,◦ Coupons and clearinghouses ◦ Hydrogen/electric cars◦ HDTV◦ Entertainment media

Trialability: People tend to prefer “trying out” a potentially costly innovation rather than having to commit before trial

Network economies: Some innovations become more valuable when more others have that innovation—e.g.,◦ Text messaging◦ E-mail◦ Online personals sites◦ Other online communities◦ Auction sites


To Adopt or Not to Adopt: How Will To Adopt or Not to Adopt: How Will Consumers Answer the Question?Consumers Answer the Question?

Some causes of resistance to adoption◦ Perceived risk--financial and social◦ Self image◦ Effort to implement and/or learn to use

the product◦ Incompatibility◦ Inertia


Influences on the Speed of Influences on the Speed of DiffusionDiffusion

Risk to expected benefit ratio (relative advantage)

Product pricingTrialabilitySwitching difficulties

and learning requirements/ ease of use


Break-Even Sales Volume Break-Even Sales Volume PointsPoints

Two types of costs◦ Fixed: Generally

independent of quantity produced within a certain range (e.g., R&D, equipment needed, setup, overhead)

◦ Variable (marginal): Costs of making one additional unit (e.g., labor, materials)

At what quantity sold will the firm break even—i.e., cover costs without making a profit?


Break-Even QuantitiesBreak-Even Quantities


Quantity Total Revenue Total Costs Net Profit

1 $15.00 $100,008.00 -$99,993.00

100 $1,500.00 $100,800.00 -$99,300.00

500 $7,500.00 $104,000.00 -$96,500.00

1000 $15,000.00 $108,000.00 -$93,000.00

2000 $30,000.00 $116,000.00 -$86,000.00

3000 $45,000.00 $124,000.00 -$79,000.00

4000 $60,000.00 $132,000.00 -$72,000.00

5000 $75,000.00 $140,000.00 -$65,000.00

6000 $90,000.00 $148,000.00 -$58,000.00

7000 $105,000.00 $156,000.00 -$51,000.00

8000 $120,000.00 $164,000.00 -$44,000.00

9000 $135,000.00 $172,000.00 -$37,000.00

10000 $150,000.00 $180,000.00 -$30,000.00

11000 $165,000.00 $188,000.00 -$23,000.00

12000 $180,000.00 $196,000.00 -$16,000.00

13000 $195,000.00 $204,000.00 -$9,000.00

14000 $210,000.00 $212,000.00 -$2,000.00

15000 $225,000.00 $220,000.00 $5,000.00

16000 $240,000.00 $228,000.00 $12,000.00

17000 $255,000.00 $236,000.00 $19,000.00

18000 $270,000.00 $244,000.00 $26,000.00

19000 $285,000.00 $252,000.00 $33,000.00

20000 $300,000.00 $260,000.00 $40,000.00

21000 $315,000.00 $268,000.00 $47,000.00

22000 $330,000.00 $276,000.00 $54,000.00


Assumptions in Simple Break Assumptions in Simple Break Even AnalysisEven AnalysisNo additional manufacturing capacity will

be needed to make any of the quantities considered

All customers pay the same priceNo interest on sales made after the initial

periodNo periodic fixed effectsMarginal costs of resources remain

constant◦ No quantity discounts◦ No increase in costs due to limited market supply


Alternative Approach: New Alternative Approach: New Products an InvestmentsProducts an Investments Calculation of net present value (NPV)--discounted

cash flows over time for◦ R&D expenses

◦ Setting up manufacturing capacity

◦ Period fixed expenses (e.g., cost of buildings and equipment depreciation)

◦ Total revenue

Discount rate should reflect the risk associated with the specific product considered

More complex models assign probabilities to various outcomes (e.g., competitor entry, reaching certain sales levels, changes in resource costs)

This approach is covered in finance and managerial accounting courses


BrandingBrandingBrands

◦ Product or product line specific brands E.g., Tide, DeWalt,

Hayes modem International issues

◦ “Umbrella Brands” 3M

◦ National vs. regional◦ National vs. international◦ Store brands

Trade marks and “genericide”

Branding has been tracedto whiskey casks that were identified for quality.


Brand Value and ImageBrand Value and ImageBrand equity: Value

added to product based on brand name◦ Choice likelihood◦ Ability to charge higher

price◦ Use of product as loss

leader Benefit in market share, temporary

revenue (Coca Cola) Possible damage to long term brand

image (Louis Vuitton suitcases in Japan)

Brand “personality:” Associations with product


Co-brandingCo-branding To take advantage of

assets of both firms Types

◦ Distributional Egalitarian: Carl’s Jr. and

Green Taco Hierarchical: Visa as

official credit card of the Olympics

◦ Line filling—e.g., airline code sharing

◦ Ingredients Cooperative: Dryers’ ice

cream with Mars M&Ms Independent: Local

computer maker advertises Maxtor hard drive components

◦ Intrusive: “Intel Inside”

◦ Partial: McD’s serves Coca Cola

◦ Sponsorship: Good Housekeeping seal of approval


Brand ExtensionsBrand Extensions Use of an existing brand

name to a new-to-the-brand product category

May lower cost of launching new product line and increase speed of market penetration, but…

Considerations◦ Congruence: Are

products consistent in image to be represented by the same brand name? Coke and Diet Coke Miller vs. Miller Light

Beer

◦ Perception of ability to make product well

◦ Extension should not be exploitative—making a “trivial” product by high image brand (e.g., Heineken Popcorn)

◦ Order of entry: First manufacturer of new to market product should not extend an existing brand—this causes confusion

Documents

BUAD 307 PRODUCT Lars Perner, Instructor 1 DEVELOPING AND MANAGING PRODUCTS Products and product lines New products: Development, successes and failures