Part 4 PRODUCT AND PRICE DECISIONS

10: Product, Branding, and Packing Concepts 11: Business Markets and Buying Behavior 12: Developing and Managing Prices 13: Marketing Channels and Supply-Chain Management 14: Retailing, Direct Marketing, and Wholesaling

Chapter 11 Developing and Managing Goods and Services Professor Jason C. H. Chen, Ph.D. School of Business Administration Gonzaga University Spokane, WA 99258 chen@jepson.gonzaga.edu

Marketing Applications

1. A company often test-markets the proposed product in a specific area or location. Suppose you wish to test-market your new revolutionary SuperWax car wax, which requires only one application for a lifetime finish. Where and how would you test-market your new product?   The aim of test marketing is to determine the extent to which potential customers will buy the product. It is not an extension of the development stage but a sample launching of the entire marketing mix. Students will have a variety of suggestions for test markets, including geographic areas with more extreme weather conditions to reduce the risk of failure in larger markets. They should keep in mind that they should be testing other elements of the marketing mix, not just the product.

4. The characteristics of services affect the development of marketing mixes for services. Choose a specific service and explain how each marketing mix element could be affected by these service characteristics.   Services have six basic characteristics - intangibility, inseparability of production and consumption, perishability, heterogeneity, client-based relationships, and customer contact. Students’ answers will vary based on the services they choose.

Internet Exercise Merck

Merck (Summary)   Merck, a leading global pharmaceutical company, develops, manufactures, and markets a broad range of health-care products. In addition, the firm’s Merck-Medco Managed Care Division manages pharmacy benefits for more than 40 million Americans. The company has established a website to serve as an educational and informational resource for Internet users around the world. To learn more about the company and its research, visit its award-winning site at www.merck.com.

Discussion Point Merck & Company Merck develops, manufactures and markets a broad range of health-care products The firm’s Merck-Medco Managed Care Division manages pharmacy benefits for more than 40 million Americans Copyright © 2014 South-Western, Cengage Learning. ALL RIGHTS RESERVED.

1. What products has Merck developed and introduced recently?   Answers will vary depending on Merck’s current products. Look on the Research tab under Pipeline to see what products are currently in development, and check the Newsroom for new product releases.

2. What role does research play in Merck’s success 2. What role does research play in Merck’s success? How does research facilitate new-product development at Merck?   Companies such as Merck must invest heavily in research and development in order to ensure that they always have new products in the pipeline. Merck provides the following summary of the importance of the research process: “The process of identifying and developing medicines is long and challenging. It begins by exploring the roots of a disease or condition. Which aspect of a disease should we target, and with what type of molecule? If a candidate molecule proves promising, it then continues through years of rigorous testing and must obtain regulatory approval before it reaches the market. A very small fraction of the candidates that begin evaluation will ultimately survive

3. Find Merck’s mission statement 3. Find Merck’s mission statement. Is Merck’s focus on research consistent with the firm’s mission and values?   According to the website, “We have made it our mission to provide innovative, distinctive products and services that save and improve lives, satisfy customer needs and to be recognized as a great place to work.” Research helps the company to meet all of these goals.

Video Case 11.1 DO AXE PRODUCTS MAKE MEN MORE DESIRABLE?

Do AXE Products Make Men More Desirable? Discussion Point Do AXE Products Make Men More Desirable? To effectively manage the brand, Unilever has regularly developed new products AXE’s product features are both tangible and psychological Love them or hate them, AXE commercials leave an indelible impression Take a look at the website Copyright © 2014 South-Western, Cengage Learning. ALL RIGHTS RESERVED.

Summary   AXE is the number one male grooming brand in both the United States and Canada. The company’s advertisements feature women who are very attracted to men who wear AXE body spray. AXE believes the provocative ads are important because they get the attention of men 18-24 years old, the company’s target demographic. AXE has extended their product line to include other grooming products such as shower gel to continue to meet the needs of young men. However, the ads and the products also appeal to pre-teens who want to feel more confident, which could damage AXE’s “sexy” perception.

1. How has AXE managed its product mix?   AXE’s product mix must satisfy its target market—men between the ages of 18 and 24. When they first entered the American market, the company needed to get young men to purchase body spray. Once AXE body spray was successful, the company engaged in line extensions and product modifications in order to keep existing customers and attract new ones. AXE’s products help young men develop an “AXE Lifestyle.”

2. How has AXE used line extensions to increase its reach among consumers?   AXE uses line extensions in several ways. It release new scents every year, and it has introduced hairstyling, aftershave, skin care, and shower gel products. AXE has also developed products for women that compliment its men’s products.

3. Why are younger generations attracted to AXE products?   During preadolescence many young men become more conscientious of their appearance and how attractive they are to the opposite sex. AXE provides a way for them to feel more confident about their body image.

PORTER’S FIVE COMPETITIVE FORCES MODEL Threats NEW MARKET ENTRANTS SUBSTITUTE PRODUCTS & SERVICES Switching cost Access to distribution channels Economies of scale Redefine products and services Improve price/performance Selection of suppler Threat of backward integration Buyer selection Switching costs Differentiation Cost-effectiveness Market access Differentiation of product or service THE FIRM INDUSTRY COMPETITORS According to Porter, there are five competitive forces in any industry, and the attractiveness of the industry depends on the strength of each force (Porter, 1985). Under the perspective of market structure, Porter’s competitive forces model (Porter, 1985; Applegate et al., 1999) has been broadly adopted as the underpinning for investigating the effect of information technology on the relationships between suppliers, customers, and other potential threats. Contemporary strategic planning frameworks -- 1) too narrow and pessimistic -- 2) they are based on projections of market share and market growth COMPETITIVE FORCES that SHAPE strategy -- depends on the type of the industry The ability to manage complexity and responsiveness has become a powerful source of competitive advantage. Internal Forces: 1.customer focus, 2.communication, 3.core competencies, 4.complexity, 5.Quality Due to characteristics of the instability of the markets in e-Commerce, Downes and Mui (1998) show that there are three forces that must be added to Porter’s five forces model: globalization, digitalization, and deregulation. digitalization – the improvement and cost reductions in digital technology have had significant impact in business for many years now. The Internet has simply accelerated much of what was already happening and spread it into other industries across the world (esp. the information-based industries). Deregulation and liberalization – it opened up new opportunities for many firms, and recent years have seen an increase in the number of related diversifications. (e.g., UK companies in the energy sector have branched out into related markets such as other forms of energy or telecommunications, making use of their physical distribution networks). Globalization – an international level of many industries and liberalization of many markets (e.g., Eastern Europe) have opened up new foreign markets for Western firms while bringing Western firms into competition with multinationals based in other countries., Such international competition is likely to accelerate following political moves, such as the signing of the General Agreement on Trade and Tariffs by the leading industrial nations which promise to reduce barriers to international trade. Concept of “glocalization” where organizations must be a part of the local environmental setting. That is to think global and act according to local customs to survive and thrive in local conditions. SUPPLIERS CUSTOMERS Bargaining power N Dr. Chen, The Trends of the Information Systems Technology TM -20

Generic Strategies Framework Michael Porter describes how businesses can build a sustainable competitive advantage “fundamental basis of above-average performance in the long run is sustainable competitive advantage.” He identified three primary strategies for achieving competitive advantage: ______ leadership - lowest-cost producer _____________ - product/service is with unique feature _______ - limited scope; occupy narrow market niche where the products/services can stand out by virtue of their cost leadership or differentiation. Cost Differentiation Focus

Competitive Advantage Focus Figure 1.2: Porter’s Generic Strategy Framework – 3 Strategies for achieving Competitive Advantage Competitive Advantage Uniqueness Perceived by Customer Lower Cost Position Industrywide (Broad Target) Overall Cost Leadership Differentiation Competitive Scope Three generic strategies Cost leadership differentiation (internal differentiation [e.g., stock option, bonus, salary increase] is good for building performance culture within the organization) From PRODUCT differentiation to SERVICE differentiation (BLUE OCEAN) Focus (focused strategy is to develop a new market niches for specialized products/services where a target area better than its competitors) -- means an appropriate position/market a. cost or b. differentiation PRODUCT differentiation  SERVICE differentiation  INNOVATION (BLUE OCEAN STRATEGY) Core concept of this strategy are two basic principles: 1. Competitive advantage is believed to be the GOAL of any strategy 2. It is to be believed that a firm must define the TYPE of CA it seeks to attain and the scope within which it will be attained. From “all things to all people” (a below-average performance) to a focus on core competencies. Particular Segment only (Narrow Target) Focus Competitive Mechanism N Dr. Chen, The Trends of the Information Systems Technology TM -22

Business Strategies and its Competitive Advantage Innovation Alliance Uniqueness Perceived by Customer Lower Cost Position Industrywide (Broad Target) Cost Leadership Differentiation Alliance Innovation Growth Competitive Scope Particular Segment only (Narrow Target) Three generic strategies Cost leadership differentiation (internal differentiation [e.g., stock option, bonus, salary increase] is good for building performance culture within the organization) From PRODUCT differentiation to SERVICE differentiation (BLUE OCEAN) Focus (focused strategy is to develop a new market niches for specialized products/services where a target area better than its competitors) -- means an appropriate position/market a. cost or b. differentiation PRODUCT differentiation  SERVICE differentiation  INNOVATION (BLUE OCEAN STRATEGY) Core concept of this strategy are two basic principles: 1. Competitive advantage is believed to be the GOAL of any strategy 2. It is to be believed that a firm must define the TYPE of CA it seeks to attain and the scope within which it will be attained. From “all things to all people” (a below-average performance) to a focus on core competencies. Cost Focus Differentiation Focus Knowledge-based economy Industrial economy Competitive Mechanism N Dr. Chen, The Trends of the Information Systems Technology TM -23

Dynamic Environment Strategies Porter’s model is useful for diagnostics, or understanding how a business seeks to profit in its chosen marketplace, and for prescriptions, or building new opportunities for advantage Porter model was developed at a time where the rate of change in any given industry was relatively _____ and _________. (i.e., stable) Newer models were developed to take into account the increasing turbulence and velocity of the marketplace slow manageable