DEVELOPING AND MANAGING PRODUCTS




BUAD 307
Products and
product lines
New products:
Development,
successes and
failures
The Product Life
Cycle and Diffusion
of Innovations
Branding
PRODUCT
Lars Perner, Instructor 1
Learning Objective #1

The choices firms need to make on new
product introductions
IMAGE/
POSITIONING
DIFFERENTIATION
IDEAS
AND
EVALUATIONS
RISK
CHOICES
PRODUCT
DECISIONS
TEST
MARKETING
DISTRIBUTION
BUAD 307
PRODUCT
LINES
PRODUCT
BRANDING
BRAND
EXTENSIONS
COMPETITIVE
RESPONSE
Lars Perner, Instructor 2
Learning Objective #2

Steering the product through the Product Life
Cycle
FEATURES
DIFFERENTIATION
BRAND
STRUCTURE
DIFFUSION
AWARENESS
IMAGE/
POSITIONING
PRODUCT
-CATEGORY
-BRAND
PRICE
BUAD 307
COMPETITION
PRODUCT
SUBSTITUTES
PARTNERSHIPS
Lars Perner, Instructor 3
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
Revitalization
BUAD 307
PRODUCT
Lars Perner, Instructor 4
Some PLC Stage Examples








BUAD 307
Color TVs: Decline
Black and white TVs:
Decline
HDTVs: Growth
VCRs: Decline
DVD players:
Decline.
Jeans: Maturity
Fast food:
Growth/maturity
Traditional
photography: Decline
PRODUCT
Digital photography:
Growth/maturity
 Fax machines:
Decline
 Travel agencies:
Decline
 Cranberry juice:
Revitalization

Lars Perner, Instructor 5
The Product Life Cycle (PLC) involves
________ over time





BUAD 307
Demand for the
product
Awareness of the
product
Competition in
supplying the product
◦ Price
◦ Features
◦ Differentiation
Profitability
Alternatives available
to the product
PRODUCT
Investment
opportunities (Boston
Consulting Group
model)
 Appropriate
strategies

Lars Perner, Instructor 6
Types 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)

BUAD 307
PRODUCT
Lars Perner, Instructor 7
The Chicken-and-Egg Problem

Some 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.

BUAD 307
A “jump start” may be needed—
e.g., period of free service in
return for early signup
PRODUCT
Lars Perner, Instructor 8
Examples of “Chicken-and-Egg”
Vulnerable Ventures








BUAD 307
Personals sites
Auction sites
Text messaging
systems
“Wiki” projects
Carpool systems
Electric cars
Computers and
software
Fashion
PRODUCT
Lars Perner, Instructor 9
Some Diffusion Examples

ATMs (*)
◦ Easy observability
◦ Significant relative advantage

Credit cards (*)

◦ Network economies

Faded, torn jeans
◦ Fads
◦ Innovations do not have to be
high tech
Rap music
◦ Low barriers to entry
◦ “Chicken-and-egg” problem
◦ “Jump-starting the cycle”

Fax machines (*)
◦ Spread to a new
consumer group

Hybrid corn (*)
◦ Trialability
◦ Imitation
*You should be able to discuss these case histories on the final
BUAD 307
PRODUCT
Lars Perner, Instructor 10
Diffusion 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.,
◦
◦
◦
◦
BUAD 307
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.,
◦
◦
◦
◦
◦
PRODUCT
Text messaging
E-mail
Online personals sites
Other online communities
Auction sites
Lars Perner, Instructor 11
To Adopt or Not to Adopt: How Will
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
BUAD 307
PRODUCT
Lars Perner, Instructor 12
Influences on the Speed of
Diffusion
Risk to expected
benefit ratio (relative
advantage)
 Product pricing
 Trialability
 Switching difficulties
and learning
requirements/ ease of
use

BUAD 307
PRODUCT
Lars Perner, Instructor 13
Break-Even Sales Volume Points

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)

BUAD 307
At what quantity sold will
the firm break even—i.e.,
cover costs without
making a profit?
QUANTITY, REVENUE,
COSTS, AND NET
PROFIT
$400,000.00
$300,000.00
$200,000.00
Total Revenue
$100,000.00
Total Costs
Net Profit
$0.00
-$100,000.00
0
10000
20000
30000
-$200,000.00
PRODUCT
Lars Perner, Instructor 14
QUANTITY, REVENUE, COSTS, AND NET PROFIT
$400,000.00
$350,000.00
$300,000.00
Total Revenue
= Total Cost
$250,000.00
Zero net profit
$200,000.00
Total Revenue
$150,000.00
Total Costs
Net Profit
$100,000.00
$50,000.00
$0.00
0
-$50,000.00
-$100,000.00
-$150,000.00
5000
10000
15000
20000
25000
Break-Even Quantities
BUAD 307
PRODUCT
Lars Perner, Instructor 16
Quantity
Total Revenue
1
100
500
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
11000
12000
13000
14000
15000
16000
17000
18000
19000
20000
21000
22000
BUAD 307
Total Costs
$15.00
$1,500.00
$7,500.00
$15,000.00
$30,000.00
$45,000.00
$60,000.00
$75,000.00
$90,000.00
$105,000.00
$120,000.00
$135,000.00
$150,000.00
$165,000.00
$180,000.00
$195,000.00
$210,000.00
$225,000.00
$240,000.00
$255,000.00
$270,000.00
$285,000.00
$300,000.00
$315,000.00
$330,000.00
PRODUCT
Net Profit
$100,008.00
$100,800.00
$104,000.00
$108,000.00
$116,000.00
$124,000.00
$132,000.00
$140,000.00
$148,000.00
$156,000.00
$164,000.00
$172,000.00
$180,000.00
$188,000.00
$196,000.00
$204,000.00
$212,000.00
$220,000.00
$228,000.00
$236,000.00
$244,000.00
$252,000.00
$260,000.00
$268,000.00
$276,000.00
-$99,993.00
-$99,300.00
-$96,500.00
-$93,000.00
-$86,000.00
-$79,000.00
-$72,000.00
-$65,000.00
-$58,000.00
-$51,000.00
-$44,000.00
-$37,000.00
-$30,000.00
-$23,000.00
-$16,000.00
-$9,000.00
-$2,000.00
$5,000.00
$12,000.00
$19,000.00
$26,000.00
$33,000.00
$40,000.00
$47,000.00
$54,000.00
Lars Perner, Instructor 17
Assumptions in Simple Break Even
Analysis





No additional manufacturing capacity will be
needed to make any of the quantities
considered
All customers pay the same price
No interest on sales made after the initial
period
No periodic fixed effects
Marginal costs of resources remain constant
◦ No quantity discounts
◦ No increase in costs due to limited market supply
BUAD 307
PRODUCT
Lars Perner, Instructor 18
Alternative Approach: New
Products 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



BUAD 307
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
PRODUCT
Lars Perner, Instructor 19
Branding
Brands
◦ 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”

BUAD 307
PRODUCT
Branding has been traced
to whiskey casks that
were identified for quality.
Lars Perner, Instructor 20
Brand Value and Image

Brand 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)

BUAD 307
Brand “personality:”
Associations with product
PRODUCT
Lars Perner, Instructor 21
Co-branding
◦ Ingredients
To take advantage of
assets of both firms
 Types
◦ Distributional

 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
 Egalitarian: Carl’s Jr. and
Green Taco
 Hierarchical: Visa as
official credit card of the
Olympics
◦ Line filling—e.g.,
airline code sharing
BUAD 307
PRODUCT
Lars Perner, Instructor 22
Brand 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
BUAD 307
PRODUCT
◦ 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
Lars Perner, Instructor 23