Products and Markets: Products and Markets Chapter 5


Learning Objectives: Learning Objectives Explain the term “market” and be able to describe 3 ways markets can be defined Describe market segmentation and ways to segment Describe 3 approaches to market segmentation Explain the term “product” and describe Kotler’s 5 levels of product benefit Describe and criticize Copeland’s product typology Understand the product life cycle Understand the concept of portfolio BCG Matrix; GEC Matrix


Key Definitions: Key Definitions Market (demand and supply sides) Market share (by volume or by value) Need Want Utility Served market Market segmentation Product Portfolio


Market (A Strategy View): Market (A Strategy View) Demand side – a group of actual or potential customers with similar needs or wants Supply side - industry


Market Share: Market Share Market share – measure of an organization’s performance with regard to its ability to win and retain customers Measurement of market share - by volume (units sold) - by value (sales turnover)


3 Ways to define markets: 3 Ways to define markets Definition based on product Definition based on need satisfaction or function performed Definition based on customer identity


Product Market: Product Market Product produced or sold Disadvantage – doesn’t identify the fact that different products may satisfy the same need or want, leading to a failure by organizations to recognize threats from different industries Advantage – economies of scale can be gained by sharing a production process Example: electronic organizer


Need Satisfaction of Function Performed: Need Satisfaction of Function Performed Relies on the concept of utility Disadvantage – very broad, can lead to a view of markets that does not allow a practical approach to decision-making Remember: Opportunities only arise from activities that the company’s competences allow it to enter, and threats come from activities that would likely be to substitute customers’ business Example: products that satisfy thirst (water, soft drinks, juice, etc.)


Customer Identity: Customer Identity Based on common requirements of customers Advantage – allows for the targeting of customers, and may provide for marketing economies of scale Disadvantage – different technologies may need to be employed, and thus not economical to produce all things for the market Example: people who play golf


Examples: Examples Starbucks McDonalds NBA Cinema 7-11 HBO Golf Club


Market Segmentation: 3 Approaches: Market Segmentation: 3 Approaches Undifferentiated marketing Differentiated marketing Concentrated marketing


Undifferentiated marketing strategy: Undifferentiated marketing strategy Denial of any market segmentation, and the assumption that demand is homogeneous Approach is appropriate when the market is truly homogeneous Examples: Coca-Cola uses this approach, Subway uses this approach


Differentiated marketing strategy: Differentiated marketing strategy Recognition of separate segments of the total market and treatment of each segment differently


Concentrated marketing strategy: Concentrated marketing strategy Organization focuses on one market segment Gives up all other parts of the market to specialize in one niche Advantage – allows the company to specialize and make a better match between their product and the segment Disadvantage – “putting all your eggs in one basket”


Product Positioning: Product Positioning Product positioning is the way in which a product or brand is perceived in relation to the preferences of segments of the market, and in relation to competitive products On the product positioning chart, an “x” represents customer preferences and perceptions of existing products


Product Positioning Chart (Beer): Product Positioning Chart (Beer) xxxx xx x Bitter Strong Weak Sweet x x x x x x x x xxxx x x x x x x Market Gap


Bases for Segmentation: Bases for Segmentation Way of distinguishing one customer type from another Common criteria before segmentation can occur: Market size Identifiability of the segment Measurability of the segment Accessability to the segment Buying behavioral characteristics of the segment


Typical Bases for Segmentation: Typical Bases for Segmentation Demographic variables (age, stage of family life cycle, gender, income, occupation, education, race, religion) Geographic variables (country, region, type of housing/neighborhood) Psychographic variables (lifestyle, personality, intelligence) Behavioral variables (brand loyalty, frequency of use, consumption occasion)


Examples of Segmentation: Examples of Segmentation McDonalds – products target to children (age segmentation), health conscious (psychographic segmentation based on lifestyle) FHM magazine – targeted to men (demographic segmentation based on gender) who are ages @ 20 -30 (demographic segmentation based on age) Ferrari – products targeted to rich (demographic segmentation based on income), risk-taking types (psychographic segmentation based on lifestyle)


Products: Definition: Products: Definition Anything offered for sale


How Value Might Be Added: Kotler’s 5 Levels of Product Benefit: How Value Might Be Added: Kotler’s 5 Levels of Product Benefit Core benefits Basic benefits Expected benefits Augmented benefits Potential benefits


Competition of Augmented Benefits: Competition of Augmented Benefits In mature markets, competition normally occurs at the augmented product level or above (over time, the augmented product may become the expected one)


Example: Kotler’s 5 levels of product benefit: Example: Kotler’s 5 levels of product benefit Mobile phones Core benefit – wireless phone calls Basic benefit – touch pad, mouthpiece, earpiece, screen Expected product – customers expect phones to have hands-free ability, a place to store contacts, SMS ability Augmented product – games, download capability, MP3 capability Potential product – social status from owning a certain phone


Copeland’s Product Classification: Copeland’s Product Classification Common view – different types of products need to be managed and brought to market in different ways By classifying types of products, organizations can easily identify how to market a product Copeland’s classification: Convenience goods Shopping goods Specialty goods


Copeland’s Classification: Convenience Goods: Copeland’s Classification: Convenience Goods Convenience goods – products purchased frequently, at low prices, and the customer sees little interest or risk in the purchase Businesses selling convenience goods should make the product available everywhere, because customers buy at the most convenient place Examples: bottled water, soft drinks, pens, notebooks, chips


Copeland’s Classification: Shopping Goods: Copeland’s Classification: Shopping Goods Shopping goods are generally more expensive, of more interest to the customer, and some risk is seen in the purchase Customers will shop around for this good Goods don’t have to be available in all outlets Promotional material should have high information content Examples: computers, mobile phones, TVs, common clothes


Copeland’s Classification: Specialty Goods: Copeland’s Classification: Specialty Goods Specialty goods are products that are very differentiated and often carry high levels of prestige Customers may insist on only one brand For businesses, high levels of service, high prices and restricted distribution is appropriate Specialized computers, cameras, watches


Limitations of Copeland’s Classifications: Limitations of Copeland’s Classifications Circular logic – the classification is based on how a product is marketed, and businesses, in turn, will use the classification as a basis for marketing the product Companies that only adopt this classification system will never lead with new product strategies


Product Life Cycle: Product Life Cycle Introduction stage Growth stage Maturity stage Decline stage


Introduction Stage: Characteristics: Introduction Stage: Characteristics Low production volume, high per unit cost Price elasticity of demand will determine pricing strategy (skimming or penetration pricing strategies) Skimming – price is high, is appropriate for products that are price inelastic Penetration – price is low, is appropriate for products that are price elastic and when gaining market share is more important than recovering development costs High risk for entrants, because cash flows will likely be negative for awhile, and imitators will enter the market


Growth Stage: Characteristics: Growth Stage: Characteristics Sales for the market as a whole increase New competitors typically enter the market Market becomes profitable Strategies: enter the market and win market share; develop new segments of the market


Maturity Stage: Characteristics: Maturity Stage: Characteristics High proportion of people who will purchase the product have already purchased it once May be expensive or risky to enter the market now or challenge for more market share Strategies: hold existing customers, compete hard for new customers, develop niches


Decline Stage: Characteristics: Decline Stage: Characteristics Market is shrinking Strategies: develop new uses for the product, find new users, reposition the product for parts of the market that will remain “Milking” strategy – low investment and take market share left by departing competitors


Product Portfolio Theory: Product Portfolio Theory Product portfolio – the array of products a company provides Assembling a portfolio is based on the idea of minimizing risk Broad portfolio – company has a presence in a wide range of product and market sectors Narrow portfolio – company operates in only a few or even one product market or sector


BCG Matrix: A way to view the entire product range: The BCG matrix is a way of identifying where a company’s products are in the market and how they should be treated in internal analysis Helps identify which product to push or drop, and when The horizontal axis measures market share in a particular way (market share measure) The vertical axis measures the rate of market growth (market growth measure) BCG Matrix: A way to view the entire product range


Slide36: Relative Market Share Rate of Market Growth 1x High 10x Low High Low


Understanding the BCG Matrix: Understanding the BCG Matrix Cash cow – a product with high market share in a low growth market normally is profitable and a generator of cash Standard strategy for a cash cow – manage conservatively and defend strongly


Understanding the BCG Matrix: Understanding the BCG Matrix Dog – a product that has a low market share in a low growth market, and is typically not profitable Standard strategy – get rid of it, or differentiate it to try to get a strong position for it in a niche market


Understanding the BCG Matrix: Understanding the BCG Matrix Stars – products that have high market share in a high growth market One important characteristic – likely to use lots of company cash in advertising and product improvements


Understanding the BCG Matrix: Understanding the BCG Matrix Question marks – products that have low market share in high growth markets If they cannot improve, they will become dogs Strategy – management must make a decision: either invest more resources in winning market share, or dump it


Another way to analyze: GEC Matrix: Another way to analyze: GEC Matrix Based on a comparison of market attractiveness and competitive strength Market attractiveness criteria is set by the user of the matrix (factors such as market growth, profitability, strength of competition, entry/exit barriers, etc. are common) Competitive strength might include technological capability, brand image, distribution channel links, production capability and financial strength


Slide42: High Medium Low Competitive Strength Market Attractiveness High Medium Low


Understanding the GEC Matrix: Understanding the GEC Matrix Cell A Strategy – invest strongly Cell B Strategy – either build strength to challenge, or build selectively Cell C Strategy – here is a dilemma, either sell or differentiate Cell D Strategy – investment and maintenance of competitive position Cells E & F Strategy – minimize risk and expand carefully Cells G & H Strategy – management for earnings Cell I strategy – sell or minimize investment