Lecture 11. PRODUCT STRATEGY

PhD., Elbek Khodjaniyazov

What is a Product?

• A product is anything that can be offered to a market to satisfy someone's needs or wants.
• A product is anything that can satisfy a need or a desire and is placed on the market in order to attract attention, to be acquired, used or consumed. It may be a physical object, a service, a person, a place, an enterprise or an idea. (Kotler, 1984)

Factors Influencing Buyer Behavior

• Economic situation
• Social status (belonging to a certain class)
• Occupation (profession)
• Geographical location (city, village, north, south, etc.)
• Purchase decision
• Culture, subculture, pressure of the reference group (“one’s own circle”)
• Psychology (personality type, needs, value system)
• Lifestyle (activities, interests, opinions)
• Age and related characteristics (state of health, family composition, etc.)

Three-Level Product Model

• Core product
• Actual (tangible) product
• Augmented product

Core Product

• The core product is the product expressed in terms of the consumer’s needs.
• It is the very heart of the product concept as a whole. The formulation of the core provides a basis for communication with the consumer, makes it possible to better understand their needs and to find ways of satisfying them more fully.
• Correctly defining the core product allows us to identify the needs hidden behind any product and to sell not the product’s features, but the benefits it provides.

Actual (Tangible) Product

• The actual product is a set of objective product characteristics, such as:

• Quality level

• Size, weight, color

• Chemical composition, specific design

• Brand name and brand mark

• Specific packaging and its size

• Other characteristics that correspond to the functional purpose of the product and highlight its core.

What Buyers Want to Know About the Actual Product

• Technical characteristics of the product
• How to use it (method of application)
• Design
• Quality of components
• Package size
• Package design
• Brand name and brand mark
• Other characteristics that support the product’s functional purpose and emphasize its core

Describing the Actual Product

When describing the actual product, remember that the consumer wants to understand:

• How exactly the product will satisfy their need;

• How it differs from competitors’ offers;

• What special advantages it has.

Useful questions:

– What is it made of and why is that good for the consumer?

– How is it packaged and what does this give to the consumer?

• – Where can it be bought conveniently and profitably, and what exactly is convenient or beneficial?
• – Where and how can additional information be obtained?

Augmented Product

The augmented product is what is additionally attaфched to the product of interest (for the same money).

It may include:

• Personal attention to the customer;

• Home delivery;

• Money-back guarantees, and so on.

• The augmented product is often the unique advantage of a given product.
• Examples of augmented product elements include the company’s image and the competence of its staff.

Customer Wishes: “Don’t Offer Me Things”

• Products and services are needed by the customer to satisfy their needs. In response to offers of certain things, the customer could say:

• Don’t offer me clothes, offer me a pleasant appearance.

• Don’t offer me shoes, offer comfort for my feet and the pleasure of walking.

• Don’t offer me books, offer enjoyment and benefit from reading.

• Don’t offer me music recordings, offer relaxation and pleasure from the sounds of music.

• Don’t offer me furniture, offer the comfort of a cozy place.

• Don’t offer me things, offer emotions, feelings and benefits.

Task: Defining Your Product

• Try to define your activity or the activity of your organization in terms of the “needs” and “wants” that it satisfies.

• Prepare a description of the actual products/services produced by your company, focusing on the interests of the target consumer.

• How would the description change if it were prepared in the interests of people (or organizations) that want to copy this business and produce similar products/services?

• How would the description change if it were prepared to inform internal customers (your staff, internal departments)?

• Does your organization offer additional services that increase the value of your product for the buyer? This helps distinguish your product from competitors’ products and can help your firm gain loyal customers.

Product Life Cycle

• Sales volume over time usually follows several phases:

1. Introduction

2. Growth

3. Maturity (saturation)

4. Decline

Task: Examples of Product Life Cycles

• 1) Give your own examples of products and outline their life cycles.
• 2) Discuss what costs may be required at different phases of the life cycle and what profit graphs from sales might look like.

Phases of the Product Life Cycle

Introduction – Capital investment phase:

• High costs for equipment, research and development, advertising.

• Low sales levels.

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Growth – Reaching the break-even point:

• High costs for equipment, development, advertising.

• High sales levels.

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Maturity (saturation) – Net profit phase:

• Operating expenses; low advertising costs.

• Stable high sales level.

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Decline – Revenue drops toward break-even:

• Low sales level of an obsolete product.

• Rising advertising costs to restore revenue.

Notes on the Product Life Cycle

• The life cycle of fashion products lasts one to two years.
• Task: give your own examples from different areas, discuss the unique features of these products, define their core, draw their life cycles and answer why their life was relatively short.
• For products less subject to fashion, the life cycle may stretch over decades (give your own examples).
• Sometimes it is possible to postpone the decline phase and extend the life cycle by changing the packaging, organizing a supporting advertising campaign, etc. Try to draw such a life cycle yourself.

Product Portfolio and the BCG Matrix

• As a rule, a product whose sales revenues no longer cover variable costs is withdrawn from the market. By that moment, the organization should have prepared another product with high sales volume.
• To achieve this, organizations have to work with a portfolio of products at different life-cycle stages.
• Consultants from the Boston Consulting Group (BCG) suggested dividing products into four groups according to:

• Market growth rate (low or high);

• Relative market share (low or high) compared with the main competitor.

• The groups are called: “Question Marks (Problem Children)”, “Stars”, “Cash Cows” and “Dogs”.

Question Marks and Stars

• Question Marks (Problem Products):
• • Products in markets with high growth rates but low relative market share.
• • Most products start their market life in this category.
• • The key question: is it worth spending money and fighting to increase sales, or is it better to redirect resources to something more profitable? (Give examples.)

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• Stars:
• • Market leaders in fast-growing markets.
• • High sales growth rates begin to cover the costs of development, production and promotion.
• • Give your own examples of such products.

Cash Cows and Dogs

• Cash Cows:
• • Products that generate stable high profits due to large-scale production.
• • Further market growth is unlikely, but the market share is already large.
• • Advertising costs may be low because the product is well known. (Give examples.)

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• Dogs:
• • Products that have lost market leadership.
• • Interest in them declines, leading to a drop in their market share.
• • The total market volume for such products practically no longer grows. (Give examples.)

BCG Matrix (Conceptual View)

• High market growth rate / High market share – Stars
• High market growth rate / Low market share – Question Marks
• Low market growth rate / High market share – Cash Cows
• Low market growth rate / Low market share – Dogs

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• Each quadrant is associated with different levels of costs and revenues and requires its own management strategy.

Product Strategies

• A strategy is the direction of action that we choose to achieve a set goal.
• A product strategy is the definition of the types and range of products that we decide to offer to consumers, which correspond to our mission and help us achieve our goals.

Product Audit as a Required Element of Strategy

• Everything an organization can offer depends on its strengths, abilities, opportunities and resources.
• Therefore, strategy development should begin with the study of internal resources:

• Staff, premises, equipment, raw materials, finances, personnel skills, etc.

• It is also necessary to study the external environment:

• Buyers, competitors, and positive/negative trends in the economy, politics, social sphere and technologies that create opportunities and threats for the planned business.

• Such research is usually called a product audit. Without it, developing product strategies makes little sense.

Questions for a Product Audit

• A product audit assumes answers to questions such as:

• What is the current situation with supplies of raw materials needed for our production, and what are the prospects?

• What warehouse facilities may be required?

• What skills and technologies are needed?

• What benefits does the consumer get from the product?

• What advantages do we have beyond what competitors offer?

• Do competitors’ advantages affect our sales volumes?

• Do our products have sufficient sales volumes and profitability?

• Do our products justify the funds invested in them?

Answers to these and many other questions form the basis for a successful product strategy. Finding them is not always easy and may require serious research and consulting.

What Determines the Choice of Product Strategy

• The choice of product strategy depends on answers to the questions:

• What can we offer?

• What are our consumers’ needs and expectations?

• What is happening with competition, and is our product acceptable from the point of view of economic, social, political, technological and environmental trends?

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• Our choice depends on the direction of the greatest demand (and purchasing power) and on where the most attractive markets for our products and services are located.
• Task: give examples illustrating how chosen strategies are linked to our capabilities, existing demand, competition and external trends.

Four Typical Product Strategies

• There are four basic strategies for products or services usually used to achieve goals:
• 1. Market penetration – increasing sales of the same product in the same market. This can be achieved at the expense of competitors or by increasing consumption among existing customers.
• 2. Market development – searching for new types of customers for your existing product. These are often customers who see a new core benefit in your product (for example, a functional product offered as a gift or for resale).
• 3. Product development – creating new or modifying existing products for sale in the current market. Even simply changing packaging can be an example.
• 4. Diversification – selling a new product in a new market, when product development and market development occur simultaneously.

Ansoff Matrix

• Igor Ansoff proposed arranging product strategies in a matrix where:

• Rows correspond to market types (existing or new),

• Columns correspond to product types (existing or new).

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• Task: Fill the Ansoff matrix with your own examples of products and services and explain for which markets each product–market strategy is, in your opinion, most appropriate and why.

Strategy Implementation and Risk

• Implementing any strategy is associated with certain risks.
• Questions to consider:
• • Will attempts to expand the market scare away our old customers?
• • Will our product become better designed but too expensive?
• • If we change nothing, will we fall behind the times and will our customers start looking for a more modern product from other suppliers?
• Task: consider a well-known organization and describe its product strategies. Discuss possible risks associated with these strategies and formulate recommendations to reduce or neutralize these risks.

Developing New Products

• All products have a life cycle, although its duration may differ.
• For organizations there is no pause: if you do not invent anything, the world will overtake and leave you behind.
• From this perspective, developing new products is a very important activity for an organization, so as to fill the gap left when an existing product enters the decline stage.

What is a New Product?

• “New products” are not only completely new ideas. They also include:
• • Additional variations on the theme of an existing product;
• • Improvements or replacements of existing products;
• • Repositioning – discovering a new product core, redirecting it to new markets or market segments.

Program for New Product Development

• To create an effective new product development program, it is important to clearly understand which product and market categories the organization wants to master.
• The organization should have clear criteria for selecting ideas related to new product development. This is important to protect against subjective decisions and unjustified spending on poorly justified projects.

Buy or Develop?

• If an organization intends to introduce new products, it can either acquire them or develop them itself.
• It is possible to acquire:
• • A small firm that offers the products and production lines you are interested in;
• • A patent – the rights to a new product from the patent owner;
• • A license to produce the product or provide the service.

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• For internal development of a new product:
• • Internal research can be carried out and conditions created for generating and studying new ideas;
• • Independent external researchers (for example, university scientists) can be hired to create a specific product to order.

Idea Generation

• Using external sources:
• • Trade and production journals, industry exhibitions, proposals from sales representatives, opinions of sellers and even customer complaint books can become sources of ideas.

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• Attribute listing (sequential analysis of characteristics):
• • This method consists in listing the characteristics and advantages of the product under study in order to find ways to improve them or make them more attractive.

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• Brainstorming:
• • A group of people is gathered and briefly familiarized with the problem.
• • The task is to generate a certain number of ideas within a given time.
• • Criticism of ideas is forbidden during the session; creative thinking is encouraged and even the “craziest” ideas are recorded.
• Task: give your own examples of finding or generating new ideas.

Idea Screening

• Before generated ideas are accepted for implementation, those that are rejected usually:

• Are incompatible with the organization’s goals or mission;

• Are unacceptable to the target consumer;

• Are not viable technologically, in terms of resources or finances, when the costs of acquiring technologies, resources, production, distribution and advertising are too high relative to the expected income.

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• Task: try to develop ideas to prevent graffiti and inscriptions in elevators, using any idea-finding methods, including brainstorming.
• Homework: prepare a short paper on the application of Edward de Bono’s methods.