Lecture 4: Product Flashcards
Growth Strategies: The Ansoff Matrix
Once you identify your positioning, that will shape your product decisions. Your positioning will determine the kinds of products that you want to make. However, designing new products is only one way in which your company can grow.
Growth Strategies Examples:
Market penetration strategy: Your current product is Ipads, and you want to deepen your reach in the current market. You’ve been selling Ipads in North America, but not everyone has been buying your iPad. Certain young people are not buying it, and you know that among the older population, there is also a relatively slow pickup of your product. So you want to deepen your reach in the North American market with the same product that you already have by employing creative advertising.
Market Development Strategy: You want to expand your reach to a new market, such as introducing Ipads to developing countries so they can understand why your product is so powerful, and the educational resources it can provide.
Product Development Strategy: The current iPad is limiting on certain factors, i.e., too heavy when people prefer portability, so develop a new version of the iPad that is lighter to reach the current market.
Diversification Strategy: A new product in a new market.
3 ways of new product development (from the company’s point of view)
- The orthodox way
- The incorrect way
- The alternative practical way
Market conditions can shape the relative appeal of using the Orthodox way or the alternative practical way.
Examples in the real world that illustrate these three ways?
- Automobile industry: Fixed costs and distribution costs are high, so they often use the orthodox way to ensure that a good number of customers will buy their products.
- Silicon Valley: A sense of urgency in competing with a fast-moving industry makes it less likely companies will employ the orthodox way.
- Smartphone apps: cost of manufacturing is lower. Also the speed of changes is fast, so the strategy is to try out their product concepts, and the ones that won’t work will be abandoned, and they will move on to the next concept.
In most cases, manufacturing and distribution costs are high.
Note: Developing new products is not the only way a company can grow.
The Orthodox Way
Begin with the three C’s. Understanding the market conditions, and then do the STP (Segmentation, targeting, and positioning).
Figure out where you can generate value and then use your positioning to determine the kind of product you want to develop.
Product decisions come at the end.
Advantages: Your probability of success is higher because you know you’re more likely to be tapping into the unmet value drivers that exist in the market.
Difficulties with the Orthodox Way: Coca-Cola’s example
Let’s say Coca-Cola company is trying to design a new product. You know they want to sell a new soft drink.
The soft drink market is actually quite complicated thought. There are a lot of different value drivers (carbonated/not carbonated, sodium content, how sweet, different flavours, etc.). It can be a very complicated, costly, and time-consuming process if you wanted to analyze the entire segment or entire population of all soft drink consumers.
A 10-dimensional space where ten value drivers are interacting with each other can make for a complicated analysis.
The Incorrect Way
The incorrect way does the exact opposite. It starts with the product and then tries to sell it.
It takes the product and thinks about how to promote it creatively and effectively, but that’s actually the incorrect way to think about new product development.
It ignores the market conditions altogether.
A lot of entrepreneurs make this mistake. They develop the product in mind. Another mistake is they have a product, but they don’t appeal to the right target segment (position right), price it right, or advertise it right.
The Alternative Practical Way
Companies often don’t use a pure form of either of these things; they use something in-between.
Rather than beginning with an in-depth sort of market analysis or the actual product, you develop some product concepts. Start with the preliminary market research. Based on your product concept, you perform a bit of segmentation, targeting, and positioning. You make the product, and by the end of the manufacturing process (which often takes a while due to industrial coordination), you do another round of STP to see if the market conditions have changed or not. If the market conditions do not change, then you launch the product.
Coca-Cola Example:
If you want to develop a new soft drink, you are going to start with some preliminary market research. You conduct focus groups, surveys, observations, ask people what they think is missing in the soft drink market?
By talking to people, you identify some product concepts. From there, you perform the selected segmentation, targeting, and positioning. You ignore other value drivers in soft drink products and focus on the one product concept you have.
if there is a decent segment size, enough people interested in this product concept, the growth rate is good, you know the competitors, and there are not a lot of them out there, then the new product may be appealing enough actually to develop the product.
By the end of the production, you do another round of STP to see if the market conditions have changed. If not, launch the product.
Why is the alternative practical way not the best approach?
Because that first step of preliminary market research can lead you astray. You can talk to people and try to come up with ideas, but these product concepts may not be the most profitable ideas. It could be that if you had done your full market research into the different segments out there, you could have identified even better product concepts. But because you skipped doing a full analysis, you arrive at some product concepts where the likelihood that that’s the best concept is lower.
Advantages: faster, more time efficient.
New Product Adoption: “ACCORD” (from the customer’s point of view)
Factors that influence the likelihood, rate, and scope of adoption/diffusion of an innovation (from the customer’s point of view):
How many people and when will they be interested in the new product?
Note: Think of each factor independently.
- Advantage
- Complexity
- Compatibility
- Observability
- Risk
- Divisibility
Note: do your best to manage all of them
ACCORD: Advantage
: If your product/innovation is advantageous (better in quality), people are more likely to try it, and the product will do well on the market.
ACCORD: Complexity
If your product/innovation is simpler to use, has less learning curve, people know how to use the product, it’s easier for people to try, and the product will do well on the market. Too complicated products lead to people walking away. If it seems impossible to make the product simpler, have to ensure to give the consumers support and guide them to use the product. Caveat: more relevant to consumer markets and less of a problem in the industrial market. It can be more complicated for industrial users because engineers are hired, and their job is to learn and use complicated products.
ACCORD: Compatibility
If the product requires more effort/behaviour change to use, it is less likely to be adopted. Whether people need to change their habits/behaviours. If the new product requires people to make more effort to use it, it is incompatible with existing behaviour, and the product is less likely to succeed, e.g., electric cars required a behavioural change to plug it in. If you own a MacBook, you are unlikely to buy an android, you’ll buy an iPhone.
E.g. Devices being compatible with each other.
ACCORD: Observability
Can your potential customers observe and understand the product’s benefits before they buy and try it?
Low observability: DVR digital video recording. Despite many advantages and benefits to using a DVR over a VCR, people aren’t able to observe these advantages. Educational marketing and give them a free trial to try the product. If people cannot observe the benefits before trying, allow them to try it.
Note: Behavioural inertia: people get lazy and don’t cancel their subscriptions.
ACCORD: Risk
Customers might worry that your product doesn’t work. The more risk (uncertainty) a customer perceives, the less likely the customer will buy it. Risk involves the probability of negative consequences and severity; how bad are the consequences if the thing doesn’t work?
Solution: Money-back guarantee (only works well if the risk of using the product is limited to the product itself, if the risk goes beyond the product itself, it won’t work: for example, in vitro fertilization, putting your body through all that, money won’t make it feel better. Also, time lost years trying). Provide a warranty to reduce the severity if it doesn’t work. Product demonstrations to understand how it works and gain a clearer sense of whether it will work well. Get the support of experts, and ask for customer reviews to entice other customers to buy. Provide hard evidence (independent data generated research) that the product works.
Accord: Divisibility
Related to risk. If you can sell something by dividing it into smaller pieces, people are more likely to buy it. By dividing the product into smaller chunks, the risk is lower (the scope of negative consequences is lower) people are more willing to try.
CD vs apple music, if you don’t like all the tracks, you can now select the ones you like.
Production Adoption Curve: Crossing the Chasm
The better you do on the factors overall, the more likely your product will cross the chasm.
When designing the product, go systematically through the factors to see which ones you can work on (you might not be able to change all factors, but if possible, change them to improve your product).
Note: The shape of the curve doesn’t matter. When you launch a new product/innovation
Innovators buy things indiscriminately, they are enthusiasts. Unlike innovators, early adopters buy things discriminately they buy only if they think there is true value).
The rest of the population is less eager, less risk-seeking, and less likely to buy things early on. The company’s advertising and the early adopter’s review convince them to buy the product (the latter is more important, more trustworthy, and trusts opinions). As a company, ensure early adopters say positive things.
Most things fail to cross the chasm because they reach a small segment of the market and die there. Most of the population doesn’t see good reviews of the product.
Crossing the chasm relies on people saying good things about your product.
Product Line Extension
Adding more products in the same category:
- Along the horizontal vs. vertical dimension?
- Using the same vs. a different brand name?
4 dimensions: horizontal, vertical, same brand name, and different brand name.
These are independent, hence 2 x 2 = 4. Meaning there are four different ways to do product line extension.
Horizontal differentiation and same brand name
Horizontal differentiation and different brand name
Vertical differentiation and same brand name
Vertical differentiation and different brand name
Product Line Extension: Existing Product Line
Product line: Different products owned by the company in the same product category.
Products in a product line are differentiated along two dimensions: horizontal or vertical
Horizontal differentiation
The products cater to segments that have different tastes but about the same price range.
Consumers have different preferences and tastes within the segment, but the products offered are around the same price range.
It is not the case that one product is objectively agreed by most people to be better than others and more expensive than others. That’s not horizontal differentiation.
Examples?
Coca-Cola: Different flavours of Coke and types (Coke zero, diet coke, etc.). All are in the same price range, but none of the flavours is better than the other. Rather, they cater to different tastes.
Vertical differentiation
The products are differentiated based on overall benefits (quality) and price.
The products cater to different segments with different sensitivities to the overall benefits vis-à-vis price.
A different willingness to pay (for additional benefits) and, therefore, different price points you can charge for your products.
Examples?
Lexus, Camry, and Corolla are all owned by Toyota. Each car caters to a different price point (offers different things). Also, within the models of the car itself, e.g., with Lexus, you pay more if you want leather, heated seats, and other beneficial features.
Extension along the Horizontal Dimension
- Same brand name but serves different target segments.
Example: In the toothpaste market, PNG extends its product line under the same brand name to serve people who value different things (have different value drivers), such as whiter teeth, protecting gums, or fighting bad breath.
- Different brand name but similar product for similar price
Example: PNG extends its product line under different brand names in the detergent market.
Why the different approach? In the toothpaste market, there is no perceived contradiction between the value drivers (a toothpaste that gives you whiter teeth isn’t going to give you bad breath or hurt your gums. However, in the case of detergent, PNG is worried that there is a perceived contradiction between the value drivers of their products. Tension with strain removal in Tide is in contradiction with colour protection in Cheer. And strong cleaning in Tide is in contrast with soft fabrics for babies.
When examining the advertising for Tide, you will notice that they consistently and prominently emphasize this positioning of Tide as a strong cleaning stain removal product.
Because tide has a very strong, well-established brand image, if Tide had been fairly new, then having tide soft and tide colours might have been more effective, but because it has such a distinctive image, they didn’t want to dilute it in any way.
Why does Tide Free and Gentle exist? The reason Tide offers this product is because companies such as Walmart and Sobeys told PNG they will only give PNG one brand name in this store or one or two shelves so PNG is constrained in their options. So they have tide, but PNG doesn’t want to lose market share to people who want soft fabrics, so they created a Tide extension (Tide Free and Gentle) to still capture that market share of people who want soft fabrics under the market constraints imposed on PNG. Note: someone from PNG actually explained this to our professor.
For the most part, PNG wants to keep its products distinctive and so they market them under different brand names.
Extension along the Vertical Dimension
- Same kind of product line under the same brand name.
Example: Toyota
Toyota has several cars in the same product line: Corolla, Camry, and Avalon. All are owned by Toyota and retain the same logo.
- Same kind of product line under a different brand name.
Toyota also uses a different brand name with a different Lexus logo for the same product line. Why? for brand prestige. Toyota wants customers to think of themselves as driving a different kind of car, a different category/level of driving experience.
Avalon isn’t a very familiar name; why is that the case? In a sense, it is getting crushed on both ends. People who are price sensitive, they are more likely to purchase the corolla or Camry. On the other hand, if the person is not price sensitive and wants to spend the money they’ll go for the Lexus.
Extensions are not necessarily easy
> 50% of extensions fail within three years because they often shrink the product development process when companies do product line extensions. They don’t go through the orthodox way of developing the product. Instead, they go ahead and try something out and see what works right.
But because you’re not really trying to understand the market as fully as possible, the probability of failure increases.
e.g., Pepsi Twist, Vanilla Coke, Diet Coke lemon
Extensions that did not work out well
Each of these brands has a well-established distinctive image closely associated with a particular kind of product.
Extensions that stretch that brand image to different products that are likely to be perceived as contradictory to the original product category or brand image (symbolized by the original product category) creates tension.
Levi’s: jeans in tension with suits
Harley Davidson: motorcycles in tensions with perfume.
Counter Example: Virgin Mobile
A successful brand name that began as a records store. It moved to sell soft drinks, then to an airline (Virgin airlines), then to cell phones and radio stations. In each case, the product is in a different category from the previous one.
Why was Virgin able to accomplish these transitions? Virgin as a brand stands for not something closely associated with a product but a lifestyle (high order value driver). Energetic, entrepreneurial, experimental abstract general lifestyle can be applied to lots of different product categories.
Virgin symbolizes a lifestyle and connects that to different products; by making that connection clear to each product, it succeeded.
Dove is another example: emphasizes real beauty (vision).
Nike is a third example: “Just do It” (value driver of independence, confidence, courage).
Takeaway: these successful product extensions appealed to high-order value drivers.
