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where,
THE RATIOS GIVEN ARE 1:X
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1. |
The ITEM COST, i.e. the actual costs of replacing the faulty or reject product |
2. |
The COST FACTOR, i.e. the administrative, handling, marketing and other costs involved in handling returns, rejects and warranties. |
3. |
The WARRANTY COST, i.e. the total cost of warranties. This is the figure given below. |
4. |
TOTAL AFTER-SALES COSTS |
The following tables provides average marketing costs ( as a % of MSP ) for Products & Services.
HISTORIC MARKETING DATA |
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Base Reference Country |
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PRODUCT LAUNCH MARKETING COSTS |
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Target Company |
Base Reference Country |
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PRODUCT LAUNCH MARKETING RATIOS |
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Target Company |
Base Reference Country |
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HISTORIC FINANCIAL INDUSTRY DATA
PRODUCT MARKETING FINANCIAL BALANCE SHEET FORECASTS
The PRODUCT MARKETING FINANCIAL SCENARIOS BALANCE SHEET FORECASTS
section gives a series of Forecasts for the Company and the industry using a
number of assumptions relating to the marketing decisions available to the
management of the Company.
The Balance sheet forecast given shows the effects of marketing changes or
improvements which management is likely to recommend:
PRODUCT MARKETING FINANCIAL SCENARIOS
Base Forecast : Median Market Scenario
Marketing Expenditure
New Product Development
Market Segmentation
Distribution Channel Improvement
Price Cutting Effect
Price Increase Effect
Quality Improvement
Target Markets Development
Product Branding + Multi-branding Investment
New Product & New Technology Cost Scenarios
Product Quality Improvement
Customer Handling Improvements
Managers in the Company will, in
both the short-term and the long-term, have vital decisions to make
regarding the marketing improvements, margins and profitability and these
decisions will need to be evaluated in light of the customers, markets,
competitors, products, industry and internal factors. The scenarios given
isolate a number of the most important factors and provide balance sheet
forecasts for each of the scenarios.
The data provides a short and
medium term forecast covering the next 6 years for each of the Forecast
Financial and Operational items. The Financial and Operational Data sections
show each of the items listed below in terms of forecast data and covers a
period of the next 6 years.
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Financial Comparisons: Scenarios |
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Target Company |
Base Reference Industry |
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Product Profiles: |
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Product & Target Markets: |
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PRODUCT + MARKET TARGETS
MARKET SEGMENTATION
In a heterogeneous market, the company has three targeting options:
The first firm to enter this market has three options:
Clearly, if it developed only one brand,
competition would come in and introduce brands in the other segments.
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i. |
LIFE-STYLE
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ii. |
PERSONALITY
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iii. |
BENEFITS SOUGHT
Further characteristics of each group may be found and the firm can choose the
benefit it wants to emphasize, create a product that delivers it and direct a
message to the group seeking that benefit. |
iv. |
USER STATUS
|
v. |
USAGE RATE
The hope is that the heavy-users of a product have certain common demographics, personal characteristics, and media habits. User profiles are obviously helpful to the Company in developing pricing, message, and media strategies. |
Target Company |
Base Reference |
MARKET BASES |
Geographic Segmentation |
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Demographic Segmentation |
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vi. |
LOYALTY STATUS
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vii. |
STAGES OF READINESS
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vii. |
MARKETING FACTORS
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The main conclusion from this discussion of market segmentation is that
the Company may segment the market in many different ways. The goal is to
determine the most decisive mode of segmentation - that is, the differences
among buyers that may be the most consequential in choosing among them or
marketing to them.
Mentioned earlier was the fact that the Company can choose one of three target
market strategies in the face of market heterogeneity. Here one amplifies on
the respective rationale of these strategies.
1. UNDIFFERENTIATED MARKETING
In undifferentiated marketing, the company chooses not to recognize the
different market segments making up the market. It treats the market as an
aggregate focusing on what is common in the needs of people rather than on what
is different. It tries to design a product and a marketing programme that
appeals to the broadest number of buyers. It relies on mass channels, mass
advertising media and universal themes. It aims to endow the product with a
superior image in people's minds, whether or not this is based on any real
difference.
Undifferentiated marketing is primarily defended on the grounds of cost
economies. It is thought to be "the marketing counterpart to
standardization and mass production in manufacturing". The fact that
the product line is kept narrow minimizes production, inventory and
transportation costs. The undifferentiated advertising programme enables the
firm to enjoy media discounts through large usage. The absence of segmental
marketing research and planning lowers the costs of marketing research and
product management. On the whole, undifferentiated marketing results in keeping
down many costs of doing business.
Nevertheless, an increasing number of companies have expressed strong doubts
about the optimal nature of this strategy.
For example, it is admitted that "some brands have very skillfully
built up reputations of being suitable for a wide variety of people",
but it is added, "In most areas audience groupings will differ, if only
because there are deviants who refuse to consume the same way other people do .
. . It is not easy for a brand to appeal to stable lower middle-class people
and at the same time to be interesting to sophisticated, intellectual upper
middle-class buyers . . . It is rarely possible for a product or brand to be
all things to all people".
The firm practicing undifferentiated marketing typically develops a product and
marketing programme aimed at the largest segment of the market. When several
firms in the industry do this, the result is hyper-competition for the largest
segment(s) and under-satisfaction of the smaller ones. The "majority
fallacy," as this has been called, describes the fact that the larger
segments may be less profitable because they attract disproportionately heavy
competition. The recognition of this fallacy has led many firms to re-evaluate
the opportunities latent in the smaller segments of the market.
2. DIFFERENTIATED MARKETING
Under differentiated marketing, a firm decides to operate in two or more
segments of the market but designs separate products and/or marketing
programmes for each. By offering product and marketing variations, one hopes to
attain higher sales and a deeper position within each market segment and one
hopes that a deep position in several segments will strengthen the customers'
overall identification of the firm with the product field. Furthermore, one
hopes for greater loyalty and repeat purchasing, because the firm's offerings
have been bent to the customer's desire rather than the other way around.
In recent years an increasing number of firms have moved toward a strategy of
differentiated marketing. This is reflected in trends toward multiple product
offerings and multiple trade channels and media.
The net effect of differentiated marketing is to create more total sales than
through undifferentiated marketing. It is ordinarily demonstrable that total
sales may be increased with a more diversified product line sold through more
diversified channels" However, it also tends to be true that
differentiated marketing increases the costs of doing business.
The following costs are likely to be higher:
a. |
Modifying a product to meet different market segment requirements usually involves some R&D, technical, and/or special tooling costs. |
b. |
Generally speaking, it is more expensive to produce m units each of n differentiated products than mn units of one product. This is especially true the longer the production setup time for each product and the smaller sales volume of each product. On the other hand, if each product is sold in sufficiently large volume, the higher costs of setup time may be quite small per unit. |
b. |
Under differentiated marketing, the company has to develop separate marketing plans for the separate segments of the market. This requires extra marketing research, forecasting, sales analysis, promotion, planning and channel management. |
d. |
It is generally more costly to manage inventories of differentiated products than an inventory of only one product. The extra costs arise because more records must be kept and more auditing done. Furthermore, each product must be carried at a level that reflects basic demand plus a safety factor to cover unexpected variations in demand. The sum of the safety stocks for several products will exceed the safety stock required for one product. Thus carrying differentiated products leads us to increased inventory costs. |
e. |
Differentiated marketing involves trying to reach different segments of the market through advertising media most appropriate to each case. This leads to lower usage rates of individual media and the consequent forfeiture of quantity discounts. Furthermore, since each segment may require separate creative advertising planning, promotion costs are increased. |
Since differentiated marketing leads to higher sales and higher costs, nothing
can be said a priori regarding the perfectness of this strategy. Some
firms are finding, in fact, that they have over-differentiated their market
offers. They would like to manage fewer brands, with each appealing to a
broader customer group. Called reverse
line extension or broadening
the base, they seek a larger volume for each brand.
3. CONCENTRATED MARKETING
Both differentiated marketing and undifferentiated marketing imply that the
firm goes after the whole market. However, many firms see a third possibility,
one that is especially appealing when the company's resources are limited.
Instead of going after a small share of a large market, the firm goes after a
large share of one or a few submarkets. Put another way, instead of spreading
itself thin in many parts of the market, it concentrates its forces to gain a
good market position in a few areas.
Through concentrated marketing the firm achieves a strong market position in
the particular segments it serves, owing to its greater knowledge of the
segments' needs and the special reputation it acquires. Furthermore, it enjoys
many operating economies because of specialization in production, distribution,
and promotion. If the segment of the market is well chosen, the firm can earn
high rates of return on its investment.
At the same time, concentrated marketing involves higher than normal risks. The
particular market segment can suddenly turn sour because of a change in buyer
perceptions or attitudes, or a competitor may decide to enter the same segment.
For these reasons, many companies prefer to diversify in several market
segments.
4. SELECTING A MARKET TARGETING STRATEGY
Particular characteristics of the seller, the product, or the market serve to
constrain and narrow the actual choice of a market targeting strategy.
i. |
The first factor is company resources. Where the company's resources are too
limited to permit complete coverage of the market, its only realistic choice is
concentrated marketing. |
ii. |
The second factor is product homogeneity. Undifferentiated marketing is more suited for homogeneous
products such as grapefruit or steel. Products that are capable of great
variation are more naturally suited to differentiation or concentration. |
iii. |
The third factor is product stage in the life cycle. When a firm introduces a new product into the market it usually finds it practical to introduce one or, at the most, a few product versions. One's interest is to develop primary demand, and undifferentiated marketing seems the suitable strategy; or it might concentrate on a particular segment. In the mature stage of the product life cycle, firms tend to pursue a strategy of differentiated marketing. |
iv. |
The fourth factor is market homogeneity. If buyers have the same tastes, buy
the same amounts for periods, and react in the same way to marketing stimuli, a
strategy of undifferentiated marketing is appropriate. |
v. |
The fifth factor is competitive market strategies. When competitors are practicing active segmentation, it is hard for a firm to compete through undifferentiated marketing. Conversely, when competitors are practicing undifferentiated marketing, a firm can gain by practicing active segmentation if some of the other factors favor it. |
The problem facing the Company in seeking segmentation of their market is how
to estimate the value of operating in each of the segments.
The firm that pursues differentiated marketing must know this in order to
allocate its marketing effort over the various segments. The firm that pursues
concentrated marketing must know this in order to decide which segments offer
the best opportunities.
A useful analytical approach is illustrated by considering an example as a
three stage exercise:
Stage 1 would show a segmentation of
the market, using as two variables the customer-prospect
mix and the product-service mix. The
customer-prospect mix consists of various buyer groups. The product-service mix
consists of products sold to these buyer groups. Cells result from this joint
segmentation of the market. Each cell represents a distinct submarket, or
product-market segment. A monetary figure is placed in each cell, representing
the company's sales in that submarket.
Relative company sales in the submarkets provide no indication of their
relative profit potential as segments. The latter depends upon market demand,
company costs and competitive trends in each submarket.
Stages 2 and 3 would show how a particular product submarket can be analyzed in
depth.
Stage 2 appraises present and future sales in the selected
submarket. The vertical axis accommodates estimates of industry sales, company
sales, and company market share. The horizontal axis is used to project future
sales in the product groups and market shares.
Stage 3 probes deeper into the marketing thinking behind the sales forecasts of
Stage 2. The horizontal axis shows the promotional
mix that the company is using or plans to use to stimulate the sales of
particular products to particular buyer group. The vertical axis shows the distribution mix that the company is using or plans
to use for the particular product and the particular buyer group. The actual promotion-distribution mix could be
detailed by placing budget figures (funds and men) in the relevant cells. The
company will use all the types of distribution and rely mainly on specific
selling approaches for stimulating sales to the particular buyer group.
By carrying out this analysis, the Company is led to think systematically
about each segment as a distinct opportunity. This analysis of the profit
potential of each segment, in conjunction with objectives, will help one to
decide on a segmentation strategy.
HISTORIC FINANCIAL INDUSTRY DATA
PRODUCT + MARKET TARGETS FINANCIAL SCENARIOS BASED BALANCE SHEET FORECASTS
The PRODUCT + MARKET TARGETS FINANCIAL SCENARIOS BALANCE SHEET FORECASTS
section gives a series of Forecasts for the Company and the industry using a
number of assumptions relating to the Product and Market Targeting decisions
available to the management of the Company.
The Balance sheet forecast given shows the effects of marketing improvements
which Sales Management is likely to recommend:
PRODUCT + MARKET TARGETS FINANCIAL SCENARIOS
Product Launch Marketing Expenditure Scenario
Marketing Expenditure
Market Segmentation
Export Sales Improvement
Distribution & Product Delivery Cost Objectives
Research & Product Cost Objectives
Target Markets Development
Product Positioning
Overseas Development
Managers in the Company will, in both the short-term and the long-term, have
vital decisions to make regarding the marketing improvements, margins and
profitability and these decisions will need to be evaluated in light of the
customers, markets, competitors, products, industry and internal factors. The
scenarios given isolate a number of the most important factors and provide
balance sheet forecasts for each of the scenarios.
The data provides a short and medium term forecast covering the next 6 years
for each of the Forecast Financial and Operational items. The Financial and
Operational Data sections show each of the items listed below in terms of
forecast data and covers a period of the next 6 years.
Target Company |
Reference Industry Finances: Base Reference Country |
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Company Financial Forecasts |
Product Sector Financial Data |
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Products & Services | |||||||
Target Company |
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TOTAL |
1 |
2 |
3 |
4 |
5 |
BASE FORECAST : MEDIAN: Financials |
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F0M | F0M | F0M | F0M | F0M | F0M |
PRODUCT LAUNCH: Financials |
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FPL | FPL | FPL | FPL | FPL | FPL |
MARKETING EXPENDITURE: Financials |
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F01 | F01 | F01 | F01 | F01 | F01 |
MARKET SEGMENTATION: Financials |
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F03 | F03 | F03 | F03 | F03 | F03 |
EXPORT SALES IMPROVEMENT: Financials |
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F11 | F11 | F11 | F11 | F11 | F11 |
DISTRIBUTION & PRODUCT DELIVERY COST OBJECTIVES: Financials |
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F28 | F28 | F28 | F28 | F28 | F28 |
RESEARCH & PRODUCT COST OBJECTIVES: Financials |
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F33 | F33 | F33 | F33 | F33 | F33 |
TARGET MARKETS DEVELOPMENT: Financials |
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F41 | F41 | F41 | F41 | F41 | F41 |
PRODUCT POSITIONING: Financials |
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F43 | F43 | F43 | F43 | F43 | F43 |
OVERSEAS DEVELOPMENT: Financials |
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F47 | F47 | F47 | F47 | F47 | F47 |
Target Company |
Reference Industry Margins: Base Reference Country |
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Target Company Operational Margins |
Product Sector Operational Margins |
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Target Company |
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TOTAL |
1 |
2 |
3 |
4 |
5 |
BASE FORECAST : MEDIAN: Margins |
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G0M | G0M | G0M | G0M | G0M | G0M |
PRODUCT LAUNCH: Margins |
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GPL | GPL | GPL | GPL | GPL | GPL |
MARKETING EXPENDITURE: Margins |
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G01 | G01 | G01 | G01 | G01 | G01 |
MARKET SEGMENTATION: Margins |
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G03 | G03 | G03 | G03 | G03 | G03 |
EXPORT SALES IMPROVEMENT: Margins |
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G11 | G11 | G11 | G11 | G11 | G11 |
DISTRIBUTION & PRODUCT DELIVERY COST OBJECTIVES: Margins |
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G28 | G28 | G28 | G28 | G28 | G28 |
RESEARCH & PRODUCT COST OBJECTIVES: Margins |
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G33 | G33 | G33 | G33 | G33 | G33 |
TARGET MARKETS DEVELOPMENT: Margins |
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G41 | G41 | G41 | G41 | G41 | G41 |
PRODUCT POSITIONING: Margins |
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G43 | G43 | G43 | G43 | G43 | G43 |
OVERSEAS DEVELOPMENT: Margins |
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G47 | G47 | G47 | G47 | G47 | G47 |
Product Mix: |
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PRODUCT MIX
1.
Formal product
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Company Products |
Products & Services |
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Product mix:
Defined as ‘the composite of products offered for sale by a company’s business unit’; which in the case of the Company and the industry is as follows:-
Target Company Operations |
Industry Operations |
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The product mix of the Company can be described as having certain
attributes which aggregate to indicate the Quality of the Product-Mix:
1. Width
2. Depth
3. Consistency
The Width of the product mix refers to how many different product lines are
found within the Company. Of course, the Width of the product mix also depends
on the definitions established for product-line boundaries.
The Depth of the product mix refers to the average number of items offered by
the Company within each product line. One or more product-line Depths can be
averaged to indicate the typical depth of the entire Company product mix.
The Consistency of the product mix refers to how closely inter-related the
various product lines are in end use, process requirements, distribution
channels or in some other way which reflects the operations of the Company.
All three dimensions of the product mix have a market rationale.
1. Through increasing the Width of the product mix, the
industry hopes to capitalize on its reputation and skills in present markets.
2. Through increasing the Depth of its product mix, the
industry hope to entice the patronage of buyers of widely differing tastes and
needs.
3. Through increasing the Consistency of its product mix, the
industry hopes to acquire an unparalleled reputation in a particular area of
business activity.
The concepts of Width, Depth and Consistency are related to those of product
item, lines and mix of the industry as a matrix.
a. Product policy at the level of the product item involves
the issue of whether to modify, add, or drop product items.
b. Product policy at the level of the product line involves
the issue of whether to deepen or shorten an existing line.
c. Product policy at the level of a product mix involves the
issue of which markets to be in.
The following diagram can be used by the reader to estimate the quality of the
Company’s Product-Mix. As a further indication of the Quality of the Company’s
Product-Mix readers can estimate the Quality of the Product-Mix of competitors
and then compare this with the Company.
A group of markets that are closely related either because of their close geographic proximity, historic connections or trade agreements, are defined together, are in general sold to the same products, are marketed through the same types of outlets or fall within given price ranges.
In the case of the Company and the industry these are as follows:-
Company Trade Cell |
Trade Cell |
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the major competitors which have product offerings for sale; which in the case of the Company and the industry is as follows:-
Company Competitors |
Industry Competitors |
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Target Company |
Base Reference |
PRODUCT-MIX QUALITY |
Performance Grid Definitions |
The Company has several options with respect to the width, depth and consistency
of their product-mix. The number of possible combinations is revealed by
considering the options available to the Company.
At least six product strategies are available.
1) |
Full-line all-market strategy. This strategy describes the intention to be all
things to all people. To implement it one must serve all market segments and
offer a full choice of products within the standard range and design of the
industry.
|
2) |
Market specialist. This strategy calls for offering a full line of all types of products required by a particular market segment. |
3) |
Product-line specialist. Here one specializes in products of a single type and sells these items to all markets. This scenario would be appropriate for product technology led companies. |
4) |
Limited product-line specialist. Companies in this category offer a particular design of a single type of product, which usually, by virtue of its design, is intended for only one market segment. This is a scenario for smaller independent companies. |
5) |
Specific-product specialist. This strategy involves picking a particular product and marketing it according to the opportunity available. Usually, because of its singular character, one or only a few market segments are involved. |
6) |
Special-situation specialist. A company with this strategy seeks to meet special situation needs with its own special capabilities, perhaps in product design, low cost processes, techniques or product flexibility. The markets for companies in this category are usually limited in size, heterogeneous and often protected from major companies. |
Given the basic product-mix strategy of the Company, they must
still review from time to time whether the specific product items and lines in
the mix represent a good balance in terms of future sales growth, sales
stability and profitability.
Markets are continuously changing their needs and preferences; competitors keep
entering and altering their marketing mixes; and the environment keeps changing.
All of these changes favor certain of the Company’s products and can hurt
others. Some of their products will just begin to show a profit, others will
continue to produce good profits, while others will be slipping badly.
It is necessary to critically evaluate the existing Company product-mix and in
order to do this one needs to analyze the relative profit contribution of the
strategic Company product groups.
This is called a Product-Mix Audit and identifies future problems for the
Company.
The analysis is simple. One estimates the relative profit contribution of each
product group at the present time and then realistically notes the likely
growth or decline of that level of profit over a period of 4 years. In this
respect one can use the market data provided elsewhere in this manual to predict
the impact on the product groups.
If at the end of the 4 year period the aggregate product group contribution to
profit has fallen, then the sum of the fall indicates the likely profit deficit
for the Company and thus indicates the level of new product introduction
required from the Company.
Sound product-mix strategy calls for the Company to ensure the continuous
addition of new products and the continuous elimination of old products.
The Company’s product mix reveals the potential for future sales growth through the proportions of its products in each of the six following categories.
1) |
Tomorrow's breadwinners - new products or today's breadwinners modified and improved. |
2) |
Today's breadwinners - the innovations of yesterday. |
3) |
Products capable of becoming net contributors if something drastic is done. |
4) |
Yesterday's breadwinners - typically products with high volume, but badly fragmented into 'specials', small orders and the like. |
5) |
The 'also-rans' - typically the high hopes of yesterday that, while they did not work out well, nevertheless did not become outright failures. |
6) |
The failures. |
Target Company |
Base Reference |
PRODUCT-MIX AUDIT CONTRIBUTIONS |
Forecast % Profit Contribution : Year + 1 |
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Forecast % Profit Contribution : Year + 2 |
||
Forecast % Profit Contribution : Year + 3 |
||
Performance Grid Definitions |
Target Company |
Base Reference |
PRODUCT-MIX AUDIT PROFIT ESTIMATES |
Performance Grid Definitions |
If the Company neglects either the new-product development function or the
product-pruning function, or both, it will awaken one day to find a very
unbalanced, unhealthy and unprofitable product mix.
One can appraise the soundness of their current product mix by the
classification each of their product groups along three dimensions:
1. Sales growth
2. Market share
3. Profitability
If each dimension is divided further into two regions, high and low, one thus
has six possible product situations.
This product-mix
classification technique has four benefits:
1) |
It indicates whether the rate of new-product development or investment in the Company is sufficient. |
2) |
It indicates whether the rate of product pruning is sufficient and which products are candidates for product pruning in the Company. |
3) |
It indicates which product objectives the Company might set for each product group, that is, whether the product's market share, sales growth or profitability should be stressed. |
4) |
It indicates how product resources should be allocated by the Company to the different products. |
The product strategy implications for the Company of products in the first four
cells are as follows:
1) |
Cell 1 products - showing high growth and high share - will be high earners for the Company and they should spend enough to maintain the high market share and not be tempted to extract extra-high profits in the short-term at the expense of market share. |
2) |
Cell 2 products - showing high growth but low share - require extra-heavy spending to build up market share before growth slows down. The Company cannot manage too many products like this and should consider withdrawing a product that it cannot move into a high market-share position. |
3) |
Cell 3 products - showing low growth but high share - are major sources of earnings. They justify enough investment to maximize cash flow consistent with maintaining market share but not more. |
4) |
Cell 4 products - showing low growth and low share - are candidates for product milking or pruning. They do not justify much investment or attention. |
PRODUCT STRATEGY IMPLICATIONS |
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MARKET SHARE |
MARKET SHARE |
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3 |
4 |
PROFIT GROWTH |
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1 |
2 |
PROFIT GROWTH |
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SALES GROWTH |
3 |
4 |
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SALES GROWTH |
1 |
2 |
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MARKET SHARE |
MARKET SHARE |
One can also select positive product strategy according to the following five
groupings:-
1) |
High-growth products deserving the highest investment support. |
2) |
Steady reinvestment products deserving high and steady investment. |
3) |
Support products deserving steady investment support. |
4) |
Selective pruning or rejuvenating products deserving reduced investment. |
5) |
Venture products deserving heavy R & D investment. |
In the search for new products to add to the product mix, the Company is guided
by specific criteria, such as seeking products that are compatible with their
existing technological or marketing strengths or products whose sales behave
counter-cyclically or counter-seasonally.
Considering the last point, the industry tries to avoid high sales variability
because this means periodic excess capacity, staff under-utilization and so on.
It would be a mistake to add new products whose sales correlate closely with
current sales so that they aggravate the fluctuations. Even a new product whose
sales are stable will not dampen sales fluctuations. The main hope of the
Company is to find new products whose sales are negatively correlated with
the sales time pattern of current products.
The static product-mix
optimization problem is defined as follows:
given n product
possibilities,
choose
m
of them (when m<
n ) such
that profit is maximized subject to a given level of risk and other constraints.
The problem is solvable through mathematical analysis, the most important
condition being the absence of strong demand and cost interactions among the
various products being considered.
The dynamic product-mix
optimization problem is the problem of timing deletions and additions to the
product mix in response to changing opportunities and resources so that the
product mix remains optimal through time.
Although it is certain that little work has been done in the industry on this
problem, computer simulations are available for the use of company managers
should they address these factors.
Company management are interested in what will happen to profits, sales
stability and sales growth as the product-mix is changed. A logical approach
would be to simulate possible sequences and timings of planned product deletions
and additions over some future time period. Such calculations would provide the
present management with the profit, stability and growth characteristics of the
different possible transformations of the product-mix through time.
THE TARGET COMPANY & INDUSTRY OPERATIONS
Target Company |
Base Reference |
PRODUCT STRATEGY |
Steady Reinvestment Products |
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Support Products |
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Venture Products |
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Performance Grid Definitions |
Brand strategy is intimately tied up with the question of product-mix strategy.
The Company faces three crucial decisions on brand strategy.
The first is whether and to what extent, they should put brand names on their
products (brand versus no brands).
The second is whether the brand names should be those of the company or those of
the distribution channels ( suppliers' versus distributors'
brands).
The third is whether the company's own brands should go under one, a few, or
many individual names (
family brands versus individual brands).
A few definitions are in appropriate:
1. |
A brand is a name, term, sign, symbol or design, or a combination of all of them which is intended to identify the goods or services of one seller or group of sellers and to differentiate them from their competitors. |
2. |
A brand name is that part of a brand which can be vocalized - the utterable. |
3. |
A brand mark is that part of a brand which can be recognized , but is not utterable, such as a symbol, design or distinctive colouring or lettering. |
4. |
Finally, a trademark is a brand or part of a brand that is given legal protection because it is capable of exclusive appropriation. Thus a trademark is essentially a legal term protecting the seller's exclusive rights to use the brand name and/or brand mark. |
Branding will be used as a general term describing the establishing of brand names, marks, or trade names for a product.
Why should the Company consider a branding programme when it
clearly involves cost, packaging, labeling, legal protection - and a risk,
should the product should prove unsatisfying to the user?
At least four purposes may attract the Company:
1) |
A brand mark for identification purposes to simplify handling or tracing. |
2) |
A legal trademark and patent to protect unique features of their product from imitation. |
3) |
The Company may want to connote a certain quality that they are offering so that satisfied buyers might easily obtain that product again through brand recognition. |
4) |
The Company may see the brand name as an opportunity for endowing the product with a unique story and character that may create the basis for price differentiation. |
Sometimes the pressure for branding comes not from company management but from
the distributor or ultimate buyer. Distributors may want names as a means of
making the product easier to handle, identifying suppliers, holding protection
to certain quality standards and increasing buyer preference. Ultimate buyers
may want brand names to help them identify the products they want without close
inspection. The brand name has informational value to the buyer.
In branding their products, companies may use their name(s) (suppliers' brands),
the names of their distributors (distributors' brands), or follow a mixed brand
policy, producing some output under their own name(s) and some output under
distributors' names.
Historically, suppliers' brands have dominated most markets, however in recent
times, larger stores and wholesalers have seen an advantage in developing and
offering their own brands. The distributor may be able to obtain and sell the
products at lower prices than the suppliers' brand (because private brands do
not bear the suppliers' promotional expenses and because of volume of
purchasing), passing on some of these cost savings and still realizing a higher
profit margin. Having Own Branding gives a distributor more control over pricing
and also some measure of control over the producing company because the
distributor can threaten to change the source of supply. Because of these and
other advantages, distributors' brands have become an important factor in brand
competition.
The competition between suppliers' and distributors' brands has been labeled the
'battle of the brands'. In this confrontation, the distributor has many
advantages on his side. Retail merchandising outlets are scarce, and many
suppliers, especially newer and smaller ones, cannot introduce products into
distribution under their own name. The distributors take special care to
maintain the quality of their brands, building consumers' confidence. Many
buyers know that the private label is often manufactured by one of the big
suppliers anyway. The distributors' brands are often priced lower than
comparable suppliers' brands, thus appealing to budget-conscious shoppers,
especially in times of inflation. The distributors give more prominent display
to their own brands and make sure they are better supplied. For these and other
reasons, the former dominance of the suppliers' brands is ending. Indeed, some
marketing commentators predict that distributors' brands will eventually knock
out most suppliers' brands.
Suppliers of national brands are in a very trying situation. Their instinct is
to spend a lot of money on consumer-directed advertising and promotion to
maintain strong brand preference. Their price has to be somewhat higher to cover
this promotion. At the same time, the mass distributors put strong pressures on
them to put more of their promotional money towards trade allowances and deals
if they want adequate shelf space. Once suppliers start giving in, they have
less to spend on consumer promotion and their brand demand starts deteriorating.
This is the national brand suppliers' dilemma.
If the Company choose to produce most of their output under their
own name they still face several choices.
At least four brand name strategies can be distinguished:
1) |
Individual brand names. This policy is followed by companies with consumer, highly advertised, products. |
2) |
A blanket family name for all products. This policy is followed by companies with related products sold in limited markets. |
3) |
Separate family names for all products. This policy is followed by certain large scale distributors. |
4) |
Company trade name combined with individual product names. |
Competitors within the same industry may adopt quite different brand strategies.
What are the advantages of an individual-brand-names
strategy?
A major advantage is that the Company does not tie its reputation to the
product's acceptance. If the product fails, it is not a bad mark for the
company. Or if the new product is of lower quality, the Company does not dilute
its reputation.
The supplier of a line of expensive or high-quality food products can introduce
lower-quality lines without using its own name.
On the positive side the individual-brand-names strategy will permit the Company
to search for the best name for each new product. Another advantage is that a
new name permits the building of new excitement and conviction.
The opposite policy, that of using a blanket family name for all products, also
has some advantages if the Company is willing to maintain quality for all items
in the line. The cost of introducing the product will be less, because there is
no need for 'name' research, or for expensive advertising to create brand name
recognition and preference. Furthermore, sales will be strong if the company's
name is good.
Where a company produces or sells quite different types of products, it may not
be appropriate to use one blanket family name. Companies often invent different
family brand names for different quality lines within the same product class.
Finally, sometimes managers may want to associate their company name along with
an individual brand for each product. In these cases, the company name
legitimize, and the individual name individualizes, the new product.
In the present discussion two particular strategies deserve mention:
1. Brand Extension strategies
2. Multi-brand strategies
1. Brand extension strategy
A brand-extension strategy is any effort to use a successful brand name to
launch product modifications or additional products. In the case of product
modifications, it is commonplace to compare one brand with a new and improved
replacement. Brand extension also covers the introduction of new package sizes,
features, models and so on. More interesting is the use of a successful brand
name to launch new products. Brand extension has also been used by companies to
cover a variety of new products that could not easily find distribution without
the strength of the original name.
Another kind of brand extension occurs when suppliers of consumer and producer
durables add stripped-down models to the lower end of their line to permit
advertising their brand as starting at a low price. Thus companies may advertise
their products as 'starting at $99'. In these cases, these 'fighter' or
'promotional' products are used to draw in customers on a price basis who, upon
seeing the better models, usually decides to trade up. This is a common strategy
but must be used carefully. The 'promotional' brand, although stripped, must be
up to the line's quality standards. The seller must be sure to have the
promotional product in stock when it is advertised. Consumers must not get the
feeling they were 'taken', or else they may terminate their future business with
the seller.
2. Multi-brand strategy
A multi-brand strategy is the development by a particular seller of two or more
brands that compete with each other. Suppliers of high volume consumables have
pioneered this strategy.
There are several reasons why suppliers turn to multi-brand strategy. First,
there is the severe battle for point of sale coverage. Each brand that the
distributor accepts get some allocation of merchandising and coverage. By
introducing several brands, a supplier ties up more of the available distributor
resources, leaving less for competitors.
Second, few consumers are really so loyal to a brand that they would not, under
the right circumstances, try another. They respond to price-cutting deals, gifts
and new-product entries that claim superior performance. Thus the supplier who
never introduces another brand entry will almost inevitably face a declining
market share. The only way to capture the 'brand switchers' is to be on the
offering end of a new brand.
Third, creating new brands develops excitement and efficiency within the
supplier's organization. Certain companies see their individual brands and
managers in internal competition that keeps products dynamic and in a state of
flux.
Fourth, a multi-brand strategy enables the Company to take advantage of
different market segments. Consumers respond to various appeals, and even
marginal differences between brands can win a large following.
In deciding whether to introduce another brand, companies should consider such
questions as:-
a. |
Can a unique story be built for the new brand? |
b. |
Will the unique story be believable? |
c. |
How much will the new brand cannibalize the sales of the company's other brand versus the sales of the competitors' brands? |
d. |
Will the cost of product development and promotion be justified by the estimated Return on Investment? |
A major pitfall to avoid is introducing a number of multi-brand entries, each of which obtains only a small share of the market and none of which is particularly profitable. In this case, the company has dissipated its resources over several partially successful brands instead of concentrating on a few brands and building each one up to highly profitable levels. Such companies should weed out the weaker products and establish tighter screening procedures for choosing new brands to introduce.
Target Company |
Base Reference |
BRAND STRATEGY |
Performance Grid Definitions |
The following pages analyze the effects of New Product or Product
Revision expenditure in terms of the Company and the industry's Financial and
Operational results.
New Products refer to entirely new products or services offered to customers and
Product Revisions refer to the improvement or enhancement of existing products
or services.
The data assumes that the Company and the industry will increase its New Product
investment by a rate of 5% above that of the industry averages.
The Financial and Operational Data forecasts given for the New Product
Expenditure Scenario makes the following assumptions:-
1. Forecasts are based on all external factors:
a. Market Growth (Medium + Long Term)
b. Competitive Market Factors
c. Competitor + Industry Environment Factors
2. Forecasts assume ceteris paribus in terms of internal factors with the
exception of an acceleration of New Product or Product Revision expenditure
which is assumed to increase by a rate equivalent to 5% greater than the
competitor average.
3. Forecasts assume change (as appropriate) in Market Competitors. The forecast
assumptions use Competitor databases to forecast changes in competitive
situations which will affect the Company and includes the Competitor response
(in New Product Terms) to the scenario shown.
This section analyses the effects of a Market Segmentation
programme and its concomitant expenditure in terms of the Company and the
industry's Financial and Operational results.
Marketing Segmentation involves the repositioning, repackaging and remarketing
of existing products to meet and serve other market segments. In general terms
the expenditure incurred is limited product development costs plus additional
marketing costs.
This tactic is regarded as a short or medium-term operation where the benefits
are seen in a fairly short time.
The Financial and Operational Data for the Market Segmentation Expenditure
Scenario forecasts given make the following assumptions:-
1. Forecasts are based on all external factors:
a. Market Growth (Medium + Long Term)
b. Competitive Market Factors
c. Competitor + Industry Environment Factors
2. Forecasts assume ceteris paribus in terms of internal factors with the
exception of a Market Segmentation programme and its concomitant expenditure
which is assumed to increase by a rate equivalent to 5% greater than the
competitor average
3. Forecasts assume changes in Market Competitors. The forecast assumptions use
Competitor databases to forecast changes in competitive situations which will
affect the Company and includes the Competitor response (in Market Segmentation
Terms) to the scenario shown.
HISTORIC FINANCIAL INDUSTRY DATA
PRODUCT MIX BASED BALANCE SHEET FORECASTS
The PRODUCT MIX FINANCIAL SCENARIO BALANCE
SHEET FORECASTS section gives a series of Forecasts for the Company and the
industry using a number of assumptions relating to the product decisions
available to the management of the Company.
The Balance sheet
forecast given shows the effects of product improvements which Product
Management is likely to recommend:
PRODUCT MIX FINANCIAL
SCENARIOS
Base Forecast : Median Market Scenario
Research & Product Cost Objectives
Product Positioning
Product Branding + Multi-branding Investment
New Product & New Technology Cost Scenarios
Product Cost Improvements
Product Quality Improvement
Managers in the Company will, in both the short-term
and the long-term, have vital decisions to make regarding the product
improvements, margins and profitability and these decisions will need to be
evaluated in light of the customers, markets, competitors, products, industry
and internal factors. The scenarios given isolate a number of the most important
factors and provide balance sheet forecasts for each of the scenarios.
The data provides a short and medium term forecast covering the next 6 years for
each of the Forecast Financial and Operational items. The Financial and
Operational Data sections show each of the items listed below in terms of
forecast data and covers a period of the next 6 years.
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Financial Comparisons: Scenarios |
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Target Company |
Base Reference Industry |
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