1 Marketing Management Dr. C. M. Chang Only to be used by instructors who adopt the text: C. M. Chang, “Engineering Management: Challenges in the New Millennium,”

1

Marketing Management

Dr. C. M. Chang

Only to be used by instructors who adopt the text: C. M. Chang, “Engineering

Management: Challenges in the New Millennium,” Pearson Prentice Hall (2005)

Copyright © 2005 by Dr. Carl Chang

2

Chapter Contents

• Introduction

• Marketing Function

• Market Forecast -- Four-step Process

• Market Segmentation

• Product Strategy

• Pricing Strategy

3

Chapter Contents

• Marketing Communications (Promotion)

• Distribution (Placement) Strategy

• Other Factors Affecting Marketing Success

• Summary

• Appendices (1) Product Testing Program, (2) Market Attractiveness and Marketplace Acceptance

4

Introduction

• Basic functions of an enterprise: Marketing and Innovation - special roles for engineers!

• Marketing: Provide products/services meeting the needs and wants of customers, Focusing on basic marketing concepts and applications

• Innovation: Strengthen the firm’s competitive marketing position and sustain profitability by technology, supply chains, product design, etc.

5

Marketing Function

Firm

Information(Advertising,Promotion)

CustomersSuppliers

Purchase(Response, Vote, Attitude)Information(Market Research,Wants/needs Preferences)

6

Selling Versus Marketing

ProductionCapacities

ManufacturingProducts

AggressiveSales Efforts

Aim at Customer

as a Target

PotentialMarketing

Opportunities

ProductionCapabilities

MarketProducts/Services

Actual Wants/Needs ofPotentialCustomers

MarketingProgram

Customer

7

Marketing Orientation

• Customer Focus - Understand needs, create value, and serve to assure customer satisfaction, with inter-functional teamwork

• Competitor Focus - Seek advantages relative to competitors, monitor behavior and respond to strategic moves (foes or friends)

• Profit Focus - Manage to assure short- and long-term profitability

8

Marketing Process

DefineProblem

Analyze Market

(Environment,Competition,

Strength,Weakness,

Needs/Interestsof DefiningSegments

Select Segment (s):Profitability, Fit with

Company/Product/Market

DevelopMarketing Program

(Set strategies for Product,

Pricing, Promotion and

Distribution)

ImproveProgram

EvaluateProgram

9

Levels of Marketing Strategy

• Corporate Level: Set future direction of what businesses to pursue (product, service, total solution, etc.) and what value to be emphasized

• Business Level: Bring products/services to the marketplace and achieve/maintain competitive advantages

• Operational Level: Plan marketing program and implement/control marketing efforts

10

Marketing Effectiveness Diagram

Customer RetentionLow

Low

High

Cu

stom

er A

ttra

ctiv

enes

s

High

11

Marketing Effectiveness

• Total Success: High profitability at maximum possible rate

• Partial Success: New customers replace lost customers

• Partial Failure: Sales slow or fall due to a lack of new customers

• Total Failure: Sales fall as customers leave

12

Key Elements in Marketing

• Market (size, growth rate, location)

• Environment (competition, entry barriers, constraints)

• Customers (who, why, when, where how, what)

• Marketing Mix

13

Market Forecast

• Demand forecast is critically important• Four-step process by Barnett (Source: F. William Barnett, “Four Steps to Forecast total Market

Demand,” Harvard Business Review, July/August 1988)

• (1) Define the market - Total Sales revenue per year of all products delivering similar benefits to customers regardless of physical and functional features

• , (2) Segment the market, (3) Determine the segment drivers and predict their changes, (4) conduct sensitivity analysis

14

Market Forecast

• (2) Segment the market - Subdivide total market into homogeneous customer subgroups with similar buying behavior and preferences

• (3) Determine segment drivers and predict their changes - key factors affecting the segment growths

15

Market Forecast

• (4) Conduct sensitivity analyses - assess risks and check assumptions

• Application examples: (a) Industrial product - Segments based on industries with individual segment growth rates as drivers, assuming product demand is proportional to growth and business levels involved

16

Market Forecast

• (b) Electricity - segments of industrial, commercial and residential; drivers are: business climate and industrial growth rate for industrial; Internet sales increase, consumer confidence, stock market performance for commercial; new home sales, change in home size and energy efficiency of appliances for residential

17

Environment

• Market study is needed to assess:

• Competition (market share distribution, technology, brand strength, marketing position, customer loyalty, etc.)

• Barriers of entry (capital, technology, supply chains, distribution channels, governmental regulations, etc.)

18

Customer Orientation

• Define needs through research (real value of a product to customer - prestige, convenience)

• Define market segments (groups with similar needs to facilitate product customization)

• Differentiate products and communications (e.g., “Dude” selling Dell computers)

• Create differentiated advantages for customers

19

Customers

• Who (Profile, who buy from competitors, who does the buying, for whom is the buying done)

• Why (Reasons for product preference: price, product performance, convenience, product styling, service, packaging)

• What (What for, what value benefit, what they really want? what needed in the future?)

20

Customers

• Where (where to get product information, where is buying decision made, where to buy from: Retail store, mail order, via internet, department store, discount store )

• How (How to decide, how to compare)

• When (When to buy, weekly, monthly, special occasions, etc.)

21

Buyer (Purchaser)

Consumer (End-user)

Prescriber (specifier deciding on needs and its

satisfaction)

Who Makes What Decisions for Whom?

22

Market Segmentation

• Purpose

• Segmentation Steps

• Criteria for Creating an Effective Segmentation Strategy

• Pitfalls of Market Segmentation

23

Purpose

• Divide consumers into groups having similar product/service preferences (divide/conquer)

• Value to Company: (1) Match products/ service better to the groups, (2) Create suitable channels of distribution to reach them, (3) Uncover new consumer groups, not being served sufficiently in the past, (4) Focus on niches being neglected by competition

24

Additional Segmentation Benefits to Company

• Develop suitable marketing strategies

• Formulate better-fitting marketing programs

• Track changes of buying behavior over time

• Evaluate company’s competitive position in these segments

• Achieve improved effectiveness in utilizing marketing resources

25

Pitfalls

• Over-Segmentation (small sizes, fragmented segments difficult for company to serve -scale of economy) - Newer supply chains allows “build-to-order” strategies to serve smaller segments (Dell, Custom beer, Chinese foods, etc.)

• Over-concentration (lack of balance between segments)

26

Problem 9.1

• Which are the bases for tradeoffs between conflicting wants and needs of different customers with respect to the same product? How important is it to emphasize product quality, when a new, unique product is launched?

27

Answer 9.1

• Customers make the following typical tradeoffs: (1) Quality versus price, (2) Common features versus customization, (3) Automated self-service versus personalized attention, (4) Technical functionality versus styling and other aesthetic values

• When launching new products, quality is secondary to time-to-market and price. The strength of a new product lies in its novelty

28

Marketing Mix

DistributionStrategy

PricingStrategy

ProductStrategy

PromotionStrategy

Customer

29

Marketing Mix

• Product Strategy: Functional attributes, compatibility to customer needs, distinguishable features over competition, product-line strategy, product/market fit

• Promotion/Communication Strategy: How to promote, adopt pull/push, which media to use, fit promotion to market segment selected

30

Marketing Mix

• Pricing Strategy: Skimming or penetration based pricing, value-added pricing, target pricing, pricing fit to market segment

• Placement (Distribution) Strategy: Intensive, exclusive or selective distribution, relationship with intermediaries (retailers, wholesalers), changes in distribution logistics and technologies

31

Product Strategy

• Nature of Products

• Life Cycle of Products

• New Product Development Process

• Product Failure (Rate, Reasons)

• Summary

32

Product Positioning

• What product features to include and emphasize - critically important

• Selection of product features to place new (or existing) products in a favorable position with respect to competition - customer preferences and gap created by existing products in marketplace

• Example: Automobiles

33

Product Life Cycle

• Every Product goes through a number of phases: (1) Initiation (product development, testing, market development, advertising), (2) Growth (product promotion, market acceptance, profit growth), (3) Stagnation (price competition, substitution, new technologies), (4) Decline (cash cow strategy, product withdrawal)

34

Product Life Cycle

Product Life Cycle

-20

-10

0

10

20

30

40

50

0 10 20 30 40 50 60 70 80 90 100

Product Life (%)

$

Sales

Profit

35

Product Supply Curve

• Product supply curve describes the market behavior of companies -- supplying larger quantity of products in the product price is raising to higher levels in search of higher profits

• Product innovations -- better products or lower product price, causing demand to increase and downward shift of supply curve

36

Impact of Product Innovation

Downward Shift of Supply Curve

0

2

4

6

8

10

10 15 20 25 30 35

Quantity

Pri

ce ($

/Uni

t) Old Suppy

Demand

New Supply

37

Product Portfolio

Market ShareHigh Low

Low

High

?M

ark

et G

row

th R

ate

38

Products/Brands

• Brand - A Distinct identity that differentiates a relevant, enduring and creditable promise of value associated with a product, service or organization that indicates the source of that promise. It represents all images and experience customers have of and with the organization.

39

Promise of Value - Brand Examples

• IBM - Superior Service and support

• Apple - Simple and easy to use

• Lucent - Newest technologies

• Gateway - Friendly service

40

Brand Pyramid

5 - Personality4 - Value relevance3 - Benefits (Emotional and Psychological)2 - Benefits (Technical)1 - Product features and characteristics

1

2

3

4

5

41

Problem 9.3

• Is it better to market a new product quickly and then improve the design later or to incorporate all design modification/ improvements before launching the product?

42

Answer 9.3

• Marketing product quickly is a superior strategy for new products, as doing so will allow (1) Brand name build up, (2) Customer loyalty creation, (3) Customer retention due to “switching costs,” and (4) earlier customer response assessment, (5) Steady product design improvements, and (6) Larger gross margin for lack of competition in earlier phase of product life cycle.

43

Answer 9.3

• Waiting to market the new product until all conceivable design improvements have been incorporated suffers from two drawbacks: (1) Not offering what exactly what the customers want and need (due to a lack of customer feedback), (2) Loss of a preemptive marketing advantage

44

Problem 9.4

• How can product development costs be reduced by entering the market late?

45

Answer 9.4

• Some companies follows the “best follower” strategy; Wait until a new product is about to take off, reverse engineer the competitor’s products, modify the product features, and enter the market with imitation products to compete at a slightly lower price

• In 1985-86, IBM started with the innovative PCs, followed by many clones thereafter

• Follower realizes smaller gross margin, never a leader

46

Problem 9.5

• For products intended for the global markets, customers’ wants and needs are regionally different. How can a centralized concurrent engineering team develop a product, which serves as the common “platform” for the global markets?

47

Answer 9.5

• One option is to segregate the mechanical aspects (functionality) of the products from their aesthetic aspects (look and feel)

• General Motors is accomplishing this challenging objective by: (1) Build identical assembly plants for Buick cars at four global locations, (2) Outsource major subassemblies to local industries to reduce import duties and to satisfy local content laws

48

Answer 9.5

• (3) Standardize the technical specifications so that parts are globally interchangeable for load balancing (market demands, labor disputes, regulations, etc.), (4) Allow design changes to account for local market conditions (cultural preferences in car names, styling, color), (5) Retain centralized concurrent engineering approach to implement global business strategy and realize scale of economy benefit

49

Pricing Strategy

• Pricing Options

• Factors affecting Price

• Pricing Methods

50

Pricing Options

• Skimming Strategy - Set premium price initially to capture high profitability from affordable customers and then reduce price in time to reach additional customers in the marketplace (e.g., new books, ginger)

• Penetration Strategy - Set price low to penetrate the market rapidly for setting barrier of entry to late-coming competitors (e.g., Microsoft Office 2000, Japanese motor cycles)

51

Pricing Methods

• Cost: Price = Cost + Markup (e.g., 30% of cost)

• Profit: Price = Cost + Profits (e.g., ROI)

• Market: Set price to what the buyers are willing to pay (imperfect information distribution, the next best alternative available to buyer)

• Value: Set price in proportion to product’s value added to buyer (application know-how)

• Competition: Set price at level charged by competition (Target Pricing)

52

Target Pricing

• Set the selling price based on customer inputs and market survey and determine pertinent product features

• Add a gross margin that company must have

• Obtain the Cost of Goods Sold (CGS) that must not be exceed

• Define material/parts, design, product development, and production method to meet CGS target

53

Internet-Enabled Communications Options

B-to-B B-to-C

Manufacturer/Supplier

Customers

Intermediary

Virtual Market

Source: “Leverage Web for Corporate Success,”Business Horizon (1999)

Direct

54

Internet-Enabled Communications Options

• Business to Business: Manufacturer’s Intranet for intermediaries

• Business to Consumer: Web portals of distributors for selling to consumers

• Direct: Manufacturer’ web sites (Dell, Gateway), buyer’s portals (Covisint, ChemConnect)

• Virtual Market: Third party search portals (Yahoo), auction site (e-Bay), e-marketplace

55

B-to-B E-HubsManufacturing Inputs Operational Inputs

Systematic Sourcing Catalog Hubs MRO HubsChemdex AribaSciQuest.com W.W. GraingerPlasticsNet.com MRO.com

BixBuyer.com

Spot Sourcing Exchangers Yield Managere-steel EmployeasePaperExchange.com Adauction.comAlta Energy CapacityWeb.comIMX Exchange

Source: Steven Kaplan and Mohanbir Sawhney, "E-Hubs: The New B-to-B Marketplaces,"Harvard Business review, May-June 2000.

56

Contextual Marketing

• Bringing marketing messages directly to customer at the point of need (“hitting the iron while it is hot”)

• Johnson & Johnson - Banner ads for Tylenol, when stock market drops more than 100 points

• Google - List ads ahead of list of hits

• Dell - Product Specs in CNET and ZDNET

57

Distribution Strategy

• Channels of Distribution• Functions of Distribution

Channels• Type of Distribution• Organizational Structures• Impact of E-Commerce

on Distributions

58

Other Factors Affecting Marketing Success

• Alliances & partnerships

• Customer Interactions and Loyalty

• Organizational effectiveness

59

Customer Loyalty

• Five determinants of Customer Loyalty: (1) Quality customer support, (2) on-time delivery, (3) compelling product performance, (4) convenient and reasonable priced shipping and handling, and (5) clear and trustworthy privacy policies.

• Dell - Customer Experience Council: Order fulfillment, product performance, post- sale service and support.

60

Best Practice Examples

• Amazon.com - Tailor product offerings to individual preference, one-click convenience, error-free delivery; 59% business from repeat customers

• EBay - Assure satisfaction of auction, buyer and seller rate each other, insurance of firs $200, Money in escrow account until buyers are satisfied, 50% of customers are referrals

61

Summary

• What Engineering Managers should strive to do? (1) Understand the very important roles played by marketing and certain marketing issues affecting engineering, (2) Become versed in marketing mix, (3) Recognize the uncertainties involved in marketing (customer perceptions, competitive analysis, sales forecasts), (4) Adopt the customer orientation in all engineering programs, (5) Provide required supporting engineering inputs.

62

Summary - Engineering Inputs

• Product: Innovative design, product features, use of technologies, efficient production systems and processes, reliability, service, quality, maintenance.

• Price: Cost control, improved cost analysis (ABC)

• Promotion: Brochures, training, analysis of feedback

• Distribution: Logistic optimization

63

Summary

• Marketing and Innovation are two principal functions of an enterprise

• Engineers know how to innovate, they also need to become effective in interacting with marketing to assure business success of any enterprise - This combination of capabilities will enable them to become major contributors to product-based profit-seeking enterprises

64

References

• Philip Kotler, "Marketing Management: Analysis, Planning,Implementation and Control,” 7th Edition, Prentice-Hall (1991)

• William Lazer, “Marketing 2000 and Beyond,” American Marketing Association (1990)

• Gilbert A. Churchill, Jr.., ad J. Paul Peter, “Marketing: Creating Value for Customers,” Irwin/McGraw-Hill (1998)

• Houston E. Elam and Norton Paley, “Marketing For Non-Marketers: Principles and Tactics that Everyone in Business Must Know,” AMACOM (1992)

65

References

• Robert Hartley, “Marketing Mistakes and Successes,” John Wiley (1998)

• Edwin W. Cundiff and Mary Tharp Hilger, “Marketing In the International Environment,” Prentice-Hall (1988)

• Peter K. Francese, “Marketing Know-how: Your Guide to the Best Marketing Tools and Sources,” American Demographic Books (1996)

• Don Debelak, “Marketing magic: Innovative and Proven Ideas for Finding Customers, Making Sales and Growing Your business,” B. Adam (1994)

66

References

• Jan Zimmerman, “Marketing on the Internet,” Maximum Press (2000)

• Bud E. Smith and Frank Catalano, “Marketing Online for Dummies,” IDG Books (1998)

• Kevin J. Clancy and Robert S. Schulman, “The Marketing Revolution: A Radical Manifesto for Dominating the Marketplace,” HarperBusiness (1991)

• For business cases, articles and selected trade publications, see the text.