Tag: Product Strategy

Making the most of your offer

the products and services you offer are key to the survival and growth of your business.  But if your product mix is static, its effectiveness will weaken.

As stated previously in this blog, your customers have needs that they want satisfied; they have jobs that they want completed.  Customers want solutions, not products.  They want a four millimetre diameter hole, not a four millimetre drill bit.  Their focus is on the solution that will get the job done, not the product needed to provide that solution.

Over time, it is likely that consumers will move from one product to another if it is shown that the new product option offers a better solution to the consumer’s need than the existing product.  Consumers will switch to another product if they perceive it offers a better way to get the job done – cleaner, faster, safer, more environmental – and less costly!

No product, service or organisation is indispensable if a better offer exists elsewhere.

Take the example of the mangle.  A mangle used to be an indispensable, but exceedingly dangerous, tool for doing the laundry.  no household would be without access to a mangle on wash day.  When the first washing machines appeared in the late 19th century they were fitted with a mangle to squeeze excess water from the wash. Often these mangles were electrically powered.

But no one uses a mangle today.  Modern washing machines with high speed spin cycles use centrifugal force to remove water from the laundry.  Modern machines are safer; you aren’t going to crush your hand in a modern machine (a common injury with mangles); they are less time consuming and use less effort on the part of the consumer; and because they use a lot less water, they are more environmental.

So consumers have switched away from mangles to remove water from their weekly wash; there is no longer a market for mangles in the United Kingdom.

However, in many businesses there is a problem.  Product portfolio management is seen as a tactical, not a strategic activity.  Small drops in sales levels are often dealt with at a local or regional level, not a strategic responsibility of senior management.  The solution isn’t to alter the product mix but to offer additional incentives to salesmen and agents.  Little or no thought is given as to whether the drop in sales is a result of an incorrect product strategy.

Often products are placed in organisational silos.  Issues with product management are contained within those silos and no one looks to see if the overall product strategy is at fault.

Reviewing the management of your product portfolio is more than examining sales figures.  You need to:

  •  Review customer needs
  •  Review product or service attributes
  •  Are needs changing over time?
  •  Review your customer value proposition
  •  Examine your wider business model
  •  Assess existing and potential risks
  •  Manage the product life cycle
  •  Examine distribution and supply chains; are you using the most appropriate use to market?
  •  Are you using the right tactics to implement your marketing strategy?

The starting point for considering your product mix strategy is the consideration of value.  There are two forms of value;

  1. Organisational Value: The flow of cash and the reputation gained through the sale of your goods and services
  2. Customer Value: The benifits of your products and the solutions they offer.

Successful businesses are those who gain more value from consumers than is spent delivering products and services.

Customers get value from seeing a job well done or a need satisfied.  A firm will be profitable if the customer value it generates exceeds the costs of delivering a satisfying solution to the customer.

And remember, best value does not necessarily mean cheapest price.  It is a measure of overall utility. Customers will trade off different perceived values from a range of product offers. This is often a primary source of marketing differentiation.

Remember value equals benefits of the product or service minus the effort needed to obtain those benefits, minus the risk involved in the product choice, minus the price charged for the product or service.

Reducing the price is only one way of maximising customer value. Alternatively, you can increase the benefits of usage; you can reduce the effort needed to access the benefits of your offer; you can reduce the risk inherent in a consumer choosing your product.

And it isn’t just your target customer who needs a value proposition.

Prospective customers need a value proposition to compare your products with others in the market.  Your salesforce needs a value proposition to present to customers.  Your distributors and retailers need a value proposition to ensure appropriate prominence for your products; and your internal stakeholders and shareholders need a value proposition to assess your organisation’s market value.

Teacy and Wiersema see three potential areas for a value proposition to be developed; management efficiency, product leadership and customer intimacy.

You customer value proposition must relate to all the stakeholders in your organisation and it must integrate the needs of those stakeholders as well as those of customers.  Stakeholders need to be informed of where they sit in the customer value process as well as how different stakeholder groups relate to each other.  You must state clearly how the organisation and its stakeholders create customer value in a unique and differentiated way from that of your competitors.

So:

  •  The roles of organisational stakeholders must be aligned to the process of delivering the customer value proposition
  •  The aim should be to open doors and close sales
  •  You should look to increase revenues by having a clear market position
  •  Aligning stakeholders roles should speed time to market
  •  Aligning the roles of stakeholders should reduce costs and wastage
  •  Alignment or stakeholders to the customer value proposition should improve operational efficiency and increase market share
  •  Align to the customer value proposition to improve customer retention

As the product mix cannot be static, product innovation is a necessary element.  Innovate or die.  Change should be business as usual.  Remember, not everything new will sell; failure is part of the new product development process.  You cannot be responsible for the unpredictability of consumers.

When assessing your product mix, it can be useful to reassess the business you are in.  For example, is Harley Davidson a motorcycle manufacturer or a lifestyle brand?  They don’t just produce bikes, they make clothing, luggage, and license fragrances.

Can you reassess your product mix through segmenting your market in a different way?  Do you segment based on consumer income or psychographic measures?

Do you track the value customers see in your products? Is that value declining? If so what changes can you make to reinvigorate that value?  Are product attributes once seen as optional extras now seen as necessities?  For example, few cars today are sold without a satellite navigation system or passenger airbags.

It can be important to work with your target customers in the development of your offer.  They may provide useful insight into which innovations offer sustainable value.

Management of your product mix is a strategic, not a tactical task.  It is important that development of your offer is considered across your organisation and that it is not solely the responsibility of your sales or marketing team.

 

Using Portfolio Matrices to Plan for the Future

In previous blog entries, I have discussed the Boston Consulting Group Growth/Share matrix as a tool for product portfolio management.  However, this matrices is seen by many business academics as flawed.  Some academics have tried to amend the BCG model and even the BCG have attempted to mitigate the matrix’s defects through other tools, in particular their Growth/Gain matrix.

Given the difficulty in developing a model of portfolio management, several large multinational firms employed academics to build portfolio management tools.  Two of the tools developed are the General Electric Multifactor Portfolio Matrix and the Shell Directional Policy Matrix.

The General Electric Matrix compares the attractiveness of a particular market or market segment with your business’s competitive position in that market.  The matrix does not rely solely on market growth.  A number of market attractiveness measures are used including:

  1. Market Size
  2. Market Growth Rate
  3. Beatable Rivals
  4. Market Entry Barriers
  5. Social, Political and Legal Factors

Similarly competitive strength is not based solely on market share.  Again a number of criteria can be selected including:

  1. Market Share
  2. Business Reputation
  3. Distribution Capability
  4. Market Knowledge
  5. Service Quality
  6. Innovation Capability; and,
  7. Cost advantages.

When using the GE matrix, management decide which criteria are to be used.  Each factor is weighted.  The weighting of all factors combined cannot exceed ten.  Each factor is then given a relative importance out of ten.  By multiplying the weighting with the importance factor, a score for each factor is calculated. These scores are added to give a market attractiveness and competitive position score for each product line.

These scores are then plotted on a 3×3 matrix.  From this matrix, five strategic zones are defined:

  • Zone One: In this zone both market attractiveness and competitive position is strong.  The aim for products in this zone is to build and manage sales for market share growth.  This equates to star products in the BCG matrix.
  • Zone Two: In this zone, your competitive position is strong but the market is not particularly attractive.  The proposed strategy is that you manage the product for consistent profits whilst maintaining market share.  This zone equates to BCG matrix cash cows.
  • Zone Three: Here the market is highly attractive but your competitive strength is relatively weak.  It is a zone where the strategic product policy can be determined by the relative strength of your competitors.  If your competitors are weak or passive, your strategy would be to build the products position in the market. If you face strong competition, the aim would be to retain the existing market position of your product.  If your commitment to the market is low, your aim would be to harvest the product for cash.
  • Zone Four:  Here both competitive position and market attractiveness are weak.  This position is similar to a ‘cash dog’. This could be a product in a declining market or a dog product which is difficult to divest (e.g. a required accessory).  This is a product to be harvested for cash
  • Zone Five:  Here both competitive position and market attractiveness are extremely weak.  The aim should be to divest the product. To run down production or to sell it to another party.

There have been a number of criticisms of the GE matrix.  It is a richer tool in terms of content and it is therefore more flexible. However, it is much harder to use than the BCG matrix and it can be affected by managerial bias, power games and empire building.  Decisions on the use of the matrix and resulting strategies need to be made above the level of strategic business units.

The Shell Directional Policy (created by research financed by Shell Oil) does something a bit different to the GE matrix and the BCG matrix in that it looks to the future rather than relying on existing product portfolios.

The Shell Matrix compares the attractiveness of a market or segment with the potential for profitability in that market.  Again multiple weighted factors are used to give products scores. Again a three by three matrix is produced which delivers eight strategic positions:

  1. Leader: Here a firm has strong competitive capabilities and strong profitability prospects.  this is your core market where you have a leadership position.
  2. Growth Leader:  Here prospects for profitability are average but you have strong competitive capabilities. Here you look to improve the prospects of profitability using tools such as value chain analysis.
  3. Try Harder:  Here prospects for profitability are strong but your competitive capabilities are only average.  the aim is to improve those competitive capabilities through training and recruitment.
  4. Double or Quit:  Here prospects of profitability are strong but your competitive capabilities are weak.  So the decision is whether it is worth investing in improving those capabilities.
  5. Custodial Growth:   Here both profitability and competitive capabilities are average.  This and Double or Quit are similar to the Question Mark products of the BCG matrix.
  6. Phased Withdrawal:  Here profitability is average but your competitive capabilities are weak. The aim is a managed withdrawal from the market or segment.
  7. Cash Generation: Here you have strong competitive capabilities but the prospects for high profit margins are weak.  This equates to the BCG matrix cash cow.
  8. Disinvest: Here both competitive capabilities and profitability prospects are weak.  This is a dog product ripe for disinvestment.

Both the Shell Matrix and GE matrix require significant levels of information gathering and analysis. However, if your in business, shouldn’t you be doing this anyway?

All portfolio management matrices have strengths and weaknesses.  When using these tools you must be aware of those strengths and weaknesses.  perhaps the best option is to use these matrix tools in combination.

These are tools to help strategic decision-making: They are not the source of mandatory instruction.

So use these tools, in full awareness of their attributes to give a rounded and comprehensive view of your product portfolio.

How Your Products Influence Your Marketing Strategy

The Oxford Dictionary of Marketing describes the following major categories of consumer product:

  1. Convenience Products: Consumers buy these products with little thought or analysis. An example would be ready meals in a supermarket.  Brand loyalty and personal preference play a large part in a consumers buying decision.  These are items consumers buy regularly.
  2. Staple Products:  These are items consumers would describe as the basics, bread, milk potatoes, petrol, flour, etc.
  3. Impulse Products:  Consumers buy these products without any thought or planning.  They are purchased because of their attractiveness or their availability.  To market impulse products, you need to tempt the prospective purchaser.  This is why confectionery is placed next to the till and why prominent positions in supermarkets; aisle-ends and eye-level shelves; are so important to producers of impulse products.
  4. Emergency products: These are purchased for immediate need.  So an airport retailer will sell locks for suitcases and air sickness pills. These are the candles you buy in case of a power cut or the painkillers you buy when you have a headache.
  5. Shopping Products:  These are goods consumers spend time looking for.  The purchasing experience is a part of the enjoyment of the product.  Consumers will spend time comparing and contrasting the various options available.  There are two types of shopping product:
    1. Homogenous Goods:  These are undifferentiated in terms of quality but differentiated in relation to price.  Consumers will spend time making price comparisons before their decision to purchase.
    2. heterogenous Goods: Both price and quality vary.  Consumers will balance price and quality constantly.  When marketing these products it is important that customers are given plenty of options and sufficient information to make a decision.
  6. Speciality Products:  These products are purchased with deep and intensive search. A great deal of detail and knowledge is involved in their purchase.  Detailed comparisons between products are made. Consumers will likely want to trial the product before they purchase.  For example, motor retailers providing test drives.  Purchasing these products is often complex and time-consuming.  the perception of quality by consumers is often a critical determinant for purchase.  You need to match the needs and expectations of  potential purchases.
  7. Grudge Products:  Buyers have little interest in the product but know that at some point they will have to buy it.  Often these are products where there is no choice but to buy.  For example, in the UK it is the law that you buy car insurance.  Other products like life insurance and funerals are grudge products.  Daytime TV, often targeted at the retired, is full of advertisements for grudge products, funeral plans, mobility aids, and over-50’s life cover.

Your product management strategy will depend on whether you are a pioneer in the market or a follower.  It will also depend on the stage the product is in its life cycle.  The order in which products enter the market is important. Pioneer brands often have greater market share than later entrants into the sector. However, the costs of maintaining a pioneer product or brand are often higher than follower products.

Pioneer products have advantages on both the supply and demand sides.  On the supply side, pioneer brands can be the first to obtain raw materials; there are better experience effects, cost advantages and the ability to preempt supply and distribution channels.  On the demand side pioneer brands often have better recognition and familiarity.  Pioneer brands often set consumer perceptions of a product or product category.  They get to set the norms for a product.  They set consumer expectations.  Pioneer products get to market as being first.  They can shift the market by developing new products which cannibalize the first and which deter others from entering the market.  These products are often the source of brand extensions which reduce the available shelf space for competitors (although care is needed to avoid the extensions reducing the share and prominence of the originating product.

There are dangers in being first. Competitors can leapfrog your product through the application of technology. Market norms can be disrupted.  John Logie Baird may have invented television but he died a pauper.  Marconi’s electronic TV system, the more technological solution, was selected over Baird’s problematic physical system.  Pioneer products involve heavy research and development spending and as they set the standard for the sale of a product, there may be inflexibility.

There are four classic Price/Promotion strategies for products.  The choice of these strategies will likely depend on the type of product you have:

  • Rapid Skimming:  Where there is high promotional spend but the price of goods is also high.   This is the strategy for luxury goods which may be shopping goods or speciality goods.  It is the strategy for designer training shoes and high-end mobile phones.
  • Slow Skimming:  This is where there is a high price but low promotional spend.  Often when a high level of promotional activity is seen as conflicting with the product image.  This is a strategy for exclusive products such as Rolls Royce cars.  it is a strategy where word of mouth is seen as being a major element in product sales.  Products using a slow skimming strategy are sometimes vulnerable to new market entrants.
  • Rapid Penetration Strategy:  Where there is a low price but high promotional spend.  This is the strategy for fast-moving consumer goods and convenience products.  The aim is to gain market share rapidly and then to hold onto it.  It is the strategy of low-cost airlines and budget hotels.  It is the strategy of budget supermarkets like Aldi and Lidl.
  • Slow Penetration Strategy:  This is the strategy when prices are low and so is promotional spend.  It is the strategy of supermarket own brand products and discount chains like Poundland and Bargain Books.  It is the strategy of commodity products, staple products and some grudge products. You need a low costs base to allow the low product cost.  Often promotion is little more than the actual effort of selling.

When developing a marketing plan, you need to know what type of product you are selling; what the customer expectations of the product are, and what perceptions you want consumers to draw from your products.  Can your product be sold at a high price which generates high profit margins.

As products move through their life cycle, they often move to a high/high or a low/ low position. The majority of consumer products will be seen as necessities or luxuries.  You also need to keep products relevant as consumers needs and expectations change. If your products demand a slow skimming strategy, you will likely need to create fighter and flank brands to protect market share of your core product from attacks by competitors.