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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

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Chapter Contents • Introduction • Marketing Function • Market Forecast -Four-step Process • Market Segmentation • Product Strategy • Pricing Strategy 2


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

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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. 4


Marketing Function Information (Advertising, Promotion)

Suppliers

Firm

Customers

Purchase (Response, Vote, Attitude) Information (Market Research, Wants/needs Preferences) 5


Selling Versus Marketing Production Capacities

Actual Wants/ Needs of Potential Customers

Manufacturing Products

Aggressive Sales Efforts

Aim at Customer as a Target

Production Capabilities Potential Marketing Opportunities

Market Products/ Services Marketing Program

Customer

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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 7


Marketing Process Define Problem

Evaluate Program

Analyze Market (Environment, Competition, Strength, Weakness, Needs/Interests of Defining Segments

Select Segment (s): Profitability, Fit with Company/Product/Market

Improve Program

Develop Marketing Program (Set strategies for Product, Pricing, Promotion and Distribution)

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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 9


Marketing Effectiveness Diagram Customer Attractiveness

High

Low Low

Customer Retention

High

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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 11


Key Elements in Marketing • Market (size, growth rate, location) • Environment (competition, entry barriers, constraints) • Customers (who, why, when, where how, what) • Marketing Mix 12


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 13


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 14


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 15


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 16


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.) 17


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 18


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?) 19


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.) 20


Who Makes What Decisions for Whom? Consumer (End-user)

Buyer (Purchaser)

Prescriber (specifier deciding on needs and its satisfaction)

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Market Segmentation • Purpose • Segmentation Steps • Criteria for Creating an Effective Segmentation Strategy • Pitfalls of Market Segmentation 22


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 23


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 24


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) 25


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?

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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 27


Marketing Mix Product Strategy

Pricing Strategy

Customer

Distribution Strategy

Promotion Strategy

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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 29


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 30


Product Strategy • Nature of Products • Life Cycle of Products • New Product Development Process • Product Failure (Rate, Reasons) • Summary 31


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 32


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) 33


Product Life Cycle Product Life Cycle 50 40

$

30 20

Sales

10

Profit

0 -10

0

10

20

30

40

50

60

70

80

90

100

-20 Product Life (%)

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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 35


Impact of Product Innovation Downward Shift of Supply Curve 10 Price ($/Unit)

8 Old Suppy

6

Demand

4

New Supply

2 0 10

15

20

25

30

35

Quantity

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Product Portfolio Market Growth Rate

High

?

Low High

Market Share

Low 37


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. 38


Promise of Value Brand Examples • • • •

IBM - Superior Service and support Apple - Simple and easy to use Lucent - Newest technologies Gateway - Friendly service

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Brand Pyramid 5 4 3 2 1

5 - Personality 4 - Value relevance 3 - Benefits (Emotional and Psychological) 2 - Benefits (Technical) 1 - Product features and characteristics 40


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?

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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. 42


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 43


Problem 9.4 • How can product development costs be reduced by entering the market late?

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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 45


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?

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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 47


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 48


Pricing Strategy • Pricing Options • Factors affecting Price • Pricing Methods

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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) 50


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) 51


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 52


Internet-Enabled Communications Options Virtual Market

Direct

Customers

Manufacturer/ Supplier

B-to-B

Intermediary

B-to-C

Source: “Leverage Web for Corporate Success,� Business Horizon (1999) 53


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 54


B-to-B E-Hubs Manufacturing Inputs

Operational Inputs

Systematic Sourcing

Catalog Hubs Chemdex SciQuest.com PlasticsNet.com

MRO Hubs Ariba W.W. Grainger MRO.com BixBuyer.com

Spot Sourcing

Exchangers e-steel PaperExchange.com Alta Energy IMX Exchange

Yield Manager Employease Adauction.com CapacityWeb.com

Source: Steven Kaplan and Mohanbir Sawhney, "E-Hubs: The New B-to-B Marketplaces," Harvard Business review, May-June 2000. 55


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 56


Distribution Strategy • Channels of Distribution • Functions of Distribution Channels • Type of Distribution • Organizational Structures • Impact of E-Commerce on Distributions 57


Other Factors Affecting Marketing Success • Alliances & partnerships • Customer Interactions and Loyalty • Organizational effectiveness 58


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. 59


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 60


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 61 engineering inputs.


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 62


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 63


References • Philip Kotler, "Marketing Management: Analysis, Planning,Implementation and Control,” 7th Edition, PrenticeHall (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 NonMarketers: Principles and Tactics that Everyone in Business Must Know,” AMACOM (1992) 64


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) 65


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. 66


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