Products and Services by Geoff Lancaster©

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For a marketing plan to be successful it is essential that all elements of the marketing mix should support each other. Marketing mixes will change between products, services and market situations and indeed this is what makes marketing dynamic; it is the skill of the individual marketing person in manipulating the individual mixes that can make a product or service a success or a failure. Different emphases to individual elements in the marketing mix are often called for. However, the product or service is particularly important in this calculation for this is the tangible element that will appeal to customers and it is upon this that customers’ purchases and repeat purchases are based. This is what must provide the end satisfaction for this, after all, is the practical application of the marketing concept.

A study of products and services is concerned with, amongst other things, design, appearance, length of time it will last and how is perceived by customers and non-customers alike.

1 Defining the product

People purchase what marketing practitioners term a ‘bundle of satisfactions’. This includes obvious things like the physical product itself or a less tangible service offering. If asked to state what they have purchased most customers will simply mention the product or service in its simplest terms. However, there is much more to a purchase than simply this.

It is the task of marketing to take a more expansive view of what constitutes an augmented product or service, and then combine the marketing mix in such a way as to present consumers with the ‘bundle of satisfactions’ that marketing research has identified as being most pertinent to their requirements. This augmented product concept is sometimes called the extended product, and this definition includes the total marketing effort. Thus a view of the product or service is rather broader than the mere object or service offering; it is the utility or a ‘bundle of satisfactions’ that provides satisfaction.

2 Categories of products

Given the background that has been presented, we are now in a position to present a formal classification system for products and services. This is needed in order that marketing planners can more easily formulate and design their strategies and tactics.

Industrial goods are separated from consumer goods as the first part of this categorisation.

2.1 Industrial goods

The mention of industrial goods conjures images of components and raw materials, but not all industrial goods are as tangible as this. A number of additional items and services are important to ensure the smooth running of a factory. A classification exists to describe categories of industrial goods and services:

This classification is linked to organisational buying behaviour where the fact that buyers are dealing with larger sums of money and larger quantities tends to make it a more professional and organised process than in consumer goods purchasing.

2.2 Consumer goods

These are the types of products and services with which we, as individuals, are familiar. Unlike industrial products, more irrational and emotional motives tend to be connected with their purchase and it is upon this factor that many manufacturers base much of their marketing effort. As with industrial goods, they also lend themselves to a number of sub-categories.

3 Product management

3.1 Organisational considerations

Larger organisations, especially those that produce consumer durables and fast moving consumer goods (fmcg) often have what is termed a ‘product management’ system of managing single products or a line of similar products. In fmcg companies, the term used tends to be ‘brand manager’ whose responsibility it is to manage the image and the marketing (but not the selling) of a single product line. This person acts as a liaison between the advertising agency and the company and is responsible for the ‘image’ of the product and will commission marketing research when it is needed.

This kind of system has been criticised on the grounds that product managers have to rely upon others, especially the sales force, to carry out their ideas. This has the potential for conflict, particularly on the part of the field sales force who have to be sold the promotional idea with which they may, or may not, agree.

Where a system of product management is in operation, the typical organisation of the marketing function is that the marketing manager is in overall control and is directly under the managing director. Under the marketing manager is the overall products manager and under the products manager come individual brand managers. Alongside the products manager comes the sales manager and under the sales manager comes the sales team organised by various kinds of geographical or functional split.

3.2 Strategic considerations

Under this heading of product management it is appropriate to discuss the strategies that are open to product managers when devising strategies for their product portfolios. Igor Ansoff first introduced his idea of a simple matrix in 1957 and it is described in Figure 1:

  NEW MARKETS (1) EXISTING MARKETS (2)
NEW PRODUCTS (1)
   
   
EXISTING PRODUCTS (2)

Figure 1 Ansoffs matrix

Each of the decisions is looked at in turn under their respective headings:

4 New products

Different companies have different policies in relation to this subject. Many let others taking risks and follow when new products are launched and proved. They are, however, very important for the thrusting innovative company, but there are risks attached in terms of damage to the company’s reputation if the new product fails plus the attendant costs of development and launch. The product or service is the main component of marketing as it provides revenue. Before the formal development programme is discussed, a listing of the types of new product categorisation used by marketing people is now described:

4.1 Organisation for new product development

How new product development is managed is a critical factor in relation to potential success or failure. There are a number of different organisational alternatives in this respect:

4.2 The process of new product development

The process of new product development goes through a logical series of steps from the inception of the idea to the actual launch of the product. These steps are now explained:

An American firm of consultants, Booz, Allen and Hamilton first put forward the notion of the decay curve of new product ideas which is illustrated in Figure 2:

Ideas or concepts        
      Evaluation/screening  
      Business analysis  
      Development  
      Market testing  
      Commercialisation  
         
        Time

Figure 2 Decay curve of new product ideas

In their original research Booz, Allen and Hamilton found that it took 58 new product ideas to produce one potentially successful product. However, even during the ‘commercialisation’ stage there was still a 50/50 chance that the product would not be successful. Later research that they undertook suggested that it took considerably fewer new product ideas to produce a successful product.

4.3 Factors for successful innovation

McKinsey & Co conducted research in 1980 that investigated a number of large multi-national organisations. The research examined factors that were deemed to be essential in their successful operation and eight factors were highlighted:

This research has stood the test of time and it is still cited today as being the critical success formula for successful international enterprise.

5 Product mix and product line

The above terms are used a lot within product management in addition to the terms ‘depth’ and ‘width’ of the product mix (or product assortment). This latter description means all of the product lines and items that a company offers for sale. Basically, the product line is a group of closely related product items. The width of the product mix denotes the number of product lines carried. The depth of the mix denotes the range of items within each line and is calculated by dividing the total number of items carried by the number of lines. There is another term that is ‘consistency’, and this relates to the closeness of items in the range in terms of product and marketing characteristics. By attempting this analysis, product management can look more objectively at its overall product mix and decide whether or not certain lines should be lengthened, shortened or deleted.

6 Product life cycle

The notion of the product life cycle is almost as old as the subject of marketing. Various stages are proposed which show that a product passes through a number of stages in its life from the time it is conceived (the development phase) to the time it is deleted during the decline stage. Marketing people have found it to be a useful planning tool and this point is expanded shortly.

The principal problem with this theory is that it is so neat as to be totally ‘believable’ and some product managers tend to expect that every product will fit this neat curve. Marketing academics (notably, Dallah and Yuspeh) have, therefore, criticised the concept on the basis that when a product is launched it is often killed off prematurely because sales suggest that it has gone into a quick decline, whereas the reality is that what they are is probably only a slight hiccup in the growth curve of the product.

Figure 3 shows the theoretical curve of product life cycle. On this diagram is superimposed the revenue curve which shows the product recovering its costs of development and launch and then moving into profitability. Naturally, all products will behave differently, but as a tool of planning this theory has much to commend it.

Sales/revenue     Sales  
           
    loss   profit  
Development Introduction Growth Maturity Saturation Decline

Figure 3 The product life cycle

The shape of the curve can alter and this is useful in illustrating the effect of different marketing conditions. Different patterns are suggested in Figure 4 with explanations, but more combinations are possible.

Sales   Sales   Sales  
           

Figure 4 Different shapes of the product life cycle

In the above diagram the first diagram represents a ‘fad’ product which comes quickly into the marketplace and is never seen again. The second diagram represents a ‘fashion’ product whose sales might go in cycles. The third diagram represents a product that passes through a number of phases, but where the product manager does not allow the product to become ‘stale’ after it has entered maturity. This is done by introducing a modification that builds upon the success of the original product.

As has been mentioned, the concepts as outlined in Figure 4 can be used as planning tools and the shapes of curves can be hypothesised that can fit almost any marketing situation. It is useful as a tool of product planning.

The product life cycle is influenced by the nature of the product, changes in the competitive environment, changes on the part of consumers who might display different preferences as the product moves through its life cycle. The shape of the curve, from an individual manufacturer’s viewpoint, can also be altered as a result of competitive actions. The product life cycle can thus be applied to the industry as a whole (which will include a summation of all manufacturers’ sales who are marketing that particular product) or it can apply only to the sales of a specific product for an individual company.

The time span of the product life cycle can range from say a fashion season to many years. In this latter case the maturity and saturation stages will be considerably lengthened. It is now acknowledged that different categories of life cycle exist. We have used soap and shoes as our illustrations, so the curve is applicable within one of the following groups:

7 Strategies suggested by each life cycle stage

Successful use of the product life cycle concept is being able to identify the passage from one stage to another. This requires that the company makes use of marketing research and marketing intelligence which form part of the company’s marketing information system. The product life cycle can thus be used strategically and impart an anticipated course of product development for which strategies can be planned and which will ensure the company’s long terms growth in the marketplace.

Marketing actions are now suggested which are normally appropriate to each of these separate stages.

7 Product diffusion and adoption

The notion of product diffusion and adoption was first put forward by Everett Rogers. Diffusion processes relate to the speed and extent of take-up of a new product and it considers the people who are the ultimate target of marketing efforts, rather than the marketplace itself that is the function of the notion of the product life cycle. The diagram that forms the model suggested for the diffusion curve is very much like the model for the product life cycle, and indeed there are similarities between them both. In the case of this theory, consumers do not necessarily fall into the same category for all purchases, and the theory very much describes consumer behaviour in relation to their individual needs and preferences. The theory is explained in Figure 5.

Sales to first-time adopters
                   
        Early majority
34%
  Late majority
34%
     
                   
Innovators
2.5%
  Early adopters
13.5%
          Laggards
16%
 
                  Time

Figure 5 The product adoption process/diffusion of innovations

Figure 5 represents the rate at which the product is purchased for the first time by single individuals who are categorised into adopter categories, depending upon when in the cycle of time the purchase was made for the first time. The process is termed the ‘diffusion of innovations’.

Diffusion is of course closely related to the adoption process of individual customers and it has been found that five particular facets of products will lead to a more rapid and wider adoption:

In the context of buyer behaviour, the adoption process is very closely allied to the process that was cited in Figure 5. Indeed, it links in very neatly in terms of the decision-making processes that take place prior to making the purchase of a new innovatory product or service.

The adoption process can be described as:

Awareness   Interest   Evaluation   Trial   Adoption   Post-adoption confirmation

It is related to the diffusion of innovations in that this is typically the process through which purchasers must go before making a major new product purchasing decision; more so in this particular case as they have never tried the product before.

Although Figure 5 adds up to 100% this is not to say that everybody will ultimately purchase the product or service. If we consider home telephones as an example it could probably be said that the country has reached saturation in terms of new subscribers. However, a number are not subscribers because they like privacy and are not listed in the directory or have some other personal reasons for not wanting a telephone. A minority, of course, would like a telephone, but cannot afford one. In any case, the market for home telephones will never be 100% of all households. Those categories who never purchase are termed ‘non-adopters’.

8 Portfolio models

The first documented use of portfolio analysis was done by Alan Zakon in the late 1960s who was then working with the Mead Paper Corporation in the USA. He proposed a matrix as shown in Figure 6:

SAVINGS ACCOUNT SWEEPSTAKE
BOND MORTGAGE

Figure 6 Zakon’s matrix

The formula was very simple. Savings account meant no cash flow but growth; sweepstake meant speculative products; bonds were some cash flow and some growth and mortgage meant large cash flow but no growth. Products, or SBUs, were simply assessed on a qualitative basis and then placed in an appropriate box. However, what the matrix did to was to allow management to look objectively at SBUs in terms of their current situation and allow management to make decisions as to their future.

However, since this first model, which is now more for historical interest than for practical application, many models have been developed, the most important and well known of which are now described and evaluated in more detail.

8.1 Boston Consulting Group (BCG) matrix

The BCG matrix (sometime referred to as the ‘Boston box’) was an ‘overnight success’ as it had much to commend it, not least of which was the fact that it was underwritten by the Harvard Business School. It did, however, have much backing in terms of research that came principally from the Profit Impact of Marketing Strategy (PIMS) study that incorporated 57 large companies and 620 subsidiary companies in its database in 1974. By linking market share with profitability, the PIMS study was found to closely correlate with the notion of the BCG matrix. It was also popular in that it was simple and by concentrating on the criteria of market growth and market share it was a tool to which the user could instantly relate. The BCG matrix is described in Figure 7:

M       20
STARS QUESTION MARKS
CASH COWS DOGS
A   H    
R   I    
K   G    
E   H    
T        
         
G        
R        
O        
W       10
T        
H        
         
R   L    
A   O    
T   W    
E        
        % 0
          10   HIGH   1.0   LOW   0.1
          RELATIVE MARKET SHARE (log scale)

Figure 7 BCG Matrix

Each of the circles represents the size of the overall market and the segment taken out of that circle represents the company’s share of that total market.

Each of the quadrants is now explained:

In practice companies tend to have a balanced portfolio, but those with a preponderance of ‘dog’ products are clearly in difficulty. Stronger companies will have a preponderant mixture of ‘stars’ and ‘cash cows’. It does not follow that SBUs must progress around each of the boxes in a sequential manner. However, the matrix is dynamic and will change over time as market conditions get better or worse and indeed as products move through their product life cycle stages. Marketing management must attempt to ensure that ‘star’ and ‘cash cow’ SBUs remain in their respective positions for as long as possible, for these are the ones which provide most of the company’s profits and such SBUs are indeed the company’s insurance for the future. Clearly ‘question marks’ must be looked at in terms of pushing them into the ‘star’ category through marketing actions. ‘Dogs’ clearly need careful evaluation to see whether any pruning of the range is needed.

8.2 The General Electric (GE) business screen

This matrix was developed by the management consultants, McKinsey & Co, for General Electric (USA). It was an attempt to try to overcome some of the difficulties encountered when attempting to apply the BCG matrix by using a broader range of company and market factors when assessing the position of a particular SBU. The technique uses market attractiveness and business position as its two criteria. Different weights are attached along each axis along the parameters of ‘low’, ‘medium’ and ‘high’. For the ‘market attractiveness’ axis, measurements like market growth rate, market size, difficulty of market entry, number of competitors, profit margins and technological requirements should be considered. For the ‘business position’ axis, this considers matters like the size of the SBU, the strength of its position compared to that of the competition, capabilities of the organisation in relation to production and research and development and the strength that is displayed within the management of the SBU. The matrix uses nine boxes and is described in Figure 8:

    BUSINESS POSITION
    HIGH MEDIUM LOW
M  
Invest heavily for growth Invest selectively and build Develop for income
Invest selectively and build Develop selectively for income Harvest or divest
Develop selectively and build on strengths Harvest Divest
A  
R H
K I
E G
T H
   
A  
T M
T E
R D
A I
C U
T M
I  
V  
E  
N L
E O

S

W
S  
   

Figure 8 General Electric (GE) matrix

Similar to the BCG matrix, the circles represent the size of the overall market, and the segments within each of the circles represents that SBU’s share of the total market.

8.3 Porter’s generic strategies and the industry/market evolution model

In 1980 Michael Porter identified three generic strategies for achieving success in a competitive market:

Figure 9 illustrates the profitability implications of these strategies. It can be seen that financial success does not necessarily mean that a company has to have a high market share to be successful.

P    
focus   cost leadership
differentiation
     
  no cost leadership
no focus
 
  no differentiation  
R   HIGH
O    
F    
I    
T    
A    
B    
I    
L    
I    
T   LOW
Y    
      LOW HIGH
      MARKET SHARE

Figure 9 Porter’s generic strategies

Fig 9 illustrates the profitability implications of the three strategies. It can be seen in this model that financial success does not mean that a company has to have a high market share. Companies can have a small market share and still be profitable (upper left) through specialised offerings. The upper right sector is profitable as products can be differentiated or they may have a large market because of economies of scale reflected in lower prices. Companies ‘stuck in the middle’ have problems as a result of low profits and a modest market share.

In 1985 Porter developed a model which furthered this earlier research. His model was based upon three broad stages in the evolution of and industry/market:

Each of these stages were then looked at in terms of whether the company was a leader or a follower in the industry, and the matrix is illustrated in Figure 10 which also suggests strategies for each individual sector:

        GROWTH
(emerging industry)
MATURITY
(transition to maturity)
DECLINE
S   L  
keep ahead of the field cost leadership;
raise barriers to entry;
deter competitors
redefine scope;
divest peripheral activities;
encourage departures
imitation at lower cost;
joint ventures
differentiation;
focus
differentiation;
new opportunities
T   E  
R   A  
A   D  
T   E  
E   R  
G      
I      
C      
       
P   F  
O   O  
S   L