Product and Services Management

George Avlonitis, Paulina Papastathopoulou

• Publisher: SAGE Publications Ltd
• Year: 2006
• Print ISBN: 9781412908658, 9781412908641
• eBook ISBN: 9781446223222
• Edition: 1
• Topic: Business
• Subtopic: Marketing
• Index: Business

`A text that successfully bridges the gap between academic theorizing and practitioner applicability because it uses multiple real-world examples/mini-cases of management techniques to illustrate the well-researched academic theoretical foundations of the book? - Creativity and Innovation Management

`A complete and useful treatment of the domain of product and service decisions. This book is unique in its treatment, dealing with product and service portfolio evaluation, new product/service development and product/service elimination in an integrated manner. Enlivened by many mini-cases, the book provides a soup-to-nuts approach that will prove very attractive for students and be a valuable reference for managers as well. Highly recommended? - Gary L Lilien, Distinguished Research Professor of Management Science, Penn State University

`Product and Services Management (PSM) is a welcome, up to date summary of the key issues facing firms in developing and refreshing their portfolios. The examples and cases bring the academic arguments clearly into focus and demonstrate the crucial role of PSM in leading the overall strategy of the firm? -

Professor Graham Hooley, Senior Pro-Vice-Chancellor, Aston University, Birmingham

`Managers responsible for and students interested in product portfolio decisions previously had to consult several sources for obtaining up-to-date information; books on new product development, articles on service development, readers on product management, and frameworks for product evaluation and termination. With the book Product and Services Management the reader obtains four-in-one. Avlonitis and Papastathopoulou reveal in a compelling and comprehensive manner why product decisions are the cornerstone of modern marketing and business, and illustrate the theory with numerous mini-cases from Europe and elsewhere. A must read for everyone with a passion for products? - Dr Erik Jan Hultink, Professor of New Product Marketing, Delft University of Technology

This book provides a holistic approach to the study of product and services management. It looks at the key milestones within a product?s or service life cycle and considers in detail three crucial areas within product management, namely product/service portfolio evaluation, new product/service development and product/service elimination.

Based on research conducted in Europe and North America, this book includes revealing cases studies that will help students make important connections between theory and practice.

The pedagogical features provided in each chapter include chapter introduction, summary, questions and a further reading section. Additional material for instructors include PowerPoint slides and indicative answers to each chapter?s questions.

This book is written for undergraduate and postgraduate students of business administration who are pursuing courses in marketing, product portfolio management, new product development and product policy.

1	The Product as an Economic Variable

Introduction

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The product is the raison d’être of every company. In general, every economic activity revolves around products. A product can be either tangible or intangible. In the case of tangible products we refer to goods, whereas intangible products are usually called services.

Every product reflects the efforts of the company to match its resources with the demands of the market. Although the success or failure is the result of various factors, matching resources with market demands is crucial.

The product is the starting point for the majority of the planned marketing activities of a company. It is impossible to decide about pricing, promotion or distribution channels if the nature and the characteristics of the product are not properly defined. In the long run, the strategic and tactical marketing decisions revolve around the product because this is the main source of revenue for the company.

In this chapter, we address the following questions:

• How does the economics and marketing literature treat the product concept?
• Which are the main product-related concepts?
• Which are the various product classification schemes on the basis of tangibility, durability and use?

Historical overview of the product concept

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When reviewing the history of economic activity it becomes apparent that the idea that the product itself was a planned variable, while its sales administered by the seller is of quite recent origin.

This idea is rooted to the concept of differential (competitive) advantage which in turn – being the belief of a consumer that one seller’s offering possesses more want satisfaction ability than other sellers’ offerings – is rooted in the competition and in the varied needs and wants that exist in the market place.

Up to the 1930s, the concept of differential (competitive) advantage in terms of ‘product’ is absent in the literature of Economics. Until that time, the price is the basis for competition in the economic system and the consumer has no choice preference for different products under the assumption of homogeneity on both demand and supply side, made by the classical and marginalist economists.

These assumptions remained partially valid until the end of the nineteenth century. By virtue of the mass production techniques brought by the industrial revolution, product homogeneity was probably more of a reality in the eighteenth and nineteenth centuries, when producers had to compete on the basis of price, emphasizing quantity rather than quality or choice.

With the advent of the twentieth century these assumptions were no longer valid. The economic system witnessed a number of changes which brought different bases for competition: variety both in materials and in means of production had started to be introduced at an increasing rate; improved forms of transportation has largely eliminated the security of locational monopolies and has broadened market opportunities which would support more sophisticated production systems; improved means of communication with the market disperse information about the sellers’ products and also provided strong incentive for the inclusion of the product in the sellers’ ‘total offering’ (marketing plan).

These concurrent revolutions in production, communication and transportation coupled with the fact that industries become oligopolistic (namely, the supply of products was concentrated in the hands of relatively few sellers) brought forward other non-pricing bases of competition. In the beginning of the twentieth century the more percipient economists had recognized that such changes had taken place and that product differentiation was more typically the basis of competition than was price. This view was crystallized by Robinson (1932) and Chamberlin (1933). Abandoning the assumptions of a homogeneous product, both authors developed the theory of ‘monopolistic competition’ under which the seller’s sales are limited and defined by two more variables in addition to price, namely the nature of the product and advertising outlays.

In Chamberlin’s monopolistic competition theory the product is defined as a ‘bundle of utilities’ in which the physical offering is but one element, and becomes the basis on which a seller can differentiate his offering from that of his competitors. Chamberlin (1957) argues that buyers in the market have a real freedom to differentiate, distinguish, or have specific preferences among the competing outputs of the sellers. This view led to the development of the differential advantage concept, one of the most important concepts in the marketing theory.

Alderson (1965) has attempted to provide the link between the concept of differential advantage and the economy as it actually exists. Alderson has noted that differentiation in a product’s characteristics gives a seller control over the product with that exact identity and configuration, supporting the view that ‘the seller offering a product different from others actually does occupy a monopoly position in that limited sense’. However, product differentiation can be based on product characteristics such as patented features, trademarks, packaging (for example, design, colour, style) (Alderson, 1965).

It is, however, the existence of varied wants and needs in the market place that allows competition through product differentiation and a policy of differential advantage to be pursued. Alderson asserts that, behind the acceptance of differentiation are differences in taste desires, income, location of the buyers, and the uses of commodities. Smith (1956) also notes that the seller pursues a policy of differential advantage in general, and product differentiation in particular, in order to meet both competitive activities and the various needs and wants in the market place. However, the seller can pursue a policy of product differentiation, either by offering the same product throughout the whole market and secure a measure of control over the product’s demand by advertising and promoting differences between his/her product and the product’s of competing sellers, or by viewing the market as a number of small homogeneous markets (market segments) each having different product differences and adjusting the product and the elements surrounding its sale according to the requirements of each market segment. The seller who adopts the latter method in pursuing a policy of product differentiation, is actually pursuing a policy of market segmentation.

However, a policy of differential advantage must be dynamic in nature since the seller must continually adjust his/her ‘total offering’, to match the ever changing competitive activities and customers’ ‘motivation mixes’ in the market place. Naturally, such adjustments alter the seller’s cost structure and profitability. The seller therefore must be constantly engaged in creating a ‘total offering’ from all the elements under his/her control, in a way that will give differential advantage and profitability. This ‘axiom’ has led to the development of the marketing mix concept.¹

Despite the fact that the product variable is central in the marketing literature, the competitive theory of the firm based on the theory of microeconomics emphasizes the price as the predominant variable under the seller’s control.

Undell (1968) was the first to carry out research to test the hypothesis that non price-related facets of competitive strategy are at least as important as pricing from the seller’s point of view. According to his findings, the sales effort or marketing communication including advertising and other promotional programs was perceived first in importance, product effort including product planning, product R&D and the services accompanying the product was perceived second, while pricing ranked third.

In the light of Undell’s research results, it could be wise to agree with Wentz, Eyrich and Stevenson (1973) who argue that ‘prior to the twentieth century price was the main instrument of competition and the primary weapon for the destruction of competing firms. Today the product play this role …’.

A different version of the importance of product variable is given by Thompson (1962) who asserts that, ‘the two most important factors in Marketing are a) the product and b) the ultimate consumer (people) … the obvious objective is to get these two in perfect harmony … if this situation does not exist which of the two major elements is the easiest to change: product or people?’ He then proceeds to state that, although companies can rather easily change products, they cannot change people, but simply influence them. It is actually easier to identify ‘what people want and to supply it than it is to influence them to want what you make’. The author’s conclusive remark is that, the most important controllable factor in marketing is the product.

Main product-related concepts

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The recognition of the importance of the ‘product’ variable in the Marketing literature has driven many marketing scholars in the development of a number product-related concepts as well as various product classifications.

In the remainder of the chapter we turn our attention to these concepts and classifications.

Product levels

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Levitt (1980) has proposed that the product can be analysed in five distinct levels:

• Core benefit – refers to the main benefit the customer buys (for example, the buyer of a vehicle purchases ‘transportation’).
• Basic product – refers to the basic characteristics or attributes of the product, without which there is no product (for example, tyres of a car).
• Expected product – refers to the characteristics of the product that the customer takes for granted (for example, tyres in a good condition).
• Augmented product – refers to the product characteristics that surpass the customer’s expectations (for example, road assistance).
• Potential product – refers to those characteristics that could be added to the product in the future and offer customer delight.

Nowadays, companies are competing at the augmented product level. In other words, they try to differentiate their offerings by providing product characteristics that are beyond the expected functional features. An extensive discussion of the augmented product is provided in Chapter 2.

Product hierarchy

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According to Kotler (2003), product hierarchy comprises the following five categories:

• Need family – the basic need underlying the existence of a product family (for example, security).
• Product family – all the product classes that can satisfy a basic need effectively (for example, savings and income).
• Product class or category – a group of products within a product family (for example, investment products).
• Product line – a group of products within a product class, which are closely related because they are targeted to the market, through the same distribution channels or are priced within a specific range (for example, investment accounts).
• Product type – a group of items within a product line that function in a similar manner (for example, capital guaranteed accounts).
• Brand – the name of a product (for example, Dunbar Bank).
• Item – a unit within a brand or product line which is distinguished by size, price, or some other characteristic of element (for example, the FTSE 100 index).

Product hierarchy provides the different levels at which a product should be managed. For example, product line management is associated with different decisions compared to brand management. In Chapter 2, we address such product-related issues in more detail.

Product life cycle

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One of the most important product-related concepts is the product life cycle (PLC). This concept can be illustrated as a curve in a diagram in which the horizontal axis represents time, while the vertical axis portrays sales/profits of the product. Typically, the product life cycle curve is S – shaped, as presented in Figure 1.1.

This curve is divided into four successive stages namely, introduction, growth, maturity and decline. The PLC model is useful mainly as a framework for developing effective marketing strategies in different stages of the life cycle of both physical goods and services. Some leading experts who view the PLC model as the foundation of marketing strategy have made a number of suggestions regarding the marketing implications that each stage has for marketing action. ...

Table of contents

• Cover Page
• Title
• Copyright
• Contents
• 1 The Product as an Economic Variable
• 2 Types of Product Decisions
• 3 Product Life Cycle and Marketing Strategy
• 4 Evaluation of Product/Service Portfolio
• 5 New Product/Service Development and Portfolio Models
• 6 Pre-Development Activities of New Products and Services
• 7 Development, Testing and Launching New Products and Services
• 8 Successful Adoption and Diffusion of New Products and Services
• 9 Identification and Revitalization of Weak Products and Services
• 10 Evaluation of Weak Products/Services and Elimination Strategies
• 11 Organizational Arrangements for Developing, Managing and Eliminating Products and Services
• Appendix 1 New Product Budget
• Index