BUSINESS MARKETING

(MKTM4061)
Credit hrs: 3/5ECTS
2022/23, YEAR IV SEM. 1

CHAPTER 5
INDUSTRIAL PRODUCT DECISIONS
5.1 Industrial Decisions
5.2 Product Line Definition
1. What is a product line?
2. Competitive advantage
3. Product line – marketing
5.3 Product Life Cycle Analysis
1. Introduction (Market development)
2. Rapid Growth
3. Maturity
4. Decline
5.4 Product Portfolio Classification, Analysis, and Strategy
5.4.1 What is a Product Portfolio?
5.4.2 Diagnosing the Product Portfolio
5.4.3 Product Portfolio Strategies
5.5The New Industrial Product Development Process
1. Idea and Concept Generation
2. Screening and Evaluation
3. Business Analysis
4. Product Development
5. Product Testing
6. Product Commercialization and Introduction
5.6 Product Deletion Strategy
1. Harvesting
2. Line Simplification
3. Divestment

5.1 Industrial Decisions

Important Industrial Product Decisions
1. Market Segmentation Decision: The first product decision to be made is the market segmentation
decision because all other decisions: Product mix decisions, product specifications and positioning and
communications decisions depend upon the target market.
2. Product mix decision: Product mix decision pertains to the type of products and product variants to be
offered to the target market.
3. Product specifications: This involves specification of the details of each product item in the product
mix. This includes factors like styling, shape, size and other attributes and factors like packaging and
labeling.

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4. Positioning and Communications Decisions: Positioning is the image projected of the product.
Communication refers to promotional message designed for the product. Obviously, both positioning
and marketing communication are very much interested. How product promoted to the customer is a
very important part of the business marketing strategy.

5.2 Product Line Definition

What is a product line?
A product line is a group of products that a company creates under a single brand. The products are similar
and focus on the same market sector. Maybe their function or channel distribution are the same or similar.
Perhaps their physical attributes prices, quality, or type of customers are the same? We call the
activity product lining.
“A product line is a group of related products produced by one manufacturer. For example, products that
are intended to be used for similar purposes or to be sold in similar types of shops.”
A company can have more than one product line. The number of product lines it has reflects its resources,
i.e., how powerful it is.
Product line numbers might also show the other players in the marketplace how competitive the company
is. In this context, the term ‘marketplace’ means the same as ‘market’ in its abstract sense.
Competitive advantage
Marketing executives believe that product lines give companies a competitive advantage. When a
business has a competitive advantage, it has an edge over its rivals.
When a company has many product lines and groups them together, it creates a product mix.

Product line – marketing

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Product lines are often part of a marketing strategy. Companies keep adding more products to attract
buyers. Specifically, they want to attract buyers who are familiar with the brand.
A marketing strategy exists when you combine all your marketing goals and objectives into one
comprehensive plan.
For example, a company that has a product line in grooming and hair care might add a new line in personal
care. A company that makes telecommunications software may introduce a new app for tracking a cell
phone. Customers who already know the brand will be more willing to buy from their new line.
5.3 Product Life Cycle Analysis
Like living beings, products have life cycle. The product life cycle (PLC) is depicted by the sales curve of
the product since its introduction. An industrial product normally passes through (i.e., a PLC has) four
different stages, namely, Introduction (market development), Rapid growth, Maturity (Saturation), and
Decline.
Fig. 5.1 depicts a typical product life cycle.

Market Rapid
Development Growth
Sales Maturity
(Saturation)

Low Learning Decline

Products

Time
1. Introduction (Market development)
The market development of a product life cycle covers the period from the introduction of a new product to
the starting point of rapid growth in the sales of the product. In respect of the high learning product (i.e.,
products which take a fairly long period for customers to learn its application or to get accepted) the market
development stage also represent the introductory phase. Low learning products normally reach the rapid
growth stage fast, as indicated in figure 5.1.
The market development stage is characterized by:
1. Low sales because it generally takes some time for a new product to get wide acceptance by
consumers and it also takes time to expand and marketing of the product.
2. High costs per unit because of the low sales and high promotional expenditure.
3. Absence of (or low) competition the product is entirely new.
4. Loss or negligible profit because of low sales and high costs.
Marketing Strategy
The promotion strategy will aim at
Creating wide spread awareness of the product,
Quickening learning and gaining trial by early adopters.
Publicity and personal selling and trade journals are often very important media of promotion. Only a
limit number of models of the product are introduced.
Distribution tends to be exclusive or selective with high distributor margins to justify heavy
promotional spending.
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 Price skimming or penetration strategy may be adopted depending on the product and market
characteristics.
2. Rapid Growth
The rapid growth stage is characterized by:
1. Fast growth in sales because of increasing consumer acceptance and expansion of marketing.
2. Growing profits because of growing sales and fall in the incidence of fixed production cost and
marketing cost per unit.
3. Increasing Competition
4. Market segmentation and the introduction of different versions (models) of the product.
Marketing Strategy
During the growth state the marketing strategies of an industrial marketer should focus on three
important areas;
 Improve product design to offer more benefits. To achieve wider market penetration, the market
would be segmented and more versions/models of the product would be introduced in a wide price
range.
 Price reduction The increase in scale of operation may facilitate price reduction. However fast
increase in demand may provide a favorable environment for pricing. Whether the prices remain stable,
fall or rise will depend on the demand conditions, cost factors, competitive environment and the
marketing objectives and strategy.
 Improve distribution network - Distribution trends become more intensive and extensive. Improve
distribution network to enable the customers’ easy availability of the product.
 Sales promotion - In promotion, selective demand creation gains more importance. The emphasis of
personal selling from product awareness to bring acceptance of the product. The increase in competition
may also make sales promotion important besides other promotional factors.
If these strategies are not implemented by industrial marketers in the growth stage, it becomes easy for
the competitors to enter the market because of non-availability of the product and high profits due to
high prices.
3. Maturity
The maturity stage is characterized by:
1. Saturation of sales (in the early part of this stage, sales may grow slowly but at the later part there
could be a fall in sales).
2. Intense competition
3. Falling profits because of high promotional expenditure and falling margins.
Marketing Strategy
In maturity stage the number of competitors entering the market will increase. As a result of increased
competition the profits will be reduced. The marketing strategies to be adopted for an industrial product
in the maturity stage are;
 To enter the new market
 To find out the ways and means of satisfying the existing customers
 To cut production, marketing and other costs to maintain profit margins
 Product improvement efforts would be intensified
4. Decline
Decline tends to proceed fairly rapidly for industrial products as new technologies make an established
product obsolete.
The decline stage is characterized by:
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 1. Entry of new products which compete with the product
2. Decline in sales
3. Decline in profit- profit may even become negative
4. Exit of some of the firms
Marketing Strategy
There would be pruning of the product line by dropping unprofitable items.
Pricing would be profit oriented irrespective of its impact on market share because when the product
is in the decline stage there is hardly any point in increasing or maintaining the market share by
incurring loss.
Promotion would be cut to the minimum required.
Marginal distribution outlets would be phased out.
Under this stage an industrial marketer should adopt the strategy of withdrawing the existing product
from the market or introduce a new product as a replacement or reduce marketing or other costs to
make some profits.
5.4 Product Portfolio Classification, Analysis, and Strategy
Today, the underlying principle guiding new product development combines external market needs with
internal functional strength. This combination allows companies to develop a product portfolio that satisfies
corporate strategic objectives.

Portfolio classification models often are used to give a visual display of the present and prospective
positions of business products according to the attractiveness of the market and the ability to compete
within the market.

The business marketer must regularly review the product portfolio, developing strategic alternatives for
each of the company's current product, businesses, and prospects for new customers.

The concept of the product portfolio emphasizes viewing products not individually, but as parts of a total
system. This perspective invites management's regular review of strategic alternatives and corresponding
resource allocation decisions.

5.4.1 What is a Product Portfolio?

A product portfolio is the firm's offering of products or divisions, each of which can be identified as a
strategic business unit (SBU) and most of which operate as a separate profit center that may have its own
management, its own set of identifiable markets and competitors and its own marketing strategies.

Management’s first step is to identify the key businesses that make up the company, called strategic
business unit (SBUs). An SBU can be a company division, a product line within a division, or
sometimes a single product or brand. (Kotler & Armstrong)

The industrial firms’ product portfolio typically consists of related businesses and/or products grouped into
SBUs that are homogeneous enough to control most factors affecting their performance. Resources are
allocated to SBUs in proportion to their contribution to the corporate objectives of growth and profitability.

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The challenge is to identify the SBUs in the firm's product portfolio that enhance the overall corporate
mission, while withdrawing support for those that do not. The concept of the product portfolio was first put
forth by the founder of the Boston Consulting Group, Bruce Henderson, in a booklet published in 1970.

Henderson looked at a firm's products or divisions as a mix of businesses that strategically interact and
influence one another, principally in terms of their use of resources and the development of these resources
against opportunities in a competitive marketplace. He described and evaluated products and divisions in
terms of three dimensions:
1. The attractiveness of the market, especially in light of the SBU's stage in the product life cycle.
2. The business-to-business firm's position in the market in terms of market share
3. The firm's acknowledged or perceived strengths and weaknesses, relative to competitors.

5.4.2 Diagnosing the Product Portfolio

BCG MATRIX
The Boston Consulting group’s product portfolio matrix (BCG matrix) is designed to help with long-term
strategic planning, to help a business consider growth opportunities by reviewing its portfolio of products
to decide where to invest, to discontinue or develop products. It's also known as the Growth/Share Matrix.
The Matrix is divided into 4 quadrants based on an analysis of market growth and relative market share, as
shown in the diagram below.

Figure 5.2 Boston Consulting Groups (BCG) Matrix.

1. Stars: market leaders that are typically at or nearing the peak of their product life cycle and are able to
generate enough cash to maintain their high share of the market and usually contribute to the company’s
profits.
2. Cash cows: products that bring in far more money than is needed to maintain their market share
3. Question marks: new products with the potential for success but need a lot of cash for development.
4. Dogs – Low market share and low growth rate (less profitable or may even be negative profitability)

Strategic Implication of BCG Matrix

 The cash surplus from any cash cows should be used to support the development of selected
question marks & nurture stars.
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  The long-term objective is to consolidate the positions of stars and turn favoured question marks
into stars, thus making the company’s portfolio more attractive.
 Question marks with the weakest or most uncertain long-term prospects should be divested to reduce
demands on a company’s cash resources.
 Dogs having reached the end of their useful life are generally best put to sleep unless they are still
performing a useful function – not merely making a contribution to overheads.
 The portfolio must be balanced – when there are sufficient cash cows, stars & question marks
 If the company lacks sufficient number of these businesses, it should consider acquisitions &
new ventures to build a more balanced portfolio.

5.4.3 Product Portfolio Strategies

An appropriate strategy for products in each category is given briefly in Table 5.1.
First, a primary goal of an industrial company should be to secure a position with cash cows but also to
guard against the frequent temptation to reinvest in them excessively.
The cash generated from cash cows can be used to support stars that are not self-sustaining.
Surplus cash might be used to finance selected question marks toward a dominant market position.
Question marks that cannot be funded might be divested.
A dog could be restored to a position of viability by shrewdly segmenting the market that is, by
rationalizing and specializing the business into a small niche that the product can dominate.

If that approach is not feasible, the firm will weigh harvesting the SBU by cutting off all investment in the
business, giving consideration to liquidating the unit when and if the opportunity develops.

This concept provides the business marketer with a useful synthesis of the analysis and judgments
necessary as an SBU moves through the product life cycle, presenting a provocative source of strategic
alternatives.

The business marketer must remember that a strategy is a decision about what must be done; likewise, a
tactic is a decision about how to do it. Marketing planners must plot the projected positions of each SBU
under both present and alternative strategies, enabling them to decide on strategies for each SBU, the
tactics to use in carrying out those strategies, and the resources to assign each SBU.

Table 5.1 Strategy implications of products in the product portfolio quadrants

Quadrant Investment Earning Cash-Flow Strategy implication
characteristics characteristics characteristics
Stars Continual expenditures Low to high Negative cash flow Continue to increase market
for capacity expansion (net cash user) share, if necessary, at the
Pipeline filling with cash expense of short-term earnings
Cash Capacity maintenance High Positive cash flow Maintain share and cost
cows expenditures (new cash leadership until further
contributor) investment becomes marginal
Question Heavy initial capacity Negative to low Negative cash flow Assess changes of
marks expenditures High R&D (net cash user) dominating segment: if good,
costs go after share; if bad, redefine
business or withdraw

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Dogs Gradually deplete High to low Positive cash flow Plan an orderly withdrawal so
capacity (net cash contributor as to maximize cash flow

5.5 The New Industrial Product Development Process

New product success is a vital goal for many firms. In the last two decades numerous studies have been
conducted to try to determine what makes a new product succeed or fail. The research has been intensive
because new product success has long been valued as essential to the economic health of a business unit
and as a critical means for improving business performance.

Five basic attributes are found to be of exceptional importance in new product success:
1. An open-minded, supportive and professional management,
2. Good market knowledge and strategy,
3. A unique and superior product,
4. Good communication and coordination, and
5. Proficiency in technological activities.

About 80 percent of all commercialized new products fail. Clearly, an effective new product development
process must be firmly in place and operational within the organization if the new product failure rate is to
drop. The new product development process shown in exhibit 5-2 shows the six phases management must
address to offer the best chance for the product's success. The following discussion will explore each of the
six phases in this process.
1. Idea and Concept Generation
The idea and concept generation phase involves the search for product ideas or concepts that meet company
objectives. These new ideas often will come from the customer, although the sales department's
distributors, suppliers, other employees and research and development play an important role in this
effort. Many marketing analysts suggest that an open perspective is essential for generating new ideas.

2. Screening and Evaluation

The next phase is a screening and evaluation to determine which ideas submitted merit a detailed study as
to potential feasibility and market acceptance. A screening process can focus company energies on creating
and developing products that have greater likelihood of succeeding in the market place.

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The nature of this part of the analysis can be indicated by a series of questions meant to be informative but
not exhaustive.
1. Do we have or can we develop access to the necessary raw materials?
2. Is the project's scope feasible within our existing financial capability?
3. Is there some synergy within our existing product line?
4. Is it likely that our present customers represent a potential market, or must we develop entirely new
markets?
5. Could the product be marketed through our existing sales force and distributor organization?
6. Does the idea appear to be within the capability of our product development organization?
7. What impact would the successful development of this product have on our existing products,
markets
and marketing organization?
8. Can the new product be manufactured within our existing production facilities and with our
existing
skills?
Negative answers to several such questions, or the recognition that significant new financial, managerial,
marketing, production, or supplier resources would be required, would reduce the attractiveness and
feasibility of producing the new product.
3. Business Analysis
The business analysis phase, along with the remaining phases in the process, expands the idea or the
concept through creative analysis into a "go" or "no go" recommendation. Management examines return-
on-investment criteria as well as competition and the potential for profitable market entry.
A more specific list of considerations during the business analysis stage includes:
 demand projections  break-even analysis
 cost projections  discounted cash flow
 competition  the Bayesian decision model and
 required investment  Simulation models to assess the likely
 profitability profitability of promising new product ideas.
4. Product Development
The product development phase takes the product to a state of readiness for product and market testing.
Activities during this particular stage are more difficult and time consuming than many would expect.
Something that looks great on paper can fail miserably when engineers and production technicians try to
create the physical product. Many new product ideas are either abandoned or sent back for more study
at this point in the development process.
5. Product Testing
The firm conducts commercial experiments necessary to verify earlier business judgments during the
product testing phase. Testing takes place both in the laboratory and in the field and usually involves pilot
production testing as well as market testing for acceptance or rejection. More companies now are turning
to market testing to indicate the product's performance under actual operating conditions, the key buying
influencers, reactions to alternative price and sales approaches, the market potential and the best market
segments to pursue. Some market test methods commonly used by business marketers in the new product
development process include product use tests and trade shows, along with distributor and dealer display
rooms.
6. Product Commercialization and Introduction

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The final phase of development involves launching the new product through full-scale production and sales
and committing the company's reputation and resources to the product's success. The product
commercialization and introduction phase is critical in any new product development process. The success
of the product is likely to depend heavily on how well marketing managers’ deal with the launch.
Although the new product development process is complex, difficult, interdisciplinary, challenging and
expensive, it is nonetheless vital to sustain the profitable growth of the firm. A primary purpose of this
process is to eliminate new product ideas that do not seem feasible before extensive resources are expended
on a potential product failure. New product ideas within the development process follow a characteristic
decay curve, with a progressive elimination of product ideas during each stage of the process.
5.6 Product Deletion Strategy
In identifying and analyzing product performance deviations from established norms, management often
discovers that seldom is weak product performance the result of one factor only. Often, poor sales,
inadequate profit and decline in market potential, among other factors, play roles in poor performance.
Generally, a variety of factors are interrelated. In addition, noncompetitive price, production problems,
inferior technology and uneconomic production batches are other reasons cited for unsatisfactory
product performance.
The idea that some products entering the decline stage of the product life cycle must be eliminated reflects
the strategic thinking that every SBU plays an important part in making the product portfolio viable.
When the SBU becomes a drain on the financial and managerial resources of an organization, management
has three alternatives in the strategy for product deletion:

1. Harvesting
Harvesting is a strategy applied to a product or business with slowly declining sales volume and/or market
share. It is an effort to cut the costs associated with the SBU in order to help improve the cash flow.
Harvesting leads to a slow decline in sales; when the business ceases to provide positive cash flow, it is
divested.
The implementation of harvesting strategy requires where appropriate, reducing maintenance of facilities,
cutting advertising and research budgets, limiting the number and scope of channel intermediaries used,
eliminating small-order customers and reducing service levels in terms of delivery time, sales assistance
and so on.

2. Line Simplification
Line simplification is a product deletion strategy that trims a product line to a manageable size by pruning
the number and variety of products and services offered. This can lead to a variety of benefits, such as
potential cost saving from longer production runs, reduced inventories and a more focused concentration
of marketing, research and development and other efforts on fewer products.

The decision to drop an SBU from the product line is a difficult one to make. Despite the emotional aspects
of this decision, the need for objectivity in this market cannot be overemphasized.

3. Divestment
Divestment is a situation of reverse acquisition and is also a key dimension of marketing strategy.
Divestment decisions are principally economic or psychological in nature; they may allow the firm to
restore a balanced product portfolio. If the firm has too many high-growth businesses, its resources might

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be inadequate to fund such growth. In contrast, if the firm has too many low-growth businesses, frequently
it will generate more cash than is required for investment purposes.

For the firm to grow evenly over time, while showing regular earning increments, a portfolio of both fast
and slow-growing businesses is necessary. Divestment can help to achieve this type of balance.

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