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Chapter 9 - 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

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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.
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Marketing Function
Information
(Advertising,
Promotion)

Customers
Suppliers Firm

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

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Selling Versus Marketing
Production Manufacturing Aggressive Aim at
Capacities Products Sales Efforts Customer
as a Target

Production
Capabilities
Actual Wants/
Potential Market
Needs of
Marketing Products/
Potential
Opportunities Services
Customers
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

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Marketing Process
Define Evaluate Improve
Problem Program Program

Analyze Develop
Market Marketing
(Environment,
Competition, Program
Select Segment (s): (Set strategies
Strength,
Profitability, Fit with for Product,
Weakness,
Company/Product/Market Pricing,
Needs/Interests
of Defining Promotion and
Segments 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

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Marketing Effectiveness Diagram
High
Customer Attractiveness

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

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

• , (2) Segment the market, (3) Determine the


segment drivers and predict their changes, (4) conduct sensitivity
analysis

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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

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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
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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
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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.)

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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

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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?)
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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.)

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Who Makes What Decisions
for Whom?

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

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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)
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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

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Marketing Mix
Product
Strategy

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

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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
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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)
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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
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Impact of Product Innovation

Downward Shift of Supply Curv e

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8
Price ($/Unit)

Old Suppy
6
Demand
4 New Supply
2

0
10 15 20 25 30 35
Qua ntity

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Product Portfolio
High

Market Growth Rate


?

Low
High Low
Market Share 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.
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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 5 - Personality
4 - Value relevance
4
3 - Benefits (Emotional
3
and Psychological)
2
2 - Benefits (Technical)
1 1 - Product features and
characteristics
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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.
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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

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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

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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
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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
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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)
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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)
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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

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Internet-Enabled
Communications Options
Direct Virtual Market

Customers
Manufacturer/
Supplier

B-to-B Intermediary B-to-C

Source: “Leverage Web for Corporate Success,”


Business Horizon (1999)
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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
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B-to-B E-Hubs
Ma nufa cturing Inputs Ope ra tiona l Inputs

Syste m a tic Sourcing Catalog Hubs M RO Hubs


Chemdex Ariba
SciQuest.com W .W . Grainger
PlasticsNet.com MRO.com
BixBuyer.com

Spot Sourcing Exchangers Yield M anager


e-steel Employease
PaperExchange.com Adauction.com
Alta Energy CapacityW eb.com
IMX Exchange

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

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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

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Distribution Strategy

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

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

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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.

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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

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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 engineering inputs.
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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

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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

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References
• Philip Kotler, "Marketing Management: Analysis,
Planning,Implementation and Control,” 7th Edition, Prentice-
Hall (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 Non-
Marketers: Principles and Tactics that Everyone in Business
Must Know,” AMACOM (1992)
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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)

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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.

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