Multimedia Marketing/Marketing.iso/market/chapter5.3p

Text File | 1996-08-22 | 17KB | 352 lines

SECTION 5.3  Strategies for Life Cycles

INSTRUCTIONS Try to answer this question "Would a firm use one strategy, no
matter what stage of the product life cycle in which it might find itself?

EXAMPLE

A manufacturer of frozen Chinese foods introduced its new brand
of sweet and sour pork ten years ago. At that time there was
little competition and the product was very well prepared, allowing
the company to charge premium prices. Demand for the brand was so
strong that the company survived on only a moderate advertising
budget.

The company management has wisely realized that times have changed
and the old strategy is obsolete. The firm has lowered its prices
and increased its advertising budget. This was appropriate, as
several large competitors have entered the market and charge modest
prices. Further, consumer demand has declined as tastes have shifted
to Italian, Mexican, and French food. The firm has been successful,
but only by astutely changing its strategy when the environment changed.

DETAILS

During the introduction stage of the product life cycle, the company
can use several strategies; high-profile, premeptive penetration,
selective penetration, and low profile. Managers who pursue a high-
profile strategy introduce a product with a substantial promotion
expenditure as well as a high price in order to recover as much
cost and profit as is possible in a short time period. Marketers
of new appliances, such as popcorn poppers with automatic buttering
features have introduced products with a high profile policy.

This policy is most effective when a large portion of the market
is unaware of the item, price is relatively unimportant to the
target market, and the firm wants to develop high preference for
its brand because extensive competition is expected in the future.

There are some good reasons for pursuing a high profile policy.
Heavy promotion levels can inform target customers of an item's
existence.A high price can both help to build an item's prestige
and generate funds for the extensive promotion effort.

A premptive penetration policy requires a heavy promotional expenditure
accompanied with a low price. Managers adapting this strategy believe
that target customers are largely unaware of their product's
existence, price is relatively important to them, a large potential
market exists with economies of scale possible from large sales
volumes, and substantial competition is expected.

Low margins and high sales volumes tend to discourage competitors
from entering a market, while scale economies are expected to help
profitability. Tract housing developments and tour packages are
two examples of products that managers frequently introduce through
a premptive penetration strategy.

Selective penetration consists of pricing a product relatively high
while keeping promotional expenditures at a moderate level. Firms
typically introduce prestige items like furs and high-fashion
attire in this way. Selective penetration can be a good decision
when numerous target customers are aware of an item, customers are
willing to pay a high price, a relatively small potential market
exists (substantial economies of scale are unlikely) and little future
competition is expected.

A low profile strategy combines a small promotional budget with a
low price. Marketers introduce many industrial goods, such as
lubricants and cleaning and office supplies, through this strategy.
It is most effective when many target customers are aware of a
product,a large price-sensitive market exists, and a significant
level of competition is expected.

In the growth stage of the product life cycle there are two
fundamental and opposing strategies. First, management may opt to
earn as much short run profit as possible by holding prices up
and spending only moderate sums on marketing effort. A watch
producer followed this strategy for its gold digital watches.
Rather than investing in marketing to aim for future profits, the
company assessed high prices (as much as ,2,500), utilized
exclusive distribution, and engaged in only limited product
development and promotion.

Other companies choose to reinvest profits into substantial marketing
efforts in order to build a strong market position for future
profitability. Companies electing to pursue this strategy emphasize
some combination of large-capacity production facilities that will
bring about greater scale economies, changes in quality, adding more
intermediaries, and heavy promotion efforts to build brand preference.

PROBLEM 1

A marketer of canned peanuts believes that a premptive penetration
strategy would be effective for introducing a new brand of unsalted
peanuts. This strategy would be effective when.

A. Target customers are relatively unaware of the product's existence.
B. Price is very important to target customers.
C. A small market exists.
D. Substantial competition is not expected.

WORKED
A marketer of canned peanuts might choose a premptive penetration
strategy for introducing a new brand of unsalted peanuts. This
strategy requires a heavy promotion expenditure accompanied with
a low price. The large promotion expenditure is necessary because
many target customers do not know about the existence of the product--
they have to be informed. The low price is necessary because target
customers feel that price is important--they are price sensitive

ANSWER  A
INSTRUCTIONS Try to answer this question "Would a firm use one strategy, no
matter what stage of the product life cycle in which it might find itself?

EXAMPLE

A manufacturer of frozen Chinese foods introduced its new brand
of sweet and sour pork ten years ago. At that time there was
little competition and the product was very well prepared, allowing
the company to charge premium prices. Demand for the brand was so
strong that the company survived on only a moderate advertising
budget.

The company management has wisely realized that times have changed
and the old strategy is obsolete. The firm has lowered its prices
and increased its advertising budget. This was appropriate, as
several large competitors have entered the market and charge modest
prices. Further, consumer demand has declined as tastes have shifted
to Italian, Mexican, and French food. The firm has been successful,
but only by astutely changing its strategy when the environment changed.

DETAILS

There are three strategies that marketers can employ at the maturity
stage of the product life cycle; marketing mix modification, product
modification, and brand extension.

Altering one or more of the elements of a product's marketing mix
is called a marketing mix modification strategy. It may involve
seeking new segments to pursue, stimulating greater use of company
brands by current customers, or repositioning of the product.

Sometimes a firm can locate new segments of customers. Many companies
initially market consumer items on the east and west coasts, because
of the high population densities, adaptive cultures, and high incomes.
As these segments mature, they then develop strategies to penetrate
other less-populated states.

Modifying the marketing mix to stimulate greater usage by existing
customers is another way of generating increased sales. Fast food
chains use contests and coupons to promote increased consumption.
Packaged food companies provide free recipes using the product
to promote increased consumption.

Product modification is another technique that involves making
slight style and feature improvements. The annual style changes
in the auto and fashion industries are examples. By making last
year's model seem dated, marketers induce customers into buying
a new item.

Brand extension is another major strategy that can be helpful
during maturity. It involves finding new uses for a product.
Baking soda, for example, has been promoted as an odor inhibitor
for refrigerators, cat litter boxes, and thermos bottles. Many
software producers have moved from developing video games to
educational programs for home computers. Successful brand
extensions can enable marketers to break away from mature markets
and into growth opportunities.

However, brand extension usually involves substantial marketing
costs because it is similar to bringing out a new product and
requires a high initial investment. Consequently, management should
pursue it only if the extension actually produces substantial
benefits to a significant market segment that was previously
unsatisfied.

PROBLEM 2
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A furniture manufacturer is utilizing a product modification strategy.
A possible advantage is that target customers:

A. May feel that they must have this year's model.
B. Will purchase because the price has been lowered.
C. Will purchase because the promotion mix has changed
D. Will purchase because the product is now available in a new
   channel of distribution.

WORKED

A furniture manufacturer that uses a product modification strategy
may benefit in that target consumers may feel that they must have
this year's model. Some will feel that the product has been improved
and they want the best. Others will buy the new item for prestige
reasons. Another reason for purchase is boredom with an old model.
It is not necessasry to make major changes in the product--minor
modifications will do.

ANSWER  A
INSTRUCTIONS Try to answer this question "Would a firm use one strategy, no
matter what stage of the product life cycle in which it might find itself?

EXAMPLE

A manufacturer of frozen Chinese foods introduced its new brand
of sweet and sour pork ten years ago. At that time there was
little competition and the product was very well prepared, allowing
the company to charge premium prices. Demand for the brand was so
strong that the company survived on only a moderate advertising
budget.

The company management has wisely realized that times have changed
and the old strategy is obsolete. The firm has lowered its prices
and increased its advertising budget. This was appropriate, as
several large competitors have entered the market and charge modest
prices. Further, consumer demand has declined as tastes have shifted
to Italian, Mexican, and French food. The firm has been successful,
but only by astutely changing its strategy when the environment changed.

DETAILS

There are five strategies that are available during the decline
stage of the product life cycle; recycle, status quo, retrenchment,
milking, and pruning.

A recycle strategy is one where a company makes a heavy promotional
expenditure to revive a product that is in decline. In a sense,
the company hopes to introduce the product again. In this stage
fewer competitors are in operation than was the case during earlier
stages. This means that competitor counteractive strategies are
less likely.

Normally recycling is done when management feels optimistic about
the future of the product and is convinced that it has a loyal
following and satisfies needs effectively. This strategy can be
more expensive than some of the other alternatives. Management should
study the situation carefully to gain evidence that future revenues
will be sufficient to cover the substantial promotional expenses.

PROBLEM 3

A cosmetic manufacturer has a lipstick brand that is in decline
and is considering a recycle strategy. This strategy may be
effective because:

A. Lipstick is a luxury, not a necessity.
B. The demand for lipstick varies considerably, from year to year.
C. The demand for lipstick is affected by advertising expenditures.
D. The lipstick industry essentially is monopolized by a few firms.

WORKED

A cosmetic manufacturer has a lipstick brand that is in decline
and is considering a recycle strategy. This strategy may be effective
because the demand for lipstick is affected by advertising
expenditures. The major means of recycling is to use this promotion
method to revive the product by creating new demand. The demand
for some products, such as computer paper, hand soap, and garage
shelves, is not influenced much by advertising. On the other hand,
advertising can create images for personal attraction enhancement
items such as lipstick and dress clothing.

ANSWER  C
INSTRUCTIONS Try to answer this question "Would a firm use one strategy, no
matter what stage of the product life cycle in which it might find itself?

EXAMPLE

A manufacturer of frozen Chinese foods introduced its new brand
of sweet and sour pork ten years ago. At that time there was
little competition and the product was very well prepared, allowing
the company to charge premium prices. Demand for the brand was so
strong that the company survived on only a moderate advertising
budget.

The company management has wisely realized that times have changed
and the old strategy is obsolete. The firm has lowered its prices
and increased its advertising budget. This was appropriate, as
several large competitors have entered the market and charge modest
prices. Further, consumer demand has declined as tastes have shifted
to Italian, Mexican, and French food. The firm has been successful,
but only by astutely changing its strategy when the environment changed.

DETAILS

Under a status quo strategy, the firm retains the same marketing
mix that it employed during maturity. This is especially appealing
to companies that once held significant consumer loyalty within
specific market segments. As a market begins to decline, it often
does so through a peeling away of the outer segments distant from
its core. However, those firms with an established niche at the
heart of the market may be able to maintain profitability by
continuing their current strategies.

Retrenchment takes place when a firm withdraws from weak market
segments to enable concentration on those segments where it has the
greatest strength. It is based on the 80-20 principle; 80 percent
of a company's sales are often derived from 20 percent of its
customers. Similarly, 20 percent of a company's products often
account for 80 percent of its sales.

Retrenchment makes cost reductions possible and allows concentration
of marketing efforts in the most promising arenas. The firm can
stimulate profitability and cash flow as a result. Once a company
has successfully retrenched, it can again attempt to expand its
operations once it has regained its financial strength.

A milking strategy is roughly analogous to salvaging a sinking
ship--a firm cuts all costs to a bare minimum and continues to
sell the product so long as its revenues cover all variable costs.
This strategy makes sense when it appears certain that a product's
death is close at hand.

Pruning is a strategy of abandoning a product. Unfortunately, many
managers hold on to products which once were popular and perhaps
contributed substantially to establishing the company's market
position. However, outdated successes are not part of a marketer's
realm. Therefore, once forecasts of opportunity no long justify
continued efforts, the firm should drop a product so that it can
devote efforts to more promising ventures.

PROBLEM 4

A producer of light fixtures has a product line that is in the
decline stage. It might decide that a status quo strategy is
appropriate if:

A. The product line still has significant consumer loyalty within
   one or more specific market segments.
B. The product line is outdated, but once was popular and contributed
   substantially to the firm's market position.
C. It appears certain that a product's death is close at hand.
D. Fewer competitors are in operation than was the case in earlier
   stages of the life cycle.

WORKED

A producer of light fixtures that has a product line in the decline
stage might consider that a status quo strategy is appropriate if
the line still has significant consumer loyalty within one or more
specific market segments. With a status quo strategy the company
will use the same marketing mix as it employed during maturity.
This will continue to satisfy those segments made up of consumers
who are loyal to the product line, even though it will not appeal
to other segments. This may allow the company to take advantage
of this loyalty factor.

ANSWER  A