In the past 10 years, big-box
retailers such as Wal-Mart and Home Depot have grown
tremendously, dominating the market for many products and
establishing themselves as the crucial link between
manufacturers and consumers. As such, they are increasingly
powerful and important to manufacturers. Now a new study
provides manufacturers with a framework for designing new
products that will ensure they satisfy their first-line
customers — those big-box retailers.
The research was published
recently in the journal Marketing Science in a paper
co-authored by marketing professor P.K. Kannan of the University
of Maryland’s Robert H. Smith School of Business, Lan Luo, of
the University of Southern California and Brian Ratchford of the
University of Texas at Dallas. An outgrowth of a project for
Black & Decker, it is the first such study to tackle the big-box
shelf space issue in this manner.
The project began with
researchers setting out to develop a decision support system to
help manufacturers design products that were robust from both an
engineering performance perspective and a marketing performance
perspective. Kannan and his colleagues used a small Black &
Decker power tool as the subject of their study. They designed a
decision model and Black & Decker promptly implemented it.
But in the process of refining
and discussing the data with company leadership, Kannan
discovered that Black & Decker executives had a secondary—and
equally perplexing—problem. It wasn’t enough to design a tool
that met the end-user’s needs if big box retailers like Wal-Mart
or Home Depot declined to stock the product. Indeed, Home Depot
controls 50 percent to 60 percent of the market for the small,
hand-held grinder that was the subject of Kannan’s study.
He and his colleagues realized
that manufacturers needed to consider the preferences of the
retailer as well as the needs of the product’s end user. Using
data taken from the original study, Kannan was able to
springboard into this new research area which resulted in an
approach to positioning and pricing a new product that directly
incorporates retailer’s acceptance criteria into the development
process.
Kannan’s model incorporates the
retailer’s price assortment and potential reactions of competing
manufacturers. That turns out to be an important consideration,
because competitors are also reaching the market through the
same big box retailer, and a competitor’s moves could affect
Black & Decker’s product acceptance. Kannan used elements of
game theory in the model to help plan the manufacturer’s moves
as well as predict the moves of competitors. Kannan says those
anticipated responses are taken into account in order to come up
with a design that will make maximum profit for the manufacturer
and the channel retailer, while still being very useful for the
end user.
The model develops marketing
forecasts and profits associated with different design
alternatives by using individual-level consumer preferences, the
retailer’s existing product assortment, and the retailer’s and
competitor’s potential price reactions in response to the entry
of the new product. Because of the intense competition new
products face when coming to market, this framework could have a
significant impact on the decisions manufacturers make when
designing new products.
Black & Decker isn’t the only
company that will be able to benefit from this research. The
framework Kannan developed can be adapted to any industry where
products have to pass through a dominant retailer to reach the
market, such as electronics or consumer packaged goods.
Retailers are looking for profits and consumers are looking for
the best product for the best price. The solution for
manufacturers is to satisfy both at the initial stages of
product design.
More from this issue of
Leading the Digital Economy, July 2007
►A New Way to Get
Inside Consumer Minds to Predict Buying Behavior
►Revealing the Performance of
Small Investors
►A Revolution in the
Securities Industry
►Starbucks, P&G and China’s
Emerging Middle Class
