PODCAST: Breaking into the Big Box
At
the Smith School, collaboration across functions and
disciplines is common, but so is collaboration with business
practitioners, who bring real-world problems for real-world
solutions. For example, recent research by P.K. Kannan,
Harvey Sanders Associate Professor of Marketing, is changing
the way at least one manufacturer designs its products.
Kannan, who began his academic career in engineering,
partnered with Shapour Azarm, professor of mechanical
engineering at the University of Maryland’s A. James Clark
School of Engineering, on an initial grant proposal to the
National Science Foundation (NSF). The two wanted to look at
how manufacturers could design products that had robust
engineering performance but were also robust from a
marketing performance perspective. The research project was
received with enthusiasm, not just from NSF but also from
Black & Decker, who provided one-third of the $450,000 that
funded the project.
Kannan and his colleagues used a small Black & Decker
power tool as the subject of their study, and designed a
decision support system to help the company choose which
characteristics to include in the product’s design. Black &
Decker promptly implemented the decision model once it was
finished. 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” purveyors like
Wal-Mart or Home Depot declined to stock the product. That’s
because these large retailers have become increasingly
powerful in recent years and are now dominant in many
product markets. For example, 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.
Through this close collaboration with Black & Decker
executives, Kannan 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 then
able to springboard into this new research area.
The results were published in Marketing Science
last spring. “New Product Development Under Channel
Acceptance,” authored by Lan Luo, PhD ’06, University of
Southern California, Kannan, and Brian Ratchford of the
University of Texas at Dallas, develops 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.
“We are looking at the overall market—end user, big box
retailer, potential competitors—and trying to anticipate
what competitors might do in response to our product. We
take those anticipated responses into account and try 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,” says Kannan.
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.
“New Product Development Under Channel Acceptance” was
the lead article in the March 2007 issue of Marketing
Science. For more information about this research,
contact
pkannan@rhsmith.umd.edu. |
