Small Business Management Chapter 15 PowerPoint

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CHAPTER
15
Product
Development and
Supply Chain
Management

LEARNING OBJECTIVES
By studying this chapter, you should be able to…
15-1 Recognize the challenges associated with the growth of a
small business.
15-2 Explain the role of innovation in a company’s growth.
15-3 Identify stages in the product life cycle and the new product
development process.
15-4 Describe the building of a firm’s total product.
15-5 Understand product strategy and the alternatives available to
small businesses.
15-6 Discuss how the legal environment affects product decisions.
15-7 Explain the importance of supply chain management and the
major considerations in structuring a distribution channel.

15-1 TO GROW OR NOT TO GROW
• Some entrepreneurs find that maintaining the status quo is
challenge enough and thus choose not to grow their ventures.
• Growing quickly can be a stressful proposition if an entrepreneur
is not prepared.
• A business’s reputation may be damaged if it is unable to deliver on
time or with the level of quality promised, or if it must turn down an
order because it can’t handle the volume.
• Rapid growth in sales and profits may be hazardous to a
company’s cash flows.
• A growth trap can occur because growth tends to demand additional
cash faster than it can be generated in the form of increased profits.
• Growing a business too quickly can be stressful for a small firm’s
owners and personnel.
• Increased demand may stretch an owner’s staff too thin, resulting in
burnout, apathy, and poor overall performance.

15-2 INNOVATION:
A PATH TO GROWTH
• Small entrepreneurial firms produce twice as
many innovations per employee as large firms,
accounting for half of all those created and an
amazing 95 percent of all radical innovations.
• The probability that a new innovation will go on
to become a success is extremely low.

15-2a Gaining a
Competitive Advantage
• The risk of failure increases when innovation is the
goal.
• An entrepreneur can reduce the risk of innovation by:
• Basing innovative efforts on experience.
• Targeting products or services that have been overlooked.
• Validating a market for the product or service.
• Emphasizing value creation for customers.
• Pursuing new ideas that will lead to more than one product or
service.
• Raising sufficient capital before launching a new product or
service.
• Innovation is a means by which a firm can achieve and
sustain a competitive advantage.

15-2b Achieving Sustainability
(slide 1 of 2)
• A company’s competitive advantage needs to
be long-lasting to have great impact.
• Sustainable competitive advantage – A value-
creating position that is likely to endure over time.
• To incorporate sustainability into strategy, an entrepreneur
should use the firm’s unique capabilities in a way that
competitors will find difficult to imitate.
• The competitive advantage life cycle has three
stages:
1. Develop.
2. Deploy.
3. Decline.

15.1 The Competitive Advantage Life Cycle

15-2b Achieving Sustainability
(slide 2 of 2)
• In order to maintain performance over time, companies
must continue to reinvent themselves—and they must
do this before the business stalls.
• Firms that wait until they hit a slump before making
adjustments run a serious risk of failing to realize a complete
recovery.
• A firm is more likely to avoid a slump if it keeps a close eye on
“hidden curves” related to its competition, its internal
capabilities, and its people—and takes corrective measures
before these hidden trends become apparent in the company’s
financial results.

15-3 THE PRODUCT LIFE CYCLE
AND NEW PRODUCT DEVELOPMENT
• The product life cycle concept and the four-
stage approach to new product development
can be used to answer the following two
questions:
1. What creates the need for innovation in a specific
business?
2. How can innovation be managed?

15-3a The Product Life Cycle
(slide 1 of 2)
• Product life cycle – A detailed picture of what happens to a
specific product’s sales and profits over time.
• The four stages of the product life cycle are:
1. Introduction.
2. Growth.
3. Maturity.
4. Decline.
• The product life cycle concept is important to a small business for
three reasons:
1. It points out that promotion, pricing, and distribution policies should all
be adjusted to reflect a product’s position on the curve.
2. It highlights the importance of revitalizing product lines, whenever
possible, to extend their commercial potential.
3. It is a continuing reminder that the natural life cycle for most products
rises and then falls; thus, innovation is necessary for a firm’s survival.

15.2 The Product Life Cycle

15-3a The Product Life Cycle
(slide 2 of 2)
• Products and/or services and competitive advantages
that are on the verge of decline can be reinvigorated
using any number of different strategies, including the
following:
• Modifying a product or service by adding new features.
• Proposing alternative uses.
• Refreshing a competitive advantage through an ongoing
program of research and development that yields proprietary
technology.
• Expanding into complementary products.
• Redefining the business.

15-3b The New Product
Development Process (slide 1 of 4)
• It is usually up to the small business owner to
find, evaluate, and introduce the new products
that the company needs.
• This responsibility requires setting up a process for
new product development.
• Most small business owners tackle new product
development by following a common four-stage, structured
approach:
1. Idea accumulation.
2. Business analysis.
3. Development of the physical product.
4. Product testing.

IDEA ACCUMULATION
• The first stage of the new product development process—idea
accumulation—involves increasing the pool of ideas under
consideration.
• There are many possible sources for new ideas, including:
• Sales staff, engineering personnel, or other employees within the firm.
• Government-owned patents, which are generally available on a
royalty-free basis.
• Privately owned patents listed by the U.S. Patent and Trademark
Office.
• Other small companies that may be available for acquisition or merger.
• Competitors’ products and their promotional campaigns.
• Requests and suggestions from customers.
• Brainstorming.
• Marketing research (primary and secondary).

BUSINESS ANALYSIS
• Business analysis, the second stage in new product
development, requires that every new product idea be
carefully studied in relation to several financial
considerations.
• Any idea failing to show that it can be profitable needs to be
discarded.
• The following four key factors should be considered in
conducting a business analysis:
1. The product’s relationship to the existing product line.
2. Cost of development and introduction.
3. Available personnel and facilities.
4. Competition and market acceptance.

DEVELOPMENT OF THE PHYSICAL PRODUCT
• This stage of new product development entails sketching out the plan for
branding, packaging, and other supporting efforts, such as pricing and
promotion.
• But before getting to that point, an actual prototype (usually a functioning
model of the proposed new product) may be needed.
• After these components have been evaluated, the new product idea may
be judged a misfit and discarded, or it may be moved to the next stage for
further consideration.
PRODUCT TESTING
• The last step in the product development process should determine
whether the physical product is acceptable (safe, effective, durable, etc.).
• While the product can be evaluated in a laboratory setting, a limited test
of market reaction should also be conducted.

15-4 BUILDING THE
TOTAL PRODUCT
• Components of a total product offering include:
• Branding.
• Packaging.
• Labeling.
• Warranties.

15-4a Branding (slide 1 of 2)
• Brand – A verbal and/or symbolic means of
identifying a product.
• The brand identity of most small businesses
will have the following three components:
1. Brand image – The overall perception of a brand.
• The intangible brand image component is important to
consumers’ acceptance of a firm’s total product offering.
• Consumers are far more likely to respond positively to
businesses that craft and communicate interesting and
consumer-relevant images that encourage an emotional
connection to the firm.

15-4a Branding (slide 2 of 2)
2. Brand name – A brand that can be spoken.
• A brand name should:
• Be easy to pronounce and remember.
• Be descriptive.
• Be eligible for legal protection.
• Be full of promotional possibilities.
• Be suitable for use on several product lines.
• Lead to a domain name that is relatively inexpensive to acquire.
3. Brandmark – A brand that cannot be spoken; a
company logo.
• Trademark – A legal term indicating that a firm has
exclusive rights to use a brand to represent a product.
• Service mark – A legal term indicating that a company has
the exclusive right to use a brand to represent a service.

15.3 Components of a Brand Identity

15-4b Packaging
• Packaging is a significant tool for increasing
total product value.
• Innovative packaging is often the deciding
factor for consumers.

15-4c Labeling
• A label is an important informative tool,
providing brand visibility and instructions on
product care and use.

15-4d Warranties
• Warranty – A promise, written or unwritten, that a product will
perform at a certain level or meet certain standards.
• All sellers make an implied warranty that the seller’s title to the
product is good.
• A merchant seller, who deals in goods of a particular kind, makes
the additional implied warranty that those goods are fit for the
ordinary purposes for which they are sold.
• A written warranty on a product is not always necessary.
• Warranties are important for products that are:
• Innovative.
• Comparatively expensive.
• Purchased infrequently.
• Relatively complex to repair.
• Positioned as high-quality goods.

15-5 PRODUCT STRATEGY
• Product strategy – The way in which the
product component of the marketing mix is
used to achieve a firm’s objectives.
• This involves several supporting features:
• Product item – The lowest common denominator in the
product mix—the individual item.
• Product line – The sum of related individual product
items.
• Product mix – The collection of a firm’s total product lines.
• Product mix consistency – The similarity of product lines
in a product mix.

15.4 Product Lines and Product Mix for 180s LLC

15-5a Product Marketing
Versus Service Marketing
• Product – A total bundle of satisfaction—whether a
service, a good, or both—offered to consumers in an
exchange transaction.
• In addition to the physical product or core service, a product
also includes complementary components, such as its
packaging or a warranty.
• Marketing services presents unique challenges not
faced when marketing goods.
• Certain characteristics—tangibility, amount of time separating
production and consumption, standardization, and
perishability—lead to a number of differences between the
strategies for marketing goods and those for marketing
services.

15.5 Services Marketing Versus Goods Marketing

15-5b Product Strategy Options
• There are six categories of major product
strategy alternatives, which are based on the
nature of the firm’s product offering and the
number of target markets:
1. One product/one market.
2. One product/multiple markets.
3. Modified product/one market.
4. Modified product/multiple markets.
5. Multiple products/one market.
6. Multiple products/multiple markets.
• Each alternative represents a distinct strategy.

15-6 THE LEGAL ENVIRONMENT
• Strategic decisions about growth, innovation,
product development, and the total product
offering are always made within the guidelines
and constraints of the legal environment of the
marketplace.

15-6a Consumer Protection
• Federal legislation regarding labeling and product
safety was designed to protect consumers.
• The Consumer Product Safety Act of 1972 protects the public
against unreasonable risk of injury or death.
• This act created the Consumer Product Safety Commission to set
safety standards for toys and other consumer products and to
ban goods that are exceptionally hazardous.
• The Nutrition Labeling and Education Act of 1990 requires
every food product covered by the law to have a standard
nutrition label, listing the amounts of calories, fat, salt, and
nutrients in the product.
• Meeting the legal requirements for labeling can cost thousands of
dollars per product.

15-6b Protection of
Intellectual Property (slide 1 of 5)
• Safeguarding a company’s intellectual property
is critical to success.
• Four primary means are used by firms to
protect certain proprietary assets:
1. Trademarks.
2. Patents.
3. Copyrights.
4. Trade dress.

15-6b Protection of
TRADEMARKS
• Trademark or service mark protection safeguards a company’s
distinctive use of a name, word, phrase, slogan, symbol, design,
logo, picture, or any combination of these.
• Entrepreneurs should investigate potential names carefully to
ensure that they are not already in use.
• Registration of trademarks is permitted under the federal Lanham
(Trademark) Act, making protection easier if infringement is
encountered.
• A company’s federally registered trademark rights can last
indefinitely, as long as the owner uses the mark continuously on
or in connection with the goods and/or services to which it applies,
and renews the registration with the U.S. Patent and Trademark
Office in accordance with the mandatory schedule (usually every
10 years thereafter).

15-6b Protection of
PATENTS
• Patent – The registered, exclusive right of an inventor to make,
use, or sell an invention.
• The primary types of patents are:
• Utility patents – Registered protection for a new or improved
process, machine, manufactured product, or “composition of matter.”
• Design patents – Registered protection for the appearance of a
product and its inseparable parts.
• Plant patents – Registered protection for any distinct, new variety of
living plant.
• Because the process can be so complicated, it is advisable to use
a patent attorney to prepare a patent application.
• Lawsuits concerning patent infringement can be costly.

15-6b Protection of
• New procedures in the patent-approval process are not always
kind to small businesses.
• All patent applications are now prioritized to a new “first-to-file” rule
(replacing the long-standing “first-to-invent” specification), which
allows big corporations with deep pockets and more familiarity with
the process to “patent early and challenge often.”
COPYRIGHTS
• Copyright – The exclusive right of a creator to reproduce,
publish, perform, display, or sell his or her own works.
• Works created on or after January 1, 1978, receive copyright
protection for the duration of the creator’s life plus 70 years.
• Under the Copyright Act of 1976, copyrightable works are
automatically protected from the moment of their creation.

15-6b Protection of
• Any work distributed to the public should contain a copyright
notice consisting of three elements:
1. The symbol ©.
2. The year the work was published.
3. The copyright owner’s name.
TRADE DRESS
• Trade dress – Elements of a firm’s distinctive image not protected
by a trademark, patent, or copyright.
• Trade dress is the “look” that a firm creates to establish its
marketing advantage.
• Trade dress can be protected under trademark law if it can be
shown that the design or appearance of one product is so similar
to that of another that the typical consumer would be likely to
confuse the two.

15-7 SUPPLY CHAIN
MANAGEMENT
• Supply chain management – A system of
management through which a company
integrates and coordinates the flows of
materials and information needed to produce a
product or service and deliver it to customers.
• Effective supply chain management can
potentially lower the costs of inventory,
transportation, warehousing, and packaging,
while increasing customer satisfaction.

15-7a Intermediaries
• Intermediaries provide an efficient means of
distribution if customers are widely dispersed
or if special packaging and storage are
needed.
• Types of intermediaries include the following:
• Merchant middlemen – Intermediaries that take
ownership of the goods they distribute.
• Agents – Intermediaries that do not take ownership
of the goods they distribute.
• Brokers – Intermediaries that do not take
ownership of the goods they distribute.

15-7b Channels of Distribution
(slide 1 of 2)
• Distribution – The physical movement of products
and the establishment of intermediary relationships to
support such movement.
• Physical distribution (logistics) – The activities of
distribution involved in the physical relocation of
products.
• Channel of distribution – The system of relationships
established to guide the movement of a product.
• A channel of distribution can be either direct or indirect.
• Direct channel – A distribution system without intermediaries.
• Indirect channel – A distribution system with one or more
intermediaries.
• Dual distribution – A distribution system that involves more
than one channel.

15.6 Channels of Distribution

15-7b Channels of Distribution
(slide 2 of 2)
• The three main considerations in evaluating a channel of
distribution are:
1. Costs.
2. Coverage.
3. Control.
COSTS
• In many cases, the least-expensive channel may be indirect.
COVERAGE
• Indirect channels of distribution increase market share.
CONTROL
• A direct channel of distribution provides more control.

15-7c The Scope of
Physical Distribution (slide 1 of 4)
• The components of physical distribution include the following:
• Transportation.
• Storage and materials handling.
• Inventory management.
TRANSPORTATION
• Available modes of transportation are traditionally classified as:
• Airplanes.
• Railroads.
• Trucks.
• Pipelines.
• Waterways.

15-7c The Scope of
• The choice of a specific mode of transportation is usually based
on several criteria:
• Relative cost.
• Transit cost.
• Reliability.
• Capability.
• Accessibility.
• Traceability.
• Transportation intermediaries are legally classified as:
• Common carriers – Transportation intermediaries available for hire
to the general public.
• Contract carriers – Transportation intermediaries that contract with
individual shippers.
• Private carriers – Lines of transport owned by shippers.

15-7c The Scope of
STORAGE AND MATERIALS HANDLING
• A small business that does not use merchant middlemen or
wholesalers must plan for its own warehousing.
• Forklifts, special containers, and packaging are part of a
materials-handling system.
DELIVERY TERMS
• Delivery terms specify which party is responsible for several
aspects of the distribution.
• Delivery terms include:
• Paying the freight costs.
• Selecting the carriers.
• Bearing the risk of damage in transit.
• Selecting the modes of transport.

15-7c The Scope of
• The simplest delivery terms—and the most advantageous to a
small business as the seller—is F.O.B. (free on board) origin,
freight collect.
• This shifts all of the responsibility for freight costs to the buyer.
• Ownership of the goods and risk of loss also pass to the buyer at the
time the goods are shipped.
• Many small businesses are finding that using third-party logistics
firms (3PLs) is more cost effective than carrying out the same
functions on their own.
• Third-party logistics firms (3PLs) – Companies that provide
transportation and distribution services to firms that prefer to focus
their efforts on their primary operations.

Key Terms (slide 1 of 2)
agents/brokers
brand
brand image
brandmark
brand name
channel of distribution
common carriers
contract carriers
copyright
design patent
direct channel
distribution
dual distribution
indirect channel
merchant middlemen
patent
physical distribution (logistics)
plant patents
private carriers
product
product item
product life cycle
product line
product mix
product mix consistency
product strategy

Key Terms (slide 2 of 2)
service mark
supply chain management
sustainable competitive
advantage
third-party logistics firms (3PLs)
trade dress
trademark
utility patent
warranty

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