Understanding your competitive environment is critical for competing effectively. In fact, a firm’s industry structure and the effect of existing and potential rivals are the major determinants of strategy selection. A key component of a firm’s strategy has to be product planning: which variety of a product should a firm produce? How many varieties should it produce and how different should those varieties be?
To build an effective product plan, a firm needs to understand the ways in which consumers choose among particular brands. A firm will always want offer only those products (or services) that consumers will want to buy. A useful way to begin thinking about a product is to consider the bundle of characteristics and attributes that are desired in some proportion by various segments of the marketplace. For example, Coca Cola is defined its mix of flavouring, sweetness, and caffeine content. The point is that, give a range of products with similar prices from which to choose, consumers may buy a particular brand because the characteristics of that product matches up most closely to their preferences.
Product characteristics and attributes that are important to consumers can be mapped on a Product Map (sometimes called a Perceptual Map). The Product Map displays the leading products currently offered in a market, placed on the map according to how their desired attributes are measured in terms of characteristics delivered per dollar expended by the consumer.
Consumer theory holds that consumers buy a particular brand or product because it is closer to their ideal preferences. The further a product is away from a consumer`s ideal point, the less willing they will be able to pay for it. The trick, therefore, is for firm`s to know consumer preferences intimately and seek to build the characteristics and attributes into their products that are most desired by consumers.
Differentiated consumer preferences encourage product variety as firm`s seek to exploit those differences in their product offerings. However, exploiting these differences can be expensive. To the extent that there are economies of scale in production, exploiting product variety can be costly.
Scale effects can be partially offset by economies of scope: economies of scope exist where it is cheaper for a firm to produce multiple product lines in the same firm than to produce them separately.
Firms often make the mistake of creating a brand image which is misaligned with what consumers actually desire. A further mistake is to ground the brand in characteristics and attributes whose desire by consumers is fleeting and short-lived – when these characteristics go out of favour, or tastes change, the brand begins to die. Therefore, as always, firms must always begin with a thorough understanding of their marketplace and consumer needs before building a brand.