a simple model for demand and product management h.e. cook department of general engineering uiuc

A Simple Model for Demand and Product Management

H.E. CookDepartment of General Engineering

UIUC

The Question Addressed

Can a simple model of product demand give both qualitative and quantitative insight into managing the development of new products?

Outline

1. The inter-connectivity between customers, society, and the firm.

2. Fundamental & bottom-line metrics.3. A simple market transaction.4. Product demand: theory & experiment.5. Marketing research for Product Value.6. Conclusions.

Inter-connectivity BetweenFirm, Customer, and Society

Metric types: Green=FundamentalBlue= Bottom-line

Societal Needs

Environmental Attributes

Societal Value

Price

Customer Needs

System Attributes

Customer Value

Cost

Profit

Society & Manufacturer

Loop

Customer & Manufacturer

Loop

Demand

Cash Flow

Quantitative ModelingSimple Transaction

Manufacturer

Buyers

Seller Buyer Rest of Society

P-C V-P G

P-C V-P

If buyer and seller bargain with equal strength, they arrive at a price which allows them to share the free value created:

Price Agreed To = (Value + Cost)/2

Source: Cook, H. E. Product Management: Value, Quality, Cost, Price, Profit and Organization. Kluwer Academic Publishers, Norwell, MA, 1997.

Fundamental Driving Forces

A reduction in free energy drives transformations in the inanimate world.

An increase in free value drives transformations in animate world.

Demand Is Key Variable in Terms of Constructing Model

Societal Needs

Environmental Attributes

Societal Value

Price

Customer Needs

System Attributes

Customer Value

Cost

Profit

Society & Manufacturer

Loop

Customer & Manufacturer

Loop

Demand

Cash Flow

Taylor Expansion D=D(V,P) for N Competitors (Discard Higher Order Terms)

1i i i i i

j i

D K V P V PN

2NE DK

P

2

2

12

EV P P

E

N simultaneous equations

Negative slope of demand with price

Average value for segmentis approximately twice price

Linear Demand Curve for a Monopoly

Demand

Price

V0 V0+V

0

V

But you only need to focus on changes in demand and value!

Fit of Linear Model to Demand Curve

Value Change with Linear Model

0

2

4

6

8

10

0 2 4 6 8 10 12

Dem

and

Price

Valueincrease

Test of Linear Model Simulated Purchase of Two Lottery Tickets

0

0.05

0.1

0.15

0.2

0.25

0.3

$30 $40 $50 $60 $70 $80 $90 $100

Fra

ctio

n se

lect

ing

lotte

ry t

icke

t

Price of lottery ticket

Economic value

80% chance of winning $100

50% chanceof winning $100

Economic value

Source: Cook, H. E. and A. Wu, On the evaluation of goods and selection of the best design alternative, Research in Engineering Design. 13. 42-54 (2001).

Combining Logit and Linear Models

2

22

exp( )

1

11

ii

i i

i

i i

DU U

D

N E V P V PU U

P

V PN E

P E

Logit model

Combinedmodel

S-Model Universal Metric for Product Management

V CU

t

Agrees with findings, obtained from comparative studies, that highly successful companies lead in quality, speed to market, and control of costs.

Using Historical Demand & Price InfoTo Solve for Value over Time

1

i Ti i

N D DV P

K N

Value of Two Competing Minivans over Time

$40,000

$42,000

$44,000

$46,000

$48,000

$50,000

1991 1992 1993 1994 1995 1996 1997

Model year

Value Market leader: FWD, car-like ride & handling

Challenger: RWD, van-like ride & handling Challenger moves to FWD,

car-like ride & handling

Market leader reacts:drivers side 2nd door,

added interior room

Value Trends for Mini-vans

Solve for value from historical

demand and price data.


Direct Value Method for Marketing Research

Select one

Select one

Select one

Without 4th door With 4th door

$20,000

$20,000

$20,000

$20,000

$20,500

$21,000

Select one$20,000 $21,500

Select one $22,000$20,000

When demands are the same,the price difference is equal to value difference.

Value of Added Rear Sliding Dooron Minivan

20

30

40

50

60

70

80

90

$20000 $20500 $21000 $21500 $22000 $22500

f [

%]

Price

$21,225

Value of 4th Door =$21,225-$20,000 = $1,225


Price where demands are the same.

Experiment for Value of Interior Noise

Source: Pozar M. and Cook H E (1998) On Determining the Relationship Between Vehicle Value and Interior Noise. SAE Transactions, Journal of Passenger Cars 106:391-401

Resulting Value Curve for Interior Noise

Source: Pozar M. and Cook H E (1998) On Determining the Relationship Between Vehicle Value and Interior Noise. SAE Transactions, Journal of Passenger Cars 106:391-401

0

0.2

0.4

0.6

0.8

1

1.2

20 40 60 80 100 120Noise level, dB(A)

V/V0

Best fit curve

Points from human factor studies.

Experiment for Value of Pickup Attributes

Source: Monroe, E.M. and Cook, H.E., Determining the Value of Vehicle Attributes Using a PC Based Tool, 1997 SAE International Congress & Exposition, Detroit, Michigan, February 24 - February 27, 1997

Values Found for Pickup Attributes

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

Two-ToneColor

4x4Drive

SportyTrim

ExtendedCab

AllOwn TruckNot Own TruckMenWomen

Val

ue

of O

pti

on

Source: Monroe, E.M. and Cook, H.E., Determining the Value of Vehicle Attributes Using a PC Based Tool, 1997 SAE International Congress & Exposition, Detroit, Michigan, February 24 - February 27, 1997

Summary & Conclusions

1. A simple model of demand provides both qualitative and quantitative insight for managing new product development.

2. Taguchi’s cost of inferior quality can be determined from the value curve of the attribute. Recommend replacing Taguchi’s loss function with the cash flow function.

3. The model also provides the foundation for a more direct and transparent approach for determining customer value using either written or computerized surveys.

4. A single, Universal Metric exists for product management equal to the time rate of change of value minus variable cost.

a simple model for demand and product management h.e. cook department of general engineering uiuc

Documents