Brand Extension as a Strategy for Reducing Risks - Coursework Example

Brand Extension as a Strategy for Reducing Risks In New Product Development in the Food Industry Companies that choose to stay in one place and make do with its signature products, proven moneymakers though they may be, will run into trouble if not go out of business sooner or later. Diversification and innovation are imperative for business growth and expansion, and this means coming up with new products to boost a company’s product line. Herein lies the problem because developing a new consumer product is a costly, high-risk business proposition. Companies so inclined have to start practically from scratch, especially if the product they have in mind is totally new and unproven. Even if these companies overcome the difficulties at the product development stage, the odds on their product ever making a market splash are stacked against them. This dilemma has long stared the food industry in the face, this sector being made up mostly of small and medium-sized companies each with 20 or so employees. (The likes of McDonald’s, Kentucky Fried Chicken and Kenny Rogers are the few notable exceptions.) Even so, the food sector is perhaps the most profitable and widely distributed industry in the world with, it is said, one food establishment to be found in every street corner. Economists have come to think of this industry as uniquely recession-proof, catering as it does to the most primal urge of man – the appeasement of hunger. During an economic crisis, people may forego acquisition of cars, appliances and cut back on their expenses for clothes and the like but food establishments will always draw them in. As a gold mine rich in business opportunities, it is said that all the food companies have accomplished at present is scratch the surface of this bottomless industry. Because of the food companies’ size, the food sector has been described as a low-tech industry, with the lowest research-and-development to sales ratio. The industry’s R&D to sales ratio is pegged at an average of only 1 per cent as against 12 per cent for the drug industry, 8 per cent for electronics and 4 per cent for motor vehicles (MAPP Working Paper 38, EU Concerted Action). This leaves much to be desired since R&D is crucial to achieving success in innovation, which in turn is necessary for making any company competitive. The said European Union study noted that a modern supermarket carries about 10,000 to 15,000 products at any given time with a yearly turnover of 10 per cent. One United Kingdom food retailer alone successfully introduced 1,500 new own-label products in 1993 to place the company ahead of its competitors. The conclusion is that introduction of new products is an “essential element of competition between food companies” and that innovation definitely gives them a competitive edge. Still and all, food companies operating on the economy-of-scale basis simply cannot afford the risks involved in diversification and innovation in the traditional sense. The advent of the brand extension concept gave these companies a way out of their problem by enabling them to develop new products without the attendant risks and extra costs. With brand extension, food companies found an effective strategy to reduce the risks of new product development. Brand extension is the use of an established brand name for a new product that is intended for another product category or class (Keller & Aaker 1992). Simply put, a brand extension is a product that carries the name of a known brand even as the new product fills a market need different from that of the parent brand. The idea is to ride piggyback on the name established by the parent brand so that the new product avoids the extra costs and risks inherent in coming up with a totally new consumer product. An entirely new product without the “symbolic” meaning of brands (i.e., company prestige, status and personality) to prop it up would be difficult to sell otherwise (Czellar 2003). The use of brand extension to good effect is exemplified by globally popular Adidas which sometime ago came out with its equally successful Adidas deodorant-body spray for men. In this case, Adidas the high-profile shoemaker for athletes and action men wisely hewed close to this image by targeting more or less the same market for its brand extension in the form of the deodorant. The product class or category of the brand extension is different but the target market is similar to that of the parent brand. Before the deodorant, Adidas also made market coups with men’s watches, T-shirts and other brand extensions. Such success of brand extensions is witnessed often in the food industry where, as noted earlier, innovation can make or unmake companies. From hamburgers at the start, for example, McDonald’s has since included fried chicken and countless other food products in its menu to keep its lead position in the fast-food sector. KFC used the same brand extension strategy successfully by coming out with numerous food items other than fried chicken. At work in this instance is what is known in industrial economics as “perception of fit” or perceived similarities, which can be either a product category fit or a band-level fit. The Adidas shoes and deodorant spray both qualify as product category and brand-level fits sharing as they do common product attributes, and there is some comparison between the macho image of Adidas shoes and the image consumers have of the deodorant spray. A product category fit refers to the perceived similarity between the extension category and the existing product category of the parent brand. A brand-level fit, on the other hand, has to do with similarities between the extension product category and the brand. Reddy et al. (1994) has demonstrated that the parent brand’s symbolic associations impact positively on the market acceptance of the brand extension. The same observation is made by Swaminathan (2001) who thought it is the consumer’s prior experience with the parent brand that does the trick. Both studies suggest that the more elaborate the consumer’s knowledge of the brand extension, the more likely he will take to the product. Such knowledge is of course related largely to the parent brand of the extension. On the food industry, there are several factors believed necessary to gauge the success of new product development. These include potential market share, sales and profit objectives, technical aspects, impact on the company and its reputation, and timing of the development process from its initial stages to market launch. Kristensen, Ostergaard & Juhl (1998) in a study involving 300 Danish food companies found that it is particularly difficult and costly for food producing companies to include the customers’ perceptions in developing a new product because of the many products and markets peculiar to the industry. This study pointed to several company inputs which can ensure success in new product development: 1) existence of a product development department, 2) general competence and learning, 3) robustness and variation, 4) top management involvement, 5) involvement of marketing and production departments, 6) information from and about customers, 7) information from employees, 8) complaints, 9) use of quantitative and qualitative research, 10) exchange of information between producer and customers, and 11) pre-launch evaluation of buying frequency. In the development process for any food product, a full-blown unit is important to deal with the biological and nutritional questions involved in such an enterprise. Is any ingredient going into the product suspected of harmful biological contents? Can the nutritional value and safety to be claimed by the product pass Food and Drug Administration standards? On the need for separate production and marketing departments, the production arm could use its expertise in transforming new ideas into mass produced items while the marketing unit will be charged with analyzing consumer demands and translating these into useful production inputs. Regarding complaints, these should be treated formally since they can lead to improvement and high success rate for the new product. Qualitative research provides useful information from the target market and quantitative research enables the company to make inferences about population segments for which the new product is planned. Constant flow of information between company and consumers demonstrates commitment and generates goodwill for the company. As for the pre-launch evaluation of buying frequency, it allows the company to decide when the product should be launched or whether it should be launched at all, thus minimizing the potential risks. All these efforts entail considerable costs in time and money that food companies, being generally small by world standards as noted in the Kristensen et al. report, can ill-afford. To ensure their profitability and growth with the modest resources at their command, food companies in the study opted to innovate through brand extension and adaptation without going into the development of an entirely new product. Based on interviews conducted by Kristensen et al. with the Danish food companies, the industry’s perception of a “new product” varies from it being just an adaptation of an existing product to that of being a “brand-new product.” Some said a new product is an existing product in a new packaging. It is believed that companies that look at an adaptation as a new product have better chances of success than those using a brand-new product to satisfy the usual concept of a new product. Czellar agrees that adaptation of an existing product as an acceptable definition of a new product leads to a higher success rate for the company involved. This result is not surprising, since it is obviously easier to work in a known product group than in a completely new area. Kotler et al, (1991) refers to innovation as “any good, service, idea or product that is perceived by someone as new. The idea may have a long history but it is an innovation to the person who sees it as new.” In short, a product may be an innovation to one person but not to another. In the consumer’s eyes, an innovation may just be a price reduction, which to the producer means a cost-saving change in production technology. Any change in an advertising message is also considered an innovation when, in the eyes of consumers, it leads to a repositioning of the product. The product is not regarded as new, however, when the said price reduction is temporary and the change in advertising copy is only minor. There are at least six categories of products considered as new by companies in the food industry that sought to join the innovation bandwagon without spending so much on a new-to-the-world product. These are new product lines, additions to existing product lines, improvements or revisions in existing products, repositioning and cost reduction. The intensity of innovation in the food sector is considered low, such that this effort usually bears the character of imitation. Small and medium-sized food companies have built-in advantages over their large counterparts to make such a go of innovation. These advantages are: 1) They have a simple and focused organizational structure, without the the bureaucratic tangle at often hobble big companies. 2) Their managers are generally committed and highly motivated, active in planning and implementation, take higher risks and motivate their staff constantly. 3) They are more exposed to competition, thus able to react quickly on changing market requirements. 4) The cost of innovation in this sector, especially overhead expense, is lower. 5) R&D efficiency is much higher since the companies are not obliged to develop skills that they could not use later. 6) They grow through the niche strategy and specialize in their own technology or in orientation towards customers. 7) The low-risk and fixed-cost factors favor the competitive position of these smaller companies over their large counterparts. At the evaluation process stage for brand extensions, it has been found that the perceived high quality of the parent brand results in positive market evaluation of the brand extension. In other words, positive feelings in the marketplace are directly transferred from the parent brand to the extension. Studies on the direct effects of fit on brand extension conclude that the higher the perceived fit, the more positive the consumer’s attitude toward it. Studies suggest the wise use of advertising to change consumer mood in the brand extension’s favor. The objective is to engender a positive consumer mood as this enhances “attitude transfer from brand to extension.” Through intensified media exposure, the company involved can facilitate the information retrieval process and thus improve fit perceptions. Advertising elements such as information type and amount, exposure as well as techniques like priming and distancing, can affect consumer attitude toward extensions in a positive way. This is a “must” particularly in situations where the proposed extension is tied closely with the existing products of the parent brand in category and class, or when the consumer attitude toward the brand is rather negative. Another important component of brand extension evaluation is positioning which can be functional and experiential or symbolic. For brands with functional or experiential positioning, the information processed on extension evaluation is product-related, whereas brands with symbolic positioning involve information not related to the product. Based on studies, the market performance of a brand extension depends more on the basis of its symbolic value rather than on its experiential or functional worth. The popular assumption is that only competitors positioning their products in the same way can waylay a brand extension en route to the marketplace. On this concern, companies agree on the need to fortify their position in the home market which, among other efforts, is deemed crucial to a successful product launch. References: Aaker, D.A. &Keller, K.L. 1990. Consumer Evaluations of Brand Extensions. Journal of Marketing, 54 (1), 27-41. Aaker, J.L. 1999. The Malleable Self: The Role of Self-Expression in Persuasion. Journal of Marketing Research, 36 (2), 45-57. Czellar, S. 2002. Consumer Attitude Toward Brand Extensions: An Integrative Model and Research Propositions, Section HEC 40, Boulevard du Pont-a’Arve, 1211 Geneva 4, Switzerland. Czellar, Z. 2003. Interim Journal of Research in Marketing, 20 (2003) 97-115113, Winter Educators’ Conference (pp.186-194). Chicago: American Marketing Association. Kristensen, K.Ostergaard, P. & Juhl, H.J. Success and Failure of Product Development in the Danish Food Sector, The Aarhus School of Business, Dept. of Information Science, DK-8210 Aarhus V, Denmark, May 9, 1998. MAPP Working Paper No. 38. A Framework for Analyzing Innovation in the Food Sector. Innovation Subgroup, EU Concerted Action (Structural Change in the Food Industry). Read More