STRATEGIC PRODUCT DESIGN FOR RETAIL CHANNEL ACCEPTANCE UNDER ...

207 Pages·2007·2.77 MB·English

ABSTRACT
Title of Dissertation: STRATEGIC PRODUCT DESIGN FOR RETAIL
CHANNEL ACCEPTANCE UNDER UNCERTAINTY
AND COMPETITION

Nathan Williams, Doctor of Philosophy, 2007

Dissertation directed by: Shapour Azarm, Professor
Department of Mechanical Engineering
A. J. Clark School of Engineering

P. K. Kannan, Associate Professor
Department of Marketing
R. H. Smith School of Business
Significant recent research has focused on the marriage of consumer preferences
and engineering design in order to improve profitability. However, in many markets, the
profitability of new products for manufacturers is also a significant function of the retail
channel structure through which the new products reach the ultimate customer. At the
crux of the issue is the fact that channel dominating retailers, like Home Depot, Toys R’
Us, Wal-Mart have significant power arising from their hundreds of billions of dollars of
sales revenue and have the ability to unilaterally control a manufacturer’s access to the
customers.
A product design methodology is proposed that accounts for this new and
important power asymmetry. Manufacturer’s product success as defined by profit is
affected by pricing at the retail and wholesale levels which in turn is dependent on the
channel structure, i.e., retailer monopoly or duopoly. These channel structures are
explored in this dissertation under an econometric or game theoretic framework and the
results are shown to have important implications for designers. Additional non-
traditional considerations for engineering product design such as bundling and exclusive
contracts which are typical for retail channels are also explored by integrating marketing
models with a design optimization structure. Lastly, some design methods for mitigating
uncertainty in the strategic landscape of retailer dominated channels are developed.
The dissertation has three research thrusts. Research Thrust 1 is devoted to
developing a product design optimization approach with retailer acceptance as a
probabilistic constraint on candidate designs. Slotting allowances are considered in
concert with engineering design as complimentary approaches to achieving access to
consumer markets. The retailer’s decision framework and the design optimization
approach of Thrust 1 are extended in Thrust 2 to include competitive pricing responses
from both competing manufacturers and channel controlling retailers. In Thrust 2 the
implications for product design when manufacturers face monopolistic and duopolistic
retail channels is explored as well as the design implications of an exclusive
manufacturer/retailer relationship. Finally, in Thrust 3 the prior thrusts are implemented
for multiple product categories and product bundles in order to consider synergy and
competition amongst multiple complementary designs. Under this final Thrust 3, an
approach to mitigating the risk of uncertainty in competitor design attributes is also
developed.
STRATEGIC PRODUCT DESIGN FOR
RETAIL CHANNEL ACCEPTANCE
UNDER UNCERTAINTY AND COMPETITION

by
Nathan Williams

Dissertation submitted to the Faculty of the Graduate School of the
University of Maryland, College Park in partial fulfillment
of the requirements for the degree of
Doctor of Philosophy
2007

Advisory Committee:

Professor Shapour Azarm, Co-Advisor/Chair
Associate Professor P. K. Kannan, Co-Advisor (Dean’s representative)
Professor Bilal Ayyub
Associate Professor Linda Schmidt
Associate Professor Peter Sandborn
 Copyright by

Nathan Williams

2007
To My Dear Wife, Holly
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ACKNOWLEDGEMENTS
First and foremost I would like to express my sincere gratitude to my advisors,
Dr. Shapour Azarm and Dr. P.K. Kannan. Their tremendous energy, generosity and
patience cannot be overstated. I am especially grateful for their selfless focus on
preparing me for a productive career in academia. I can only hope to provide such
wonderful guidance and inspiration to students as I embark on my career.
I would also like to thank Dr. Bilal Ayyub, Dr. Linda Schmidt, and Dr. Peter
Sandborn for serving on my dissertation committee. Their guidance and comments have
been invaluable in developing a much more focused presentation of this work. Such
effort requires significant sacrifice of time and energy on their part and I am extremely
grateful. I would like to thank the U.S. National Science foundation for its partial support
of this work through Grant CMMI0654042. Such support does not constitute an
endorsement by the funding agency of the opinions expressed in the paper.
Several of my colleagues and mentors should also be noted for their efforts and
advice during the development of this dissertation and include: Dr. Genzi Li, Mr. Vikrant
Aute, Dr. Pat Moran, Dr. Dennis Hasson, CDR Len Hamilton, Dr. Russ Smith and Dr.
Joel Schubbe. In particular, I’d like to thank Mr. Mian Li whose selfless aid could
always be relied upon. Our collaboration was the most productive and enjoyable part of
the past few years which I hope we continue in future endeavors.
I would like to thank my parents and family (Ben, Wendy, Cheryl, and Wayne)
for their encouragement. Most importantly, I’m indebted to my wife, Holly, who has
supported me through so many years of school. Her love and understanding has pushed
me past the most difficult times with enough momentum to now finish.
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TABLE OF CONTENTS

ABSTRACT....................................................................................................................................................i
LIST OF FIGURES.....................................................................................................................................vi
LIST OF TABLES.....................................................................................................................................vii
NOMENCLATURE..................................................................................................................................viii
NOMENCLATURE..................................................................................................................................viii
CHAPTER 1: INTRODUCTION............................................................................................................1
1.1 MOTIVATION AND OBJECTIVE...........................................................................................................2
1.2 RESEARCH THRUSTS..........................................................................................................................7
1.2.1 Research Thrust 1: Engineering Product Design Optimization for Retail channel
Acceptance.................................................................................................................................9
1.2.2 Research Thrust 2: Design for equilibrium Pricing in Channel Markets.............................10
1.2.3 Research Thrust 3: Multi-Category Design of Bundled Products for Retail Channels
Considering Demand Dependencies and Uncertainty in Competitive Response.....................11
1.3 ASSUMPTIONS..................................................................................................................................12
1.4 ORGANIZATION OF DISSERTATION...................................................................................................13
CHAPTER 2: DEFINITIONS AND TERMINOLOGY......................................................................15
2.1 INTRODUCTION................................................................................................................................15
2.2 MARKETING AND ECONOMICS DEFINITIONS AND TERMINOLOGIES.................................................16
2.3 MULTI-OBJECTIVE GENETIC ALGORITHM (MOGA)........................................................................20
2.4 SUMMARY........................................................................................................................................23
CHAPTER 3: ENGINEERING PRODUCT DESIGN OPTIMIZATION FOR RETAIL
CHANNEL ACCEPTANCE......................................................................................................................24
3.1 INTRODUCTION................................................................................................................................25
3.2 BOTTUM-UP DESIGN FRAMEWORK..................................................................................................29
3.3 THE RETAILER’S PRODUCT ACCEPTANCE DECISION........................................................................34
3.3.1 Computing the Retailer Value Proposition............................................................................35
3.3.2 Retail Models with Slotting Allowances................................................................................36
3.3.3 Solution to the Full Retailer Model.......................................................................................38
3.3.4 Estimation of Product Demand.............................................................................................41
3.4 THE MANUFACTURER’S DECSION....................................................................................................43
3.4.1 Parametric Production Cost Model.......................................................................................46
3.4.2 The Combined Manufacture/Retailer Model.........................................................................48
3.5 CASE STUDY APPLICATION...............................................................................................................49
3.5.1 Marketing Model Example: Angle Grinder..........................................................................49
3.5.2 Cost Model Example: Angle Grinder...................................................................................51
3.5.3 Engineering Model Demonstration: Universal motor and Bevel Gears...............................53
3.6 CASE STUDY RESULTS......................................................................................................................59
3.6.1 Tradeoffs in Manufacturer’s Profit vs. Retailer’s Acceptance..............................................61
3.6.2 Slotting Allowance Sensitivity...............................................................................................63
3.7 DISCUSSION OF APPROACH AND CASE STUDY..................................................................................64
3.7.1 Implications of Customer Preferences and Assortments on Product Design........................64
3.7.2 Importance of Retailer Acceptance Criteria to Design.........................................................66
3.7.3 Slotting Allowances: Considerations for the Firm in Design Selection................................68
3.8 SUMMARY....................................................................................................................................70
CHAPTER 4: STRATEGIC ENGINEERING PRODUCT DESIGN FOR MONOPOLISTIC AND
DUOPOLISTIC RETAIL CHANNELS....................................................................................................72
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4.1 INTRODUCTION................................................................................................................................73
4.2 MARKET STRUCTURE AND PROPOSED FRAMEWORK..........................................................................78
4.3 FROM PRODUCT DESIGN TO MARKET SHARE..................................................................................80
4.4 APPROACH TO STRATEGIC INTERACTIONS........................................................................................85
4.4.1 Pricing Framework...............................................................................................................86
4.4.2 Strategic Cases......................................................................................................................91
4.5 CASE STUDY....................................................................................................................................94
4.5.1 Optimization Approach.........................................................................................................95
4.6 DISCUSSION OF APPROACH AND CASE STUDY..................................................................................96
4.6.1 Interpretation of Manufacturer vs. Retail Profits..................................................................96
4.6.2 Comparison of Strategic Environments: Cases 1-3..............................................................98
4.6.3 Analysis of Exclusive Strategy.............................................................................................102
4.6.4 Optimal Engineering Designs.............................................................................................104
4.7 SUMMARY......................................................................................................................................107
CHAPTER 5: MULTI-CATEGORY DESIGN OF BUNDLED PRODUCTS FOR RETAIL
CHANNELS CONSIDERING DEMAND DEPENDENCIES AND UNCERTAINTY IN
COMPETITIVE RESPONSE..................................................................................................................110
5.1 INTRODUCTION..............................................................................................................................111
5.2 APPROACH TO MULTI-CATEGORY DESIGN WITH BUNDLES...........................................................115
5.2.1 Layer 1: Discrete Choice Marketing Model.......................................................................117
5.2.2 Layer 2: Retail Pricing Model............................................................................................120
5.2.3 Layer 3: Manufacturing Engineering and Pricing Model..................................................123
5.2.4 Multidisciplinary uncertainty..............................................................................................129
5.3 CASE STUDY: CORDLESS ANGLE GRINDER AND RIGHT ANGLE DRILL...........................................132
5.3.1 Nested Logit Demand Model...............................................................................................132
5.3.2 Engineering Performance Model........................................................................................136
5.3.3 Case Study Sources of Uncertainty......................................................................................141
5.4 OPTIMIZATION APPROACH.............................................................................................................143
5.5 RESULTS AND DISCUSSION............................................................................................................144
5.6 SUMMARY......................................................................................................................................147
CHAPTER 6: CONCLUSIONS...........................................................................................................149
6.1 CONCLUDING REMARKS................................................................................................................150
6.1.1 Engineering Product Design Optimization for Retail Channel Acceptance........................150
6.1.2 Strategic Engineering Product Design for Monopolistic and Duopolistic Retail Channels152
6.1.3 Multi-Category Design of Bundled Products for Retail Channels Considering Demand
Dependencies and Uncertainty in Competitive Response......................................................154
6.2 MAIN CONTRIBUTIONS..................................................................................................................156
6.3 FUTURE RESEARCH DIRECTIONS...................................................................................................160
6.3.1 Improvements in the Retailer Acceptance Criterion............................................................160
6.3.2 Improvements in Strategic Interactions...............................................................................161
6.3.3 Product Line Formulation...................................................................................................162
APPENDIX................................................................................................................................................165
APPENDIX A............................................................................................................................................165
APPENDIX B - PROOFS.............................................................................................................................166
B.1 Preparatory Material.............................................................................................................166
B.2 THEOREM 1 – Retailers’ multiproduct Nash equilibrium.......................................................167
B.3 Theorem 2 – Manufacturer’s single product Nash equilibrium.............................................173
APPENDIX C: COMPUTATIONAL ISSUES..................................................................................................178
REFERENCES..........................................................................................................................................181

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LIST OF FIGURES

Figure 1.1.1: Product Design for Dominant Retailers with Competition.....................7
Figure 1.2.1: Design Considerations for Retail Channels............................................9
Figure 1.4.1: Organization of Dissertation.................................................................14
Figure 2.3.1: Flowchart of MOGA in One Generation..............................................22
Figure 2.3.2: Solutions to Multi-Objective Problem..................................................23
Figure 3.2.1: The Bottom –Up Framework................................................................33
Figure 3.5.1: 4.5” Angle Grinder Commonly Used for Masonry and Metal Work...49
Figure 3.5.2: Engineering Components......................................................................53
Figure 3.6.1: Profit vs. Probability of Acceptance (%)..............................................62
Figure 3.6.2: Effect of Slotting Allowance................................................................64
Figure 4.2.1: Strategic Design Framework.................................................................79
Figure 4.3.1: Product Design to Market Share...........................................................82
Figure 4.4.1: Pricing Framework................................................................................87
Figure 4.5.1: Optimization Formulations...................................................................95
Figure 4.6.1: Strategic Environment Comparison......................................................98
Figure 4.6.2: Exclusive Channel Comparison..........................................................104
Figure 5.2.1: Multi Layered Design Framework......................................................116
Figure 5.2.2: Discrete Choice Design for Product Bundling....................................117
Figure 5.2.3: Retailer Pricing Layer.........................................................................120
Figure 5.2.4: Manufacturer's Bundle Design Framework........................................124
Figure 5.2.5: Nested Optimization...........................................................................128
Figure 5.2.6: MORO: Robust Optimization.............................................................131
Figure 5.2.7: Robust Optimization Topology...........................................................132
Figure 5.3.1: Design Variables.................................................................................137
Figure 5.5.1: Robust/Nominal Pareto Comparison..................................................145
Figure B1: Lemma 1.............................................................................................166
Figure C1: MNL Profit Function..........................................................................180

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LIST OF TABLES
Table 1.1.1: Dominating Retailer Profits........................................................................3
Table 3.5.1: Utility Estimates for Four Segments.........................................................50
Table 3.5.2: Example Segment Share...........................................................................51
Table 3.5.3: Engineering Design Variables..................................................................54
Table 3.5.4: Universal Motor Design Computations....................................................55
Table 3.5.5: Bevel Gear Design Computations.............................................................56
Table 3.5.6: Grinder Constraints g(x)...........................................................................57
Table 3.5.7: Customer Level Product Attributes y........................................................58
Table 3.6.1: Example Market Share..............................................................................59
Table 3.6.2: Previous and New Product Development (NPD) Comparison.................60
Table 3.6.3: Pareto Frontier of Designs........................................................................63
Table 4.5.1: Example Assortment at a Retailer.............................................................94
Table 4.6.1: Designs for Monopoly Retailer.................................................................99
Table 4.6.2: Designs for Duopoly Identical Retailers.................................................101
Table 4.6.3: Designs for Duopoly Differentiated Retailers........................................102
Table 4.6.4: Designs for Exclusive Case (Identical Duopoly)....................................103
Table 4.6.5: Pareto Designs........................................................................................106
Table 5.3.1: Grinder and Drill Category Utilities.......................................................133
Table 5.3.2: Bundle Category Utilities.......................................................................135
Table 5.3.3: Cordless Tool Mass Computations.........................................................138
Table 5.3.4: Common Constraints..............................................................................139
Table 5.3.5: Grinder and Drill Performance Constraints............................................140
Table 5.5.1: Sample of Optimal Designs....................................................................146
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