Conjoint Analysis - 1

New Product Design

Role of design in new product development

Conjoint Analysis for product design

Kirin case

“Courtyard by Marriott”

Conjoint Analysis - 2

Where companies want to put their efforts in new product development:

Getting our new products to the market on time, as planned (76% of companies interviewed).

Improving the appeal of our new products to customers (73%).

Developing our new products faster from concept to introduction (68%).

Developing products that are easier to manufacture, sell, install, and service (61%).

Reducing costs/investments related to new product development and introduction (47%).

Reducing the payback period of our new products (47%).

Increasing the number of new products (44%)

Arthur D. Little Worldwide Survey

Conjoint Analysis - 3

Breakdown of Success Factors:Process versus Environment

Importance toSuccess (rank

order)

Factors that portrayNPD process

Factors that describeProject Setting

1 1. Product superiority as perceived bycustomers

1. Product Superiority asperceived by customers

2 2. Early and sharp product definition3 3. Quality of technological activities4 4. Technological Synergy5 5. Quality of predevelopment activities6 6. Marketing Synergy7 7. Quality of marketing activities8 8. Market attractiveness9 9. Top management support

10 10. Competitive position

Source: Robert G. Cooper, Winning at New Products (1993)

Impact of Product Superiority on Product Success

18.4

58

98

0

50

100

Su

cc

es

s r

ate

(%

)

Mkt Share11.6%

Minimal Moderate Maximal

Product Superiority

Mkt Share32.4%

Mkt Share53.5%

Success measured using four factors: (1) whether it met or exceeded management’s criteria for success, (2) the profitability level (1-10 scale), (3) market share at the endof three years, and (4) whether it met company sales and profit objectives (1-10 scale).

Source: Robert G. Cooper, Winning at New Products (1993)

Kodak -2/99 - 4

Impact of Early Product Definition on Product Success

26.2

64.285.4

0

50

100

Su

cc

es

s r

ate

(%

)

Mkt Share22.9

Poor Moderate Strong

Product Definition

Mkt Share36.5

Mkt Share37.3%

Source: Robert G. Cooper, Winning at New Products (1993)

Kodak -2/99 - 5

Impact of Market Attractiveness on Product Success

73.961.542.5

0

50

100

Su

cces

s ra

te (

%)

Mkt Share31.7

Low Moderate High

Market Attractiveness

Mkt Share33.7

Mkt Share36.5%

Source: Robert G. Cooper, Winning at New Products (1993)

Kodak -2/99 - 6

Resources Allocated at Each Stage of NPD

57

315.3

435.9

148.4

553.2

203.8

0

100

200

300

400

500

600

PredevelopmentActivities

Product development& product testing

Commercialization

Mean Expenditure($000K)

Mean Person-Days

Source: Robert G. Cooper (1993)

Kodak -2/99 - 7

Conjoint Analysis - 8

Value of Good Design

80% of a product’s manufacturing costs are incurred during the first 20% of its design (varies with product category).

Conjoint Analysis is a systematic approach for matching product design with the needs and wants of customers, especially in the early stages of the New Product Development process.

Conjoint Analysis - 9

A way to understand and incorporate the structure of customer preferences into the new product design process. In particular, it enables one to evaluate how customers make tradeoffs between various productattributes.

The basic output of conjoint analysis are:

• A numerical assessment of the relative importance that customers attach to attributes of a product category

• The value (utility) provided to customers by each potential feature of a product

What is Conjoint Analysis?

Conjoint Analysis - 10

Customer Value Assessment Procedures

CustomerValue

Attitude-Based

Direct Questions

UnconstrainedFocus groupsDirect survey questionsImportance and attitude ratingsrule-based system/AI/expert systems

Constrained/Compositional MethodsMultiattribute value analysisBenchmarking

Indirect/(Decompositional Methods)Conjoint analysisPreference Regression

Behavior-BasedChoice modelsNeural networksDiscriminant analysis

Inferential/Value-BasedInternal engineering assessmentIndirect survey questionsField value-in-use assessment

Conjoint Analysis - 11

Why is Conjoint Analysis Useful?

Designing new products that enhance customer value

Forecasting sales/market share/profit of alternative product concepts

Identifying market segments for which a given concept offers high value

Identifying the “best” concept for a target segment

Exploring impact of alternative pricing and service strategies

Demand forecasting/production planning with flexible manufacturing systems

Conjoint Analysis - 12

Measuring Importance of Attributes

When ordering a computer, how important is…Circle one

Not Very

Important Important

Price 1 2 3 4 5 6 7 8 9

Performance 1 2 3 4 5 6 7 8 9

Reliability 1 2 3 4 5 6 7 8 9

Delivery time 1 2 3 4 5 6 7 8 9

Conjoint Analysis - 13

Should we offer our business travelers more room space or a fax machine in their room?

Should we offer a shower or a bath in a hotel room?

Given a target cost for a product, should we enhance product reliability or its performance?

Should we use a steel or aluminum casing to increase customer preference for the new equipment?

How Do We Resolve These “Design” Questions?

Conjoint Analysis - 14

Measuring ImportanceUsing Conjoint Analysis

Restaurant Type Distance Formal?

1 Italian Near Yes ___

2 Italian Near No ___

3 Italian Far Yes ___

4 Italian Far No ___

5 Chinese Near Yes ___

6 Chinese Near No ___

7 Chinese Far Yes ___

8 Chinese Far No ___

Conjoint Analysis - 15

Attributes• Price (4 options)• Delivery_terms (4 options)

Perf. specs Delivery time PriceExceed by 20% 6 months $600kExceed by 5% 9 months $700kMeet specs 12 months $800kShort by 5% 15 months $900k

Delivery termsInstalled, 2-year guaranteeInstalled, 1-year guaranteeInstalled, service contractFOB seller, service contract

A total of 256 (4x4x4x4) different offerings can be designed from these options!

An Example Conjoint Study:Air Pollution Control Equipment

• Performance specs (4 options)• Delivery time (4 options)

Conjoint Analysis - 16

Data for Conjoint Analysis: Paired Comparisons

Deluxe Mid-levelmodel model

Performance specs Exceed by 20% Exceed by 5%

Delivery time 12 months 6 months

Price 700k 700k

Delivery terms Installed, 1 year Installed, service contract

Which do you prefer?

Which one would you buy?

Conjoint Analysis - 17

Example of a SophisticatedData Gathering Instrument

Profile 1

Performance specs - Exceeds by 20%Delivery time - 12 months

Price - 700kDelivery terms - Installed, 1 year

Process pollution problem - Moderate

Please estimate the percent of your processes like the one described above where youwould use the product described by this profile, and each of the products listed below.

% ProcessesTest productCompetitor ACompetitor B

Conjoint Analysis - 18

Data for Conjoint Analysis: Full-Profile Ratings or Ranks

Product Perf_spec Del_time Price Del_terms Example bundle Preferencenumber score

1 Exceed_20% 6_months $600k Inst_2yr 100

2 Exceed_20% 9_months $700k Inst_ser 80

3 Exceed_20% 12_months $800k FOB_ser 40

4 Exceed_20% 15_months $900k Inst_1yr 20

5 Exceed_5% 6_months $700k Inst_1yr 70

6 Exceed_5% 9_months $600k FOB_ser 75

7 Exceed_5% 12_months $900k Inst_ser 65

8 Exceed_5% 15_months $800k Inst_2yr 70

9 Meet_specs 6_months $700k Inst_ser 50

10 Meet_specs 9_months $900k Inst_2yr 20

11 Meet_specs 12_months $600k Inst_1yr 40

12 Meet_specs 15_months $700k FOB_ser 30

13 Short_5% 6_months $900k FOB_ser 5

14 Short_5% 9_months $800k Inst_1yr 10

15 Short_5% 12_months $700k Inst_2yr 10

16 Short_5% 15_months $600k Inst_ser 0

Conjoint Analysis - 19

Example Part Worth for Attributes

Conjoint Analysis - 20

Example Part Worths for Attribute Options

Conjoint Analysis - 21

U(P) = aijxij

k

i=1

m

j=1

P: A particular product/concept of interest

U(P): The utility associated with product P

aij: Utility associated with the jth level (j = 1, 2, 3...kj) on the ith attribute

kj: Number of levels of attribute i

m: Number of attributes

xij: 1 if the jth level of the ith attribute is present in product P, 0 otherwise

Conjoint Utility Computations

j

Conjoint Analysis - 22

The relevant market consists of products P1, P2,...PN. Some of theses may be existing products and, others concepts being evaluated.

(Assume) Each consumer will prefer to buy the product with the highest utility among those available

Then forecasted market share for products Pi is given by:

Where K is the number of consumers who participated in the study

Market Share Forecasts

MS PConsumers who prefer i the most

Kik

K( )

1

Conjoint Analysis - 23

Market consists of three products and three customers

Product

Market Share Computation (Air Pollution Control Equipment)

Waste watch Thermatrix Wahlco

Performance specs Exceed 5% Exceed 20% Meet SpecsDelivery time 9 months 9 months 6 monthsPrice $800k $900k $600k Delivery terms FOB_ser Inst_1Yr Inst_ser

Conjoint Analysis - 24

Market Share Computation:(Air Pollution Control Equipment)

Sunoco Mattel ICIBase 0 0 0 Meet specs 5 10 10Exceed 5% 35 0 40Exceed 20% 40 0 50 12 months 20 5 39 months 30 20 86 months 40 10 10$800k 5 20 2$700K 8 35 5$600K 10 50 10Inst_ser 6 5 10Inst_1Yr 8 10 20Inst_2Yr 10 20 30

Customer’s Utility

Conjoint Analysis - 25

Computed Utility for Products

Market Share Computation:(Air Pollution Control Equipment)

WasteWatch Thermatrix Wahlco

Sunoco 70 78 61

Mattel 40 30 75

ICI 50 78 40

Maximum Utility Rule: If we assume customers will only buy the product with the highest utility, the market share for Thermatrix is 2/3 and 1/3 for Wahlco.

Share of preference rule: If we assume that each customer will buy each product in proportion to its utility relative to the other products, then market shares for the three products are:

Waste Watch: 30.3% Thermatrix: 34.8 Wahlco: 34.9

Conjoint Analysis - 26

Identifying Segments based onConjoint Part Worths

Part-worth means for each option in each cluster: Option Overall CL1 CL2 ---------- ----------- ---------- -----------

Exceed_20% 17.9 4.00 27.9 Exceed_5% 17.5 4.08 27.2 Meet_specs 13.9 14.8 13.3 Short_5% 3.42 5.54 1.89 6_months 11.1 6.38 14.4 9_months 17.4 12.9 20.7 12_months 18.5 10.2 24.4 15_months 5.39 1.92 7.89 600 23.0 35.8 13.7 700 16.5 26.2 9.50 800 6.35 10.0 3.72 900 1.48 2.77 5.56 Inst_2yr 16.8 26.2 10.1 Inst_1yr 15.0 20.5 11.0 Inst_serv 6.06 5.15 6.72 FOB 2.65 1.08 3.78 ClusterProportion .419 .581

Conjoint Analysis - 27

Members in Each Segment

Segment 1 Cummins, Illinois-Tool, Mattell, Nes_Resn, Ralston

Purina, New_W-Tech, Baltimore Gas, Applied Coatings, Pharmasyn, Th_Electric, Ag_Power, Vencor, El_chem.

Segment 2 ICI, Deere, Intel, Mobil, Maytag, Air Products,

Sunoco, HP, Conagra, Kimberly Clark, Hershey, Texaco, Union Carbide, Westinghouse Electric, Dow Chemical, Boise Cascade, Kodak, El_Chem, 3M

Conjoint Analysis - 28

Kirin Case

Run traditional cluster analysis to do segmentation based on needs variables and targeting on bases variables.

Run conjoint analysis to identify segments and also the products best suited for those segments.

Interpret all your results in both strategic and tactical terms -- what should Kirin do to position itself better for the future, and with respect to the particular the current product.

Conjoint Analysis - 29

Situations Where Conjoint Analysis Might Be Valuable

The new concept involves important tradeoffs affecting design, production, marketing, or other operational variables.

Product/service is realistically decomposable into a set of basic attributes.

Product/service choice tends to be high involvement.

Factorial combinations of basic attribute levels are believable.

Desirable new-product alternatives can be synthesized from basic alternatives.

Product/service alternatives can be realistically described, either verbally or pictorially. (Otherwise, actual product formulations should be considered).

Perceptions of hypothetical combinations are reasonably homogeneous across members of the target group.