Strategic Product Design for Retail Channel Acceptance under Uncertainty and Competition

Abstract

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.