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Introduction to Systems &
Entrepreneurial Engineering
Ali Yassine Department of Industrial & Enterprise Systems Engineering University of Illinois at Urbana Champaign [email protected]
Product Value & Demand
Traditional Views of Products
Marketing Engineering
Perspective Product is a bundle of attributes
Complex assembly of components
Metrics of Success
Commercial Feasibility
Technical Feasibility
Decisions Variables
Product Attribute Targets & Price
Size, Shape, Dimensions
Engineering Design
- The goal of engineering design is the
transformation of a product concept into a
detailed product model and manufacturing
plan.
- Managers must find a way to meet technical
specifications and cost considerations.
Marketing Research
- The goal of marketing research is to provide
facts and direction to make more informed
decisions about how to create value for
consumers.
- Value is related to key product attributes
- Managers must find a way to provide value
to consumers through those attributes.
Characteristics, Design Parameters, & CV
Attributes (Automobile)
- Characteristics and Parameters - Weight - Horsepower - Steel - Type of Paint (Chemical) - Attributes - 0 ‐ 60 time - Fuel Economy - Leather Appearance - Color
Describing the product
vs.
Describing how the consumer experiences the product
Types of Design Decisions
Change in Value No Change in Value
Change in Cost
Both
(Profit Function)
Manufacturing Study
(Cost Function)
No Change in Cost
Marketing Study
(Value Function)
Seek new alternative
Functions Used to Evaluate Design
Alternatives
- Cost Functions
- Traditional Methods
- DFM cost software, purchasing history, guess
- Value Functions
- Traditional Market Research
- Direct Value Method (DVM) of Market Research
- Profit Function
- Combines cost and value functions to estimate profitability
A Simple Transaction
Seller Buyer P-C P-C (^) V-P V-P
If buyer and seller bargain with equal strength, they arrive at a price which allows them to share the net value created:
Price Agreed To = (Value + Cost)/
Source: Cook, H. E. Product Management: Value, Quality, Cost, Price, Profit and Organization. Kluwer Academic Publishers, Norwell, MA, 1997.
Importance of Value
- Customers buy products for their value.
- If price is higher than value, they will not buy.
- Value and price drive demand.
Cartel Point
Taylor Expansion about this Point
Demand
Price P (^) Ref V (^) Ref
0
DRef
Source: HE Cook, Product Management , Kluwer Academic Publishers, 1997, ©HE Cook 1997 with permission. Chapt 3, fig 3.6.
Products Differentiate in Price and
Value
Source: HE Cook, Product Management , Kluwer Academic Publishers, 1977, ©HE Cook 1977 with permission. Chapt 3, fig 3.7.
Demand
Price P (^) Ref V (^) Ref
0
DRef
Linear Approximation to Non‐
linear Curve
0
1
2
3
4
5
6
7
8
0 2 4 6 8 10 12
Demand
Price
Linear approximation
Marginal value
Baseline demand
Baseline price
D 0
P 0
V 0
Application of Demand/Price Analysis
for Mini‐van Value Trends
$40,
$42,
$44,
$46,
$48,
$50,
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
The Profit Function
V F (^) i i i i i i
I
D p c c
Y
Demand
Price
Variable cost
Fixed cost Investment amortized over Y years
Cournot‐Bertrand Pricing Theory
For S‐Model Cash Flow
2 2 2
2
2 2 2
2
2 1
2 3 1
2 1
2 3 1
i i Cmpt Cmpt i
i i Cmpt Cmpt i
N N C N N V N N C V P N N
N N C N N V N N C V P N N
δ δ δ δ δ
⎡ (^) + ⎤ (^) + ⎡ (^) + + ⎤ (^) + ⎡ (^) − ⎤ ⎡ (^) − ⎤ ⎣ ⎦ ⎣ ⎦ ⎣ ⎦⎣ ⎦ =
⎡ + ⎤ + ⎡ + + ⎤ + ⎡ − ⎤ ⎡ − ⎤ ⎣ ⎦ ⎣ ⎦ ⎣ ⎦⎣ ⎦ =
Variational form:
0
i
i
A
P
∂
∂
Theory is based upon the assumption that each
competitor i prices to maximize it cash flow A i assuming
that the other competitors will do nothing:
Result:
Guide to Understanding the Strategic Role of
Attributes
- Prepare the list of Critical to Value (CV) attributes
- Note attribute type
- Larger‐is‐Better (LIB)
- Smaller‐is‐Better (SIB)
- Nominal‐is‐Better (NIB1 & NIB2)
- Collect competitive benchmarking information
- Plot value curves w/ competitive data
Value Curve Equations
0
( ) ( ) V
V g v g f V
γ = =
[ ] [ ]
[ ] [ ]
2 2
2 2 0
I C I V I C I
g g g g f g g g g
⎢ −^ −^ − ⎥
[ ] [ ]
[ ] [ ]
2 2
2 2 (^0 )
( ) (^) I C I
I C I
V g g^ g^ g^ g Ln Ln V (^) g g g g
γ
⎛ ⎞ ⎡^ − − − ⎤ ⎜ ⎟ =^ ⎢^ ⎥ ⎝ ⎠ ⎢ −^ −^ − ⎥ ⎣ ⎦
Dimensionless value coefficient
Parabolic function
Linear plot equation used to determine GAMMA:
y (^) slope x
Multi‐attribute Value Expression
V g g g = Vv g vg vg
Dimensionless Value Curve for Interior Noise
0
1
20 40 60 80 100 120 Noise level, dB(A)
V/V 0
Best fit curve γ=0.
Ideal 40 dB(A) Base 66 dB(A) Critical 110 dB(A)
Ideal point
from human factor studies.
Critical point from human factor studies.
