Paper Presentation: "The Strategic Role of Product Quality" by Jacobson & Aaker 1987)
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Paper Presentation: "The Strategic Role of Product Quality" by Jacobson & Aaker 1987)
- 1. Robert Jacobson & David A. Aaker The Strategic Role of Product Quality Journal of Marketing, Volume 61, October 1987 Presented by: Andreas Schwarzinger Prof. Dr. Florian Stahl Innovation Marketing – Lecture 1 Spring Term 2009 1
- 2. Jacobson & Aaker (1987): The Strategic Role of Product Quality Research Problem & Motivation Introduction Research Findings Conclusion Why study product quality? » Because it can affect your business heavily! » Some examples? Seminar „Essential Models and Theories in Marketing” Fall Term 2010 2
- 3. Jacobson & Aaker (1987): The Strategic Role of Product Quality Research Problem & Motivation Introduction Research Findings Conclusion Seminar „Essential Models and Theories in Marketing” Fall Term 2010 3
- 4. Jacobson & Aaker (1987): The Strategic Role of Product Quality Research Problem & Motivation Introduction Research Findings Conclusion Why did Jacobson & Aaker study product quality? Determine the strategic role of product quality. American firms losing markets to Japanese Prior research focused on Study by Phillips, Chang & and European brands other strategic variables like Buzzel (1983) on the impact thanks to their market share, price or of quality on ROI, market (perceived) higher advertising. share, price and cost. quality products. Seminar „Essential Models and Theories in Marketing” Fall Term 2010 4
- 5. Jacobson & Aaker (1987): The Strategic Role of Product Quality Research Problem & Motivation Introduction Research Findings Conclusion What did Phillips, Chang & Buzzel (1983) find out about quality? » Quality has no consistent direct effect on ROI. » Quality has a significant positive influence on market share. » Quality has no significant influence on cost. » Quality has is a differentiating factor that allows firms to ask higher prices. Seminar „Essential Models and Theories in Marketing” Fall Term 2010 5
- 6. Jacobson & Aaker (1987): The Strategic Role of Product Quality Research Problem & Motivation Introduction Research Findings Conclusion » Quality has no consistent direct effect on ROI. Really? » Quality has a significant positive influence on market share. What about exclusivity? » Quality has no significant influence on cost. So is higher quality for free? Seminar „Essential Models and Theories in Marketing” Fall Term 2010 6
- 7. Jacobson & Aaker (1987): The Strategic Role of Product Quality Research Methodology Introduction Research Findings Conclusion Jacobson & Aaker chose an extension of Phillips, Chang & Buzzel‘s (1983) research framework to answer the following questions: » Is product quality really an exogenous variable? Treating product quality as an endogenous variable. Control for feedback between quality and other strategic variables. » What about firm-specific effects? Make use of pooled time series cross-sectional data. Seminar „Essential Models and Theories in Marketing” Fall Term 2010 7
- 8. Jacobson & Aaker (1987): The Strategic Role of Product Quality Research Framework / Model Introduction Research Findings Conclusion How did Jacobson & Aaker try to answer these questions? » Five-equation vector autoregressive model 5 dependent variables: ROI, market share, relative price, relative cost, relative (perceived) product quality 5 independent variables: one-year lagged values for ROI, market share, relative price, relative cost, relative (perceived) product quality Model estimated for 6 business groupings: Consumer goods (also called final goods) Durable goods (e. g. cars) Consumer nondurable goods (e. g. a bottle of Coca Cola or an apple) Capital goods (e. g. factories, machineries, tools) Raw and semifinished goods (e. g. tires or radio units as parts of a car) Components and supplies (transistors or diodes as parts of electronics). Seminar „Essential Models and Theories in Marketing” Fall Term 2010 8
- 9. Jacobson & Aaker (1987): The Strategic Role of Product Quality Research Framework / Model Introduction Research Findings Conclusion in other words… The model estimates the effect of product quality on ROI, market share, price and cost, as well as the influence of these strategic variables on quality itself. Seminar „Essential Models and Theories in Marketing” Fall Term 2010 9
- 10. Jacobson & Aaker (1987): The Strategic Role of Product Quality Data & Sample Introduction Research Findings Conclusion Which data base did Jacobson & Aaker use for their empirical analysis? » PIMS SPIYR data base » 13’000 observations Seminar „Essential Models and Theories in Marketing” Fall Term 2010 10
- 11. Jacobson & Aaker (1987): The Strategic Role of Product Quality Data & Sample Introduction Research Findings Conclusion What is PIMS? » Profit Impact of Market Strategy » Initiated by General Electrics in 1960 as an empirical study » Goal: Make the different strategic business units comparable » Measuring Unit: ROI » 1972, the project was handed over to the Harvard Business school » 1976, the American Strategic Planning Institute took over the project lead » Between 1970 and 1983, about 2000 strategic business units took part Seminar „Essential Models and Theories in Marketing” Fall Term 2010 11
- 12. Jacobson & Aaker (1987): The Strategic Role of Product Quality Results of the Statistical Analysis Introduction Research Findings Conclusion Seminar „Essential Models and Theories in Marketing” Fall Term 2010 12
- 13. Jacobson & Aaker (1987): The Strategic Role of Product Quality Results of the Statistical Analysis Introduction Research Findings Conclusion Results of the empirical analysis - The effects of quality: » Quality has a direct positive effect on profitability (ROI) » Quality has a positive effect on market share. » Quality is a differentiating factor that enables firms to charge a higher relative price. » The impact of quality on cost was found to be insignificant Seminar „Essential Models and Theories in Marketing” Fall Term 2010 13
- 14. Jacobson & Aaker (1987): The Strategic Role of Product Quality Results of the Statistical Analysis Introduction Research Findings Conclusion Results of the empirical analysis – How quality is affected: » There was no evidence found of ROI influencing quality. » ROI also has a very little effect on the other business factors. » Market share does not seem to have a significant effect on quality. » Only for capital goods market share has a significant and negative impact on quality. » Price is found to have a significantly positive impact on perceived quality. » Overall, cost does not seem to have an impact on quality. Seminar „Essential Models and Theories in Marketing” Fall Term 2010 14
- 15. Jacobson & Aaker (1987): The Strategic Role of Product Quality Conclusion & Managerial Implications Introduction Research Findings Conclusion Results of the empirical analysis – How quality is affected: » There was no evidence found of ROI influencing quality. » ROI also has a very little effect on the other business factors. » Market share does not seem to have a significant effect on quality. » Only for capital goods market share has a significant and negative impact on quality. » Price is found to have a significantly positive impact on perceived quality. » Overall, cost does not seem to have an impact on quality. Seminar „Essential Models and Theories in Marketing” Fall Term 2010 15
- 16. Jacobson & Aaker (1987): The Strategic Role of Product Quality Conclusion & Managerial Implications Introduction Research Findings Conclusion SportAuto quick facts: » SportAuto is a German car magazine » Existing since 1969. » Industry-wide influence of its test results » USP: so-called Supertest » Supertest consists of several measurings on a car’s performance » Supertest is conducted at the same tracks, under the same circumstances and with the same driver all the time Seminar „Essential Models and Theories in Marketing” Fall Term 2010 16
- 17. Jacobson & Aaker (1987): The Strategic Role of Product Quality Conclusion & Managerial Implications Introduction Research Findings Conclusion Why am I telling you this? » Reason 1: Because SportAuto is my favourite private lecture. » Reason 2: Because the SportAuto Supertest, in other words, is the perfect source for objective comparisons of the performance of sports cars! » Reason 3: Because I want to show you the impact of the managerial implications of Jacobson & Aaker’s findings in a tangible way, with the helpf of a real-world example. Seminar „Essential Models and Theories in Marketing” Fall Term 2010 17
- 18. Jacobson & Aaker (1987): The Strategic Role of Product Quality Conclusion & Managerial Implications Seminar „Essential Models and Theories in Marketing” Fall Term 2010 18
- 19. Jacobson & Aaker (1987): The Strategic Role of Product Quality Conclusion & Managerial Implications Introduction Research Findings Conclusion The central question now is: Why can Aston Martin set such prices? » Performance? No, as seen. » Exclusivity? No, as Jacobson & Aaker found out. » Market share? No, Aston Martin sells just ~5000 cars / year. » Cost? No, if Aston Martin would not work as cost-efficient as the others, they would no exist anymore. » Other factors? Like Sound, Design, Desireability, …? Maybe. » Price? Obviously, there are feedback effects of price on perceived quality. The high price is a signal for high quality! Seminar „Essential Models and Theories in Marketing” Fall Term 2010 19
- 20. Jacobson & Aaker (1987): The Strategic Role of Product Quality Conclusion & Managerial Implications Introduction Research Findings Conclusion Conclusions and managerial implications: » Product quality should be treated as an endogenous strategic variable. » A firm can choose from a variety of different strategies based on quality, depending on the business setting and context. » In absence of complete information, price seems to be a signal of quality. » Products with higher quality are favored and receive a higher market share. » Higher quality tends not to be obtained as a result of increased cost. » Customers seem to place a premium on quality and are willing to reward those firms perceived as offering a quality product. Seminar „Essential Models and Theories in Marketing” Fall Term 2010 20
- 21. Jacobson & Aaker (1987): The Strategic Role of Product Quality Limitations & Future Research Introduction Research Findings Conclusion Things to keep in mind when dealing with the findings of Jacobson & Aaker: » The influence of quality on ROI seems to be different in different situations and business settings. » Higher quality tends not to be obtained as a result of increased cost. But: High cost firms can lower quality instead of raising prices, when customers are more price sensitive than quality sensitive. Firms with a cost advantage can raise quality instead of lowering prices when customers are more quality sensitive than price sensitive. » High product quality can be used to obtain a higher market share. But: This strategy could be self-defeating: Very high levels of market share could lower customers’ perceptions on quality and open the market for new entries. Seminar „Essential Models and Theories in Marketing” Fall Term 2010 21
- 22. Thank you for your attention. Prof. Dr. Florian Stahl Innovation Marketing – Lecture 1 Spring Term 2009 22
Notas del editor
- I want to welcome everybody to today‘s presentation on the articel „the strategic role of product quality“ by Jacobson & Aaker, published in 1987 in the Journal of Marketing.
- 15 15 Before I start with the actual presentation of the paper, I quickly wanted to give you a short overview and introduction to the research field of product quality and a possible answer to the question, why we should study product quality at all. The answer to this question is as simple as it is obvious: Whereas you can to some extend hide a badly performing marketing campaign or the bad moral behaviour of some of your employees, you cannot hide a bad product quality. As soon as a poorly built product reaches the market, everything is too late. Such cases then can heavily affect your business.
- 15 15 To give you some examples and maybe a current one, think of the problems Airbus currently has with ist super plane, the A380. Fisher Price, not only this year, but also in the past, had to recall several millions of toys because they could possibly be dangerous for children. And by dangerous I mean that eletric buggies could have been catching fire and burning your children away. So we‘re talking about serious quality issues. Possibly the best known example of a insufficient product quality was the Mercedes A-Class, which was tilting in the so-called Elk-Test. And last, but not least, if you google „XBOX 360 quality issues“, you even find a dedicated Wikipedia page just for the possible problems you can have with your XBOX, up to the most popular one, the so-called „ring of death“.
- 15 15 So without a doubt, product quality is a issue managers should be aware of when conducting and implementing strategic decissions. Now maybe Jacobson & Aaker’s motivation for their research paper was similar. Additionally and especially, their motivation of determine the strategic role of procut quality arose from 3 sides. On the one hand and at the time the paper was conducted, it could have been observed that more and more US firms and managers put an emphasis on product quality, because they lost markets to Japanese and European brands which were able to produce higher quality goods. You can think of Sony entering the market for consumer electronics or the invasion of Japanese automotive brands like Toyota, Honda or Mazda to the US . On the other hand, the authors explain that there already existed a variety of research on the role and the impact of other strategic variables on profitability, like for example market share, the price or the level of advertising. A comparably low amount of research could be found on the impact of product quality, though. Thirdly and as a starting point of their research, Jacobson & Aaker choose the empirical analysis of the effect of product quality by Phillips, Chang & Buzzel (1983).
- 15 15 Those authors conducted a comprehensive empirical study on the role of product quality, finding that » there is no consistent direct effect of product quality on ROI, » there is a significant positive influence of product quality on market share, » there is no significant influence of product quality on cost, » product quality is a differentiating factor that allows firms to ask higher prices. Now, I don‘t know what you currently think of those findings, but I and obviously Jacobson & Aaker found some of them pretty confusing. To give you a better understanding for the questions these findings impose, I want you to consider the automotive brand Aston Martin for the next couple of Minutes.
- 15 15 Aston Martin is a British carmaker that builds such epic cars as the Aston Martin DBS you see on this picture and which you may know from the last two James Bond movies. You know, the ones with Daniel Craig. Or for the ladies, the ones where you saw Daniel Craig coming out of the sea with all his muscles. Yeah, this one. Now, back on topic. When Philips, Chang & Buzzel say that product quality has no consistent direct effect on profitability, symbolized by Return on Investment, then I find this finding pretty worrying. Because if you take this notation to the extrem, it would mean that all efforts of firms to establish premium brands are worthless, that Aston Martin should concentrate on building small, fuel-efficient, cheap cars instead of making such beatiful to look at, but deaply impractical monsters. Also, if you think of such small and exclusive brands like Aston Martin: Do the findings of Philips, Chang & Buzzel mean that Aston Martin should exploit its obviously high perceived quality and flood the market with ist cars? Does this mean that the higher the quality, the better the cars sell? So why are there competitors like Porsche, Ferrari, Lamborghini or Maserati still around? The maybe most puzzling finding though is that quality has no significant effect on cost. What‘s the first thought that comes into your mind when you read this finding? ( ask audience )
- 15 15 I think you get the idea and see that the article by Philips, Chang & Buzzel is or was a perfect starting point for Jacobson & Aaker to go ahead and conduct their own research. What they did was taking the base model by Philips, Chang & Buzzel and enrich it by two important extensions, which is treating quality as an endogenous variable and checking for firm-specific effects. Now don‘t worry if you don‘t understand this by now, because I will explain what this all means in just 2 minutes time.
- 15 15 The model Jacobson & Aaker developed to conduct their empirical analysis was a five-equation vector autoregressive model with 5 dependent variables and five independent variables. Afterwards, they estimated their model for six business groupings. Now maybe it is easier for you to understand the model if you see its symbolization on this slide.
- 15 15 Now instead of letting you think of this equation for the next 10 minutes and wait until you are able to explain it to your neighbour or yourself, I want to give you a very short, very simple translation of these mathematical notations into one sentence: The model estimates the effect of product quality on ROI, market share, price and cost, as well as the influence of these strategic variables on quality itself. Now remember that the hypothesis or assumption of Jacobson & Aaker was that product quality actually is an endogenous variable and therefore actually is influenced by the other strategic variables as well as firm-specific effects.
- 15 15 The data base the authors used for their research was the PIMS data base, which consists of about 13‘000 observations. Now since this is not the first time in this seminar that we hear about the PIMS data base, I thought it is a good idea to give you some more information about this rather important data base in the strategic research.
- 15 15 The „Profit Impact of Market Strategy“ study was initiated by GE in 1960. As some of you may now, GE back then was a quite differentiated company with a lot of different business units and products sold. The intention of GE therefore was to find out the underlying, strategic success factors of all ist strategic business units and make them therefore comparable to each other. In 1972, the project was handed over to the Harvard Business School, which extended the study to other companies as well. Finally, in 1976, the American Strategic Planing Institute in Cambridge took over the study and invited about 200 companies with 3000 strategic business units to take part in the study. So between 1970 and 1983, a huge data base of strategic business factors was achieved, which later formed the basis for research papers like the one I am presenting you today.
- 15 15 But let‘s now go back to Jacobson & Aaker‘s paper and the main findings of their study. These findings are summarized in 5 tables like the one you find here. Now instead of letting you alone with this mashup of numbers, I will try to give you the main findings of the statistical analysis on the next slides.
- 15 15 Now basically, Jacobson & Aakon found the same results as Philips, Chang & Buzzel. Namely that quality has a positive effect on market share. Quality also has a positive influence on price and has no significant impact on cost. In contrast to Philips, Chang & Buzzel, Jacobson & Aaker found that quality actually has a direct positive effect on profitability.
- 15 15 Now this is not very interesting, because as I said, the results are pretty similar to the ones from Philips, Chang & Buzzel. On the other hand, though, Jacobson & Aakon could find some significant evidence for their assumption that quality is an endogenous variable. Although the Return on Investment, cost and the market share have no effects on quality itself, price was found to have a serious impact on perceived quality.
- 15 15 At this point I want to jump over to the conclusions of Jacobson & Aaker‘s paper and discuss a bit more in detail, what the found impact of price on perceived quality actually means for business units and future managers like you.
- 15 15 To do this, I want to introduce you to this amazing magazine, called SportAuto. In essence, it is a car magazine that has specialized itself on sports cars and now exists for about 40 years. The main part of the magazine, as you can now find out by yourself, is the so-called Supertest, which for more than 20 years now compares the performance of sports cars in an extremely scientific manner. Within the supertest, the car‘s acceleration, cornering and braking abilities, lap times on racetracks, ist aerodynamic efficiency and much more are tested.
- 15 15 No why am I telling you all this stuff? Probably because I am an utter, useless car guy that has no other hobbies than fast cars… No, the reason I am showing you the magazine is that the Supertest is a perfect mean of comparing the performance of sports cars in a scientific, objective manner. More importantly though, I want to show you the managerial implications of Jacobson & Aaker‘s paper in a tangible way.
- 15 15 What you see here is what happens if you plot a cars performance, measured by the points reached within the Supertest (80 is the maximum) against its price. If we define the quality of a sports car by the performance it is capable of delievering, which from my point of view is a pretty sensible move, then what we can see out of this graph is that Aston Martin obviously does not build the sportiest, most capable cars when it comes to objective performance, but asks an extremely high price of ist customers.
- 15 15 Now the questions which arises from this and which I want to think of with you ist why Aston Martin can ask these prices of ist customers when the objective performance of ist cars is so much worse than the one of ist competitors. Now as Jacobson & Aaker have found out, exclusivity is not a possible explanation for this observation. Since Aston Martin is so small, market share isn‘t, either. Cost also is no feasible explanation, because I think no one of us thinks that Aston Martin could survive if ist cost-structures wouldn‘t be as effective as the ones of its competitors. Now of course factors like the emotional experience of sports cars play maybe play an important part in the pricing of Aston Martin, but what I think we can clearly see from this example is that there obviously exist some feedback effects between the high prices Aston Martin asks and the perceived performance of ist products.
- 15 15 So, next to the finding that prices can be signals for quality, what else can we learn from Jacobson & Aaker‘s paper? I think the two most important ones are the ones highlighted here, namely that quality obviously is an endogenous strategic variable which should be treated as such. And that the ideal quality strategy is highly dependent on the specific business setting and context. Now of course there exist some limitations to these findings and managerial implications, which should be named before you leave the class room today and start a business based on these conclusions.
- 15 15 The first is that quality not always seems to have the same effect on profitability. A 10% improvement in maximum speed will not be a big step forward for Aston Martin, but would be a huge step for the entry-level VW Golf. Furthermore, the empirical finding that quality does not affect cost could have some other reasons which were excluded within the research, namely that firms rather chose to adjust quality than prices. And last, but not least, exclusivity could actually play an important role for perceived quality, which at the end brings us back to the Aston Martin example. Would such a car be as desireable to you if every second car you see on the street would wear an Aston Martin badge? (ask audience) Well, this actually is a question for future research, which brings me to the end of this presentation. Thank you for your attention.