So far we have set the background to new product development decisions. Not all innovation strategies involve in-house development of new products, but where this route is selected evidence on successful new product development suggests that a systematic approach is essential. The following sequence of steps in new product development was originally suggested by the American consultants, Booz, Allen & Hamilton following research they conducted initially in 1968 and followed up in 1981. It is still in widespread use in marketing textbooks today. This enables us to outline some of the key marketing issues involved at each stage of developing a new product:
Good ideas are the life blood of new product development. This raises the question: ‘What constitutes a “good idea”?’ Evidence on the mortality rates involved in developing new products means that we need a lot of ideas before we are likely to find one that constitutes a winner. Two key aspects are involved in increasing the number of ideas for new products, namely:
Product screening for new ideas
Screening should encompass both internal company sources and external sources. The most obvious sources are those departments charged with this responsibility that include:
In some ways it is sources of ideas outside of the above departments that represent some of the richest and frequently untapped sources of new product ideas such as:
Leaf suggested a five-step approach to studying competitors’ products:
Appropriate records for all ideas put forward, but not used, should be kept for future reference. Although we have been concerned to discuss ways of generating more ideas for new products, it is important to note that quality as well as the quantity of ideas matters. The ideas need to be relevant to overall corporate objectives and strategies.
Product innovation charter
Crawford20 has suggested the notion of a ‘product innovation charter’ to ensure that idea generation is conducted within this framework. The charter specifies, as a prelude to idea generation, the goals of new product development, the product/market areas to which new product development should be aimed, and the corporate objectives towards which the new product development programme should contribute.
Risks in new product development
Product screening is a preliminary assessment of ideas with a view to determining which should be dropped and which retained for potential development. Screening is a means of increasing the quality of managerial decisions, since selection based on judgement is more likely to result in two sorts of error:
New product screening methods are used to reduce the risk, but are nevertheless imperfect since there is always an element of judgement. The use of pre-specified screening criteria and product idea rating systems, i.e. a formal screening approach, can help. We now discuss the most frequently used screening techniques.
The simplest form of screening technique is the use of a checklist of all criteria to be taken into account in evaluating the product, i.e.:
Each of these broad areas is broken down into a number of marketing sub-criteria for evaluation:
A development of the checklist approach is the use of either profiling, or merit number systems. Here the criteria to be used for assessment are given a numerical weighting according to their judged relative importance. Each new product idea is then scored against each of the pre-established criteria, say on a l to 10 basis, with 1 being a poor score and 10 the highest (i.e. a strong product idea). Scores and weightings are then multiplied to give an overall score for the product idea. A profiling system uses exactly the same approach but the weighted total scores against each criterion are presented in the form of a visual profile for each new product idea.
Screening new product ideas is inevitably subjective. Consider the breakfast cereals company which has come up with five different ideas for a new breakfast cereal, but can only afford to develop one. At a senior management meeting called to discuss the relative merits of each product the following managers are asked to select their favourite product from the five proposed and give their reasons.
With so many different views and reasons, how would one decide which product to choose? By listing each criterion used by each manager (sales potential, profit margin, ease of production, greenness and taste), we can then ask each manager to score each new product, against each criterion. The score for each can then be represented in a simple bar chart for each product. The product with the highest visual profile wins the day.
The benefit of such formal systems is that they force assumptions (and prejudices and vested interests) about new products into the open. They also induce systematic and sometimes more objective, appraisals of new product ideas, where over-enthusiasm and excitement can blind management to potential dangers.
Although we have discussed screening as the second stage in new product development, screening effectively takes place throughout the development of a new product, right up to (and after) launch. The idea of preliminary screening is to spot ‘no win’ products early, before development resources are wasted. Effective screening requires the consideration of a wide number of criteria. It is important to have a wide range of viewpoints and skills from different functions in the organization. Analysis of past failures points to over-enthusiasm of either research and development or marketing as a prime cause of ‘go-errors’.
Crawford suggests a number of functions of concept testing. It tries to identify sure losers that can be eliminated from further consideration. Presuming the concept is acceptable, the company must then obtain an estimate of the sales that the product would enjoy. This has brought some contention amongst researchers to the subject.
He states that the most common format for gathering respondents’ reactions on their likelihood of purchase form is a five-point scale:
It is customary to combine the number of people who answered that they probably or definitely would buy and to use that number as an indication of group reaction. This is called the ‘top-twoboxes’ figure.
It is not particularly important whether precisely that many people would or would not buy the product. In the first place, the product that will eventually be offered will almost certainly be different from the description offered in the interview, as much development and further testing needs to be done. However, if the company doing the research has an inventory of percentages from past studies, the figure from the current study may provide a good indicator.
Research methods in concept testing
However the specific data is presented, methods used for analysis are conventional:
Personal interviewing can be done by a one-to-one interview survey or by focus group where a creative researcher approaches a group of people in a controlled situation with a concept statement that is discussed or refined. The focus group technique is a powerful tool in the new product development process and in the hands of a skilled researcher can be used to achieve in-depth understanding of consumer behaviour, attitudes, perceptions and reactions to new product concepts Arising from the importance of concept testing, many researchers use a sequenced system of interviewing. Here they start with several focus groups, themselves in a sequence from exploratory to confirmatory.
Then for consumer products the testing is carried over into individual interviews in shopping arcades or homes; for industrial interviewing, people involved in the buying decision are interviewed on site. This research method is constructed differently to fit each situation.
Telephone interviews Using modern computer-based interviewing technology, this method is quicker and cheaper and is tending to replace traditional in-home personal interviews. It is also useful for obtaining more superficial background information. However, telephone focus groups are not very effective.
Mail Portfolios of concepts can be mailed to potential users, although sample selection and response can pose a problem because of its low response rate. This is more successful when a mail test of a new product concept is combined with a telephone follow-up.
The Internet is being increasingly used in researching new product concepts. The obvious advantage here is speed of response, but in addition its interactive nature allows new product concepts to be explored with a wider range of potential customers.
Information gathered concept testing
Exactly what information should be gathered in a concept development study is a function of the situation, but several general issues are suggested by researchers:
Advantages and limitations of concept testing
The advantages of concept testing are:
Concept testing for new products can be particularly difficult when the new product is unlike anything else on the market. In this situation it is difficult for consumers to have any frame of reference against which to judge the concept. The Red Bull drink product was completely different to any of its predecessors on the market. Products like this require careful attention to the context and application of concept testing techniques.
Marketing strategy development
If the results of the concept testing stage are encouraging, the next step in the new product development process is the formulation of preliminary marketing strategy plans for the product launch which include:
By now, the new product will have progressed to the stage where it is possible to more precisely assess its likely sales and profit potential. At this stage, few resources may have been committed to the project. However, the stage is rapidly being approached where further progress may involve substantial investment – including, for example, investment in pilot plant and the development of prototypes.
Before a decision can be made about the product development stage, a detailed analysis of the business potential of the new product is required. If these results are satisfactory, the stages of product development and market testing, preceding market launch, can take place.
As far as possible, a company must be sure that the launch of a new product will contribute to the profitability of the firm. For this reason the company should conduct an analysis of the likely financial outcome as a central issue in the ‘go’/’no go’ decision.
The approach to business analysis is to compare alternative new projects, with each other or some in-company standard, using criteria that give indications of future profitability. Like screening, business analysis is a process and not an event. Business analysis involves estimation of likely sales and profit levels. This stage precedes development of the product itself, so in later stages, particularly in test marketing, initial estimates of the business potential of the new product are likely to become firmer as information on which to base the estimates becomes clearer.
Product development will also enable more accurate cost estimates to be made, including direct and investment costs. Business analysis and test marketing can thus be thought of as a continuation of the screening process carried out earlier in the development of the product.
Business analysis requires that estimates be made for the product in three areas:
Payback period is defined as the time required to repay the initial investment, which is calculated by summing predicted successive yearly net profits until the original outlay is exceeded. Provided accurate information is used, this technique is quick and simple. However, it does not take into account the likely life of the product and cannot be an adequate measure of profitability.
Return on capital is defined as the percentage annual net profit to the net assets employed in the product. The analysis is applied to each year of the forecasted life cycle and provides a means of direct comparison with alternative investment options. Account is then taken of the changing value of money over time.
Discounted cash flow is a technique that takes into account the time value of money by effectively weighting the value of cash flows by an amount that depends on when they occur in relation to the initial investment, i.e. money received during the early part of the life cycle is considered more valuable than that received years later. This technique has gained universal acceptance as a means of investment appraisal as conventional capital investment appraisal techniques give insufficient evidence to allow the decision maker to take the development decision to the next logical stage.
There is significant difference between venture capital required to set up the development and working capital requirement needed to maintain necessary levels of marketing activity after the launch stage, so projections for working capital needs are vital. It is also essential to consider financial pressure that new product introductions can have upon the liquidity position of the company. There is a lagged effect during market development that can place a company in severe liquidity crisis, attributable to the rate of growth.
Survival through innovation, growth and competitive advantage is an interactive triangle, bounded by time. Financial implications of innovation and new product development necessitate an understanding of start-up capital and working capital needed to stay in business. It is vital that a cash budget is developed to forecast incomes and expenditures pertaining to the new project that impact on the company’s entire product portfolio.
Pre-tax profits, i.e. the bottom line, and return on capital invested are goals for achievement. The means of their attainment is through an effective budgetary control system with concurrent variance analysis based on the forecasted cash needs of the project to survive and achieve growth. Cash flow forecasting is therefore essential.
Margins can be eroded through an inability accurately to determine costs and cost behaviour in relation to output. A comprehensive understanding of fixed and variable costs in relation to projected levels of performance is vital to establish a financial control climate within which the new product development process can be nurtured. Absolute profits can be disappointing in the short term.
Therefore, objectives have to be set clearly in relation to the time horizons of the development plan to monitor progress towards targeted profits. Attention to these aspects of financial control is advised to provide a balance between marketing enthusiasm and the requirements to achieve and maintain a stable financial position for the new enterprise.
If business analysis points to a favourable decision, the next major step is product development which is where costs tend to rise substantially. Once a physical product e.g. a prototype, has been developed, further testing, both technical and consumer, should be carried out. Even at this stage an objective and critical view needs to be taken about further investment in the product.
This is the penultimate stage before full scale commercialization and launch. Here, the new product is tested in a way that involves consumers purchasing in a normal shopping situation, or in the case of a more durable product, being tested in an environment in which it is finally used (usually in the home). This process is conducted towards the end of the development process when the concept, product and marketing strategy are at a refined stage. The objective of the test marketing exercise is reduction of risk in any subsequent decisions that are made. The need for this research is to reduce the risk of a costly mistake in a national launch.
In an unusual context for new products, an embarrassing launch in recent years was that of British Airways’ new tail fin designs. British Airways felt it was time to move away from the traditional red, white and blue British flag logotype design on their aeroplane tail fins, replacing them with a series of ethnic and abstract designs designed to appeal to a more cosmopolitan and global flying public.
The result was subsequently felt to be a public relations disaster and it was universally disliked, especially by the then Prime Minister, Margaret Thatcher, who very publicly placed her handkerchief over the new tailfin design while being videoed for a news programme with a model of a British Airways plane carrying the new logo. The concept had been researched, although it would have been difficult to conduct true test marketing in this situation, but a small-scale roll-out of the new designs would probably have quickly established that consumer reaction to them was unfavourable. The argument in favour of test marketing is that it measures consumer behaviour in a real situation.
The results give an indication of overall consumer response to the marketing mix, whereas product testing measures only individual aspects. Test marketing also removes a major problem in product research, which is that the consumers know that they are being studied, and this alters responses accordingly.
By definition, the exercise takes place in an area substantially smaller than that covered by the entire market. Choice of area is dependent on the nature of the product. Since the objective is to create a scaled-down version of the national launch, test markets for products developed by major companies in the consumer field generally take place in areas defined by the target market coverage.
Increasingly, companies are looking to cut costs and time-scales of market testing by using laboratory test or simulated market tests. In industrial product markets, product user tests and dealer tests are commonplace.
The final stage of new product development is ‘commercialization’, or bringing the product to the market. If the company goes ahead with commercialization, it is likely to begin to incur its highest costs, involving as it does investment in plant and production and marketing costs. As a consequence care and planning is required if the product is to succeed: many otherwise excellent products have failed because of an inadequately managed launch phase.
Amongst key questions to be addressed at the launch stage are:
Timing of new product launches is critical: too early and the market or product may not be ready; too late and the opportunity may have passed or a competitor has arrived in the market.
A major decision at the launch stage is the geographical coverage of the launch e.g. should it be on a local/regional basis first or national or even international? This decision involves selection and timing of areas for the launch. In some cases it pays to go first for the more profitable segments of the market only. In others, circumstances will dictate an all-over launch attack to cover the whole market simultaneously. Critical to this decision are company resources and the existence or absence of competitors i.e. how quickly might they move in?
By this stage a detailed plan of attack for the launch should be drawn up, including sales forecasts, budgets, allocation of resources and detailed timings. Most important at this stage is an understanding of target markets and the processes of diffusion and adoption.
These key issues must be resolved at the launch stage right as they provide the platform on which the product’s future performance will be built. As Green et al.23 have shown, changes to the product’s competitive position after entry may be very difficult and expensive to achieve. Because of this, they have developed an ‘Entry Strategy Performance Model’ which attempts to capture what they feel are some of the key determinants of performance for a new product and which must be considered at the entry and commercialization stage.
Diffusion and adoption of innovations
The adoption process relates to the stages that every prospect for a new product has to pass through in terms of their buying perceptions i.e.:
These are important processes, particularly in marketing communications. If a prospect has already passed through the awareness stage of adoption, then advertising copy must seek to encourage interest in the product or brand.
Individuals differ in their attitudes towards new product acceptance. Of particular relevance to the new product market are the ‘innovator’ and ‘early adopter’ categories. By definition these are the first to adopt new products and services and so represent prime market targets (Munnukka24). Little evidence has emerged to support the notion of a general ized attitude to innovativeness as it tends to be product specific, although if a company can identify likely innovators within a product market, initial marketing programmes should be targeted at this group. Consumers can be grouped into five ‘adopter categories’, each of which has distinct characteristics, so specific strategies need to be formulated that suit individual needs of each group at a given time.
The marketing of a product should be seen in as many dimensions as possible e.g. the ‘early majority’ will require a specific approach to advertising, pricing and distribution. Competitors will be employing the marketing mix in a similar way and will, in turn, create market conditions that require decisions and action of a strategic nature, which in this case should be relevant to the ‘growth’ stage of the product life cycle.
An entry strategy performance model
The following typifies customer characteristics in each group:
Diffusion processes relate to the speed and extent of take-up of a new product. In most circumstances the new product marketer is interested in securing the widest adoption at the highest rate. Clearly, diffusion is related to the adoption process of individual customers, but five particular product characteristics tend to favour a more rapid and extensive adoption and diffusion process:
New product development and innovation
In an area of marketing that is characterized by change, in recent years a number of key developments have taken place regarding the management of new product development and innovation. In part, these developments reflect improvements in our knowledge regarding key factors in managing this process more successfully. In part, they reflect changes in the competitive and market environment. Some of the more important of these developments are now discussed.
Design and new product development
Design of a product is a major source of product differentiation in a competitive marketplace. The importance of design in new product success has long been recognized by some, but not since the 1930s has design been so strategically used to gain advantage in the marketplace. Block suggests that distinctive design can render older competitors obsolete. He suggests that more durable product designs can have an impact on both users and non-users for many years.
To be durable, a product design does not have to be complicated; a good product design is one that satisfies the needs of the customer and makes a product eye-catching in the marketplace. A company recognized for its design skills, which are a major facet of its marketing success, is the Apple Corporation.
As well as helping to differentiate a company’s products from those of competitors, the design process determines product attributes such as functional capabilities and product lifespan. Price shows how the life cycle cost of a product is significantly influenced by how it is designed and this affects ease of manufacture and serviceability.
Simplifying design results in benefits like reduced costs and marketing benefits of improved quality and potentially shorter product development lead times. Lee and Sasser have suggested that the total cost of producing and delivering a product is determined by the design. At the time of design completion only 5 per cent of the budget for new product development may have been spent, but 80 per cent of the remaining budget has been committed.
How products are designed has changed significantly in recent years. Customer-focused designs have replaced the expensive, slow, product-oriented, engineer-dominated design processes of the past. Neff28 proposed that quality function deployment (QFD) be introduced to ensure customers’ ideas are incorporated into the product design process from the outset. Marketing has the responsibility of relating customer requirements to technical departments including design, so in a well run organization marketing research should be used to evaluate the marketability of new designs at an early stage.
Customer requirements should be translated into technical requirements at each stage of product development, but it is at the early design stages that they are most important.Competitive benchmarking is also an approach that can be used to ensure that proposed new product designs improve on those of competitors in aspects which have greatest importance and value to customers. The effect of QFD requires far-reaching changes in how a company operates with respect to design and new product development.
In essence it requires different functional groups to interact simultaneously, to identify and solve problems through greater teamwork and communication, particularly between marketing and design functions. An example of how QFD can be used in new product design and development is outlined by Lockomy and Khurana.29 In particular, they stress the significance of the role of QFD in integrating functions horizontally through the process of design and new product development.
In the diagram we can see that quality function deployment starts at the beginning of the process of new product development, and as explained, centres on identifying customer needs. QFD then helps translate these needs through each stage of the design and development process including manufacturing and production.
The idea is to ensure that customer needs and wants remain paramount in each and every successive stage of the process right up to and including production. It is suggested that one of the key advantages of implementing a system of QFD is that ‘a pioneer’ in a market can charge premium prices in the early years of a product’s life cycle, and then use process improvement initiatives to generate savings in later years.
Product development cycle and quality function deployment (QFD) key events
Overall, effective management of the design process is essential if products are to compete successfully in the marketplace. Most companies realize this and have elevated their design function to a more important role in the process of innovation than was afforded in previous years.
Speed and flexibility in the new product development Process
With competitive environments changing rapidly to meet changes in markets, technologies, and user needs, product life cycles have become shorter. There is an increased premium on speed and flexibility in managing new product development. Because of this, companies have sought to find ways of improving their performance with respect to these attributes and the most important development in this respect has been to move from the traditional sequential approach to product design and development to one which is characterized by shorter, overlapping phases between the different stages of new product development and with interaction and feedback from cross-functional and multi-functional areas. Takeuchi and Noanaka30 suggested a holistic approach to new product development where several phases of development overlap.
The process represents the traditional sequential process of new product development with each functional area completing its part in the process independently before passing the project on to the next department in the sequence. For example, the first department might be R&D with ideas for a new product.
These ideas are then passed onto, say, the design department who translate them into a preliminary design. The design is then passed to production to manufacture and finally the marketing department comes up with plans for marketing the new product. This is a slow process as work on one stage cannot take place until the previous stage has been completed and ‘signed off’. In the process we are beginning to see some overlap between the stages. Each stage is still managed independently and in sequence, but there is beginning to be communication between one department and the next in the process. the stages overlap. There is teamwork and communication.
Responsibilities for each stage are still divided, but work on production and marketing plans might begin earlier; indeed, while R&D and design work is still ongoing. Clearly, this reduces the amount of time needed for developing new products.
Sequential (A) versus overlapping (B and C) phases of new product development
With the sequential approach to product development, the new product goes through each phase in a step-by-step manner, moving from phase to phase only after all requirements of each phase have been completed. The ‘Type B approach’ has moved from the traditional sequential approach to a process where development overlaps at the borders of each phase.
The final truly holistic approach shown in Type C is where the different phases of product development run together. This inevitably means an end to functions being specialized, where marketing examines customer needs, engineers produce designs and production builds the product. This Type C process is akin to running a relay race with each function passing the baton from one to another, rather the new product development process being organized around multi-functional teams who take charge of the product development process, developing products, manufacturing processes and marketing plans simultaneously to collapse time.
The increased speed of product development to which this gives rise can represent a major source of competitive advantage. For example, Ray31 cites the case of Canon. In the early 1980s Canon’s top management set an objective of reducing product development cost and time by 50 per cent. Ultimately, Canon reduced its development costs by 30 per cent and achieved its objective of reducing time to market by 50 per cent. This enabled Canon to increase its market share by 10 per cent over a ten-year period. Similarly, when Yamaha threatened Honda’s leadership in the motor cycle market, Honda unleashed 30 new motor cycle models within a six-month period, effectively thwarting the Yamaha threat.
Similarly, Brassington and Pettit32 cite the example of Renault. By bringing all new product development activities for a new model into a ‘technocentre’, Renault reduced the time and the costs of new product development. They suggest that costs for Renault have been cut by up to 25 per cent and development times for new products reduced from nearly eight years to just three.
Inter-company collaboration in new product development
As products become more complex, design and manufacturing requires more resources, so some companies are turning towards collaboration when developing new products. Each collaborating company concentrates on activities that reflect their competencies so the product development process is shared between the different members of the supply chain. Collaboration is increasingly being promoted as an effective strategy in dealing with some of the more complex aspects of product development.
Littler and Leverick33 suggest that collaboration offers a means to secure access to technologies, skills and information, to share costs and risks of product development and again reduce the time taken to develop products. Styles34 contends that pooling resources and capabilities can generate synergistic growth between organizations in terms of developing a current product or service, or through the creation of an entirely new venture. Collaboration between different companies for new product development has been increasing in recent years in addition to licensing, joint ventures and strategic alliances.
This is particularly the case for new technology and high cost/high risk products. A successful example of a strategic alliance between companies to develop new technology and products was that described earlier in this chapter, where co-operation between Kodak, Fujifilm, Minolta, Nikon and Canon led to the development of the Advanced Photographic System (APS). This was a new type of film that was easier to use, load and change than conventional 35mm and other format films. These companies combined to share development costs up to the point where the technology was proven. They then went their separate ways in developing specific products and features on cameras incorporating the new technology. The technology would probably never have been developed unilaterally by individual companies in the industry.
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