Ch 12: Developing New Products

Innovation

the process by which ideas are transformed into new offerings, including products, services, processes, and branding concepts that will help firms grow

Why do firms create new products?

Why Do Firms Create New Products? Changing Customer Needs

- when they add products, services, and processes to their offerings, firms can create and deliver value more effectively by satisfying the changing needs of their current and new customers or by keeping customers from getting bored with the current product or service offering

Why Do Firms Create New Products? Market Saturation

- the longer a product exists in the marketplace, the more likely it is that the market will become saturated.

- without new products or services, the value of the firm will decline

- saturated markets also offer opportunities for a company that is willing to adopt a new process or mentality

Why Do Firms Create New Products? Managing Risk through Diversity

- thru innovation, firms often create a broader portfolio of products, which help them diversify their risk and enhance firm value better than a single product can

- more diversified portfolio can better withstand external shocks like changes in consumer preferences or intensive competitive activity

Why Do Firms Create New Products? Fashion Cycles

- In industries that rely on fashion trends and experience short product life cycles (apparel, arts, books, and software) most sales come from new products

Why Do Firms Create New Products? Improving Business Relationships

- New products do not always target end consumers; sometimes they function to improve relationships with suppliers

Diffusion of Innovation

- the process by which the use of an innovation, whether a product or a service, spreads throughout a market group over time and over various categories of adopters

- helps marketers understand the rate at which consumers are likely to adopt a new product or service

- also gives them a means to identify potential markets for their new products or services and predict their potential sales, even before they introduce the innovations

Pioneers/Breakthroughs

- New product introductions that establish a completely new market or radically change both the rules of competition and consumer preferences in a market

- market pioneers can command a greater market share over a longer time period

- Not all succeed: imitators capitalize on their weakness and gain advantage of the market

- they pave the way for the followers, who can spend less marketing effort creating demand for the product line and focus directly on creating demand for their specific brand

First Movers

- Pioneers have the advantage of being first movers: as the first to create the market or product category, they become readily recognizable to consumers and this establish a commanding and early market share lead

- tend to have less sophisticated design and may be higher prices, leaving room for better and lower priced competitive products

Why is the failure rate for new products so high?

- failure to assess the market properly by neglecting to do appropriate product testing, targeting the wrong segment, and/or poor positioning

- firms may also overextend their abilities or competencies by venturing into products or services that are inconsistent with their brand image and/or value proposition

Diffusion of Innovation Curve

- innovators, early adopters, early majority, late majority, laggards

- a few ppl buy the product or service at first, then more buy, and finally fewer ppl buy as the degree of diffusion shows

Diffusion of Innovation Curve: Innovators

- buyers who want to be the first on the block to have the new product or service

- enjoy taking risks and are highly knowledgeable

- firms that invest in the latest tech, either to use in the products or services or to make the firm more efficient are also innovators

- well informed on products

- 2.5% of the total market for a new product or service

Diffusion of Innovation Curve: Early Adaptors

- don't like to take as much risk as innovators but instead wait and purchase the product after careful review

- most go ahead and purchase bc they tend to enjoy novelty and often are regarded as the opinion leaders for particular product categories

- 12.5%

- spreads the word; crucial for bringing the other three buyer categories to the market

- if the early adaptor group is small, the number of people who ultimately adopt the innovation likely will also be small

Diffusion of Innovation Curve: Early Majority

- 34%

- few new products and services can be profitable until this large group buys them

- if this group never becomes large enough, the product fails

- don't take as much risk and wait until the bugs are worked out

- when they enter the market, the number of competitors in the marketplace usually also has reached its peak, so these buyers have many price and quality choices

- finally start to see profit

Diffusion of Innovation Curve: Late Majority

- 34%

- when they enter the market, the product has achieved its full market potential

- sales tend to level off or may be in decline when they enter the market

- finally start to see profit

Diffusion of Innovation Curve: Laggards

- 16%

- avoid change and rely on traditional products until the product is no longer available

- some case they never adopt a certain p/s

Diffusion of Innovation Theory

- Firms can predict which types of customers will buy their new product or service immediately after its introduction as well as later as the product is more and more accepted by the market

- then firms can develop effective promotion, pricing and other marketing strats to push acceptance among each customer group

- helps speed thru innovators and early adopters to get to early and late majority

Diffusion of Innovation Theory: Relative Advantage

- if a p/s is perceived to be better than substitutes, then the diffusion will be relatively quick

Diffusion of Innovation Theory: Compatibility

- a diffusion process may be faster/slower, depending on various consumer features, including international cultural differences

Diffusion of Innovation Theory: Observability

- when products are easily observed, their benefits or uses are easily communicated to others, which enhances the diffusion process

- even a great product might diffuse more slowly if people feel uncomfortable talking abt what they perceive to be involved in their personal care

Diffusion of Innovation Theory: Complexity and Trialability

- Products that are relatively less complex are also relatively easy to try

- these products will generally diffuse more quickly and lead to greater and faster adoption than will those that are not so easy to try

Product Development Process

(stages and important objectives of each stage that were stated in the diagram in the TB but the image wouldn't show up so I wrote it all out)

1. idea generation: Development of viable new product ideas

2. concept testing: Testing of the new product ideas among a set of potential customers

3. product development: Development of prototypes and/or the product

4. market testing: Testing the actual products in a few test markets

5. product launch: Full-scale commercialization of the products

6. evaluation of results: Analysis of the performance of the new products and making appropriate modifications

Product Development Process: Idea Generation

- Development of viable new product ideas

- To generate ideas for new products, a firm can use its own internal R&D efforts, collab with other firms and institutions (R&D consortia), license tech, brainstorm, outsource competitors' products and services, and/or conduct consumer research

- 7 Idea Sources: Internal R&D, R&D consortia, Licensing, Brainstorming, Outsourcing, Competitors' products, Customer Input

Product Development Process: Idea Generation: Internal R&D (Idea Source)

- firms have their own R&D departments that scientists and engineers work to solve problems and develop new ideas

- product development costs for these firms are high, but the resulting new p/s is expected to have a good chance of being a breakthrough

- R&D investments are continuous investments so they firm may lose money on a few new products

- in long run, firms home a few extremely successful new products, known as blockbusters, can generate enough revenues and profits to cover the losses of other products

- reverse innovation: turn subsidiaries in less developed markets for new product ideas

Product Development Process: Idea Generation: R&D Consortia (Idea Source)

- To develop new product ideas, firms have been joining R&D Consortia, or group of other firms and institutions, including govt and educational institutions, to explore new ideas or obtain solutions for developing new products

- R&D investments come from the group as a whole, and the participating firms and institutions share the results

- can involve pharmaceutical or high tech members whose research can cost a ton-> National Institutes of Health (NIH) sponsors med foundations to conduct research to treat rare dideases

Product Development Process: Idea Generation: Licensing (Idea Source)

- firms buy the rights to use tech or ideas from other firms thru licensing agreement

- saves high costs of in-house R&D

- firm is banking on a solution that already exists but has not been marketed

Product Development Process: Idea Generation: Brainstorming (Idea Source)

- sessions during which a group works together to generate ideas

- no idea can be immediately accepted or rejected

- moderator may channel participants' attention to specific product features and attributes, performance expectations, or packaging

- end of session: members vote on best idea or combo of ideas. then carried forward to next stage of product development

Product Development Process: Idea Generation: Outsourcing (Idea Source)

- when companies have trouble moving thru these steps alone, they outsource: hire an outside firm to help generate ideas and develop new products and services

Product Development Process: Idea Generation: Competitors' Products (Idea Source)

- a new product entry by a competitor may trigger a market opportunity for a firm, which can use reverse engineering to understand the competitor's product then bring and improved version to the market

- reverse engineering: taking apart a product, analyzing it, and creating an improved product that does not infringe on the competitor's patents, if any exist

- copycats

Product Development Process: Idea Generation: Customer Input (Idea Source)

- listening to consumer in both B2B and B2C markets

- bc customers for B2B are few, firms can follow their use of products closely and solicit suggestions and ideas to improve these products either by using a formal approach (focus groups, interview, surveys) or informal discussions

- firms design and develp team wok on these suggestions

- joint effort btwn selling firm and customer increases the probability that the customer eventually will buy the new product

- LEAD USERS: those innovative product users who modify existing products to suit their needs

Product Development Process: Concept Testing

- Concept: brief written description of the product/ service (tech, working principles, forms, visual images) What the customer needs it would satisfy

- Concept testing: the process in which the concept is presented to potential buyers or users to obtain their reactions. Reactions enable developer to estimate sales value and see if its worth future development

- is this product gonna satisfy a need that other products are not meeting

Product Development Process: Product Development

- Product Development/Product Design: a process of balancing various engineering, manufacturing, marketing, and economic considerations to develop a product's form and features or a service's features.

Product Development Process: Product Development: Prototype

- Prototype: made by engineering team. It is the first physical form or service description of new product. In rough or tentative form, that has the same properties as new product but is produced thru different manufacturing processes, sometimes even the crafted individually

Product Development Process: Product Development: Alpha vs Beta Testing

- Alpha Testing: firm attempts to determine whether the product will perform according to its design and whether it satisfies the need for which it was intended. Occurs in firms R&D department (in-house with employee groups)

- Beta Testing: uses potential consumers who examine the product prototype in a real use setting to determine its functionality, performance, potential problems, and other issues specific to its use. The firm might develop several prototype products that gives to users, then survey those users to determine whether the product worked as intended and identify any issues that need resolution (tested with consumer groups outside company)

Product Development Process: Market Testing

- test the market for the new product with a trial batch of products

- these tests can take two forms: premarket testing and test marketing

Product Development Process: Market Testing: Premarket Tests

- conducted before a p/s is brought to market to determine how many customers will try and then continue to use it

- more controlled and more private

Product Development Process: Market Testing: Test Marketing

- A method of determining the success potential of a new product; it introduces the offering to a limited geographical area prior to a national launch.

- strong predictor of a product success bc firms can study actual purchase behavior, which is more reliable that simulated tests

- costs more and takes longer

- made public, less controlled, larger

Crowdfunding as market targeting

- GE uses crowdfunding: online tool for raising money, to gauge consumer interest in potential products

- if enough ppl are willing to pay ahead of time for something, GE Appliances' FirstBuild unit will put it into production

- in not, the concept des

Product Development Process: Product Launch

- if the market testing returns with positive results, the firm is ready to introduce the product to the entire market

- req lots of financial resources and extensive coordination of all aspects of the marketing mix

- firm confirms target markets and determines how the product will be positioned. Then the firm finalizes the remaining marketing mix variables for the new product, including the marketing budget for the first year

Product Development Process: Evaluation of Results

- postlaunch review to determine whether the product and its launch were a success or failure and what additional resources or changes to the marketing mix are needed

- use panel data to improves the profitability of success during the test marketing phase of a new product introduction. Panelists scan in their receipts

Product Development Process: Evaluation of Results: measure success of a new product by three interrelated factors

-satisfaction of technical requirements

-degree of customer acceptance

-satisfaction of the firm's financial requirements

- if product is not performing sufficiently well, poor customer acceptance will result, which leads to poor financial performance

Product Life Cycle

describes the stages a new product goes through in the marketplace: introduction, growth, maturity, and decline

Product Life Cycle: Introduction Stage

- when the product category first launches and innovators start buying the product

- Sales: low; Profits: neg/low; Consumers: innovators; Competitors: one/few

- intro stage for new, innovative p/s: starts with single firm and innovators are the ones to try new offering

- sensing the viability and commercialization possibilities of some market-creating new product, other firms soon enter market with similar/improved products at lower prices

- initial losses due to high start up cots and low levels of sales rev as product starts to take off. if it does take off, profits are seen toward the end of this stage

Product Life Cycle: Growth Stage

- the product gains acceptance, demand in sales increase, and more competitors emerge in the product category

- Sales: rising; Profits: rapidly rising; Consumers: early adaptors and early majority; Competitors: few but increasing

- growing number of product adopters, rapid growth in industry sales, and inc in competitors and available product versions

- market becomes more segmented and consumer pref more varied, which inc the potential for new markets for new uses of p/s

- try to reach new customers by studying them and producing diff product variations-> goal of segmentation is to ride the rising sales trend and firmly establish the firm's brand to not be outdone by competitors

- firms not yet established stronghold in market decide to exit: industry shakeout

Product Life Cycle: Maturity Stage

- industry sales reach their peak, so firms try to rejuvenate their products by adding new features or repositioning them

- if these efforts succeed, the product achieves new life. if not... DECLINE STAGE

- Sales: peak; Profits: peak to declining; Consumers: late majority; Competitors: many

- marketing costs inc to try to defend market from competitors

- price competition bc avg price of product falls

- low prices and inc costs erode profit margins

- in later stages of maturity: market is saturated and all potential customers already have the product ( happens in devel countries)

- Tactics to increase their customer base and/or defend their market share: Entry into new markets/market segments and Development of new products

Product Life Cycle: Maturity Stage: Tactics to increase their customer base and/or defend their market share

- Entry into new markets/market segments:

--- entering new markets that are less saturated (international)

- Development of new products:

--- introduce new products with improved features or find new uses for existing products bc they need innovation and product proliferation to defend market share from competition

Product Life Cycle: Decline Stage

- Sales: declining; Profits: declining; Consumers: laggards; Competitors: few and decreasing

- either postiion themselves in niche segment of die hard consumers or those with special needs or they exist market

The shape of product life cycle curve

- In Theory: bell shaped with regard to sales and profits

- In Reality: each product or service category has its own individual shape; some move more rapidly through their product life cycles than others, depending on how different the category is from offerings currently in the market and how valuable it is to the consumer

- New products and services that consumers accept very quickly have higher consumer adoption rates very early in their product life cycles and move faster across the various stages.

Strategies Based on Product Life Cycle: Some Caveats

- most challenging part: managers don't know what shape each product's life cycle will take, so there is no way to know precisely what stage a product is in

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