PRODUCT:NEW PRODUCT DEVELOPMENT PROCESS, Idea generation, Test Marketing

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Principles of Marketing MGT301

Lesson 21

Lesson overview and learning objectives:

In last Lesson we discussed the concept regarding some individual decisions about the product like

product attributes, labeling and packaging. Today we will continue the same topic and will discuss

the process of new product development again as well.

o PRODUCT

o NEW PRODUCT DEVELOPMENT PROCESS

A. Product Line Strategies

We have looked at product strategy decisions such as branding, packaging, labeling, and support

services for individual products and services. But product strategy also calls for building a product

line. A product line is a group of products that are closely related because they function in a similar

manner, are sold to the same customer groups, are marketed through the same types of outlets, or

fall within given price ranges. For example, Nike produces several lines of athletic shoes and

Motorola produces several lines of telecommunications products. In developing product line

strategies, marketers face a

number of tough decisions.

The major product line

P ro d u c tt L iin e E x tte n s iio n s

P ro d u c L n e E x e n s o n s

decision involves product

line length--the number of

items in the product line.

Stretching

Filling

Conttractng a

ractiing a

The line is too short if the

Con

PrroductLine

P oduct Line

Adding new

Adding sizes or

manager can increase profits

items to line

styles

Drroppng ittems

D oppiing iems

by adding items; the line is

too long if the manager can

Dow nw ard

increase profits by dropping

items. Company objectives

Upw ard

and resources influence

product line length. Product

Tw o-w ay

lines tend to lengthen over

time. The sales force and

distributors may pressure the

product manager for a more complete line to satisfy their customers. Or, the manager may want to

add items to the product line to create growth in sales and profits. However, as the manager adds

items, several costs rise: design and engineering costs, inventory costs, manufacturing changeover

costs, transportation costs, and promotional costs to introduce new items. Eventually top

management calls a halt to the mushrooming product line. Unnecessary or unprofitable items will

be pruned from the line in a major effort to increase overall profitability. This pattern of

uncontrolled product line growth followed by heavy pruning is typical and may repeat itself many

times.

The company must manage its product lines carefully. It can systematically increase the length of

its product line in two ways: by stretching its line and by filling its line. Product line stretching

stretches its line downward, upward, or both ways.

Many companies initially locate at the upper end of the market and later stretch their lines

downward. A company may stretch downward to plug a market hole that otherwise would attract a

new competitor or to respond to a competitor's attack on the upper end. Or it may add low-end

products because it finds faster growth taking place in the low-end segments.

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Principles of Marketing MGT301

B. New-product development

Given the rapid changes in consumer tastes, technology, and competition, companies must

develop a steady stream of new products and services. A firm can obtain new products in two

ways. One is through acquisition--by buying a whole company, a patent, or a license to produce

someone else's product. The other is through new-product development in the company's own

research and development department. By new products we mean original products, product

improvements, product modifications, and new brands that the firm develops through its own

research and development efforts. In this chapter, we concentrate on new-product development.

New products continue to fail at a disturbing rate. One source estimates that new consumer

packaged goods (consisting mostly of line extensions) fail at a rate of 80 percent. Moreover, failure

rates for new industrial products

may be as high as 30 percent.3Why

Marketing

Business

do so many new products fail?

Strategy

Analysis

There are several reasons.

Although an idea may be good, the

Concept

market size may have been

Product

Development

Development overestimated. Perhaps the actual

and Testing

product was not designed as well

as it should have been. Or maybe

it was incorrectly positioned in the

Test

Idea

market, priced too high, or

Marketing

Screening

advertised poorly. A high-level

executive might push a favorite

idea despite poor marketing

Idea

research findings. Sometimes the

Commercialization

Generation

costs of product development are

higher than expected, and

sometimes competitors fight back harder than expected.

Because so many new products fail, companies are anxious to learn how to improve their odds of

new-product success. One way is to identify successful new products and find out what they have

in common. Another is to study new-product failures to see what lessons can be learned. Various

studies suggest that new-product success depends on developing a unique superior product, one

with higher quality, new features, and higher value in use. Another key success factor is a well-

defined product concept prior to development, in which the company carefully defines and

assesses the target market, the product requirements, and the benefits before proceeding. Other

success factors have also been suggested--senior management commitment, relentless innovation,

and a smoothly functioning new-product development process. In all, to create successful new

products, a company must understand its consumers, markets, and competitors and develop

products that deliver superior value to customers.

So companies face a problem--they must develop new products, but the odds weigh heavily

against success. The solution lies in strong new-product planning and in setting up a systematic

new-product development process for finding and growing new products. Figure shows the eight

major steps in this process.

a) Idea generation

New-product development starts with idea generation--the systematic search for new-product

ideas. A company typically has to generate many ideas in order to find a few good ones. Major

sources of new-product ideas include internal sources, customers, competitors, distributors and

suppliers, and others. Using internal sources, the company can find new ideas through formal

research and development. It can pick the brains of its executives, scientists, engineers,

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Principles of Marketing MGT301

manufacturing, and salespeople. Some companies have developed successful "entrepreneurial"

programs that encourage employees to think up and develop new-product ideas. Good new-

product ideas also come from watching and listening to customers. The company can analyze

customer questions and complaints to find new products that better solve consumer problems.

The company can conduct surveys or focus groups to learn about consumer needs and wants. Or

company engineers or salespeople can meet with and work alongside customers to get suggestions

and ideas. Finally, consumers often create new products and uses on their own, and companies can

benefit by finding these products and putting them on the market. Customers can also be a good

source of ideas for new product uses that can expand the market for and extend the life of current

products. Competitors are another good source of new-product ideas. Companies watch

competitors' ads and other communications to get clues about their new products. They buy

competing new products, take them apart to see how they work, analyze their sales, and decide

whether they should bring out a new product of their own. Finally, distributors and suppliers

contribute many good new-product ideas. Resellers are close to the market and can pass along

information about consumer problems and new-product possibilities. Suppliers can tell the

company about new concepts, techniques, and materials that can be used to develop new products.

Other idea sources include trade magazines, shows, and seminars; government agencies; new-

product consultants; advertising agencies; marketing research firms; university and commercial

laboratories; and inventors.

The search for new-product ideas should be systematic rather than haphazard. Otherwise, few new

ideas will surface and many good ideas will sputter in and die. Top management can avoid these

problems by installing an idea management system that directs the flow of new ideas to a central point

where they can be collected, reviewed, and evaluated. In setting up such a system, the company can

do any or all of the following:

· Appoint a respected senior person to be the company's idea manager.

· Create a multidisciplinary idea management committee consisting of people from R&D,

engineering, purchasing, operations, finance, and sales and marketing to meet regularly and

evaluate proposed new-product and service ideas.

· Set up a toll-free number for anyone who wants to send a new idea to the idea manager.

· Encourage all company stakeholders--employees, suppliers, distributors, dealers-- to send

their ideas to the idea manager.

· Set up formal recognition programs to reward those who contribute the best new ideas.

The idea manager approach yields two favorable outcomes. First, it helps create an innovation-

oriented company culture. It shows that top management supports, encourages, and rewards

innovation. Second, it will yield a larger number of ideas among which will be found some

especially good ones. As the system matures, ideas will flow more freely. No longer will good ideas

wither for the lack of a sounding board or a senior product advocate

b) Idea Screening

The purpose of idea generation is to create a large number of ideas. The purpose of the succeeding

stages is to reduce that number. The first idea-reducing stage is idea screening, which helps spot

good ideas and drop poor ones as soon as possible. Product development costs rise greatly in later

stages, so the company wants to go ahead only with the product ideas that will turn into profitable

products. As one marketing executive suggests, "Three executives sitting in a room can get 40

good ideas ricocheting off the wall in minutes. The challenge is getting a steady stream of good

ideas out of the labs and creativity campfires, through marketing and manufacturing, and all the

way to consumers."

Many companies require their executives to write up new-product ideas on a standard form that

can be reviewed by a new-product committee. The write-up describes the product, the target

market, and the competition. It makes some rough estimates of market size, product price,

development time and costs, manufacturing costs, and rate of return. The committee then

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Principles of Marketing MGT301

evaluates the idea against a set of general criteria such as these: Is the product truly useful to

consumers and society? Is it good for our particular company? Does it mesh well with the

company's objectives and strategies? Do we have the people, skills, and resources to make it

succeed? Does it deliver more value to customers than do competing products? Is it easy to

advertise and distribute? Many companies have well-designed systems for rating and screening

new-product ideas.

c) Concept Development and Testing

An attractive idea must be developed into a product concept. It is important to distinguish

between a product idea, a product concept, and a product image. A product idea is an idea for a

possible product that the company can see itself offering to the market. A product concept is a

detailed version of the idea stated in meaningful consumer terms. A product image is the way

consumers perceive an actual or potential product.

Concept testing calls for testing new-product concepts with groups of target consumers. The

concepts may be presented to consumers symbolically or physically For some concept tests, a

word or picture description might be sufficient. However, a more concrete and physical

presentation of the concept will increase the reliability of the concept test. Today, some marketers

are finding innovative ways to make product concepts more real to consumer subjects. For

example, some are using virtual reality to test product concepts. Virtual reality programs use

computers and sensory devices (such as gloves or goggles) to simulate reality.

d) Marketing strategy Development

The next step is marketing strategy development, designing an initial marketing strategy for

introducing this car to the market.

The marketing strategy statement consists of three parts. The first part describes the target market; the

planned product positioning; and the sales, market share, and profit goals for the first few years.

The second part of the marketing strategy statement outlines the product's planned price,

distribution, and marketing budget for the first year. The third part of the marketing strategy

statement describes the planned long-run sales, profit goals, and marketing mix strategy:

Business Analysis

Once management has decided on its product concept and marketing strategy, it can evaluate the

business attractiveness of the proposal. Business analysis involves a review of the sales, costs, and

profit projections for a new product to find out whether they satisfy the company's objectives. If

they do, the product can move to the product development stage.

To estimate sales, the company might look at the sales history of similar products and conduct

surveys of market opinion. It can then estimate minimum and maximum sales to assess the range

of risk. After preparing the sales forecast, management can estimate the expected costs and profits

for the product, including marketing, R&D, operations, accounting, and finance costs. The

company then uses the sales and costs figures to analyze the new product's financial attractiveness.

Product Development

So far, for many new-product concepts, the product may have existed only as a word description, a

drawing, or perhaps a crude mock-up. If the product concept passes the business test, it moves

into product development. Here, R&D or engineering develops the product concept into a

physical product. The product development step, however, now calls for a large jump in

investment. It will show whether the product idea can be turned into a workable product.

The R&D department will develop and test one or more physical versions of the product concept.

R&D hopes to design a prototype that will satisfy and excite consumers and that can be produced

quickly and at budgeted costs. Developing a successful prototype can take days, weeks, months, or

even years. Often, products undergo rigorous functional tests to make sure that they perform

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Principles of Marketing MGT301

safely and effectively. The prototype must have the required functional features and also convey

the intended psychological characteristics.

Test Marketing

If the product passes functional and consumer tests, the next step is test marketing, the stages at

which the product and marketing program are introduced into more realistic market settings. Test

marketing gives the marketer experience with marketing the product before going to the great

expense of full introduction. It lets the company test the product and its entire marketing

program--positioning strategy, advertising, distribution, pricing, branding and packaging, and

budget levels.

The amount of test marketing needed varies with each new product. Test marketing costs can be

enormous, and it takes time that may allow competitors to gain advantages. When the costs of

developing and introducing the product are low, or when management is already confident about

the new product, the company may do little or no test marketing. Companies often do not test-

market simple line extensions or copies of successful competitor products.

h) Commercialization

Test marketing gives management the information needed to make a final decision about whether

to launch the new product. If the company goes ahead with commercialization--introducing the

new product into the market--it will face high costs. The company will have to build or rent a

manufacturing facility. The company launching a new product must first decide on introduction

timing Next, the company must decide where to launch the new product--in a single location, a

region, the national market, or the international market. Few companies have the confidence,

capital, and capacity to launch new products into full national or international distribution. They

will develop a planned market rollout over time. In particular, small companies may enter attractive

cities or regions one at a time. Larger companies, however, may quickly introduce new models into

several regions or into the full national market.

Speeding Up New-Product Development

Many companies organize their new-product development process into the orderly sequence of

steps starting with idea generation and ending with commercialization. Under this sequential

product development approach, one company department works individually to complete its stage

of the process before passing the new product along to the next department and stage. This

orderly, step-by-step process can help bring control to complex and risky projects. But it also can

be dangerously slow. In fast-changing, highly competitive markets, such slow-but-sure product

development can result in product failures, lost sales and profits, and crumbling market positions.

"Speed to market" and reducing new-product development cycle time have become pressing

concerns to companies in all industries.

In order to get their new products to market more quickly, many companies are adopting a faster,

team-oriented approach called simultaneous (or team-based) product development. Under this

approach, company departments work closely together, overlapping the steps in the product

development process to save time and increase effectiveness. Instead of passing the new product

from department to department, the company assembles a team of people from various

departments that stay with the new product from start to finish. Such teams usually include people

from the marketing, finance, design, manufacturing, and legal departments, and even supplier and

customer companies.

Top management gives the product development team general strategic direction but no clear-cut

product idea or work plan. It challenges the team with stiff and seemingly contradictory goals--

"turn out carefully planned and superior new products, but do it quickly"--and then gives the team

whatever freedom and resources it needs to meet the challenge. In the sequential process, a

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Principles of Marketing MGT301

bottleneck at one phase can seriously slow the entire project. In the simultaneous approach, if one

functional area hits snags, it works to resolve them while the team moves on.

KEY TERMS

New-product development: The development of original products, product improvements,

product modifications, and new brands through the firm's own R&D efforts.

Idea generation: The systematic search for new-product ideas.

Idea screening: screening new-product ideas in order to spot good ideas and drop poor ones as

soon as possible.

Product concept: A detailed version of the new-product idea stated in meaningful consumer

terms.

Concept testing: Testing new-product concepts with a group of target consumers to find out if

the concepts have strong consumer appeal.

Business analysis: A review of the sales, costs, and profit projections for a new product to find

out whether these factors satisfy the company's objectives.

Product development: A strategy for company growth by offering modified or new products to

current market segments. Developing the product concept into a physical product in order to

ensure that the product idea can be turned into a workable product.

Commercialization: Introducing a new product into the market.

Test marketing: The stage of new-product development in which the product and marketing

program are tested in more realistic market settings.

Sequential

S a le s a n d

P r o fits ($ )

product

development

S a le s

new-product

development

approach in which

P r o fits

one

company

department works

to complete its

T im e

stage of the process

In tr o d u c tio n

P ro d u c t

G ro w th

M a tu r ity

D e c lin e

before passing the

D e v e lo p m e n t

S ta g e

new product along

the

S a le s a n d P r o fits O v e r

th e P r o d u c t's L ife F r o m

department

and

In c e p tio n to D e m is e

stage.

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