Introducing New Market Offerings
After reading this chapter, students should:
12) Know what challenges a company faces in developing new products
13) Know what organizational structures are used to manage new-product development
14) Know what are the main stages in developing new products
15) Know what is the best way to set up the new product development process
16) Know what factors affect the rate of diffusion and consumer adoption of newly launched products
DETAILED CHAPTER OUTLINE
Companies need to grow their revenue over time by developing new products and expanding into new markets. New product development shapes the company’s future. Improved or replacement products and services can maintain or build sales; new-to-the-world products and services can transform industries and companies and change lives. But the low success rate of new products and services points to the many challenges involved. More and more companies are doing more than just talking about innovation. They are fundamentally changing the way they develop their new products and services.
Firms all over the world are trying to come up with creative ways to develop even better new products and services, faster and more efficiently. Marketers are playing a key role in the development of new products by identifying and evaluating new-product ideas and working with R&D and other areas in every stage of development.
17) NEW PRODUCT OPTIONS
19) There are a variety of types of new products and ways to create them. A company can add new products through acquisition or development.
A) The acquisition route can take three forms:
P) The company can buy other companies.
Q) It can acquire patents from other companies.
R) It can buy a license or franchise from another company.
B) The development route can take two forms:
10) It can develop new products in its own laboratories called organic growth
11) It can contract with independent researchers or new-product development firms to develop new products.
Types of New Products
There are six categories of new products:
(xii) New-to-the-world products
(xiii) New product lines
(xiv) Additions to existing product lines
(xv) Improvements and revisions of existing products
(xvii) Cost Reductions.
A) Fewer than 10 to 15 percent of all new products are truly innovative and new to the world.
B) These products involve the greatest cost and risk because they are new to both the company and the marketplace.
11) Most new-product activity is devoted to improving existing products.
D) Many high-tech firms strive for radical innovation
CHALLENGES IN NEW PRODUCT DEVELOPMENT
New-product introductions have accelerated in recent years. In many industries, the time it takes to bring a product to market has been cut in half.
The Innovative Imperative
New-product introductions have accelerated in recent years
In an economy of rapid change, continuous innovation is a necessity
Companies that fail to develop new products put themselves at risk.
New Product Success
Most established companies focus on incremental innovation.
Newer companies create disruptive technologies.
Established companies can be slow to react or invest in these disruptive technologies because they threaten their investment.
Incumbent firms must carefully monitor the preferences of both customers and non-customers over time and uncover evolving, difficult-to-articulate customer needs.
New Product Failure: New-product development can be quite risky.
17) New products continue to fail at a disturbing rate:
1. Around 95 percent in the United States
2. Around 90 percent in Europe
New products can fail for many reasons:
12) Shortage of important ideas in certain areas
13) Fragmented markets
14) Social and governmental constraints
15) Cost of development
16) Capital shortages
17) Shorter required development time
18) Shorter product life cycles
Many companies today use customer-driven engineering to design new products.
Customer-driven engineering attaches high importance to incorporating customer preferences in the final design.
New product development requires senior management to define business domain, product categories, and specific criteria
Budgeting for New-Product Development
Senior management must decide how much to budget for new-product development.
O) Some companies solve this problem by financing as many projects as possible, hoping to achieve a few winners.
P) Others apply conventional percentage of sales figures.
Q) Spend what the competition does.
R) ) Some companies use the stage-gate system to manage the innovation process.
1) The gatekeepers make one of four decisions at each stage of the process:
E) The process can be depicted as a funnel.
F) Many firms use a spiral development process that recognizes the value of returning to an earlier stage to make improvements before moving forward.
MANAGING THE DEVELOPMENT PROCESS: IDEAS
The new product development process starts with the search for ideas.
New product ideas can come from interacting with various groups and from using creativity-generating techniques
Interacting with Others
Ideas for new products can come from many sources, such as customers, scientists, competitors, employees, channel members, and top management.
S) Customer needs and wants are the logical place to start the search.
T) One-on-one interviews and focus group discussions can explore product needs and reactions.
C) Technical companies can learn a great deal by studying customers who make the most advance use of the company’s products and who recognize the need for improvements before other customers do.
T) Employees throughout the company can be a source of ideas for improving production, products, and services.
E) Companies can also find good ideas by researching competitors’ products and services.
Submit new ideas to an internal idea manager.
Here is a sampling of techniques for stimulating creativity in individuals and groups.
20) Attribute listing
21) Forced relationships
22) Morphological analysis
23) Reverse assumption analysis
24) New contexts
G) Increasingly, new product ideas arise from lateral marketing that combines two product concepts or ideas to create a new offering.
21. Idea Screening
A company should motivate its employees to submit new ideas to an idea manager. Ideas should be written down and reviewed each week by an idea committee
A) The company then sorts the proposed ideas into three groups:
P) Promising ideas
Q) Marginal ideas
B) A DROP-error occurs when the company dismisses an otherwise good idea.
1) It is extremely easy to find fault with other people’s ideas.
14) A GO-error occurs when the company permits a poor idea to move into development and commercialization.
15) An absolute product failure loses money, because its sales do not cover variable costs.
16) A partial product failure loses money, but its sales cover all its variable costs and some of its fixed costs.
17) A relative product failure yields a profit that is less than the company’s target rate of return.
18) The purpose of screening is to drop poor ideas as early as possible.
1) The rationale is that product-development costs rise substantially with each successive development stage.
19) Most companies require new-product ideas to be described on a standard form that can be reviewed by a new-product committee.
20) The executive committee then reviews each idea against a set of criteria.
21) The surviving ideas can be rated using a weighted-index method.
K) As the idea moves through development, the company will constantly need to revise its estimate of the product’s overall probability of success using the following formula:
Overall Probability Probability of Probability of
Probability = of technical X commercialization X economic
of Success completion given technical success given
MANAGING THE DEVELOPMENT PROCESS: CONCEPT TO STRATEGY
Attractive ideas must be refined into testable product concepts.
M) A product idea is a possible product the company might offer to the market.
N) A product concept is an elaborated version of the idea expressed in consumer terms.
Concept Development and Testing
A product idea can be turned into several concepts.
A) Questions to ask include:
20) Who will use this product?
21) What primary benefit should this product provide?
22) When will people consume this product?
B) The answers to these questions will form several concepts:
13) Concept 1
14) Concept 2
15) Concept 3
C) Each concept represents a category concept that defines the product’s competition.
D) Next, the product concept has to be turned into a brand concept.
Concept testing involves presenting the product concept to target consumers and getting their reactions. The concepts can be presented symbolically or physically.
In the past, creating physical prototypes was costly and time-consuming.
Today firms can use rapid prototyping to design products.
Companies are also using virtual reality to test product concepts.
Concept testing entails presenting consumers with an elaborated version of the concept.
After receiving information, researchers measure product dimensions by having consumers respond to the following:
)A Communicability and believability
)B Need level
)C Gap level
)D Perceived value
)E Purchase intention
)F User targets, purchase occasions, purchasing frequency
F) The respondents’ answers indicate whether the concept has:
17) A broad consumer appeal
18) What products this new product competes against
19) Which consumers are the best targets
Consumers’ preferences for alternative product concepts can be measured through conjoint analysis, a method for deriving the utility values that consumers attach to varying levels of a product’s attributes.
N) Respondents are shown different hypothetical offers formed by combining varying levels of the attributes, then asked to rank the various offers.
O) Management can identify the most appealing offer and the estimated market share and profit the company might realize.
C) The marketer now uses a statistical program to derive the consumer’s utility functions for each of the five attributes.
W) The higher the utility, the stronger the consumer’s preference for that level of attribute
X) Clearly, this consumer sees price and package design as the most important attributes.
y. When preference data are collected from a sufficient sample of target consumers, the data can be used to estimate the market share any specific offer is likely to achieve, given any assumptions about competitive response.
z. The most customer-appealing offer is not always the most profitable offer to make.
aa. Conjoint analysis has become one of the most popular concept-development and testing tools.
Marketing Strategy Development
Following a successful concept test, the new-product manager will develop a preliminary strategy plan for introducing the new product into the market
A) The plan consists of three parts
1) The first part describes the:
19) Target market’s size
22) Planned product’s positioning
24) Market share
25) Profit goals in the first few years
2) The second part outlines
13. Planned price
14. Distribution strategy
15. Marketing budget for the first year
3) The third part describes the
Long-run sales and profit goals
Marketing-mix strategy over time
13) Business Analysis
After management develops the product concept and marketing strategy, it can evaluate the proposal’s business attractiveness. Management needs to prepare sales, cost, and profit projections to determine whether they satisfy company objectives. If it does, then the concept can move into the development stage.
Estimating Total Sales
Total estimated sales are the sum of estimated first-time sales, replacement sales, and repeat sales. Sales-estimation methods depend on whether the product is a one-time purchase, an infrequently purchased product, or a frequently purchased product.
a. Infrequently purchased products exhibit replacement cycles dictated by physical wearing out or by obsolescence.
B) Frequently purchased products have product life cycles sales.
N) In estimating sales, the manager’s first task is to estimate first-time purchases of the new product in each period.
O) To estimate replacement sales, management has to research the product’s survival-age distribution.
P) Because replacement sales are difficult to estimate before the product is in use, some manufacturers base the decision to launch a new product solely on the estimate of first-time sales.
Q) For a frequently purchased new-product, the seller has to estimate repeat sales as well as first-time sales.
Estimating Costs and Profits
Costs are estimated by the R&D, manufacturing, marketing, and finance departments.
The payback period here is approximately three and a half years.
Management has to decide whether to risk a maximum investment loss of $4.6 million and a possible payback period of three and a half years.
Companies use other financial measures to evaluate the merit of a new-product proposal.
The simplest is breakeven analysis.
The more complex method is risk analysis.
MANAGING THE DEVELOPMENT PROCESS: DEVELOPMENT TO COMMERCIALIZATION
At this stage, the company will determine whether the product idea can translate into a technically and commercially feasible product.
The job of translating target customer requirements into a working prototype is helped by
a set of methods known as quality function deployment (QFD).
A) This methodology takes the list of desired customer attributes (CAs) and turns them into:
17) A list of engineering attributes (EAs).
18) A major contribution of QFD is that it improves communication between marketers, engineers, and the manufacturing people.
The R&D department will develop one or more physical versions of the product concept.
A) Its goal is to find a prototype that:
16) Embodies the key attributes described in the product-concept statement.
17) Performs safely under normal use and conditions
18) Can be produced within the budgeted manufacturing costs.
B) With the emergence of the Web, there is a need for more rapid prototyping and more flexible development processes.
C) Lab scientists must also communicate the products psychological aspects through physical cues.
1) Marketers need to supply lab people with information on what attributes consumers seek and how consumers judge whether these attributes are present.
When the prototypes are ready, they must be put through rigorous functional tests and consumer tests.
A) Alpha testing is a name given to testing the product within the company.
b. Beta testing is testing the product with customers.
C) Consumer testing can take several forms:
1) Bringing consumers into the laboratory
2) Give them samples to use in their homes.
D) Consumer preferences can be measured in several ways:
The rank-order method
The paired-comparison method
The monadic-rating method
The new product is ready to be introduced into an authentic setting with a brand name and packaging, to learn how large the market is, and how consumers and dealers react to handling, using, and repurchasing the product.
Not all companies undertake market testing.
Many companies believe that market testing can yield valuable information about buyers, dealers, marketing program effectiveness, and market potential.
The amount of market testing is influenced by the investment cost, risk on the one hand, and time pressure and research on the other.
High investment—high-risk products, where the chance of failure is high, must be market tested.
High-risk products, those that create new-product categories or have novel features warrant more market testing than modified products.
Consumer-Goods Market Testing
A) In testing consumer products, the company seeks to estimate four variables:
Q) First repeat
S) Purchase frequency
Here are four major methods of consumer-goods market testing, from the least to most costly:
1) Sales-Wave Research
In sales-wave research, consumers who initially try the product at no cost are re-offered the product, or a competitor’s product, at slightly reduced prices.
13) They might be offered the product as many as five times (sales wave) with the company noting how many customers selected the product again and their reported levels of satisfaction.
14) Sales-wave research can also expose consumers to one or more advertising concepts to see the impact of that advertising on repeat purchase.
15) Sales-wave research can be:
p. Implemented quickly
q. Conducted with a fair amount of security
r. Carried out without final packaging and advertising
D) It does not indicate what trial rates would be achieved with different sales-promotion incentives.
E) Nor does it indicate the brand’s power to gain distribution and favorable shelf positioning.
2) Simulated Test Marketing
Simulated test marketing calls for finding 30 to 40 qualified shoppers and questioning them about brand familiarity and preferences in a specific product category.
J) These people are then invited to a brief screening of both well-known and new commercials or print ads.
K) Consumers receive a small amount of money and are invited into a store where they may buy any items they wish.
L) The company notes how many consumers buy the new brand and competing brands.
M) This provides a measure of the ad’s relative effectiveness against competing ads in stimulating trial.
N) This method gives fairly accurate results on advertising effectiveness and trial rates in a shorter period of time.
O) The results are incorporated into new-product forecasting models to project ultimate sales levels.
3) Controlled Test Marketing
In this method, a research firm manages a panel of stores that will carry new products for a fee.
L) The company specifies the number of stores and the geographic locations it wants to test.
M) The research firm delivers the product and controls shelf positioning, the number of facings, displays, point-of-purchase promotions, and pricing.
N) Controlled test marketing allows the company to test the impact of in-store factors and limited advertising on buying behavior.
O) The controlled test market gives no information on how to sell the trade on carrying the new product.
P) This method also exposes the product to competition.
4) Test Markets
The ultimate way to test a new consumer product is to put it into full-blown test markets.
23) The company chooses the cities, the sales force tries to sell the trade on carrying the product and giving it good shelf exposure.
24) The company puts on a full advertising and promotion campaign.
25) The company can also test alternative marketing plans by varying the marketing program in different cities.
26) Management faces several decisions:
R) How many test cities
S) Which cities
T) Length of test
U) What information
V) What action to take
27) In spite of its benefits, many companies today skip test marketing and rely on faster and more economical testing methods.
Business-Goods Market Testing
Business goods can also benefit from market testing.
29) Expensive industrial goods and new technologies will normally undergo alpha and beta testing (with vendors).
30) A second common test method for business goods is to introduce the new product at trade shows.
31) New industrial products can be tested in distributor and dealer display rooms.
32) Industrial manufacturers come close to using full test marketing when they give a limited supply of the product to the sales force to sell in a limited number of areas that receive promotion support and printed catalog sheets.
If the company goes ahead with commercialization, it will face its biggest costs to date.
The company will have to contract for manufacturers or build or rent a full-scale manufacturing facility.
Another major cost is marketing.
In commercializing a new product, market-entry timing is critical. The company faces three choices:
17) First entry
18) Parallel entry
19) Late entry
20) The timing decision involves additional considerations:
u. If the new product replaces an older product
v. If the product is seasonal
w. Waiting for a “killer application” to occur
E) Complicating new product launches, many companies are encountering competitive “design-arounds”—rivals are imitating inventions but making their own versions just different enough to avoid patent infringement and the need to pay royalties.
Where (Geographic Strategy)
The company must decide whether to launch the new product in a single locality, a region, several regions, the national market, or the international market. Most will develop a planned rollout over time.
O) Small companies will select an attractive city and put on a blitz campaign, they will enter other cities one at a time.
P) Larger companies will introduce their products into a whole region and then move to the next region.
Q) Some companies will launch their products to the national market.
R) Most companies design new products to sell primarily in the domestic market.
S) If the product does well, they may decide to roll it out to other countries.
T) In choosing rollout markets, the major criteria are:
1) Market potential
2) Company’s local reputation
3) Cost of filling the pipeline
4) Cost of communications media
5) Influence of area on other areas
6) Competitive penetration
G) The presence of strong competitors will influence rollout strategy
H) With the Web connecting far-flung parts of the globe, competition is more likely to cross national borders.
To Whom (Target-Market Prospects)
Within the rollout markets, the company must target its initial distribution and promotion to the best prospect groups.
A) These would be the
L) Early adopters
M) Heavy users
N) Opinion leaders
O) Reached at a low cost
B) The company should rate the various prospect groups on these characteristics and target the best group.
How (Introductory Market Strategy)
The company must develop an action plan for introducing the new product into the rollout markets.
L) To coordinate the many activities involved in launching a new product, management can use network-planning techniques such as critical path scheduling.
M) Critical path scheduling (CPS) calls for developing a master chart showing the simultaneous and sequential activities that must take place to launch the product.
THE CONSUMER-ADOPTION PROCESS
Adoption is an individual’s decision to become a regular user of a product.
A) The consumer-adoption process is followed by the:
1) Consumer-loyalty process, is the concern of the established producer.
B) Years ago, new-product marketers used a mass-market approach to launch new products.
1) This process had two main drawbacks:
N) It called for heavy marketing expenditures.
O) It involved many wasted exposures.
C) New-product marketers now aim at consumers who are early adopters.
Stages in the Adoption Process
An innovation is any goods, service, or idea that is perceived by someone as new. Innovations take time to spread through the social system.
J) Innovation diffusion process
K) Adopters of new products have been observed to move through five stages:
C) The new-product marketers should facilitate movement through these stages.
Factors Influencing the Adoption Process
Marketers recognize the following characteristics of the adoption process: differences in individual readiness to try new products; the effect of personal influences; differing rates of adoption; and differences in organizations’ readiness to try new products.
Readiness to Try New Products and Personal Influence
In each product area, there are pioneers and early adopters
A) People can be classified into these adopter categories:
R) Early adopters
S) Early majority
T) Late majority
B) Each of the five groups must be approached with a different type of marketing if the firm wants to move its innovation through the full product life cycle.
C) Personal influence is the effect that one person has on another’s attitude or purchase probability.
L) Its significance is greater in some situations and for some individuals than for others.
M) Personal influence is more important in the evaluation stage of the adoption process than in the other stages.
N) It has more influence on late adopters than early adopters.
O) It also is more important in risky situations.
D) Companies often target innovators and early adopters with product rollouts.
Characteristics of the Innovation
Some products catch on immediately, whereas others take a long time to gain acceptance.
A) Five characteristics influence the rate of adoption of an innovation:
16) Relative advantage—the degree to which the innovation appears superior to existing products.
17) Compatibility—the degree to which the innovation matches the values and experiences of the individuals
18) Complexity—the degree to which the innovation is relatively difficult to understand or use.
19) Divisibility—the degree to which the innovation can be tried on a limited basis
20) Communicability—the degree to which the beneficial results of use are observable or describable to others.
B) Other characteristics that influence the rate of adoption are:
17) Risk and uncertainty
18) Scientific credibility
19) Social approval
C) The new-product marketer has to research all these factors and give the key ones maximum attention in designing the new-product and marketing programs.
Organizations’ Readiness to Adopt Innovations
Adoption is associated with variables in the organization’s environment, the organization itself, and the administrators.
A) Other forces come into play in trying to get a product adopted into organizations that receive:
1) The bulk of their funding from the government
B) A controversial or innovative product can be squelched by negative public opinion.