Notes: New products are important to sustain growth and profits and to replace obsolete items. Companies are faced with pressure to innovate more—and more quickly. But the overall innovation initiative success rate is only 4.5 percent. The average consumer goods company introduces 70 to 80 new products per year. PepsiCo—over 200 products in a recent year, and Kellogg over 100 in the first half of 2004. Discussion/Team Activity: List some of the new products introduced recently. Examples: Food products, cleaning products, consumer electronics, etc.
Notes: The meaning of the term “new product” varies, and has several correct definitions, including those listed below. New-to-the-world products (or discontinuous innovations) create an entirely new market and are the smallest category of new products. In the past 100 years, ten of the most important include penicillin, transistor radio, polio vaccine, Mosaic, microprocessor, B/W television, plain paper copier, Alto personal computer, microwave oven, and Arpanet network. New product lines: These products allow a firm to enter an established market. Examples: Iams pet food from P & G. Additions to existing product lines: These products include new products that supplement a firm’s established product line. Examples: Huggies Pull-Ups and Pampers Easy-ups brands of disposable training pants. Improvements or revisions of existing products: The new and improved product may have significantly or slightly changed. Most products fit into the revision or improvement category. Examples: Tide formulations, Heinz EZ Squirt Ketchup. Repositioned products: These are existing products targeted at new markets or market segments. Examples: Cadillac Escalade sport-utility vehicles and CTS sedans. The average age of Cadillac buyers dropped from 64 to 59. Lower-priced products: This category refers to products that provide performance similar to competing brands at a lower price. Examples: Hewlett-Packard Laser Jet 3100 scanner/copier/printer/fax machine combination. Wal-Mart’s low-price fashions.
Notes: Results from studies of the new-product development process have concluded that companies most likely to succeed in new-product development and introduction are those that take the actions as shown on this slide. Make the long-term commitment needed to support innovation and new-product development Use a company-specific approach, driven by corporate strategy and objectives, with a well-defined new-product strategy. Capitalize on experience to achieve and maintain competitive advantage. Establish an environment conducive to achieving company-specific new-product and corporate objectives.
Notes: Most companies follow formal new-product development process, consisting of the seven steps shown here and in Exhibit 10.1. The funnel-shaped graphic highlights the fact that each stage acts as a screen to filter out unworkable ideas as the new-product development process evolves. A new-product strategy is part of the organization’s overall marketing strategy. It sharpens the focus and provides general guidelines for generating, screening, and evaluating new product ideas. It links the new-development process with the objectives of the marketing department, the business unit, and the corporation. All objectives must be consistent with one another. For each successful new product introduced, a company needs between 50 and 60 other new product ideas in the new-product development process.
On Line IDEO What are some recent innovations to come out of IDEO? Who are its clients? Which innovation do you like best? Notes: New-product ideas come from many sources within an organization and from outside an organization.
Notes: The head of R&D at Nokia offers five tips for successful new-product development.
Notes: Creativity is the source of new-product ideas. Two creative ways to generate new-product ideas are brainstorming and focus-group exercises. When brainstorming, a group thinks of unlimited ways to vary a product or solve a problem without criticism of an idea. The important concept in brainstorming is the quantity of ideas generated.
Notes: In the business analysis stage, the preliminary figures for demand, cost, sales, and profitability are calculated. In an existing product, the accuracy of revenue projections can be made using industry estimates of total market size. However, forecasting market share for a new entry is a bigger challenge. These questions are asked during the business analysis stage: * What is the likely demand for the product? * What impact would the new product have on total sales, profits, market share, and return on investment? * How would the introduction of a new product affect existing products? Would the new product cannibalize existing products? * Would current customers benefit from the product? * Would the produce enhance the image of the company’s overall product mix? * Would the new product affect current employees, such as hiring more people or reducing the size of the workforce? * What new facilities would be needed? * How might competitors respond? * What is the risk of failure? Is the company willing to take the risk? The business analysis is important because costs increase dramatically once a product idea enters the development stage.
Notes: The development stage can last a long time and is very expensive. For example: 10 years for Crest toothpaste 18 years for Minute Rice 15 years for Xerox copy machine 51 years for television Gillette introduced three shaving systems before introducing the Mach3 in 1998 and Fusion in 2006
Notes: The development process works best when all the involved areas (marketing, R&D, engineering, production, and suppliers) work together rather than sequentially. This product is known as simultaneous product development. This process allows firms to shorten the development process and reduce costs. The Internet is a useful tool for implementing SPD, particularly for global efforts. Global R&D is important because large companies have become global and focus on multiple markets. Second, companies want to tap into the world’s best talent.
On Line Merwyn Do you think test marketing can be simulated successfully? Go to Merwyn.com and read how the company uses algorithms to create test market results. If you have an idea, try it out. Do you think this is a suitable and effective substitute for real test marketing? Notes: Test marketing allows management to evaluate alternative strategies and to assess how well the various aspects of the marketing mix fit together. Cities chosen for test sites should reflect market conditions in the new product’s projected market area. Since no place is “ideal”, researchers should find locations where the demographics and purchasing habits mirror the overall market. Exhibit 10.2 provides a checklist for choosing a test market.
Online: New Product Works Not all new products are well received in the marketplace. Go to New Product Works’ Web site and read the polls for an overview of products the company expects to “hit” and some it expects to “miss.” What is your opinion of the products listed? Notes: Alternatives to traditional test marketing include: Single source research using supermarket scanner data. (Chapter 8) Typical cost: $300,000 Simulated market testing. Advertising and test product are shown to members of the target market. These people are taken to a mock or real store where their purchases are recorded. Typical cost: $25,000 to $100,000, compared to $1 million or more for full-scale test marketing. The Internet is a fast, cost-effective way to conduct test marketing. Firms utilizing this capability include Procter & Gamble.
Notes: The decision to market a product sets several tasks in motion, as shown on this slide. The time between the initial commercialization decision and the actual introduction may range from a few weeks to several years, depending on the complexity of the product. Costs of development and introduction can be staggering. Gillette spent $750 million developing MACH 3, and the first-year marketing budget was $300 million. A well-planned Internet campaign can provide new-product information, and is a cost-effective way to reach customers at a time they need a product than communication with a target market that may eventually have a need.
Notes: In consumer goods, 70 to 90 percent of all new products fail within the first year. Reasons are shown on this slide. Failure can be a matter of degree. Absolute failure occurs when a company cannot recover its development, marketing, and production costs. A relative product failure occurs when the product returns a profit but fails to achieve sales, profit, or market share goals. Discussion/Team Activity: Discuss products that have failed. Attempt to characterize the likely reasons for the failure.
Notes: The most important factor in new-product introduction is a good match between the product and marketing needs. Successful new products deliver a meaningful benefit to a large number of people and are different in a meaningful way from their intended substitutes.
Notes: Firms that experience success in new-product introductions share these characteristics: A history of listening to customers An obsession with producing the best product possible A vision of the market of the future Strong leadership A commitment to new-product development A project-based team approach to new-product development Getting every aspect of the product development process right
Notes: Increasing globalization of markets and of competition provides a reason for multinational firms to consider new-product development from a worldwide perspective. Starting with a global strategy allows a better ability to develop products that are marketable worldwide. In many multinational corporations, every product is developed for worldwide distribution, and unique market requirements are built in whenever possible. Some products need modification for global market penetration, particularly with pricing. For example, GM, Ford, Fiat, Renault, and others are working with Russian partners to product cars that sell for less than $15,000. similarly, GM, Toyota, and Volkswagen are focusing on China. Another popular theory is “think global, act local,” allowing countries more autonomy in new-product development.
Notes: By understanding how consumers learn about and adopt products, marketing managers have a better chance of successfully marketing products.
Notes: A person who buys a new product never before tried may become an adopter, a consumer who was happy enough with his/her product trial experience to use it again. The diffusion process is the process by which the adoption of an innovation spreads. Five categories of adopters participate in the diffusion process: Innovators: the first 2.5 percent who adopt the product. Many are obsessive about trying new ideas and products. Venturesome. Early adopters: the next 13.5 percent who adopt early in the product’s life cycle. They are oriented to the community and rely on group norms and values. Respect of others is important. Opinion leaders. Early majority: the next 34 percent weigh the pros and cons before adopting a new product, often collecting information and evaluating more brands than early adopters. Characterized as deliberate Late majority: the next 34 percent to adopt. This group adopts a new product because most of their friends have already adopted it. Characterized by skepticism. Laggards: the final 16 percent to adopt. Tied to tradition with heavy influence from the past. By the time laggards adopt an innovation, it has probably been outmoded. Marketers typically ignore laggards, who do not seem to be motivated by promotion and personal selling. Dominant value is tradition.
On Line: Electronic Gadget Depot Visit the Electronic Gadget Depot and shop for an Internet appliance. Choose one, and rate it on a scale of 1 to 10 for each of the product characteristics listed on this slide. How quickly do you think this innovation will be adopted based on your perception of its complexity, compatibility, advantage, observability, and trialability? Notes: Five product characteristics can be used to predict and explain the rate of acceptance and diffusion of a new product: Complexity: the more complex the product, the slower is its diffusion. Example: DVD recorders Compatibility: Incompatible products diffuse more slowly than compatible products. Example: contraceptives in countries with contradictory religious beliefs. Relative advantage: The degree to which a product is perceived as superior to existing substitutes. Example: The advantages of an MP3 player over a portable CD player. Observability: The degree to which the benefits or other results of using the products can be observed by others and communicated to target customers. Example: Fashion items and automobiles. Trialability: The degree to which a product can be tried on a limited basis. Example: It is easier to try a new toothpaste than a new automobile.
Notes: Exhibit 10.3 shows the rate of adoption of numerous audiovisual products introduced in the last 25 years. Satellite radio has been adopted more quickly than any other innovative audio product.
Notes: Two types of communication aid the diffusion process: Word-of-Mouth communication among consumers. Opinion leaders discuss new products. Some products, such as professional and health care services, rely almost solely on word-of-mouth communication for new business. Communication directly from the marketer to potential adopters: Messages directed toward early adopters should use different appeals than messages directed toward the early and late majority, or the laggards.
Notes: The product life cycle (PLC) is a widely familiar concept in marketing and is considered a useful marketing management tool. However, some critics have challenged the theoretical basis and managerial value of the PLC. The product life cycle traces the stages of a product’s acceptance from its introduction to its decline. The PLC concept can be used to analyze a brand, a product form, or a product category.
Notes: Exhibit 10.4 demonstrates the four major stages of the PLC: introduction, growth, maturity, and decline. The time a product spends in any one stage of the PLC may vary. The chart shown here is representative for a consumer durable good, such as a washer or dryer. In contrast, fad items move through the entire cycle in weeks (does anyone remember POGS?). Others, such as washers and dryers, stay in the maturity stage for decades.
Notes: Exhibit 10.5 illustrates typical life cycles for styles (such as formal, business, or casual clothing), fashions (such as miniskirts), and fads (such as leopard-print clothing). Changes in a product, its use, its image, or its positioning can extend the product’s life cycle. The PLC concept does not tell managers the length of a product’s life cycle or its duration at any stage. It is a tool to help marketers forecast future events and suggest appropriate strategies.
Notes: Exhibit 10.6 shows the PLC of TVs, based on 4.5 years of data. What conclusions can you draw about the PLC?
Notes: The introductory stage represents the full-scale launch of a new product. During the introductory stage, sales normally increase slowly. Marketing costs are high due to higher dealer margins required to obtain adequate distribution and the cost of consumer incentives to try a product. Production costs are high. Advertising expenses are high because consumers must be educated about the product’s benefits. Promotion strategy focuses on developing product awareness and informing consumers about the product’s potential benefits. Intensive personal selling is often required. Promotion of convenience products may require heavy consumer sampling and couponing. Shopping and specialty products demand educational advertising and personal selling to the final consumer.
Notes: The introductory stage of the PLC varies among European countries, as shown in this exhibit. Cultural factors seem to be largely responsible, and Scandinavians are often more open to new ideas than other European countries.
Notes: In the growth stage, sales grow at an increasing rate, many competitors enter the market, and larger companies may acquire small pioneering firms. Profits rise rapidly, peak, and begin declining as competition increases. Aggressive brand advertising and communication of the differences between brands is the preferred promotion strategy. Adequate distribution is a major key to establish a strong market position and product success.
Notes: The maturity stage begins when sales increase at a decreasing rate, and the market approaches saturation. This is normally the longest stage of the PLC. Annual models may appear during the maturity stage for shopping and specialty products. Product lines are lengthened to appeal to additional market segments. Service and repair help manufacturers distinguish their products from others. Heavy promotion is required to maintain market share. For example, consider the competitive “wars” between Coke and Pepsi, Budweiser and Miller, and McDonalds against Burger King and Wendy’s. As prices and profits continue to fall, marginal competitors drop out of the market. Niche marketers that target narrow, well-defined segments of a market emerge.
Notes: The rate of decline depends on how rapidly consumer tastes change or substitute products are adopted. Many convenience products and fad items lose their market overnight. A strategy for declining products includes elimination of nonessential marketing expenses, and the eventual product withdrawal as sales decline. Management expert Peter Drucker says that all companies should practice organized abandonment, which entails reviewing every product every 2-3 years and asking the question, “If we didn’t do this already, would we launch it now?” If the answer is no, begin the abandonment process.
Notes: Exhibit 10.8 shows the relationship between the adopter categories and the PLC. Note that the various categories of adopters buy products in different stages of the product life cycle. The product life cycle encourages proactive planning. It is a useful predicting and forecasting tool. Historical data can help estimate a product’s location on the curve. Almost all sales in the maturity and decline stages represent repeat purchases.
Notes: Review Learning Outcome 6 summarizes and compares the marketing strategies typically used in each phase of the product life cycle, overlaid with the PLC curve.
Developing and Managing Products
CHAPTER 10 Developing and Managing Products Designed by Eric Brengle B-books, Ltd. Prepared by Deborah Baker Texas Christian University Introduction to Marketing McDaniel, Lamb, Hair 9
Learning Outcomes Explain the importance of developing new products and describe the six categories of new products Explain the steps in the new-product development process Explain why some products succeed and others fail LO I LO 2 LO 3
Learning Outcomes Discuss global issues in new-product development Explain the diffusion process through which new products are adopted Explain the concept of product life cycles LO 5 LO 6 LO 4
The Importance of New Products Explain the importance of developing new products and describe the six categories of new products LO I
New Product A product new to the world, the market, the producer, the seller, or some combination of these. LO I New Product
Categories of New Products LO I Market Development Diversification Increase market share among existing customers Attract new customers to existing products Introduce new products into new markets Create new products for present markets New-to-the-World New Product Lines Product Line Additions Improvements or Revisions Repositioned Products Lower-Priced Products
New Product for Starbucks <ul><li>Starbucks recently marketed the film “Akeelah and the Bee”. </li></ul><ul><li>It says the film is a natural extension of the Starbucks experience. </li></ul><ul><li>Critics say the pervasive chain is overextending its welcome. </li></ul>LO I SOURCE: Janet Adamy, “Lights, Camera, Action at Starbucks ,” Wall Street Journal, April 22-23/2006, A2.
REVIEW LEARNING OUTCOME Developing New Products LO I
The New Product Development Process Explain the steps in the new-product development process LO 2
The New-Product Development Process LO 2 Long-term commitment Company-specific approach Capitalize on experience Establish an environment New Product Success Factors
New-Product Development Process LO 2 New-Product Strategy Idea Generation Idea Screening Business Analysis Development Test Marketing Commercialization New Product
Idea Generation LO 2 Diversification http://www.ideo.com Customers Employees Distributors Competitors Vendors R & D Consultants Sources of New-Product Ideas Online
Tips for New Product Development <ul><li>Disperse R & D around the globe </li></ul><ul><li>Keep teams small and empower employees </li></ul><ul><li>Flatten hierarchy </li></ul><ul><li>Encourage generation of crazy new ideas </li></ul><ul><li>Welcome mistakes </li></ul>LO 2
Brainstorming The process of getting a group to think of unlimited ways to vary a product or solve a problem. LO 2 Brainstorming
Idea Screening LO 2 The first filter in the product development process, which eliminates ideas that are inconsistent with the organization’s new-product strategy or are inappropriate for some other reason. Screening
Concept Test LO 2 Concept Test A test to evaluate a new-product idea, usually before any prototype has been created.
Business Analysis LO 2 Considerations in Business Analysis Stage Demand Cost Sales Profitability
Development LO 2 <ul><ul><li>Creation of prototype </li></ul></ul><ul><ul><li>Marketing strategy </li></ul></ul><ul><ul><li>Packaging, branding, labeling </li></ul></ul><ul><ul><li>Promotion, price, and distribution strategy </li></ul></ul><ul><ul><li>Manufacturing feasibility </li></ul></ul><ul><ul><li>Final government approvals if needed </li></ul></ul>
Simultaneous Product Development LO 2 Simultaneous Product Development A new team-oriented approach to new-product development where all relevant functional areas and outside suppliers participate in the development process.
Test Marketing LO 2 The limited introduction of a product and a marketing program to determine the reactions of potential customers in a market situation. http://www.merwyn.com Test Marketing Online
Alternatives to Test Marketing <ul><li>Single-source research using supermarket scanner data </li></ul><ul><li>Simulated (laboratory) market testing </li></ul><ul><li>Online test marketing </li></ul>LO 2 Online http://www.newproductworks.com
Commercialization LO 2 Production Inventory Buildup Distribution Shipments Sales Training Trade Announcements Customer Advertising
REVIEW LEARNING OUTCOME New-Product Development Process LO 2
Why Some Products Succeed and Others Fail Explain why some products succeed and others fail LO 3
Why New Products Fail <ul><li>No discernible benefits </li></ul><ul><li>Poor match between features and customer desires </li></ul><ul><li>Overestimation of market size </li></ul><ul><li>Incorrect positioning </li></ul><ul><li>Price too high or too low </li></ul><ul><li>Inadequate distribution </li></ul><ul><li>Poor promotion </li></ul><ul><li>Inferior product </li></ul>LO 3
Success Factors LO 3 Match between product and market needs Different from substitute products Factors in Successful New Products Benefit to large number of people
Success Factors LO 3 Listening to customers Producing the best product Vision of future market Strong leadership Commitment to new-product development Project-based team approach Getting every aspect right
REVIEW LEARNING OUTCOME Why Products Succeed and Others Fail LO 3
Global Issues in New-Product Development Discuss global issues in new-product development LO 4
Global Issues LO 4 <ul><li>Develop product for potential worldwide distribution </li></ul><ul><li>Build in unique market requirements </li></ul><ul><li>Design products to meet regulations and key market requirements </li></ul>
REVIEW LEARNING OUTCOME Global Issues in New-Product Development LO 4 Single product worldwide Modification of products Multiple products in multiple countries
The Spread of New Products Explain the diffusion process through which new products are adopted LO 5
Diffusion LO 5 Diffusion The process by which the adoption of an innovation spreads.
Categories of Adopters LO 5 Laggards Late Majority Early Majority Early Adopters Innovators
Product Characteristics and the Rate of Adoption LO 5 http://www.electronicgadgetdepot.com Trialability Observability Relative Advantage Compatibility Complexity Online
Introductory Stage <ul><li>High failure rates </li></ul><ul><li>Little competition </li></ul><ul><li>Frequent product modification </li></ul><ul><li>Limited distribution </li></ul><ul><li>High marketing and production costs </li></ul><ul><li>Negative profits with slow sales increases </li></ul><ul><li>Promotion focuses on awareness and information </li></ul><ul><li>Communication challenge is to stimulate primary demand </li></ul>LO 6
Growth Stage <ul><li>Increasing rate of sales </li></ul><ul><li>Entrance of competitors </li></ul><ul><li>Market consolidation </li></ul><ul><li>Initial healthy profits </li></ul><ul><li>Aggressive advertising of the differences between brands </li></ul><ul><li>Wider distribution </li></ul>LO 6
Maturity Stage <ul><li>Sales increase at a decreasing rate </li></ul><ul><li>Saturated markets </li></ul><ul><li>Annual models appear </li></ul><ul><li>Lengthened product lines </li></ul><ul><li>Service and repair assume important roles </li></ul><ul><li>Heavy promotions to consumers and dealers </li></ul><ul><li>Marginal competitors drop out </li></ul><ul><li>Niche marketers emerge </li></ul>LO 6
Decline Stage <ul><li>Long-run drop in sales </li></ul><ul><li>Large inventories of unsold items </li></ul><ul><li>Elimination of all nonessential marketing expenses </li></ul><ul><li>“Organized abandonment” </li></ul>LO 6
Diffusion Process and PLC Curve LO 6 Innovators Early adopters Early majority Late majority Laggards Product life cycle curve Diffusion curve Introduction Growth Maturity Decline Sales
REVIEW LEARNING OUTCOME LO 6 Product Life Cycles Time INTRODUCTION GROWTH MATURITY DECLINE Product Strategy Distribution Strategy Promotion Strategy Pricing Strategy Limited models Frequent changes More models Frequent changes. Large number of models. Eliminate unprofitable models Limited Wholesale/ retail distributors Expanded dealers. Long- term relations Extensive. Margins drop. Shelf space Phase out unprofitable outlets Awareness. Stimulate demand.Sampling Aggressive ads. Stimulate demand Advertise. Promote heavily Phase out promotion High to recoup development costs Fall as result of competition & efficient produc- tion. Prices fall (usually). Prices stabilize at low level. Sales