New Product Development and Strategy

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New Product Development and Strategy, an early draft chapter of a potential new book

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New Product Development and Strategy

  1. 1. First Draft (January 2007)Chapter New Product Development and StrategyDoes a new product succeed or fail because of its positioning, its price, itspromotion, its availability or its timing? Or is it because of its strong or weakcompetition, the economic situation or even the weather or a health scare?Entrepreneurial Success comes back to the product – the venture is the vehicle. IntroductionNew product development is one of the most important aspects of a new enterprise start upand is the activity that will most influence and guide the direction of the firm throughout itslife. The process of new product development and the success of the product in the marketwill primarily determine how well the company will sustain itself and be the key to developingany competitive advantage of the firm over others. The new product development functionhas been neglected in entrepreneurship literature, yet it is an extremely important key tosuccess in the new venture and an extremely difficult process considering new entrepreneursmay not as yet developed the all round expertise, experience and resources of largecompanies. Another area of neglect in new product development and entrepreneurshipliterature is the actual formulation, design, packaging and manufacturing processdevelopment of a new product, which is the link between technology and the market in anynew venture creation.One of the keys to successful new product and process development is the design andproduction of a new product with the minimal resources possible without sacrificing anyquality of the finished and marketable article. For the entrepreneur, this process must beundertaken in a heuristic manner (discussed later), rather than through any strict disciplinaryapproaches, advocated and practiced by large companies. This is one of the ways a newventure can gain competitive advantage over larger companies, if the product and processcan be designed and built for a fraction of the cost that more established enterprises canachieve. Thus product development is one of the most important processes of new venturecreation. New product development is a discipline where the technical aspects are learned asyou go along the process, as most of these aspects are not in any text books, but come frompeople’s lives and experiences. This is a reality of new product development that even MNCshave to face. New product development is both a manifestation and extension of strategy interms of what the company puts into the marketplace, steering the direction of the enterpriseand at the same time, an influence upon strategy or a restraint upon strategy becausefounder and/or team capabilities limit the set of options available to the new venture in termsof what can be done in the marketplace in terms of product.The new product development process is so close to the concepts of idea, opportunity anddecision to start up a new enterprise, as well as where you will go in the marketplace – youcannot by definition have a start up without beginning the new product development process.One can observe in the marketplace that some new companies almost seem immediately tomake a high impact on the market. Others enter the marketplace and seem to go nowhere,while others grow gradually over a long period of time. The difference in these companiescomes back to the initial new product development process, where some are able to quicklydevelop a new product and make profits despite of high costs and design flaws through
  2. 2. generating high revenues. Others do the same but fail to generate profits and revenues tosustain their venture, while yet others can internally sustain themselves while their ideamanifested into a product slowly develops recognition, distribution and sales in themarketplace, where revenues eventually flow over the breakeven point to generate profits tosustain the venture. New product success depends on many factors which will influence thedestiny of the new venture. In later venture life the decisions about future investment ofprofits and the strategic soundness of those decisions will determine long term sustainabilityof the firm. New product development is one of the most important aspects of long termsustainability.In the early life of the new venture the conventional rules of management and strategy arediscarded in a scramble to develop a product and get it quickly into the marketplace togenerate enough sales to survive. This is a very haphazard time where best practices andproduction efficiencies are almost irrelevant in the minds of any founder, particularly in theSME. The jump is made with primarily intuition backing the strategy and it is the faith in thisstrategy that keeps the founder and the firm going forward. This adds great risk and pressureof which statistics of new product failures lend support. This chapter will look into the issuesinvolved in new product development and the strategies underlying the process to assist thenew venture creator develop some form of roadmap across this critical period in the newventure and following periods of growth and development of the enterprise. New Product Development in the Malaysian PerspectiveThere are many estimates and statistics presented by various authors about new productfailure rates in the marketplace. Robert Calvin in his book Entrepreneurial Management claimsthat 80% of new products fail after being launched1. Observing new product launches here inMalaysia tends to confirm this, even those launched by MNCs. Failures take slightly longer toacknowledge in Malaysia due to the distribution driven approach to the market in theconsumer products arena, where products are pushed to consumers from the shelves tocustomers through the heavy use of in-store promotions and promoters. This figure of 80%would be accurate in the cosmetic sector, slightly less in the household product sector andeven less in the agriculture sector, as competing products tend to have similar functions andbenefits to what is already in the market and market fragmentation and distribution gapsinfluence sales very heavily. In Malaysia, the perceived risk of launching radical new productstends to stifle innovation, where many companies tend to prefer being product followers,allowing others to innovate to reduce risk.This mental encapsulation prevents companies coming out and differentiating themselvesfrom the competition and expanding their position in the market as a trend setter, where theyresign themselves to being trend followers. This attitude and perception makes the Malaysianmarket less innovative than perhaps some other countries in the region, which has to changeif Malaysia is going to take its rightful position in the global market as an innovative country.This situation if skilfully studied can potentially lead to numerous new product opportunitiesfor a new venture. If differentiation can be developed and accepted by consumers, then thereis plenty of room for new ventures in this country. Likewise, due to the emphasis bycompanies on being followers, there is plenty of opportunity to develop new brands, whichcan be protected by creating a source of competitive advantage that has barriers developedto prevent competitors emulating the product quickly. This is of course very easy to say, butwith the right perspectives, it is possible to exploit the strategy of product differentiation andenhance a position in the market through the correct use of branding. This originates in thenew product development process.New product development is approached differently by firms. In Malaysia, larger firms tend toeither develop a very bureaucratic and formal procedure or act upon the whim of themanaging director, or more so combine the above, which leads to a less than effectiveprocess. In a discipline which is talking about the need for faster new product development
  3. 3. processes2, Malaysian companies still lag behind, which opens up even more opportunities forSMEs.SMEs in Malaysia, at least those in consumer products lack potential exit strategies orcontingencies for failed products that SMEs in many Western countries have available tothem; that of a channel of discontinued stock (i.e., $2 or ₤1 shops), where failed productscan be disposed of at a heavy discount. The cost of new product failure in Malaysia is writingoff inventory completely, along with the development costs, customer ill-feeling and almostcertain closure with a deep sense of failure. Secondly, if the product is successful, it will mostlikely lead to copying by competitors, some of which will be much larger firms with greaterresources, brand image, salesforce, larger promotional budgets and greater distributioncapability. The advantage that being the innovator has and incumbency in the marketplace islost due to a wide gap in market power (based on distribution ability) between small andlarge companies. These are central issues that the new venture founder must consider beforestart up.While looking at the Malaysian perspective, one other issue provides the SME or the newventure with an opportunity. As many commentators see globalism as one of the largestinfluences on markets in this new century, especially with MNCs developing and launchingproducts for the ‘Malaysian’ market based on extensions of international brands with slightmodifications, more reflective upon that MNC’s history in the Malaysian market rather thanmodifications made to suit the Malaysian market, the Malaysian market remains very complexand heterogeneous, often very difficult to understand. Malaysia is one of a number of fewcountries with a significant makeup of a number of racial groups. The complexity does notstop there, as within each racial group there is great diversity. The Malays are far from ahomogeneous consumer group, with different influences upon their histories3, thus providingthem with different orientations and consumer tastes. The Chinese are also diverse, somecoming to Malaysia long ago, adopting Malay customs (the Babas), while others migratedfrom various regions in China to Malaysia and primarily maintain their Chinese culture4. Somelive partly integrated into the ‘Malaysian’ culture, while another group rarely mix from schoolthrough their working careers with other ethnic groups. Some are English educated, whileothers are Chinese educated, thus the Chinese cannot be seen as one coherent group5 ormarket.. There is also a vast difference between urban markets and rural markets6 whereconsumer tastes and preferences vary significantly. Even with the rapid development of thenew middle class in Malaysia, it still remains divided along ethnic lines7, thus developing intotwo distinct markets in many product areas, ethnically segregated shops, banking,entertainment, pop music, food, fashion, reading materials, etc. This is reinforced by thesegregation in education and careers of the various ethnic groups8.Thus Malaysia within the context described above can be seen as a number of sub-marketswithin the Malaysian market as a whole. This runs contrary to the concept of thecosmopolitan man and agrees with Crawford’s observation that there is little markethomogeneity, even within a nation9. Even with the increasing number of foreign competitorslaunching into the Malaysian market, local SMEs still have great opportunities if they are ableto understand the various consumer needs and wants of each ethnic group and find theseniches to be large enough to sustain a new business. The downside of this issue however isthat targeting specific ethnic niches may not provide a market large enough to develop anyeconomies of scale and the firm will not be able to grow past a certain point. The Role of Product Development in the EnterpriseAs mentioned in the introduction, new product development is the manifestation of the ideato exploit the chosen opportunity. It is the centre of all strategies and the vehicle that will getthe enterprise going in the market. New product development is the chosen basis of growthfor companies like Siemens, Nokia, Sony, Apple and Glaxo of which they have completelyrelied upon as a strategy. These companies are what they are today because of new product
  4. 4. development. The place of new product development in the web of company strategies andoperations is shown in figure 6.1.Figure 6.1. The Relationship of New Product Development to the Enterprise Sales Finance Profit s Strategic Marketing Management Process Development Standards Skills & Learning New Product Resources Development Production Intellectual Property Regulation Product Design Strategy Supply Chain Purchasing Management Growth Accounting SurvivalWhether an enterprise is a home based industry, a manufacturing operation or a servicebusiness, the new product development process is paramount to developing the overalldirection of the company. In most cases, it will be the only source of revenue for the ventureand total means of survival, as new product development will set the whole future scenariofor the enterprise. If the new product fails to reflect a need in the marketplace, it is mostlikely to fail, beginning heavy consequences to the enterprise. If the new product is notdifferentiated from competitors’ products, this will lead to tough competition and pricecutting, which will erode potential enterprise revenues and make it very difficult for the newenterprise to survive in an industry of stronger and larger firms. Conversely, if the product ishighly differentiated from competitors’ products in the marketplace, the new venture willhave to take enormous efforts to establish it in the marketplace, requiring a lot of time andresources to do so.Growth to a sustainable size and direction are two of the early primary objectives of the newenterprise. These early on override profitability, organisation and efficiency in the early partof new enterprise development. Gibb and Scott developed a strategic small business modelwhich shows the factors which influence growth of the enterprise10. This model provides aframework for SME development that incorporates most of the strategic issues involved in the‘top down’ corporate planning models of Ansoff, Porter and Steiner, from a micro perspective.The model has been developed on the assumption that growth is extremely important to theSME to reach minimum economies of scale, growth is synonymous with success and growthis regarded as economically desirable because SMEs are regarded as the basis of future largefirms and generators of employment11. Gibb and Scott’s model assists the enterprisedetermine how to change, accounting for the dynamic environment the new enterprise mustface in developing its strategic direction, with consideration of its internal capabilities.
  5. 5. Gibb and Scott’s model is broken down into five components. The performance baserepresents a profile of the existing business which can be broken down into sub-componentslike market trends, which would include product and marketing mix and competition,production trends, which would include measures of utilisation, efficiency and quality, etc.and financial and management trends, which would include issues like net worth, liquidityand gearing. This would be very similar to the position audit in the conventional strategicplanning process as is espoused by writers like Steiner.The base potential for development is the overall strength of the business and its capabilities.This would include many parameters that would influence the firm to change and grow, suchas the firms liquidity, technology, physical assets, human resources, accumulated experienceof markets, customers, product development, financial and networking, the personalobjectives of the founder and influence of family and peers, his or her personal capacities,visions and attitudes and the ideas base of the new venture or existing enterprise for thedevelopment of existing and future products, entry into what markets and ambitions forgrowth. This would equate to the resource audit in conventional strategic planning.The key internal and external influences on development is very similar to the strengths,weaknesses, opportunities and threats (SWOT) analysis found in most strategic planning textbooks. The Gibb and Scott model is shown in figure 6.2. below;Figure 6.2. A Model of Growth Through Product/Market Development Where the Business Could Go The Outcomes (Emerging Targets) Size and Depth of Change Key Internal Key External Influences The Process Influences TIME On the of On the Development Product/Market Development Process Development Process The Base for Potential Development Where the business is currently (Performance)Gibb and Scott (1985)The above model was developed on the basis of researching how 16 SMEs approached theissue of product/market development, from where the following assumptions of how SMEsundertake this activity were derived; 1. Planning takes place around a specific project or number of small projects,
  6. 6. 2. Strategic planning in any formal way is unlikely to exist, but through the development of a specific project a certain degree of strategic awareness will develop, without it the firm will run into blind alleys, 3. The absence of formal plans may not reflect on the capability of the SME, 4. The product/market development is highly dynamic characterised by a great deal of learning during the process by the founder/owner manager of the SME – they will usually take the approach of coming up against problems and solving them, 5. The development process will not necessarily reflect itself in traditional indicators like increased revenue and employment, 6. Lack of growth in the SME may not necessarily reflect a lack of ideas for development, growth is heavily dependent upon the founder/owner manager having time and resources available, which is an important factor in taking a proactive approach to development, 7. External information is more likely to be acquired by the founder/owner manager through friends and networks rather than from secondary data and information and how dependable this information is will depend upon the quality and variety of the network, and 8. Strengths and weaknesses of the base will be an important factor in the eventual success of the new development.The Gibb and Scott model allows SMEs to fully take account of administrative and institutionalblocks and hindrances, such as ‘red tape’ and bureaucracy and incentives and otherassistance available. Internal factors such as capabilities and resources can be matchedagainst constraints and opportunities in the external environment to determine a way forwardfor the enterprise. The model more accurately reflects the development of an SME where theinfluence and attitudes of the founder/owner manager are strongly reflected in the process.Fundamentally the new product development process is very similar between large, verylarge, SMEs and even micro-enterprises. There is very little difference in the informationrequired to undertake the process and the steps that need to be taken. In the new venturehowever the new product development process is haphazard, flexible and almost completelyinformal, while still achieving the same end result as much larger companies. Although manyacademics and practitioners advocate a formal new product development process, there islittle evidence to suggest that any formal process is more effective than the way a newventure/entrepreneur undertakes new product development. In fact many corporateorganisations are looking for ways to make their organisations more entrepreneurial. The Development of New ProductsCompanies have a number of options to grow. A company can expand its geographical area,i.e., launch its products in new markets, acquire new businesses and their products, ordevelop their own new products. Without new product development, the option ofgeographical expansion is limited because in today’s international markets, companies usuallyface either the same competitors or different competitors with similar products. Even acompany with a product based on a new breakthrough technology cannot maintain itscompetitive advantage forever and must continue to develop or acquire new products inorder to keep in front of its competitors who will eventually catch up with them.Products have a limited life and new products must be created to replace those near the endof their lifecycle. Markets and technologies are changing quickly even in the most stablemarkets, which is leading to shorter product lifecycles. If one observes the market brandshave long lives but the products under the brand umbrella are continually changed andupdated almost in a seasonally fashion. Thus companies which don’t continue to introducenew products run the risk of becoming irrelevant to the marketplace. Markets and industriesare changing so rapidly that 40% of the Fortune 500 companies that existed in 1975 do notexist today12.
  7. 7. New product development is an important aspect of the competitive environment. If existingcompanies don’t launch new products, it is most likely their competitors will gain advantagein the marketplace, which will eventually erode the company’s position in the marketplaceand later effect revenues, profitability and survival. New products are a strategy thatcompanies use to introduce enhancements into the market so they can claim benefits overtheir competitors. Today on average, new products (those introduced into the market withinthe last 5 years) represent 33% of a company’s sales13. In some markets, mobile phones,televisions, white goods, automobiles, etc., this figure is 100%.While new product development is one of the most important aspects of competitive strategy,it is also one of the riskiest. New product failure rates have risen from 45.6% in 1961 to over80% today14. Cooper’s definition of the new product development process underlies it’sstrategic importance to a firm as …”a defined product strategy for the business goals andobjectives clearly communicated to all, there are clearly defined users of strategy focuses togive direction of the business total new product effort, i.e., where you want to go. The basicnew product effort has a long term thrust and focus,”15. Trott’s definition “the actualdevelopment of new products is the process of transforming business opportunities intotangible products”16 links new product development to the process of exploiting opportunitiesin the entrepreneurial process.Finally, companies in the same industries, with similar products, have basically the samestrategy choices and generic themes to pursue win similar groups of customers, thus productdevelopment is one of the major ways a firm can differentiate itself from the its competitors. Types of New ProductsAmongst the large number of products coming out onto the market each year, it issometimes very difficult to distinguish what is really a new product. One could not claim thata new chilli sauce or sambal balacan launched into the market to be a new product unlessthere is some form of differentiation from what already exists in the market. Even if therewas some differentiation, this must be recognised by consumers. What is important accordingto Rogers and Shoemaker is that the product is perceived to be new by consumers17, i.e., theproduct is perceivably different, relative to what is already on the market. The overwhelmingmajority of products launched onto the market are usually variations of existing products,with changes in either the brand, level of service, technology, features, packaging, price, orquality dimensions, or a combination of them. Only about 10% of new products introducedare both new to the company and the market – an item not sold by that company before oran item not sold in the market before18. Thus there are many ways of classifying newproducts, given the many forms they can take. • New to the world products are the first of their kind in the market. They are usually something invented or enhanced by a significant change or advance in technology, such as a new discovery or different method utilising modified processes, materials or methods in producing a product. These products would revolutionise the market segment or even create a new market, which may require significant consumer learning to become familiar with the new product. Examples of this would be the new micro-chip processors, Intel has just announced, which will make computers more energy efficient, light weight and smaller19, the progression from land line based telephones to mobile phones and now hand phones, the progression from typewriters to electric typewriters to word processors and personal computers, the change from wood, to gas to electric and microwave cooking and the Sony walkman and Ipods. New to the world products make up only a small proportion of new products and they are perceived as the riskiest types of new products to launch as manufacturers have to deal with consumers inexperience with the new concepts and incompatibilities with their prior consuming experiences, which act as barriers to consumer adoption20.
  8. 8. • New Product Lines (New to the Firm) are not new to the market but new to the firm launching them into the market. This is where a company would enter a market for the first time, where success and profitability will depend upon the timing they entered the market, i.e., as a pioneer, early follower, early or late majority or as a late follower. The later the company enters the market, the less will be the concept risk taking, but the greater will be the competitive risk. Intellectual property value decreases as more firms enter the market with similar competitive products, leaving little room for product differentiation. Figure 6.3. below pictorially shows the situation in-terms of competition, potential profitability and IP value in relation to the time a firm enters a new market for that company.Figure 6.3. Competition, potential profitability and IP value in relation to the time a firm enters a new market for that company • Additions to Existing Product Lines are products that extend a range marketed by a firm. The product is different from existing products either in function or consumer application or as a variant of an existing product, such as a different pack size, flavour or fragrance, etc. Companies usually introduce additions to existing product lines to enhance their position in the market they are competing in, consolidate their position, to fill a perceived gap where consumers aren’t served well or to react to competitors. • Improvements and Changes to Existing Products are undertaken to improve quality or make the product more convenient to use by the consumer. This is often a continuous process by companies, but when the product has been overhauled substantially, companies may undertake a relaunch or promotional campaign to inform consumers about the change. Sometimes products are phased out with a replacement product to maintain their competitive position in the market. This happens continually in the mobile phone market, sometimes a number of times each year. • Product Repositioning are products that are retargeted at new consumer groups or a larger proportion of consumers sharing the same wants. For example, a detergent may be repositioned in a new pack size to attract new consumers, or aspirin was repositioned as a remedy for blood clots and prevention of strokes and
  9. 9. heart attacks from an analgesic, which was under attack for health reasons and heavy competition from paracetamol based product.About 10% of new products launched are new to the world products, which increases toaround 18% in moderate to high tech industries. New product lines are about 26% of newproducts, but much higher at 37.6% in moderate to high tech industries. Additions to productlines are around 26%, but dropping to 18% in high tech industries. Product changes andimprovements are around 26% of new products, 19.8% in moderate to high tech industriesand product repositionings are 7%, but almost non existent in moderate to high techindustries21. Thus, the majority of new products are developments and variations based onexisting products.Products can be either goods or services. The primary goal of a product is to fulfil a servicethat enhances human experience22, which both goods and services can do. Both havetangible components for example, a facsimile machine is a good providing a service, carsmust be serviced after purchase, a haircut provides something tangible, a written insurancepolicy is something tangible, providing assistance in time of need, people will buy a cup ofcoffee at the Coffee Bean, even though they could purchase a cup of coffee much cheaper ata kedai kopi along the side of the road and a university education produces somethingtangible. Looking another way, just because something can be stored in a warehouse asinventory doesn’t mean that it doesn’t need a distribution system23, such as insuranceindustry. Entrepreneurial New Product DevelopmentNo standard set of procedures or processes exist in new product development. There aredepartment stage, activity stage, cross functional, decision stage (stage-gate) and processmodels espoused in the literature. Different industries take different orientations towards newproduct development, where for example pharmaceutical companies will be dominated byscientific, technological and regulatory issues, while food companies are dominated byconsumer research that leads to minor product changes. Yet some industries still take acraftsman approach in the joinery, furniture, décor and kitchen refurbishing industries. Eventhe moderately high tech fragrance business creates products through more an artisticapproach, rather than a scientific approach, which has as much to do with psychology,consumer tastes, blending just as an artist on canvass would do as it does with chemistry24.In reality, new product development has as much to do with making assumptions, shortcutting the logic process through the use of heuristics, which are little rules of thumb thatfirms with experience in the industry have grown to believe in25, such as ‘30% of people whohear about a new brand will try it’. Hunches, gut feeling and intuition are heavily relied uponto progress products, contrary to what most of the literature about new product developmentadvocates.Successful new product development comes from experience and with it, the individualdiscipline and maturity to know when they are biased in their thinking of potential success orfailure of a product. Industry knowledge is very important, but it must be used objectivelywithout emotional baggage, i.e., ‘we have a long history in that market and it is ours’, or ‘wehave always been successful with new products in this market’, etc. These are cognitivebiases that can lead to failure, that some would call market arrogance. As MNCs employ moregraduate executives to fulfil managerial roles in companies without climbing the corporateladder so as to speak, the insider industry advantage is getting less and less. Marketingexecutives without grass root industry experience, passion for the industry and a tangible‘feel of it’, relying primarily on data for decisions, potentially lay open some opportunity forthe entrepreneur who has passion, diligence and sound intuition. The ‘new’ executives, oftensurrounded with market research and advertising consultants with the power to sign checkbooks, so often get things wrong and wonder why a champaka fragrance – as beautiful as itis, is not accepted by consumers who associate the fragrance with grave yards and jasmine is
  10. 10. rejected by 80% of the consumers. The facts are, agreed by the majority of all literature innew product development is that; • Less than 5% of new products launched on the market are successful, • Out of 100 new ideas, less than 2 become a commercial reality, • Most companies are followers in the market and not innovators, • Very few really novel innovations are ever launched commercially, and • Most new products are actually only incremental steps in enhancement of products, rather than something completely new.Although new product development is one of the most important strategies for sustainabilityof a company, too many companies turn away from innovation and cut costs and expenses asa reaction to declining performance, without looking into the root causes, which may beproduct life-cycle based or competitive based, which require a new product developmentsolution. Usually a panic response further stifling innovation of the company. The newproduct development option is often seen as a more difficult alternative, as under pressure,the following problems arise; • Finding the right opportunities and appropriate innovation necessary to develop them, • Reducing development times without reducing quality and innovation, • Building and maintaining brand equity through a strong product, • Integrating market, design engineering and production processes to produce, and products that are considered useful and desirable by consumers.The above is the trap for those who do not view new product development as a continuousprocess, even if it is an implicit and background process, within the company and the mindsof those who manage it.The entrepreneur, especially after start up and turning into an SME can be trapped by thescenario above, lending support to Drucker’s postulation that entrepreneurship is only a stagein the development of a firm and the entrepreneurial state can be grown out of26. This iscompounded by the small firm’s lack of resources, time, technology and expertise to researchnew ideas and innovations to develop the business27. SMEs are even more limited in theirstrategic options because of their inability to influence the environment and marketplace, dueto their size like larger companies28. Cupelled with lack of knowledge29, the entrepreneurrequires specific strategies and processes to take account of these weaknesses and navigateits birth and growth in a very focused way, that adapt to rather than change the environmentand marketplace.Strategy is the action a company takes to achieve one or more of its goals and the strategicmanagement process is the way in which managers develop these strategies30. New productdevelopment as discussed in the introduction is the manifestation of strategy and will dictatehow the company interacts with its environment and how successful and sustainable thecompany will be in the future. Due to size and age of a start-up or SME, the developmentprocess will differ greatly from large firms and will take place ‘bottom up’ or by the founderhim or herself31 and primarily involve the skilful utilisation of assets, skills and resources, totake advantage of their best competences in developing new products and entering themarketplace. Thus the entrepreneur or SME will have a set of competences that are relativelyunique to him or her32, which will provide the basis of future action. This is the nexus ofcreativity, innovation and selected strategy, discussed in chapter 2 that the entrepreneur usesto create a market niche or position with some form of competitive advantage, utilising whathe or she has in terms of ideas, competences and resources. How these factors areintegrated together will determine the entrepreneur’s capability and performance in themarketplace. To achieve this, the most important resource is skill and knowledge possessedby the entrepreneur. To a great degree this skill can only be learned through experience anddifficult to imitate from other firms33. This is not different from large firms which learn as they
  11. 11. go in the new product development process, as each product/market is unique, how toexploit opportunities and neutralise threats. Though intangible, this is a core aspect ofcompetitive advantage, unmeasurable in any conventional sense, but written about heavily byPeter Senge and Chris Argyris, outlined previously in chapter 1.Following the above arguments and problems firms face in new product development, themost important aspects of entrepreneurial new product development is a continual strategicawareness of the environment by the entrepreneur and his or her capabilities in innovation,production and management to see through the selected opportunity into an operationalreality. From the point of view of a start-up or small firm, these activities do not require the‘specialist skills’ advocated in many strategic planning34 and new product developmentprocesses. There is little evidence to suggest that these processes create more success thanthe way a new entrepreneur does things. Figure 6.4. Entrepreneurial New Product Development, Competencies and Competitive Advantage Ideas Opportunities Solutions Realisation Performance Management Capability Spots Evaluates Selects Targets Creativity Innovation Strategic Thinking Differentiation Competitive Advantage Capabilities Governing Competitive Costs: to customers Scope Knowledge: Industry/market/technical/ process Competencies Relationships: Customers/suppliers/ Entrepreneurial, Opportunity distri butors/relative power Identification, Network, Conceptual, Structure: Ability Organisational, Strategic, Technology, Commitment, ResourcesFigure 6.4 above shows the importance of personal competencies in the entrepreneurialprocess, where product development is the key to developing the strategy to realiseopportunities. Performance and growth depends upon a number of factors, which aregoverned by the core competencies of the entrepreneur or organisation35. This would suggestthat success and growth has a lot to do with these competencies and investment in thedevelopment of these competencies is important in establishing, maintaining or increasing thelead over competitors, as it is competencies that enable one to exploit opportunities.Competencies influence the ability to develop ideas and screen them for opportunities andselect the ones that can be best realised. Competencies also influence the ability to developcompetitive advantage, which ultimately differentiates the product and venture from others inthe market. Selection of the correct solution to identified opportunities, the ability tounderstand and create some form of competitive advantage and the ability to manage or
  12. 12. organise the enterprise efforts are the factors that influence performance. Throughcompetencies local companies are able to fight international companies entering the market36due to their better knowledge of the local situation. Creativity, Innovation and Strategic Thinking in the New Product Development ProcessThe initial process of contemplating the development of a new product is perhaps the mostimportant aspect of the whole process. It is here where new ideas are spotted, evaluated asto their opportunity potential, the technology and competencies required considered, variousstrategy scenarios mentally extrapolated out to evaluate their effect and benefit to theenterprise, so that the best strategy solution can be realised. This is the most fluid andunstructured part of the process where all these possibilities are sorted and evaluated in away that does not resemble real and tangible work37. The quality of information used (marketdata, knowledge of customers, technology costs, etc) has great bearing on the outcome andfinal result of the product development process.This is a creative process (explained previously in chapter 3) to seek some type of innovationto warrant the effort to launch a new product onto the market that will have somecompetitive advantage over potential competition, whether it be through lower costs,utilisation of better knowledge of the marketplace, better relationships and ability to utilise achannel of distribution, a better ability to organize the delivery of product or service oroperation in the market, which will lead to product differentiation from those competitors toprovide some market advantage. Innovation is thus the source of new products, strategy andcompetitive advantage of which Drucker postulates there are seven primary sources38,outlined in table 6.1. below;Table 6.1. Drucker’s Sources of Innovation Source Explanation Examples The Success of a revolutionary product or the • Apple computer unexpected application of technology from one • Rapid decline of Proton’s success, industry to another, sudden or unnoticed market share failure or demographic changes caused by wars, external insurgencies, migration, etc. occurrenceAn incongruity A change that is already occurring or can • Sugar free products and between be made to occur within an industry. It sugar replacements due reality as it may be visible to those inside the to concern for healthactually is and industry, often overlooked or taken for • Increasing demand forwhat it ought granted. travel and holidays due to be to increasing incomes and leisure timeInadequacy of An improvement in process that makes • Caffeine free products an existing consumers more satisfied based on an • Microwave ovenstechnology or improvement or change in technology. • Mobile phones business process Changes in New ways and means of undertaking • Health care industry industry or business based on identified opportunities • Education industry – market or gradual shifting of the nature of the private education structure industry. Perceptual Changes in peoples awareness founded • Leisure and exercise changes on new knowledge and/or values or industry aerobics & gyms growing affluence leading to new fashions and tastes
  13. 13. Demographic Gradual shift of demographics in • Establishment of more changes population by age, income groups or retirement homes ethnic groups, etc New New knowledge or application of existing • Video and VCD industry knowledge theoretical knowledge into an existing • Robotics industry that can create new products not • Biotechnology previously in existenceDrucker further postulates that the seven sources of innovation can be manifested into fourtypes of product/strategy development as summarised39 in table 6.2. below;Table 6.2. Drucker’s Four Types of Innovation for Product/Strategy Development Type Description Examples Invention Totally new product Wright Brothers – airplane Edison – light bulb Bell – telephoneExtension New use or different application of an Kroc – McDonalds already existing product Wilson – Holiday InnDuplication Creative replication of an existing concept Wal Mart – Dept. Stores Pizza Hut – Pizza Restaurant Synthesis Combination of existing concepts and Smith – FedEX factors into new use Merryil Lynch – Home equity financingProduct and strategy innovation is the means by which markets develop. Schumpeter termedthis process creative destruction, where the market evolves through a process of newproducts being launched by firms which supersede those already in the marketplace40.Outdated products will disappear and overtime the market will be represented by a range ofcompletely new products. This can be very easily seen in the automobile and mobile phoneindustries very quickly. This happens in all markets, which can be seen in Figure 6.5. showingthe product evolution of the laundry detergent.Figure 6.5. The Evolution of the Laundry Detergent
  14. 14. The Evolution of the Laundry Detergent Pre 1900’s Laundry Blue Up to Late 1940’s Solid Soaps & Powders Laundry Detergent Bars 1950’s until present Laundry Detergents Powders Laundry Detergents with Liquids Special Detergents Additives Concentrated 1980’s until present Laundry Powders Laundry Detergent TabletsProduct evolution occurs primarily through incremental product benefit improvements byfirms launching products into the market to gain advantage over competitors. This is mostlypredictable following changing consumer tastes and lifestyles. Most new products come outof this process and firms introduce these products in other international markets, thusintensifying competition across the globe. Then from time to time a firm develops a newinnovation based either upon a new technology or by picking up some technology from onearea and transferring it to their target market to create a completely new form of product inthat market. In the evolution of the laundry detergent the development of the liquid laundrydetergent in the late 1970’s is an example of later and the switch from soaps to syntheticsurfactants is an example of a completely new technology influencing the form of theproduct. The key factors influencing the process of product evolution in a market segmentcan be best illustrated by the SET diagram developed by Cagan and Vogel41.Figure 6.6. The Product Opportunity Gap
  15. 15. Social Social and cultural trends and drivers. Reviving historical trends Product Opportunity Gap Economic State of the economy Technology Shift in focus on where State of the art and to spend money emerging technology Level of disposable Re-evaluating income existing technologyThe rapidly rising levels of affluence in Malaysian consumers, along with most of the rest ofthe world, the opening up of the ASEAN economies to open foreign competition andexponential improvements in technology are rapidly decreasing the life cycle of products inthe market place. Malaysian consumer tastes are very different from a decade ago and overthe next decade will undergo further change as consumers respond to health, leisure andlifestyle issues. Coupled with the improvements in products that technology, it will no longerbe able to be assumed that product lifecycles will last more than five years as products willquickly be superseded with new models, versions and complete new designs based on newertechnologies. Advances in ICT and biotechnology will bring many new products and evenallow for the development of whole new industries, as we have seen with the development ofipods, mobile phones, new medicines based on biotechnology and the likeInnovation will also affect the ways products and services are presented to consumers bymaking products more accessible and more convenient to use like the development ofprepaid mobile phone services where accounts can be topped up at provision stores,convenience stores and petrol kiosks. Re-organising how existing businesses are run hasbrought low cost air travel to the region through Air Asia.Products and services will be also greatly affected by Government regulation. Carbon creditswill force the development of green engines and the increased use of bio-fuels in thetransport industry. Materials used in the manufacture of products will be more heavilyscrutinized like cosmetics forcing in some cases the reformulation and even completerethinking of products and their redevelopment. Occupational health and safety issues willforce more consideration about safety issues. Technology development will also create newmaterials that will perform better and be more cost effective than existing ones. All the abovescenarios are factors for product evolution, which will be driven through innovation. Thetrends towards shorter product lifecycles over the last 50 years42 is shown in figure 6.7.below;
  16. 16. Figure 6.7. The Product Life Cycle Has Shortened Dramatically Over the Last 50 Years Pharmaceuticals Food Items Tools Fifty Years Ago Toys Today Cosmetics 0 10 20 30 Length of Life Cycle (Years)Rapid technology development, the ability of strong firms to exercise some degree of controlover the channels of distribution and increasing internationalization of the market is creatinggreater market concentration. This can be clearly seen in the Malaysian retail sector wherechains like Giant, Carrefour and Tesco are quickly increasing their market share over moretraditional retail outlets. The effect of market concentration on manufacturers and suppliers isto reduce their numbers and force some product rationalization where products cater for thelarge consumer groups. Increasing market concentration defines the market into more rigidityand initially creates focus on the major market segments.At some stage market concentration will reach a point where smaller market segments arefailed to be satisfied by the smaller number of firms operating in the market. If theseunsatisfied market segments are large enough, opportunities develop for smaller firms tomove in and exploit these segments. The market will eventually see a renaissance of smallerfirms offering niche products to unsatisfied consumers sometimes through alternativechannels of distribution. An example of this is the growing number of herbal products andcosmetics marketed through direct marketing channels.New opportunities occur when a market becomes concentrated, as further growth in sales bylarger firms doesn’t correlate with increased profits as the cost to service small segments ishigh. Smaller firms are able to achieve better profits without direct competition in theseunmet segments by focusing on the most profitable customer niches and keeping costs low.Companies who are able to scale down the size and capital costs of routine technology usedin the industry, may be able to develop new sources of competitive advantage43. Figure 6.8.shows diagrammatically the relationship between market concentration and level ofopportunities in a market.
  17. 17. Figure 6.8. The Relationship Between Opportunities and Market Concentration Opportunities Firms Market Concentration Invention Verses InnovationMany people relate new product development to invention. However invention only makes upa small part of new products and less than 2% of all patents are actually commercialized.Inventors are usually good at developing ideas into concepts and tangible items, but not allinventions satisfy consumer wants and needs. It is particularly difficult for an inventor tosuccessfully develop a product in the market by themselves because of the tremendousresources needed to develop the market to make consumers aware and educate them aboutthe new product. Many inventions, although novel, fail to solve any real consumer needs, orfail to satisfy them effectively and thus fail to gain much interest from consumers.An invention will remain a conceptual idea without innovation. It is only really a starting pointin the innovation process which is concerned about turning the idea into a practical andcommercial application. Inventions involve creativity, which is only part of the whole productdevelopment process as explained by Myers and Marquis44 ….”Innovation is not a singleaction but a total process of interrelated sub processes. It is not just the conception of a newidea, nor the invention of a new device, nor the development of a new market. The processis all these things acting in an integrated fashion”.Some innovations are radical and lead to great changes in the lives we lead as did theproducts45 listed in table 6.3. to our society. But many inventions have come by accident46and it took innovation to determine potential commercial applications. These examples showthat the majority of these innovations are developed by organizations rather than individualsdue to the need of large resources and technical knowledge. Technical and productinnovation often leads to other forms of innovation such as organizational change toeffectively implement the firm’s strategies based on new products developed into the marketplace, as can be seen in the communications and air transport industries.Table 6.3. Breakthrough Innovations That Changed Our Lives1. Personal Computers 2. Microwave oven 3. Photocopier
  18. 18. 4. Pocket Calculator 5. Fax machine 6. Birth Control Pill7. Home VCR 8. Communication 9. Bar Coding Satellite10. Integrated Circuit 11. Automatic Teller 12. Answering Machine13. Velcro Fastener 14. Touch-Tone 15. Laser Surgery Telephone16. Apollo Lunar 17. Computer Disk Drive 18. Organ Transplanting Spacecraft19. Fiber-Optic Systems 20. Disposable Diaper 21. MS-DOS22. Magnetic Resonance 23. Gene-Splicing 24. Microsurgery Imaging Technique25. Camcorder 26. Space Shuttle 27. Home Smoke Alarm28. CAT Scan 29. Liquid Crystal Display 30. CAD/CAMTable 6.4. Accidents That Innovation Turned Into Successful ProductsA Raytheon engineer working on experimental radar noticed that a chocolate bar in hisshirt pocket melted. He then ‘cooked’ some popcorn. The firm developed the firstcommercial microwave oven.A chemist at G. D. Searle licked his finger to turn a page of a book and got a sweettaste. Remembering that he had spilled some experimental fluid, he checked it out andproduced aspartame (Nutrasweet).A 3M researcher dropped a beaker of industrial compound and later noticed that whereher beakers had been splashed, they stayed clean. ScotchGard fabric protectorresulted.A Dupont chemist was bothered by an experimental refrigerant that didn’t dissolve inconventional solvents or react to extreme temperatures. So the firm took time toidentify what later became Teflon.Another scientist couldn’t get plastic to mix evenly when cast into automobile parts.Disgusted, he threw a steel wool scouring pad into one batch as he quit for the night.Later, he noticed that the steel fibers conducted the heat out of the liquid quickly,letting it cool more evenly and stay mixed better. Bendix made many things from thenew material, including brake linings.Product Life CyclesAs mentioned throughout this chapter, products have a life cycle. The product lifecycle ofproducts is a reason why companies must continue to develop new products to replace thosein the market place that have come to the end of their useful life. It is extremely difficult todevelop strategy according to the product lifecycle because identifying its various stages iscomplex47. Strategy can be both a cause and effect of each stage and thus it is difficult toforecast sales for each stage in the cycle. However, understanding a products position in thecycle and the factors that can influence stage, consumer tastes, technology and competitioncan greatly assist in strategy development.Products take a predictable sales and profit path over a limited lifetime, which five stages areclearly defines48, as shown in figure 6.9.
  19. 19. Figure 6.9. The Product Lifecycle Sales & Profits Sales Profits Time 0 The Product Development Introduction Growth Maturity Decline Stage Losses & Investment 1. The product development stage where an idea is evaluated and developed into a commercial product. This is where time is spent on developing the product without any sales revenue at all with increasing costs as time goes on. For an entrepreneur, especially during start up this can be a very straining upon personal resources, especially if full time is being devoted to the project without any other source of income. 2. The introduction stage is where the product is first introduced into the market. Usually this period takes time, especially during a new enterprise start up as gaining access to distribution channels is also a learning experience with much trial and error being undertaken with potential buyers. Established companies with strong relationships with customers may be able to gain much quicker distribution. However once distribution is established there is a period where the product moves very slowly and sales growth is slow while potential customers evaluate the product for potential purchase and use. The length of this period depends upon many factors, for example how brand conscious consumers are if the product is similar to others, etc. Table 6.4. Below shows the expected slow sales growth time for various types of new products. Profits will be negative or very low during this period because of the high costs of introduction and necessary promotion required. In the introduction stage a percentage of sales cannot be used through fund accrual, and thus must be part of the initial investment. Many products fail due to firms not reserving funds for this purpose. In most Malaysian cases, especially through retail channels, the firm will have to finance the movement of stock into the channel for a long period of time, 30-180 days. Table 6.4. Expected Sales Growth Time Scenarios for New Products Type of New Product Situation/Scenario Expected Sales growth TimeNew concept products like Consumers will take time to Products will for a period of ultra concentrated become exposed to the time move very slowly off thedishwashing liquid, coffee concept and benefit of using shelf before rapid sales
  20. 20. creamer and instant coffee. the products. Distribution will growth will occur. This could take time to gain into the take up to a year in some more conservative channels. circumstances. Industrial Products and Business to Business Products The introduction stage is the time when focus must be put into persuading consumers to switch brands or in the case of a new to the world product or a significant innovation from existing products invest in educational promotional activities. Pioneering products although have the first to the market advantage as an incumbent product are very susceptible to followers who gain some advantage through learning from the pioneer’s mistakes, especially if they can exercise stronger influence over the channels of distribution. The pioneer to maintain market leadership must develop a comprehensive defensive marketing strategy (pricing & promotion, etc) to fend off challenges49 from future competitors. 3. The growth stage will be entered into if consumers accept the new product and continue to repurchase it on a regular basis. If this becomes the case then sales will begin to rapidly rise from faster shelf off-take and gaining new distribution points from conservative channel outlets that held of on initial purchase and support of the new product. New competitors will be likely to enter the market and existing competitors likely to retaliate through discounting and more vigorous merchandising at store level to maintain their market-share. As the Malaysian retail sector is a supplier driven market relying on continuous in- store activity (promotion & merchandising) the new product must be continually promoted during the growth stage. On an initial low sales base up to 40% of gross sales are needed for in-store (below the line) activities. The potential strain this can cause on funding should be underestimated as these costs will be deducted from invoice revenue. However as sales increase and promotional costs can be allocated across a larger revenue, the percentage required on in-store funding will lower to somewhere between 10-20%. The funding effect on a firm during the growth stage of a product is shown in the example in Table 6.5.Table 6.5. Effect on Sales Growth on a Firm’s Funding During the growth Stage of a Consumer Product. On the manufacturing side, increasing sales volumes allow the firm to purchase larger quantities of raw materials and packaging and negotiate lower prices leading to higher manufacturing margins and profits. The time/experience gained also allows fine tuning of the manufacturing process to make savings through increases in efficiency through process and labour experience. It is not unusual for direct manufacturing costs to come down 30% during this period. Likewise the time/experience factor allows improvement of product quality where the usual unexpected manufacturing and packaging compatibility problems are ironed out. The primary objective of the firm during the growth stage is to maintain steady sales growth until the cost of increasing sales is higher than the extra profit gained. Shelf off-take velocity, distribution and competition are the three major factors that the firm needs to consider during the later period of the growth stage. Shelf off-take velocity is influenced by advertising and in-store promotion and is usually manipulated and maximized through coordinated promotional campaigns with corresponding in-store activities, utilizing purchased shelf space from stores, participation in gondola or block promotions along the aisles and providing discounts
  21. 21. at strategic seasonal times, i.e., food items leading up to major festivals. Gaining extra distribution points in the existing channel and looking for distribution points outside the existing channel increases marginal sales of the product, i.e., moving to the hotel trade to gain extra customers. Competitor activity will influence sales growth according to the effort and activity they undertake in the market-place to counter the new product and promote their product. Competitors can be countered to some extend by adding new product benefits and variants to gain further competitive advantage over the competition, hence the importance of holding back on some potential product benefits that could have been incorporated into the original product, for some future time when those features can be utilized for market leverage over competitors when needed. This is a common strategy used by firms in the telecommunications, electronic, automobile and other consumer good industries. Figure 6.10. shows the relationship between sales, profits, shelf velocity, extra distribution and competition during the growth stage. 4. The maturity stage is where sales slow down and plateau. Products usually enter this stage when there are a number of competing products in the market. During this period, competitors will use promotion and discounting to maintain sales levels and target erosion of competitors’ sales to gain market-share. Competitors will also launch new product variants with added features and benefits to switch consumer loyalty towards their brands. During the maturity stage, where competition is at it’s peak, profitability will begin to decline as extra promotion is needed and firms begin discounting and lowering prices. In markets where the channels of distribution are concentrated, i.e., international retailers, some of the smaller brands will be dropped from product ranges and even a category rationalization can take place, leaving only a small number of brands. Firms need to employ strategies to maintain their market-share and sales level, which mentioned above will erode profitability. Competitors will attempt to vary and segment the market with new products with added features and benefits and seek new customers through developing new market segments, i.e., development of a special bleach for washing, rather than general purpose. Failure to do this would normally result in loss of market-share in an competitive environment and relegation to marginality and almost total forced withdrawal from the market. 5. Eventually the product falls into the decline stage where sales begin to go do almost steadily. This can be a very gradual process in stable technology markets like food and household products or be extremely rapid in technology based products like media and communications. The speed of the decline stage is usually governed by the velocity that consumers change their preferences away from the product towards another. In food and household products this is normally gradual, as is with insecticides, or rapid when VCRs where replaced with VCDs and later DVDs in the home media industry, with the arrival of new technologies. When the cost of managing the product in the market becomes high in comparison with the returns or the marginal utility of focusing on a new product with higher potential returns is better, most medium and large companies with large product portfolios will usually drop the product off. Smaller companies tend to hold onto a product until low sales make the product uneconomic to further produce the product. Sometimes when all brands have been withdrawn from the market, a small company can hold on to a minimum level of sales for a number of years without needing to support the product with promotion and discounts. The shoes polish market would be a good example of this situation.The product lifecycle can be used as a tool to understand how products develop, maintaintheir position and decline in markets. However it can only provide a conceptual understandingor guide, rather than a specific basis to develop marketing strategies50, as it is in reality very
  22. 22. difficult to actually determine what part of the cycle a product is actually at and whichstrategies should be utilized accordingly.The product lifecycle can be used to examine product categories, which include classes ofproducts like petroleum and automobiles, product forms, which would define the type ofproducts, i.e., in the case of automobiles, sedans, vans and four wheel drives and brands,which are a specific or group of products marketed by a specific firm or group of firms.Different product categories will exhibit different life cycles. For example, petroleum productshave an extremely long product life cycle because alternative technology and feed-stocksfrom renewable resources have not challenged the product category to date, even with allthe publicity and debate about renewable resource alternatives. This can be compared to thelife cycle of a brand of air freshener which is very short. However the product form itcompetes in will have a longer cycle than the individual brands marketed within the form, i.e.,a liquid, aerosol or gel type or household room, cupboard or automobile air freshener. Figure6.10. below Shows the difference in lifecycles between product categories, forms and brandsin the recording media industry.Figure 6.10.Looking at products within the product lifecycle framework can help distinguish betweenstyles, fashions and fads. A style is a specific form of expression of a product, i.e., in theautomobile example, a sedan or fastback. A Fashion is something that is accepted at aparticular time such as mag wheels or spoilers on cars. Fads are fashions that enter themarket suddenly, become very popular, peak quickly and become unpopular, because theydo not fulfill a strong need or satisfy it well51, i.e., mens’ carry bags as a fashion accessory inthe early 1980s. Styles can last many years and carry a specific consumer segment following,while a fashion will become popular for a period of time and slowly fad towards another. Fadswill attract a small proportion of consumers for a short period of time. Figure 6.11. shows thedifferent lifecycle curves for styles, fashions and fads.Figure 6.11.Technology and New Product DevelopmentIntellectual PropertyIntellectual property can be defined as a legal entitlement which sometimes attaches to theexpressed form of an idea, or to some other intangible subject matter. This legal entitlementgenerally enables its holder to exercise exclusive rights of use in relation to the subjectmatter of the IP. The term intellectual property reflects the idea that this subject matter isthe product of the mind or the intellect, and that IP rights may be protected at law in thesame way as any other form of property.52 One of the keys to intellectual property is theconcept of novelty which is something that has not been publicly disclosed in any form,anywhere in the world The basic forms of intellectual property of listed in the table below:Table 6.x. Basic Forms of Intellectual Property Term DefinitionCommercialisation Commercialisation of intellectual property is simply about planning how you will take your good idea to the marketplace. It involves working the idea into your business plan, consideration of protection options and considering how to market and distribute the
  23. 23. finished product.Patent Is an exclusive right granted for an invention, which is a product or a process that provides a new way of doing something, or offers a new technical solution to a problem.Manner of manufacture A legal term used to distinguish inventions which are patentable from those which are not. Artistic creations, mathematical methods, plans, schemes or other purely mental processes usually cannot be patented.Plant Breeders Rights Are used to protect new varieties of plants by giving exclusive commercial rights to market a new variety or its reproductive material.Industrial Design An industrial design - or simply a design - is the ornamental or aesthetic aspect of an article produced by industry or handicraftTrademark is a distinctive sign which identifies certain goods or services as those produced or provided by a specific person or enterprise.Copyright and Related Rights a legal term describing rights given to creators for their literary and artistic works (including computer software). Related rights are granted to performing artists, producers of sound recordings and broadcasting organizations in their radio and television programmes.Trade Secrets/Undisclosed Information is protected information which is not generally known among, or readily accessible to, persons that normally deal with the kind of information in question, has commercial value because it is secret, and has been subject to reasonable steps to keep it secret by the person lawfully in control of the information.Intellectual property must be defined widely to include trade secrets and commerciallyconfidential information, which can also be called proprietary technology. Patents as a formof intellectual property rights have issues related to their scope of protection, are sometimeshard to justify in terms of costs due to the small market the novelty will serve, are expensiveto gain registration and take a long period of time before they are accepted through processand review procedures53. Jaffe and Van Wijk state that in many jurisdictions patentenforcement is very difficult due to slow court systems, bias against foreign plaintiffs, lack oftechnical competence and a general inability to enforce judgements54. A survey undertakenby Lessor found that companies tended not to patent their innovations in many cases, due tothe fear that waiting would allow other companies to copy and counterfeit the product first indeveloping countries that had markets too small to justify the cost of registering a patent55.Grubb argues that in biotechnology, patents as a form of intellectual property rights do notserve the same purpose as in the electronics industry, where patents are used as ‘bargainingchips’ in cross licensing agreements and patent pooling as there are common productstandards imposed by necessity and regulation56.There are other alternative forms of intellectual property protection used by companies thatmaintain trade secrecy and advantage over competitors. Trade secrets can be guarded andprotected within an organisation by maintaining employment contracts with secrecyagreements that can be enforced through contractual remedies. These include specificallytailored production processes, mode and control of reactions and formulations used in theproduction of products by a company. Under legal license agreements, this technology,
  24. 24. although unpatented can be protected as proprietary knowledge under contract law. Therapid changing nature of technology and continual improvement upon processes and product,is itself a mode of protection, as long as the company maintains pro-active R&D in processand product development. Patents applications can often become redundant before theapplication is even reviewed by the patent office in an environment of continual technologychange.
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