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Chapter 11
The document discusses key concepts around developing and managing new products. It covers the importance of new products, categories of new products, the new product development process, factors in product success and failure, global issues, how new products diffuse through markets, and the concept of product life cycles. Specifically, it outlines the six stages of the new product development process and five categories of new products.
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Chapter 11
- 1. Chapter 11: Developingand Managing Products Prepared by David Ferrell, B-books, Ltd. Designed by Eric Brengle, B-books, Ltd. Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 2. The Importance ofNew Products Explain the importance of developing new products and describe the six categories of new products. LO 1 Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 3. New Product Aproduct new to the world, the market, the producer, the seller, or some combination of these. Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 4. New Product AdvantagesBeing first on the market has numerous advantages: Increased sales through longer sales life Increased margins Increased product loyalty More resale opportunities Greater market responsiveness A sustained leadership position Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 5. Categories of NewProducts Copyright 2012 by Cengage Learning Inc. All Rights Reserved New-to-the-World New Product Lines Product Line Additions Improvements or Revisions Repositioned Products Lower-Priced Products
- 6. Review Learning OutcomeDeveloping New Products LO 1 Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 7. The New ProductDevelopment Process Explain the steps in the new-product development process. LO 2 Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 8. The New-Product DevelopmentProcess Copyright 2012 by Cengage Learning Inc. All Rights Reserved Long-term commitment Company-specific approach Capitalize on experience Establish an environment New Product Success Factors
- 9. The New-Product DevelopmentProcess Copyright 2012 by Cengage Learning Inc. All Rights Reserved New-Product Strategy Idea Generation Idea Screening Business Analysis Development Test Marketing Commercialization New Product
- 10. Idea Generation http://www.ideo.com Copyright 2012 by Cengage Learning Inc. All Rights Reserved Customers Employees Distributors Vendors Competitors R & D Consultants Sources of New-Product Ideas Online
- 11. Brainstorming The processof getting a group to think of unlimited ways to vary a product or solve a problem. Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 12. Idea Screening Thefirst 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. Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 13. Concept Test Atest to evaluate a new-product idea, usually before any prototype has been created. Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 14. Business Analysis Copyright2012 by Cengage Learning Inc. All Rights Reserved Considerations in Business Analysis Stage Demand Cost Sales Profitability
- 15. Development Creation ofprototype Marketing strategy Packaging, branding, labeling Promotion, price, and distribution strategy Manufacturing feasibility Final government approvals if needed Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 16. Simultaneous Product DevelopmentA team-oriented approach to new-product development. Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 17. Test Marketing Thelimited introduction of a product and a marketing program to determine the reactions of potential customers in a market situation. Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 18. Alternatives to TestMarketing Single-source research using supermarket scanner data Simulated (laboratory) market testing Online test marketing Copyright 2012 by Cengage Learning Inc. All Rights Reserved Online http:// www.newproductworks.com
- 19. Commercialization Copyright 2012by Cengage Learning Inc. All Rights Reserved Production Inventory Buildup Distribution Shipments Sales Training Trade Announcements Customer Advertising
- 20. Review Learning OutcomeNew-Product Development Process LO 2 Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 21. Why Some ProductsSucceed and Others Fail Explain why some products succeed and others fail. LO 3 Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 22. Why New ProductsFail No discernible benefits Poor match between features and customer desires Overestimation of market size Incorrect positioning Price too high or too low Inadequate distribution Poor promotion Inferior product Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 23. Success Factors Matchbetween product and market needs Different from substitute products Factors in Successful New Products Benefit to large number of people Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 24. Success Factors Willingnessto fail occasionally Copyright 2012 by Cengage Learning Inc. All Rights Reserved 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
- 25. Review Learning OutcomeWhy Products Succeed or Fail LO 3 Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 26. Global Issues inNew-Product Development Discuss global issues in new-product development. LO 4 Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 27. Global Issues Developproduct for potential worldwide distribution Build in unique market requirements Design products to meet regulations and key market requirements Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 28. Review Learning OutcomeGlobal Issues in New-Product Development LO 4 Copyright 2012 by Cengage Learning Inc. All Rights Reserved Single product worldwide Modification of products Multiple products in multiple countries
- 29. The Spread ofNew Products Explain the diffusion process through which new products are adopted. LO 5 Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 30. Diffusion The processby which the adoption of an innovation spreads. Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 31. Categories of AdoptersCopyright 2012 by Cengage Learning Inc. All Rights Reserved Laggards Late Majority Early Majority Early Adopters Innovators
- 32. Product Characteristics and the Rate of Adoption http:// www.electronicgadgetdepot.com Copyright 2012 by Cengage Learning Inc. All Rights Reserved Trialability Observability Relative Advantage Compatibility Complexity Online
- 33. Sales of NewAudio Products Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 34. Marketing Implications of the Adoption Process Copyright 2012 by Cengage Learning Inc. All Rights Reserved Direct from Marketer Word of Mouth Communication Aids the Diffusion Process
- 35. Review Learning OutcomeDiffusion Process for New Products LO 5 Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 36. Product Life CyclesExplain the concept of product life cycle. LO 6 Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 37. Product Life CycleA biological metaphor that traces the stages of a product’s acceptance, from its introduction (birth) to its decline (death). Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 38. Product Life CycleCopyright 2012 by Cengage Learning Inc. All Rights Reserved Time Dollars Profits Sales Introductory Stage Growth Stage Maturity Stage Decline Stage 0
- 39. Product Life Cyclesfor Styles, Fashions, and Fads Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 40. U.S. Sales ofWidgets Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 41. Introductory Stage Highfailure rates Little competition Frequent product modification Limited distribution High marketing and production costs Negative profits with slow sales increases Promotion focuses on awareness and information Communication challenge is to stimulate primary demand Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 42. Growth Stage Increasingrate of sales Entrance of competitors Market consolidation Initial healthy profits Aggressive advertising of the differences between brands Wider distribution Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 43. Maturity Stage Salesincrease at a decreasing rate Saturated markets Annual models appear Lengthened product lines Service and repair assume important roles Heavy promotions to consumers and dealers Marginal competitors drop out Niche marketers emerge Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 44. Decline Stage Long-rundrop in sales Large inventories of unsold items Elimination of all nonessential marketing expenses “ Organized abandonment” Copyright 2012 by Cengage Learning Inc. All Rights Reserved
- 45. Diffusion Process andPLC Curve Copyright 2012 by Cengage Learning Inc. All Rights Reserved Innovators Early adopters Early majority Late majority Laggards Product life cycle curve Diffusion curve Introduction Growth Maturity Decline Sales
- 46. Review Learning OutcomeLO 6 Product Life Cycles Copyright 2012 by Cengage Learning Inc. All Rights Reserved
Editor's Notes
- #2 Chapter 11 Developing and Managing Products
- #3 Chapter 11 Developing and Managing Products
- #4 Chapter 11 Developing and Managing Products Notes: New products are important to sustain growth, increase revenues and profits, and to replace obsolete items. Companies are faced with pressure to innovate more—and more quickly. Discussion/Team Activity: List some of the new products introduced recently. Examples: Food products, cleaning products, consumer electronics, etc.
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- #6 Chapter 11 Developing and Managing Products 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: Disney Consumer Products recently added a new line of fragrances targeting 4-11 year old boys in Latin communities under the brand names Pirates of the Caribbean and Buzz Lightyear. Additions to existing product lines: These products include new products that supplement a firm’s established product line. Examples: McDonald’s Corp. recently introduced chicken snack wraps, which took only six months to become one of the most successful new product launches in McDonald’s history. 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: Kleenex Anti-viral tissues, Magic Eraser. Repositioned products: These are existing products targeted at new markets or market segments. Examples: Diet Dr. Pepper was repositioned as an alternative to a dessert instead of a diet beverage. 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.
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- #9 Chapter 11 Developing and Managing Products 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.
- #10 Chapter 11 Developing and Managing Products Notes: Most companies follow formal new-product development process, consisting of the seven steps shown here and in Exhibit 11.1. 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.
- #11 Chapter 11 Developing and Managing Products 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.
- #12 Chapter 11 Developing and Managing Products 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.
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- #15 Chapter 11 Developing and Managing Products 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 product 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? 4. The business analysis is important because costs increase dramatically once a product idea enters the development stage.
- #16 Chapter 11 Developing and Managing Products 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 Polaroid colorpack camera 15 years for Xerox copy machine 51 years for television 2. Gillette introduced three shaving systems over a 27 year period before introducing the Mach3 in 1998 and Fusion in 2006.
- #17 Chapter 11 Developing and Managing Products Notes: The development process works best when all the involved areas (marketing, R&D, engineering, production, and suppliers) work together rather than sequentially. This process is known as simultaneous product development. This 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.
- #18 Chapter 11 Developing and Managing Products 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 11.2 provides a checklist for choosing a test market.
- #19 Chapter 11 Developing and Managing Products 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 9) Typical cost: $300,000 Simulated market testing. Advertising and the 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.
- #20 Chapter 11 Developing and Managing Products 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.
- #21 Chapter 11 Developing and Managing Products
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- #23 Chapter 11 Developing and Managing Products Notes: In consumer goods, a large proportion of 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.
- #24 Chapter 11 Developing and Managing Products 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.
- #25 Chapter 11 Developing and Managing Products 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 Willingness to fail occasionally
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- #28 Chapter 11 Developing and Managing Products 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 produce cars that sell for less than $10,000. 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.
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- #31 Chapter 11 Developing and Managing Products Notes: By understanding how consumers learn about and adopt products, marketing managers have a better chance of successfully marketing products.
- #32 Chapter 11 Developing and Managing 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.
- #33 Chapter 11 Developing and Managing Products 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 a microwave oven to a conventional oven. 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.
- #34 Chapter 11 Developing and Managing Products Notes: Exhibit 11.4 shows the rate of adoption of numerous audio products introduced in the last 25 years. Satellite radio has been adopted more quickly than any other innovative audio product.
- #35 Chapter 11 Developing and Managing Products 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.
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- #38 Chapter 11 Developing and Managing Products 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.
- #39 Chapter 11 Developing and Managing Products Notes: Exhibit 11.5 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.
- #40 Chapter 11 Developing and Managing Products Notes: Exhibit 11.6 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.
- #41 Chapter 11 Developing and Managing Products Notes: Exhibit 11.7 shows the PLC of Widgets, based on 4.5 years of data. What conclusions can you draw about the PLC?
- #42 Chapter 11 Developing and Managing Products 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.
- #43 Chapter 11 Developing and Managing Products 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.
- #44 Chapter 11 Developing and Managing Products 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.
- #45 Chapter 11 Developing and Managing Products 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.
- #46 Chapter 11 Developing and Managing Products Notes: Exhibit 11.8 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.
- #47 Chapter 11 Developing and Managing Products 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.