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7.5: New Product Development Process

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    • Contributed by John Burnett
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    Evidence suggests that there may be as many varieties of new product development systems as there are kinds of companies. For the most part, most companies do have a formal comprehensive new product development system, and the evolution of such systems were not necessarily the result of systematic planning. The list of activities suggested in Exhibit 20 illustrates the extensiveness of this process. Because of the complexity of the process, it is important that the general guidelines of effective management be applied to new product development.13

    Before starting our discussion of the eight-step process of new product development, a necessary caveat should be considered: a great many new products fail. Depending on definitions used for products actually introduced, failure rates range between 20 per cent and 30 per cent, but have been as high as 80 per cent. Of more concern than the level of failure are the reasons for failure. Possibilities include: technical problems, bad timing, misunderstanding the consumer, actions by competitors, and misunderstanding the environment.

    Step 1: generating new product ideas

    Generating new product ideas is a creative task that requires a specific way of thinking. Gathering ideas is easy, but generating good ideas is another story. Examples of internal sources are:

    Basic research: many companies, such as DuPont, have several scientists who are assigned the task of developing new product ideas and related technology.

    Manufacturing: people who manufacture products often have ideas about modifications and improvements, as well as completely new concepts.

    clipboard_e1553ce70c2389cdfb9d14882bf48b912.pngExhibit 20: The new product development process.

    Salesperson: company salespeople and representatives can be a most helpful source of ideas, since they not only know the customer best, but they also know the competition and the relative strengths and weaknesses of existing products.

    Top management: the good top executive knows the company's needs and resources, and is a keen observer of technological trends and 0f competitive activity.

    External sources of new product ideas are almost too numerous to mention. A few of the more useful are:

    Secondary sources of information: there are published lists of new products, available licenses, and ideas for new product ventures.

    Competitors: good inferences about competitive product development can be made on the basis of indirect evidence gained from salespeople and from other external sources, including suppliers, resellers, and customers.

    Customers: frequently customers generate new product ideas or at least relay information regarding their problems that new and improved products would help to solve.

    Resellers: a number of firms use "councils", or committees made up of representative resellers to assist in solving various problems, including product development.

    Foreign markets: many companies look toward foreign markets, especially western Europe, because they have been so active in product development.

    There are probably as many approaches to collecting new product ideas as there are sources. For most companies, taking a number of approaches is preferable to a single approach. Still, coming up with viable new product ideas is rare (see Newsline).

    Step 2: screening product development ideas

    The second step in the product development process is screening. It is a critical part of the development activity. Product ideas that do not meet the organization's objectives should be rejected. If a poor product idea is allowed to pass the screening state, it wastes effort and money in subsequent stages until it is later abandoned. Even more serious is the possibility of screening out a worthwhile idea.

    Newsline: New ideas are rare

    New product ideas can come from anywhere and everywhere. It is exciting when a new product idea comes from out of the blue, prototypes test well among consumers, and purchase interest scores are off the charts. But relying on the "anywhere and everywhere" approach will not do in the long run. What is required for product development are methodologies that enable us to systematically discover new product opportunities.

    One such method is the category appraisal, which points to new product opportunities within an existing category and sometimes to opportunities in a new, adjacent category. The objective of the category appraisal study is to this what makes the category "tick". Questions to ask include:

    What drives consumer acceptability?

    What are the strengths and weaknesses of each product in the category?

    What are the opportunities to outperform existing products?

    To what extent does brand equity play a role in product acceptability?

    Does collected data point to unexplored regions of the category "space" that new products can successfully fill?

    An example from the confectionery industry illustrates this technique. The mission was to identify the properties of a new candy item for consumers who buy candy in supermarkets, convenience stores, and movie theaters. A database of in-depth sensory profile of a wide range of candy products and "liking scores" of each of those products was created. The researchers shopped 'till they dropped. They thoroughly filled a sensory space in terms of texture, flavor, size, and appearance with 25-30 products.

    A questionnaire was developed that required quantitative ratings (such as 100 per cent scale rating) of product attributes that were unique to some products. There were questions about hardness, chewiness, crispness, flavor intensity, degree of fruit flavor, sweetness, tartness, color, and many more. Overall liking for each product was also measured.

    How well each product and brand performed—the overall liking score for each product—was not an objective of the study. The point was to discover the most generalized drivers of consumer acceptability in the confectionery category. Products were ranked by their performance and key sensory properties. Close study of the data revealed that these consumers were not the least bit influenced by brand. Overall taste was the dominant factor. Second, a new chocolate product held the most promise. Of all flavors explored, chocolate captivated consumers most. In fact, the ideal product is chocolate-filled chocolates with chocolate dipping sauce.[1]

    There are two common techniques for screening new product ideas; both involve the comparison of a potential product idea against criteria of acceptable new products. The first technique is a simple checklist. For example, new product ideas can be rated on a scale ranging from very good to poor, in respect to criteria such as: value added, sales volume, patent protection, affect on present products, and so forth. Unfortunately, it is quite difficult for raters to define what is fair or poor. Also, it does not address the issue of the time and expense associated with each idea, nor does it instruct with regard to the scores. A second technique goes beyond the first: the criteria are assigned importance weights and then the products are rated on a point scale measuring product compatibility. These scores are then multiplied by their respective weights and added to yield a total score for the new product idea. Table 7 provides an example of both these techniques for screening new product ideas.

    Step 3: business analysis

    After the various product ideas survive their initial screen, very few viable proposals will remain. Before the development of prototypes can be decided upon, however, a further evaluation will be conducted to gather additional information on these remaining ideas in order to justify the enormous costs required. The focus of the business analysis is primarily on profits, but other considerations such as social responsibilities may also be involved.

    The first step in the business analysis is to examine the projected demand. This would include two major sources of revenue: the sales of the product and the sales or license of the technology developed for or generated as a by-product of the given product.

    Table 7: Screening product ideas

    Rating

    Weight

    Very good

    (5) (4)

    Fair

    (3)

    Poor

    (2) (1)

    Unweighted Value

    Weighted Value

    Customer utilities

    -amusement

    .1

    X

    5

    0.5

    -comfort

    .1

    X

    3

    .3

    -convenience

    .2

    X

    4

    .8

    -satisfaction

    .3

    X

    4

    1.2

    -easy to use

    .1

    X

    3

    .3

    Ability to create effective sales appeals

    .3

    X

    4

    1.2

    Price

    .1

    X

    2

    .2

    Product quality

    .2

    X

    3

    .6

    Product profitability

    .2

    X

    3

    .6

    Attractiveness of product to customers

    .1

    X

    4

    .4

    Ability to produce product in large volumes

    .3

    X

    5

    1.5

    Ability of new product in helping sale of other products

    .1

    X

    1

    .1

    Requires low capital investment

    .3

    X

    4

    1.2

    Product can be produced through existing advertising

    .2

    X

    3

    .6

    Product can be produced in existing facilities

    .3

    X

    4

    1.2

    Product can be distributed through existing channels

    .3

    X

    3

    .9

    Strength of competition

    .2

    X

    3

    .6

    Patent situation

    .1

    X

    2

    .2

    Total score

    60

    12.4

    A complete cost appraisal is also necessary as part of the business analysis. It is difficult to anticipate all the costs that will be involved in product development, but the following cost items are typical:

    • expected development cost, including both technical and marketing R&D;

    • expected set-up costs (production, equipment, distribution);

    • operating costs that account for possible economies of scale and learning curves;

    • marketing costs, especially promotion and distribution;

    • and management cost.

    Step 4: technical and marketing development

    A product that has passed the screen and business analysis stages is ready for technical and marketing development. Technical development involves two steps. The first is the applied laboratory research required to develop exact product specifications. The goal of this research is to construct a prototype model of the product that can be subjected to further study. Once the prototype has been created, manufacturing-methods research can be undertaken to plan the best way of making the product in commercial quantities under normal manufacturing conditions. This is an extremely important step, because there is a significant distinction between what an engineer can assemble in a laboratory and what a factory worker can produce.

    While the laboratory technicians are working on the prototype, the marketing department is responsible for testing the new product with its intended consumers and developing the other elements of the marketing mix. The testing process usually begins with the concept test. The product concept is a synthesis or a description of a product idea that reflects the core element of the proposed product. For example, a consumer group might be assembled and the interview session might begin with the question: "How about something that would do this?"

    The second aspect of market development involves consumer testing 0f the product idea. This activity must usually await the construction of tile prototype or, preferably, limited production models. Various kinds of consumer preference can be conducted. The product itself can be exposed to consumer taste or use tests. Packaging, labeling, and other elements in the mix can be similarly studied. Comparison tests are also used.

    Step 5: manufacturing planning

    Assuming that the product has cleared the technical and marketing development stage, the manufacturing department is asked to prepare plans for producing it. The plan begins with an appraisal of the existing production plant and the necessary tooling required to achieve the most economical production. Fancy designs and material might be hard if not impossible to accommodate on existing production equipment; new machinery is often time consuming and costly to obtain. Compromise between attractiveness and economy is often necessary.

    Finally, manufacturing planning must consider the other areas of the organization and what is required of each. More specifically, they should determine how to secure the availability of required funds, facilities, and personnel at the intended time, as well as the methods of coordinating this effort.

    Step 6: marketing planning

    It is at this point that the marketing department moves into action again. The product planner must prepare a complete marketing plan—one that starts with a statement of objectives and ends with the fusion of product distribution, promotion, and pricing into an integrated program of marketing action.

    Step 7: test marketing

    Test marketing is the final step before commercialization; the objective is to test all the variabilities in the marketing plan including elements of the product. Test marketing represents an actual launching of the total marketing program. However, it is done on a limited basis.

    Integrated marketing

    Trickier than you think

    Everyone knows the fastest way to get rich is to start a dot-com business. According to the US Commerce Department, traffic on the Internet doubles every 100 days. To acquire an audience of 50 million, it took radio 30 years, television 13 years, personal computers 16 years, and the Internet four years.

    Still, marketers who go online expecting to make an "overnight killing" are in for a bruising lesson. Getting on the Web takes an investment, and once there, you have to build your Web presence and brand. And there are still technical and logistical hurdles to clear. Just ask Julie Wainwright, who got a firsthand look at the new math after the pet-products website she heads, Pet.com, went public in 2000. After making its debut at USD 11 a share, the San Francisco-based Internet company's stock rose to USD 14 and then promptly dropped below USD 3.

    Volatility in the Internet business has produced a new industry—Internet consultants. As a result, a plethora of recommendations have emerged for entering an Internet business. Here are some of the suggestions:

    (a) Keep it simple—focus on providing compelling information.

    (b) Put customers first—understand them and meet their needs.

    (c) Make your site Web-friendly—do not assume everyone is technically competent.

    (d) Spread the word—publicize your Web address, offline as well as on the Net, by putting it everywhere you do business.

    (e) Be ready for success—a Web site can give you more business than you can handle.

    (f) Although e-business moves fast: managers shouldn't move carelessly—do not take risks that jeopardize reaching your goals.

    (g) Cash-flow problems are common with Internet start ups—project the amount of cash needed, then double it.

    (h) Creating a true brand is specially difficult with Internet start-ups—excellent customer service, not advertising, is likely the answer.

    (i) Deliver the goods—getting goods delivered to a customer's doorstep in a timely manner is much more complicated for Internet businesses.

    (j) Actively monitor the customer—this ongoing dialogue leads to a deeper understanding of a customer's preferences and shopping habits, and that, in turn, leads to more personalized offerings and services..

    Do not assume that the Web will solve all your problems or substitute for sound business judgment. "It is not some sort of get-rich-quick scheme," says Mark Weaver, professor of entrepreneurship at the University of Alabama. "You have to be even more a perfectionist, more meticulous, and more prepared to adjust to the changing rules of business online."[2]

    Three general questions can be answered through test marketing. First, the overall workability of the marketing plan can be assessed. Second, alternative allocations of the budget can be evaluated. Third, determining whether a new product introduction is inspiring users to switch from their previous brands to the new one and holding them there through subsequent repeat purchases is determined. In the end, the test market should include an estimate of sales, market share, and financial performance over the life of the product.

    Initial product testing and test marketing are not the same. Product testing is totally initiated by the producer: he or she selects the sample of people, provides the consumer with the test product, and offers the consumer some sort of incentive to participate.

    Test marketing, on the other hand, is distinguished by the fact that the test cities represent the national market, the consumer must make the decision herself, must pay him or her money, and the test product must compete with the existing products in the actual marketing environment. For these and other reasons a market test is an accurate simulation of the national market and serves as a method for reducing risk. It should enhance the new product's probability of success and allow for final adjustment in the marketing mix before the product is introduced on a large scale.

    However, running test marketing is not without inherent risks. First, there are substantial costs in buying the necessary plant and machinery needed to manufacture the product or locating manufacturers willing to make limited runs. There are also promotional costs, particularly advertising, and personal selling. Although not always easy to identify, there are indirect costs as well. For example, the money used to test market could be used for other activities. The risk of losing consumer goodwill through the testing of an inferior product is also very real. Finally, engaging in a test-market might allow competitors to become aware of the new product and quickly copy it.

    Because of the special expertise needed to conduct test markets and the associated expenses, most manufacturers employ independent marketing research agencies with highly trained project directors, statisticians, psychologists, and field supervisors. Such a firm would assist the product manager in marketing the remaining test market decisions.

    Duration of testing: the product should be tested long enough to account for market factors to even out, allow for repeat purchases, and account for deficiencies in any other elements in the new product (three to six months of testing may be sufficient for a frequently purchased and rapidly consumed convenience item).

    Selection of test market cities: the test market cities should reflect the norms for the new product in such areas as advertising, competition, distribution system, and product usage.

    Number of test cities: sh0uld be based on the number of variations considered (i.e. vary price, package, or promotion), representativeness, and cost.

    Sample size determination: the number of stores used should be adequate to represent the total market.

    Even after all the test results are in, adjustments in the product are still made. Additional testing may be required, or the product may be deleted.

    Step 8: commercialization

    At last the product is ready to go. It has survived the development process and it is now on the way to commercial success. How can it be guided to that marketing success? It is the purpose of the lifecycle marketing plan to answer this question. Such a complete marketing program will, of course, involve additional decisions about distribution, promotion, and pricing.

    Capsule 15: Review

    • New product strategies begin by putting "new" on a continuum.

    • There are both internal and external sources for acquiring new products.

    • The new product development process includes the following steps:

    1. generate new product ideas

    2. screen ideas

    3. perform a business analysis

    4. technical and marketing development

    5. manufacturing planning

    6. marketing planning

    7. test marketing

    8. commercialization

    The Wall Street Journal

    wsj.com

    In practice

    Organizations must introduce new products and manage existing products successfully to remain competitive in today's marketplace. Products are planned, and the product strategy aims to ensure that product objectives are achieved.

    Unprecedented advancements in technology render shorter product life cycles. As a result, product plans must provide competitive distinctiveness.

    The Interactive Journal examines product development for large and small organizations in Marketplace. Under the Marketplace heading, click on Small Business. This section provides articles targeted toward small and emerging businesses.

    Special reports on small and emerging businesses can be found in the Breakaway section, also under Small Business.

    Here you will find more in-depth analysis about small business. The Interactive Journal also sponsors several online discussions. Click on one of the links to join an online discussion.

    Return to the Marketplace home page and click on the Business Focus link on the left menu. This link directs you to articles discussing general business developments taking place in various companies.

    Return to the Front Section and select Starting a Business under Resources in the left menu. This link sends you to the Startup Journal, a site designed to provide new business with a variety of tools. Navigate the bar at the top of the site for information about franchising, financing, and running a business.

    Additional sites

    Check out www.adweek.com for industry articles about advertising and brand development. The Brandweek link on the site provides weekly excerpts of headlines from the print edition.

    Advertising Age is another resource for information about product strategies. Check out www.adage.com.

    Business Week magazine's Web site www.businessweek.com is a comprehensive site. Daily briefings cover a wide range of topics.

    Deliverable

    Use the Interactive Journal and Additional Sites listed here to find three articles about product development. Read each article and compare the strategies employed by the companies profiled. Why are the products successful, or why did they fail? Write a one-page brief supporting your conclusions.


    1. [1] Sources: Jeff Braun, "Overcoming the Odds." Marketing News, March 29,1999. pp. 15-16: David Fishben, "Sweet Success: Category Appraisal is Proven Source of New Ideas," Marketing News. March 29, 1999, pp. 15-16; Tomina "On Your Mark," Entrepreneur, April 1999, pp. 161-162; Laurie Freeman, "Brach's Fruit Snacks Shapes," Advertising Age. June 28, 1999,pp. 5-7.

    2. [2]Sources: Sreenath Sreenivasan, "Wrestling with the Web," Business Week, May 24, 1999, pp. FI6-- Peggy Pulliam, "To Web or Not to Web," Internet Marketing, June 2000, pp. 37-41; Kara Swisher, "Reality Check," The Wall Street Journal, April 17,2000,p. R19; Erin Strout, "Launching an E-Business," Sales & Marketing Management, July 2000, pp. 89-91.

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