Topic 9 – Developing New Market Offering

Kotler on Marketing; “Who should ultimately design the product? The Customer of course.”

In Topic 8 we would be looking at the challenges face by a company when it comes to developing new products, what organizational structures are used to manage new-product development, what are the main stages in developing new products and how can they be managed better and what factors affect the rate of diffusion and consumer adoption of newly launched products?

Once a company has carefully segmented the market, chosen its target customers, identified their needs, and determined its market positioning, it is better able to develop new products. Marketers plays an important role in the new product process, by identifying and evaluating new product ideas and working with Research & Development (R&D) and others in every stage of development.

Every company must develop new products. New product development shapes the company’s future. Improved of replacement products must be created to maintain or build sales.

A company can add new products through acquisition or development, or can buy out or acquire another company.

A company can develop new product in its own laboratories or it can contract other firms to develop new products on its behalf.

Boaz, Allen, and Hamilton identified six categories of new products;

1.      New-to-the-world products - New products that create an entirely new market.

2.      New product lines - New products that allow a company to enter an established market for the first time.

3.      Additions to existing product lines - New products that supplement a company’s established product lines (package sizes, flavours etc.).

4.      Improvements and revisions of existing products - New products that provide improved performance or greater perceived value and replace existing products.

5.      Repositioning - Existing products that are targeted to new markets or market segments.

6.      Cost Reductions - New products that provide similar performance at lower cost. 

Challenges in New Product Development

Several factors hindering new-product development.

1.      Shortage of Important ideas in certain areas – There may be few ways left to improve some basic products (such as steel, detergents).

2.      Fragmented Markets – Companies have to aim their new products at smaller market segments, and this can mean lower sales and profits for each product.

3.      Social and Governmental Constraints – New products have to satisfy consumer safety and environmental concerns.

4.      Cost of Development – A company typically has to generate many ideas to find just one worthy of development, and often face high R & D manufacturing, and marketing cost.

5.      Faster required development time – Companies must learn how to compress development time by using new techniques.

6.      Capital Shortages – Some companies with good ideas cannot raise the funds needed to research and launch them.

7.      Shorter Product Life Cycles – When a new product is successful, rivals are quick to copy it.

What can a Company do to develop successful new product? Cooper and Kleinschmidt found that the number-one success factor is a unique, superior product. Another key success factor is a well-defined product concept prior to development. Other success factors are technology and marketing synergy, quality of execution in all stages, and market attractiveness. 

What can a Company do to develop successful new product?

• Unique, superior product.
• Well-defined product concept prior to development.
• Technology and Marketing synergy.
• Quality of execution in all stages.
• Market attractiveness. 

Madique and Zirger studied Eight Factors Accounting for New-Product Success in the Electronic Industry.

1.      The deeper the company’s understanding of customer needs.

2.      The higher the performance-to-cost ratio.

3.      The earlier the product is introduced ahead of competition.

4.      The greater the expected contribution margin.

5.      The more spent on announcing the product.

6.      The more spent on launching the product.

7.      The greater the top management support.

8.      The greater the cross-functional team work. 

New Product Development is also risky with many large companies losing billions of dollars on new product development. example: FedEx lost $340 million on Zap Mail. British Concorde will never recover its investments.

Recent studies in the USA put the failure rate of new consumer products at 95%. 

Organizational Arrangements

New product development requires senior managers to define business domains, product categories, and specific criteria. Once company established the following acceptance criteria;

·         The product can be introduced within 5 years.

·         The product has a market potential of at least $50 million and a 15% growth rate.

·         The product would provide at least 30% return on sales and 40% on investment.

·         The product would achieve technical or market leadership.

Budgeting for New Product Development

Senior Management must decide how much to budget for new-product development. Research & Development (R & D) outcomes are so uncertain that it is difficult to use normal investment criteria. To solve such problems, some companies are financing as many projects as possible hoping to achieve a few winners.

Organizing New-Product Development

Companies handle the organizational aspect of new-product development in several ways by assigning responsibility for new-product ideas to Product Managers. Some companies create New-product Managers who report to category manager. Some companies have high level management committee charged with reviewing and approving proposals. Large companies often establish a New-product department to generate and screen new ideas.

Managing the Development Process - Ideas

Ideas Generation - The new-product development process starts with the search for ideas. New product ideas can come from interacting with various groups and from using creatively generating techniques.

Interacting With Others – Ideas for new products can come from customers, scientists, competitors, employees, channel members or top management.

Customer needs and wants, are the logical place to start the search for ideas.

Creativity Techniques – Stimulating creativity in individuals and groups.

·         Attribute Listings.

·         Forced Relationships.

·         Morphological Analysis.

·         Reverse Assumption Analysis.

·         New Contents.

·         Mind Mapping.

Idea Manager - Companies should motivate its employees through rewards to submit new ideas to the Idea Manager. New Ideas are then reviewed & screened by the Idea Review Committee. Ideas are then sorted out into three groups;

1.      Promising Ideas.

2.      Marginal Ideas.

3.      Rejects.

The promising ideas are research further with surviving ideas moving into a full scale screening process. The purpose of screening is to drop poor ideas as early as possible. The rational of dropping poor ideas is because costs involved in developing new products. 

Managing the Development Process – Concept Development and Strategy.

Development and Testing

Attractive ideas must be refined into testable product concepts. A product idea can be turned into several concepts. The product idea is a possible product the company might offer to the market.

(Product Concept) Questions that need to be asked:

1.      Who will use this product?

2.      What primary benefit should this product provide?

3.      When will people consume this product?

Product Concept has to be turned into a Brand Concept. The company needs to decide how much to charge and how to distinguish its product in the market. (Brand positioning).

Concept Testing - Concept testing involves presenting the product concept to appropriate target consumers and getting their reactions. The concepts can be presented symbolically or physically. The more the tested concepts resemble the final product or experience, the more dependable concept testing is.

Companies are also using virtual reality to test product concepts. Virtual Reality programs uses computers and sensory devices (such as gloves or goggles) to stimulate reality. Many companies today use customer-driven engineering to design new products. Customer-driven engineering attaches high importance to incorporating customer preferences in the final design.

Concept Testing entails presenting consumers with an elaborated version of the concept. Example: Our product is a powdered mixture that is added to milk to make an instant breakfast that gives the person all the needed nutrition along with good taste and high convenience. The product would be offered in three flavours (chocolate, vanilla, and strawberry) and would come in individual packets, six to a box, at $2.49 a box. After receiving this information, researchers’ measure product dimensions by having consumers respond to the following questions:

1.      Communicably and believability: Are the benefits clear to you & believable?

2.      Need Level: Do you see this product solving a problem or filling a need for you?

3.      Gap level: Do other products currently meet this need and satisfy you?

4.      Perceived value: Is the price reasonable?

5.      Purchase intention: Would you buy the product?

6.      User targets purchase occasions, purchasing frequency.

Conjoint Analysis

Consumer preferences for alternative product concepts can be measured through conjoint analysis, a method for deriving the utility values that consumers attach to varying levels of a product’s attributes. Conjoint analysis has become one of the most popular concept-development and testing tools.

Marketing Strategy

Following successful concept test, product manager has to develop a preliminary marketing strategy plan to introduce the product into the market. The plan should have;

1.      Describes the target market’s size, structure, & behavior, planned    product positioning, sales market share & profit goals.

2.      Outline the planned pricing, distribution strategy and marketing budget for the first year.

3.      Outline the long run sales, profit goals and marketing mix strategy over time. 

Business Analysis

After management develops the product concept and marketing strategy, it can evaluate the proposal’s business attractiveness.

Management needs to prepare sales, cost and profit projections to determine whether they satisfy the company objectives.

The next stage is the development stage. As new information comes in, the business analysis will undergo revision and expansion.

Estimating Total Sales – Total estimated sales are the sum of estimated first-time sales, replacement sales, and repeat sales. Sales estimation methods depend on whether the product is a one-time purchase, an infrequently purchased product, or a frequently purchased product.

Estimating Costs and Profits – Costs are estimated by the R & D, manufacturing, marketing, and financing departments in term of sales, costs and profits.

Companies use other financial measures to evaluate the merit of new product proposals.

Managing the Development Process – Development to Commercialization.

Product Development 

At this stage the company will determine whether the product idea can be translated into a technically and commercially feasible product. If non feasible, the accumulated project cost on product development will be lost however, information gained during the process will be useful.

Market Testing 

After management is satisfied with functional and psychological performance, the product is ready to be dressed up with a brand name and packaging and put into a market test. Not all companies undertake market testing, however, such testing can yield valuable information about buyers, dealers, marketing program effectiveness and market potentials.

The amount of market testing is influenced by the investment cost and risk on the one hand, and the time pressure and research cost on the other. It may also be severely reduced if the company is under great pressure due to competitor’s presence or timeframe to launch.

1.      Consumer-Goods Market Testing.

2.      Business-Goods Market Testing.

Consumer-Goods Market Testing

1.      Sales-Wave research – Consumers who initially try the product at no cost are reoffered the product.

2.      Simulated Test Marketing – Finding 30 to 40 qualified shoppers and questioning them about brand familiarity.

3.      Controlled Test Marketing – A research firm manages a panel of stores that carry new products for a fee.

4.      Test Markets – The ultimate way to test a new consumer product is to put it into full-blown test markets

Commercialization

If the company goes ahead with commercialization, it will face its largest cost build infrastructure & manufacturing facilities etc. Another major cost is marketing of the new product into the market place.

1.      When (Timing) – Market-entry timing is critical

2.      Where (Geographic Strategy) – (Single location, Region, Several Region, National or International)

3.      To Whom (Target Market Prospect) – Distribution and promotion to the best prospect groups

4.      How (Introductory Market Strategy) – Develop action plan for introducing products into the rollout market. 

The Consumer Adoption Process

How do potential customers learn about new products, try them and adopt or reject them? Adoption is an individual’s decision to become a regular user of a product. The Consumer-Adoption process is later followed by the Consumer-Loyalty process, which should be the concern of the established producer.

Stages in the Adoption Process 

An Innovation is any good, service, or idea that is perceived by someone as new. The idea may have a long history, but it is an innovation to the person who sees it as new. Innovations take time to spread through the system.

Innovation Diffusion Process can be seen as “the spread of a new idea from its source of invention or creation to its ultimate users or adopters”

Challenges in New Product Development

Most established companies focus on incremental innovation while newer companies create disruptive technologies that are cheaper and more likely to alter the competitive space. Established companies are slow to react or invest in these disruptive technologies because they threaten their investments and many failed when faced with new formidable competitors.

Stages in the Adoption Process       

Adopters of new products have been observed to move through five stages;

1.      Awareness – Consumer becomes aware of innovation but lacks information

2.      Interest – Consumer is stimulated to seek information on the innovation

3.      Evaluation – Consumer consider whether to try the innovation

4.      Trial – Consumer tries the innovation to improve his or her estimate of value

5.      Adoption – Consumer decides to make full and regular use of the innovation

Factors Influencing the Adoption Process 

Marketers recognize the following characteristic of the adoption process:

1.      Readiness to try new products and personal influence

2.      Characteristic of the innovation

3.      Organizations’ readiness to adopt innovation

Summary and Conclusion

Once a company has segmented the market, chosen its target customer group and identified their needs, and determined its desired market positioning, it is ready to develop and launch appropriate new products. Marketing should participate with other departments in every stage of new product development.

Successful new-product development requires the company to establish an effective organization for managing the development process. Companies can choose to use product managers, new product managers, new product committee, new product department or new product venture team.

Eight stages are involved in the new-product development process;

1.      Idea Generation

2.      Idea Screening

3.      Concept Development & Testing

4.      Marketing Strategy development

5.      Business Analysis

6.      Product Development

7.      Market Testing

8.      Commercialization

Then Consumer Adoption Process is the process by which customers learn about new products, try them, and adopt or reject them. Today many marketer are targeting heavy users and early adopters of new products, because both groups can be reached by specific media and tend to be opinion leaders. The Consumer Adoption Process is influenced by many factors beyond the marketer’s control including consumers’ and organizations’ willingness to try new products, personal influence & the characteristics of the new product or innovation.

 

Source: Marketing Management 11^th Edition, Philip Kotler (2003) Apprentice Hall