Developing and Managing Products Key Concepts

The New-Product Development Process Chapter 10 Developing and Managing Products The New-Product Development Process New Product Success Factors Long-term commitment Company-specific approach 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. Capitalize on experience Establish an environment

New-Product Development Process Chapter 10 Developing and Managing Products New-Product Development Process New-Product Strategy Idea Generation Idea Screening Business Analysis Development Test Marketing Commercialization New Product Notes: Most companies follow formal new-product development process, consisting of the seven steps shown here and in Exhibit 10.1. The funnel-shaped graphic highlights the fact that each stage acts as a screen to filter out unworkable ideas as the new-product development process evolves. A new-product strategy is part of the organization’s overall marketing strategy. It sharpens the focus and provides general guidelines for generating, screening, and evaluating new product ideas. It links the new-development process with the objectives of the marketing department, the business unit, and the corporation. All objectives must be consistent with one another. For each successful new product introduced, a company needs between 50 and 60 other new product ideas in the new-product development process.

Idea Generation Where Good Product Ideas Come From Chapter 10 Developing and Managing Products Idea Generation Where Good Product Ideas Come From Customers Employees Distributors Competitors Vendors R & D Consultants Sources of New-Product Ideas 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.

Tips for Successful New Product Development Chapter 10 Developing and Managing Products Tips for Successful New Product Development Disperse R & D around the globe Keep teams small and empower employees Flatten hierarchy Encourage generation of crazy new ideas Welcome mistakes Notes: The head of R&D at Nokia offers five tips for successful new-product development.

Business Analysis To Ensure Project is Feasible Chapter 10 Developing and Managing Products Business Analysis To Ensure Project is Feasible Considerations in Business Analysis Stage Demand Cost Sales Profitability Notes: In the business analysis stage, the preliminary figures for demand, cost, sales, and profitability are calculated. In an existing product, the accuracy of revenue projections can be made using industry estimates of total market size. However, forecasting market share for a new entry is a bigger challenge. These questions are asked during the business analysis stage: * What is the likely demand for the product? * What impact would the new product have on total sales, profits, market share, and return on investment? * How would the introduction of a new product affect existing products? Would the new product cannibalize existing products? * Would current customers benefit from the product? * Would the produce enhance the image of the company’s overall product mix? * Would the new product affect current employees, such as hiring more people or reducing the size of the workforce? * What new facilities would be needed? * How might competitors respond? * What is the risk of failure? Is the company willing to take the risk? The business analysis is important because costs increase dramatically once a product idea enters the development stage.

Product Development Different Aspects of Development Chapter 10 Developing and Managing Products Product Development Different Aspects of Development Creation of prototype Marketing strategy Packaging, branding, labeling Promotion, price, and distribution strategy Manufacturing feasibility Final government approvals if needed Notes: The development stage can last a long time and is very expensive. For example: 10 years for Crest toothpaste 18 years for Minute Rice 15 years for Xerox copy machine 51 years for television Gillette introduced three shaving systems before introducing the Mach3 in 1998 and Fusion in 2006

Test Marketing Test Marketing Chapter 10 Developing and Managing Products Test Marketing Test Marketing The limited introduction of a product and a marketing program to determine the reactions of potential customers in a market situation. On Line Merwyn Do you think test marketing can be simulated successfully? Go to Merwyn.com and read how the company uses algorithms to create test market results. If you have an idea, try it out. Do you think this is a suitable and effective substitute for real test marketing? Notes: Test marketing allows management to evaluate alternative strategies and to assess how well the various aspects of the marketing mix fit together. Cities chosen for test sites should reflect market conditions in the new product’s projected market area. Since no place is “ideal”, researchers should find locations where the demographics and purchasing habits mirror the overall market. The box on page 151 provides a checklist for choosing a test market.

Alternatives to Test Marketing Chapter 10 Developing and Managing Products Alternatives to Test Marketing Single-source research using supermarket scanner data Simulated (laboratory) market testing Online test marketing Online: New Product Works Not all new products are well received in the marketplace. Go to New Product Works’ Web site and read the polls for an overview of products the company expects to “hit” and some it expects to “miss.” What is your opinion of the products listed? Notes: Alternatives to traditional test marketing include: Single source research using supermarket scanner data. (Chapter 8) Typical cost: $300,000 Simulated market testing. Advertising and test product are shown to members of the target market. These people are taken to a mock or real store where their purchases are recorded. Typical cost: $25,000 to $100,000, compared to $1 million or more for full-scale test marketing. The Internet is a fast, cost-effective way to conduct test marketing. Firms utilizing this capability include Procter & Gamble.

Commercialization Bringing Product to Market Chapter 10 Developing and Managing Products Commercialization Bringing Product to Market Production Inventory Buildup Distribution Shipments Sales Training Trade Announcements Customer Advertising Notes: The decision to market a product sets several tasks in motion, as shown on this slide. The time between the initial commercialization decision and the actual introduction may range from a few weeks to several years, depending on the complexity of the product. Costs of development and introduction can be staggering. Gillette spent $750 million developing MACH 3, and the first-year marketing budget was $300 million. A well-planned Internet campaign can provide new-product information, and is a cost-effective way to reach customers at a time they need a product than communication with a target market that may eventually have a need.

New-Product Development Process From Ideas to Market Chapter 10 Developing and Managing Products New-Product Development Process From Ideas to Market

Why New Products Fail No discernible BENEFITS Chapter 10 Developing and Managing Products Why New Products Fail No discernible BENEFITS POOR MATCH between features and customer desires Overestimation of market SIZE Incorrect POSITIONING PRIE too high or too low Inadequate DISTRIBUTION Poor PROMOTION INFERIOR product Notes: In consumer goods, 70 to 90 percent of all new products fail within the first year. Reasons are shown on this slide. Failure can be a matter of degree. Absolute failure occurs when a company cannot recover its development, marketing, and production costs. A relative product failure occurs when the product returns a profit but fails to achieve sales, profit, or market share goals. Discussion/Team Activity: Discuss products that have failed. Attempt to characterize the likely reasons for the failure.

Factors in Successful New Products Chapter 10 Developing and Managing Products Factors in Successful New Products Match between product and market needs Different from substitute 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. Benefit to large number of people

Success Factors Listening to customers Producing the best product Chapter 10 Developing and Managing Products Success Factors 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 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

The Spread of New Products The diffusion process and how new products are adopted

Chapter 10 Developing and Managing Products Diffusion Diffusion The process by which the adoption of an innovation spreads. Notes: By understanding how consumers learn about and adopt products, marketing managers have a better chance of successfully marketing products.

Categories of Adopters Chapter 10 Developing and Managing Products Categories of Adopters Laggards Late Majority Early Majority Early Adopters Innovators 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.

Product Characteristics and how fast new products are adopted Chapter 10 Developing and Managing Products Product Characteristics and how fast new products are adopted Trialability Observability Relative Advantage Compatibility Complexity On Line: Electronic Gadget Depot Visit the Electronic Gadget Depot and shop for an Internet appliance. Choose one, and rate it on a scale of 1 to 10 for each of the product characteristics listed on this slide. How quickly do you think this innovation will be adopted based on your perception of its complexity, compatibility, advantage, observability, and trialability? Notes: Five product characteristics can be used to predict and explain the rate of acceptance and diffusion of a new product: Complexity: the more complex the product, the slower is its diffusion. Example: DVD recorders Compatibility: Incompatible products diffuse more slowly than compatible products. Example: contraceptives in countries with contradictory religious beliefs. Relative advantage: The degree to which a product is perceived as superior to existing substitutes. Example: The advantages of an MP3 player over a portable CD player. Observability: The degree to which the benefits or other results of using the products can be observed by others and communicated to target customers. Example: Fashion items and automobiles. Trialability: The degree to which a product can be tried on a limited basis. Example: It is easier to try a new toothpaste than a new automobile.

Sales of New Audio Products Chapter 10 Developing and Managing Products Sales of New Audio Products Notes: This graph shows the rate of adoption of numerous audiovisual products introduced in the last 25 years. Satellite radio has been adopted more quickly than any other innovative audio product.

Communication Aids the Diffusion Process Chapter 10 Developing and Managing Products Marketing Implications of the Adoption Process Direct from Marketer Word of Mouth Communication Aids the Diffusion Process 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.

Diffusion Process for New Products

Product Life Cycle Product Life Cycle Chapter 10 Developing and Managing Products Product Life Cycle Product Life Cycle A concept that provides a way to trace the stages of a product’s acceptance, from its introduction (birth) to its decline (death). 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.

Product Life Cycle Sales Dollars Profits Time Introductory Stage Chapter 10 Developing and Managing Products Product Life Cycle Time Dollars Profits Sales Introductory Stage Growth Maturity Decline Notes: Exhibit 10.2 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.

Product Life Cycles for Styles, Fashions, and Fads Chapter 10 Developing and Managing Products Product Life Cycles for Styles, Fashions, and Fads Notes: Exhibit 10.3 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.

U.S. Sales of Televisions Chapter 10 Developing and Managing Products U.S. Sales of Televisions Notes: This graph of the PLC of TVs, based on 4.5 years of data, helps illustrate the categories of adopters discussed on page 153. What conclusions can you draw about the PLC?

Introductory Stage High failure rates Little competition Chapter 10 Developing and Managing Products Introductory Stage High failure 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 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.

Introductory Stage How it works in Europe Chapter 10 Developing and Managing Products Introductory Stage How it works in Europe Notes: The introductory stage of the PLC varies among European countries, as shown in this exhibit. Cultural factors seem to be largely responsible, and Scandinavians are often more open to new ideas than other European countries.

Growth Stage Increasing rate of sales Entrance of competitors Chapter 10 Developing and Managing Products Growth Stage Increasing rate of sales Entrance of competitors Market consolidation Initial healthy profits Aggressive advertising of the differences between brands Wider distribution 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.

Maturity Stage Sales increase at a decreasing rate Saturated markets Chapter 10 Developing and Managing Products Maturity Stage Sales increase 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 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.

Decline Stage Long-run drop in sales Large inventories of unsold items Chapter 10 Developing and Managing Products Decline Stage Long-run drop in sales Large inventories of unsold items Elimination of all nonessential marketing expenses “Organized abandonment” 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.

Diffusion Process and PLC Curve Chapter 10 Developing and Managing Products Diffusion Process and PLC Curve Innovators Early adopters Early majority Late majority Laggards Product life cycle curve Introduction Growth Maturity Decline Sales Diffusion Notes: Exhibit 10.4 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.

Product Life Cycles Sales Time Product Strategy Distribution Promotion Chapter 10 Developing and Managing Products Product Life Cycles Time INTRODUCTION GROWTH MATURITY DECLINE Product Strategy Distribution Promotion Pricing Limited models Frequent changes More models Frequent changes. Large number of models. Eliminate unprofitable models Limited Wholesale/ retail distributors Expanded dealers. Long- term relations Extensive. Margins drop. Shelf space Phase out unprofitable outlets Awareness. Stimulate demand. Sampling Aggressive ads. Stimulate demand Advertise. Promote heavily Phase out promotion High to recoup development costs Fall as result of competition & efficient production. Prices fall (usually). Prices stabilize at low level. Sales 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.