New Product Planning, Strategy, and Development Contents IntroductionIntroduction Innovation StrategyInnovation Strategy Opportunity IdentificationOpportunity Identification Design ProcessDesign Process Testing and Improving New ProductsTesting and Improving New Products Correlates of Success and Reasons for FailureCorrelates of Success and Reasons for Failure

Chapter 4: Market Definition and Entry Strategy Part 1 Step 1: Identification of markets that offer the best opportunities for the organizationStep 1: Identification of markets that offer the best opportunities for the organization Step 2: Detailed definition of these markets by determiningStep 2: Detailed definition of these markets by determining a)the boundaries of each market and b)the relationship between the market and the product line Step 3: Selection of markets for new products and product line expansion, with the best prospects and organizational matchStep 3: Selection of markets for new products and product line expansion, with the best prospects and organizational match Chapter 4: Market Definition and Entry Strategy Part 2 Focus on the Bass ModelFocus on the Bass Model Opportunity Identification

Revisiting Growth Potential : The Bass Model The rate at which a product diffuses into a market is a measure of its growth potentialThe rate at which a product diffuses into a market is a measure of its growth potential A market for a product may be thought of as consisting of two groups of adopters A market for a product may be thought of as consisting of two groups of adopters InnovatorsInnovators ImitatorsImitators The rate of innovation diffusion will be governed by the relative size of these two groups and their respective propensity to innovate or imitateThe rate of innovation diffusion will be governed by the relative size of these two groups and their respective propensity to innovate or imitate The Bass Model uses the sales data from the first few years of a product category launch to create the estimated pattern of sales for the product category during its entire lifecycleThe Bass Model uses the sales data from the first few years of a product category launch to create the estimated pattern of sales for the product category during its entire lifecycle

Actual versus Fitted Actual and Fitted Adoption of VCR's Year Adoption in Thousands Actual Adoption Fitted Adoption

Actual versus Fitted Data using the Bass Model Note how similar the shapes of the actual and fitted adoption curves are to the familiar shape of the product life cycle (PLC)Note how similar the shapes of the actual and fitted adoption curves are to the familiar shape of the product life cycle (PLC) The adoption curves exhibit all the stages of the PLCThe adoption curves exhibit all the stages of the PLC –Introduction –Growth –Maturity –Decline Thus the Bass Model possesses sufficient descriptive accuracy and is also consistent with the theoretical concept of PLCThus the Bass Model possesses sufficient descriptive accuracy and is also consistent with the theoretical concept of PLC With limited data and by making realistic assumptions, the Bass Model can be used by product managers to arrive at not only the market potential for a product but also the estimated pattern of sales for each year in the product’s life cycleWith limited data and by making realistic assumptions, the Bass Model can be used by product managers to arrive at not only the market potential for a product but also the estimated pattern of sales for each year in the product’s life cycle

Revisiting Growth Potential: Market Growth Models Sure, let’s dive right in and look at some equations

The Bass Model Equation S t = P*(M- Y t-1 ) + Q*(Y t-1 /M)*(M- Y t-1 ) Where S (t) = Sales in time period ‘t’. P = Coefficient of innovation Q = Coefficient of imitation Q = Coefficient of imitation M = Market Potential M = Market Potential Y t-1 = Cumulative Sales up to time period ‘t-1’. Y t-1 = Cumulative Sales up to time period ‘t-1’.

The Bass Model: The components of the equation S t = P (M- Y t-1 ) + Q (Y t-1 /M) (M- Y t-1 ) M- Y t-1 = Remaining market potential at the beginning of time period ‘t’ Y t-1 /M = Ratio of cumulative sales at the beginning of time period ‘t’ to the total market potential the total market potential P(M- Y t-1 ) = Sales obtained in a given period(t) from the “innovators” group group Q(Y t-1 /M) (M- Y t-1 )= Sales obtained in a given period(t) from the “imitators’ group Q(Y t-1 /M) (M- Y t-1 )= Sales obtained in a given period(t) from the “imitators’ group S (t) = Total Sales from both groups in time period ‘t’.

The Bass Model Equation: An intuitive explanation S t = P(M- Y t-1 ) + Q(Y t-1 /M)(M- Y t-1 ) Sales from innovators in any period given by P(M- Y t-1 ) is a function of the remaining market potential M- Y t-1. P is simply a constant fraction. Sales from imitators in any period Q(Y t-1 /M)(M- Y t-1 ) is also a function of the remaining market potential M- Y t-1. But in addition, sales from imitators is also a result of the pressure exerted by the total number of people who have bought the product so far (Y t-1 ) in relation to the total market potential (M). In other words, sales from imitators is a function of Y t-1 /M. Hence the sales from imitators is a function of the combination of the remaining potential M- Y t-1 and the ratio Y t-1 /M. This combination is represented by the product (Y t-1 /M)(M- Y t-1 ). Q is simply a constant fraction. Hence the total sales S t is the combination of these two elements

The Bass Model: Different forms of the same equation With a little bit of algebraic manipulation the equation S t = P(M- Y t-1 ) + Q(Y t-1 /M)(M- Y t-1 ) can be re-written as S t = PM + (Q-P) Y t-1 – Q/M Y 2 t-1 = A + B Y t-1 + C Y 2 t-1 = A + B Y t-1 + C Y 2 t-1 Where A = PM, B= (Q-P) and C= -Q/M Mathematically, when all potential adopters have bought the product, S t = 0 and Y t-1 =M S t = 0 and Y t-1 =M Substituting in the equation S(t) = PM + (Q-P) Y t-1 – Q/M Y 2 t-1 0= A + B M + C M 2 0= A + B M + C M 2 This is a quadratic equation in M, and can be solved for M

We know a quadratic equation in the form ax 2 + bx + c = 0 is solved by the following formula: Hence, in our equation So if we are provided with the A, B, and C values in the equation A + B Y t-1 + C Y 2 t-1, we can estimate the market potential M and also determine the Coefficients P and Q. We will look at an illustration of this application later. The Bass Model (contd.)

With the help of basic calculus two other important formulae can be derived: 1.The time period when sales will reach peak levels T* = (1/(P+Q) )* In(Q/P) (Note: ln is short for natural log) 2.The magnitude of peak sales in the time period T* S(T*) = M(P+Q) 2 /4Q Knowledge of these two bits of information would be very useful in capacity planning The Bass Model (contd.)

Market Growth Models (contd.) Other implications from the equation S t = PM + (Q-P) Y t-1 – Q/M Y 2 t-1 1.If Q > P, sales curve will rise and fall 2.If Q < P, sales curve will fall continuously

New Product Diffusion- How the Times Are Changing Category Years to reach 1 million units (USA) Telephones27 TV sets 11 VCRs6 CDs5 HP’s Office jet all-in- one printer-scanner- fax-copier 2 * Marketing Engineering, 2nd edition, Lilien & Rangaswamy Adoption rates across categories *

Bass Model Applications In real life, the Bass Model has been adapted to many complex situationsIn real life, the Bass Model has been adapted to many complex situations In the next few slides, we will look at some simple problem solving exercises that illustrate the possible applications of the Bass ModelIn the next few slides, we will look at some simple problem solving exercises that illustrate the possible applications of the Bass Model Please also refer to the Tutorials 3 and 4 available under Week 3Please also refer to the Tutorials 3 and 4 available under Week 3

Problem # 1 For a particular product, the coefficient of innovation P (for the Bass model) is 0.05 and the coefficient of imitation Q is 0.2. The total number of potential buyers is 100, 000. a. Determine the time when sales will reach its peak. peak. b. Calculate the magnitude of peak sales

Problem # 1 ( contd.) Coeff of innovation P = 0.05Coeff of innovation P = 0.05 Coeff of imitation Q = 0.2Coeff of imitation Q = 0.2 Time to peak sales T* = 1/(P+Q) In (Q/P)Time to peak sales T* = 1/(P+Q) In (Q/P) Peak sales magnitude S(T*) = M(P+Q) 2 /4QPeak sales magnitude S(T*) = M(P+Q) 2 /4Q T* =T* = S(T*) =S(T*) =

Problem # 2 Suppose that the Bass model is fitted to empirical data, resulting in the Suppose that the Bass model is fitted to empirical data, resulting in the following expression: following expression: S t = Y t Y 2 t-1 S t = Y t Y 2 t-1 From this equation, determine the total number of potential adopters M

Problem # 2 (contd.) S t = Y t Y 2 t-1 S t = PM + (Q-P) Y t-1 – Q/M Y 2 t-1 A=PM = B=Q-P = C=-Q/M = Mathematically, when all potential adopters have bought the product, S t = 0 and Y t-1 =M S t = 0 and Y t-1 =M Solving this quadratic equation by using we obtain the value of Potential Adopters M = 391,048 we obtain the value of Potential Adopters M = 391,048

The Bass Model: Giving the numbers the finishing touches…..