PRODUCT LIFE CYCLES AND NEW PRODUCT DEVELOPMENT Professor Chip Besio Cox School of Business Southern Methodist University

Stages of the Product Life Cycle Sales Intro- duction Growth Mature Decline Time

Sales Low Rising Peak, Flattening Declining Cost Highest Average Lowest Depends Profits Negative Rising Higher Declining IntroGrowthMatureDecline

Customers Innovators Early Middle Laggards Adopters Majority Competitors Few Growing Many Few IntroGrowthMatureDecline

Introduction Stage ISSUES  Supply side –Technological leap-froging –Assume industry-wide start-up costs  Demand side –Some uncertainty in market size –Some uncertainty in market tastes –Innovators critical

Introduction Stage STRATEGIES  Market pioneers –Very risky –Need financial resources The “bleeding edge”  Pricing –Skimming –Penetration

Growth Stage STRATEGIES  Early followers  Emergence of repeat buyers  Options –Imitate –Innovate –Differentiate

Maturity Stage ISSUES  Technical certainty  Initial costs covered  Experienced, well-informed buyers  Replacement sales greater than initial sales  Problem - Commoditization

Maturity Stage STRATEGIES  Pioneer new segment  Head-to-head competition with leader  Low cost strategy  Catch leader asleep

Decline Stage STRATEGIES  Understanding reasons for decline  Options in order... –Maintain –Harvest –Drop

What Is A New Product?  New to the world  New to the company  Flankers –Line extensions –Brand extensions  Repositioning  Model changes Dyson Products Swiffer Products

New Product Development 9 New product development is the most important strategic activity of any firm  However, it is the most risky venture Most new products fail!

New Product Development Risks  Study by Assoc. of National Advertisers (2004) --across all types of industries –27% of line extensions failed –31% of new brands introduced in categories where company already had a product failed –46% of new products introduced to new categories failed  Only 1 in 7 new product ideas are carried to the commercialization phase

Why New Products Fail  Poor planning and strategy –Market is not attractive  Poor concept  Poor execution  Poor use of research  Poor technology  Poor timing –Changes in tastes/environment  Bad support from channel

How New Products Succeed  Top-management commitment  Start with the consumer -- not the factory  Intelligent use of research  Find a competitive advantage  Move quickly  Know when to get out  Accept, but manage risk

New Product Success Factors 4 Be close to the market (trends) 4 Set a strategic direction 4 Play to your strengths 4 Strong organizational support 4 Speed to market

Why Speed to Market?  Markets are getting more specialized  Intensified competition  Changing technology  Changing tastes  Rampant copying  Gaining shelf space early

New Product Development Process –Idea –Screening –Concept –Development –and Testing –Marketing –Strategy –Business –Analysis –Product –Development –Test –Marketing –Commercialization –Idea –Generation

New Product Development Process IDEA GENERATION  Gaps –Are there unfilled current consumer needs?  Growth –Are there unfilled future needs?  Synergies –Is there unfilled potential in the firm’s existing product portfolio?

New Product Development Process SOURCES OF NEW IDEAS  Technology  Market needs and user solutions  Competitors and other firms  Channels of distribution and suppliers  Management and employees  Environmental changes

New Product Development Process CONCEPT TESTING  Goal –Use primary market information to better define the product, forecast likely demand, and clarify target buyer  Common tools –Focus Groups –Conjoint Analysis –Web-based Panels

New Product Development Process BUSINESS ANALYSIS – Review Product Sales, Costs, and Profits Projections – to See if They Meet Company Objectives – – Review Product Sales, Costs, and Profits Projections – to See if They Meet Company Objectives – – If Yes, Move to – Product Development – If Yes, Move to – Product Development – If No, Eliminate – Product Concept – If No, Eliminate – Product Concept –Source: Prentice Hall

Business Analysis WHEN TO STOP A BAD IDEA  Rule 1: Remember the sunk cost fallacy  Rule 2: Set benchmarks for success beforehand and stick to them  Rule 3: Be sure to plan research so that it will allow you to diagnose the cause of problems

New Product Development Process TEST MARKETING –Standard –Test Market –Full marketing campaign –in a small number of –representative cities. –Standard –Test Market –Full marketing campaign –in a small number of –representative cities. Simulated Test Market –Test in a simulated –shopping environment –to a sample of –consumers Simulated Test Market –Test in a simulated –shopping environment –to a sample of –consumers –Controlled –Test Market –A few stores that have –agreed to carry new –products for a fee –Controlled –Test Market –A few stores that have –agreed to carry new –products for a fee –Source: Prentice Hall