CHAPTER 5
NEW PRODUCT DEVELOPMENT,
MANAGEMENT AND STRATEGY
Product Lines Defined
• Proprietary or Catalog Products:
• Standard product offerings inventoried for anticipation of sales
orders.
• Custom-Build Products:
• Made for different variations according the specifications of
customers.
• Custom-Designed Products:
• One-of-a-kind unit made for a small group of users.
• Industrial Services:
• Maintenance, repair or warranty.
Various Business Product
Strategies
•
•
•
•
•
•
•
•
Establishing product/service policies
Setting product service objectives
Searching out new products/services
Introducing new products/services
Modifying existing products/services
Dropping out old products/services
Packaging the products
Providing technical assistance/support
Consumer Vs Business Product
Strategies
•
•
•
•
•
•
•
•
Product is important and low failure rate
Derived demand and less research
Buyer and user are not the same
Specifications are very important
Longer life cycle
Product support is very important
Packaging is less important
Unimportant aesthetic characteristics
Importance of Product Planning
• Increased Competition:
• Increased global and domestic competition.
• Derived Demand:
• understanding consumer needs and wants.
• Increased Purchasing Sophistication:
• Vendor analysis, value analysis and computer
simulations.
• Labor Saving Requirements:
• Product planning to save labor cost
Types of New-Product
Approaches
• Technology push
• Once the perceived value of technology is great,
technology push usually result. When the new
product is developed, marketing function becomes
important
• Market pull
• It is the result of market research and understanding
the needs of users and development a new product
to satisfy the needs. It caries the least business risk,
because there is a chance that product will be sold.
Product Development and
Strategy in Business Marketing
• It is engineering responsibility.
• Marketing and sales personnel are
frequently called on new product.
• It is the lifeblood of the industry; therefore,
firms should spent time and effort to
developing new product.
• However, it is a risky endeavor for every
industrial firm.
Phases of New Product
Development
Idea and concept generation
Screening and evaluation
Business analysis
Product development
Product testing
Product commercialization and introduction
Marketing Activities at Each Phase
•
•
•
•
•
•
Idea and concept generation:
•
Involves the search for product ideas and concepts that meet
company objectives.
Screening and evaluation:
•
Involves analysis to determine which ideas submitted are pertinent
and merit a more detailed study of potential feasibility and market
acceptance.
Business analysis:
•
Return-on-investment criteria are examined along with competition
and the potential for market entry.
Product development:
•
Involves taking the product from an idea generated during a
brainstorming session to a state of readiness for product and
market testing.
Product testing:
•
Involves conducting commercial experiments necessary to verify
earlier business judgments.
Product commercialization and introduction:
•
Includes launching the new product through full-scale production
and sales and committing the company's reputation and resources
Alternative Approach to Product
Development
• Initial Screening
• go or no go decision
• Preliminary market assessment
• quick and dirty situation analysis
• Preliminary technical assessment
• technical evaluation of new product idea
• Detailed market study
• marketing research, focus group interviews
Alternative Approaches to
Product Development (cont.)
• Preliminary business analysis
• net present value, profit expectations
• Product development
• Alpha test
• testing in house
• Beta test
• testing the product in customer’s business
• Test market
• selling the product in test cities
Alternative Approaches to
Product Development (cont.)
• Trial production
• limited production to prove production facilities
• Final business plan
• financial analysis before commercialization
• Production ramp up
• Full scale production
• Market launch
• implementation comprehensive marketing plan
New Product Commercialization:
Common Mistakes
• When the development risks are high and
the opportunity cost are low, it is not
particularly advantageous to accelerate
product development.
• When the development risk is low and
opportunity costs are high, it is absolutely
important to speed up the process.
New Product Commercialization
(cont.)
• The most challenging situation is that when
opportunity costs and development risks are
both high.
• Breakthrough inventions:
• It is an idea that is so different that it can not be
compared to any existing practice or perception.
• Incremental innovations:
• This is continuation of existing method or practice.
New Product Commercialization
(cont.)
• Mistake No.1:
• Lack of sensitivity to the differences in the management tasks
required of incremental Vs. breakthrough projects.
• Mistake No.2:
• Tendency to assume that breakthrough projects need financial support
from top management and incremental need only backpacking.
• Mistake No.3:
• Managers already handle a portfolio of products through existing
manufacturing/sales system, it makes sense to adopt the same for the
new product. However, new customers have different buying habits;
therefore, using existing organizational systems often means
completely missing the boat on the real customers’ real needs
• Mistake No.4:
• Supplier misperception lead to faulty product positioning.
Organization of the New Product Effort
• Product manager:
• Individuals responsible for four P’s marketing mix decisions for specific
product line as it travels through life cycle; responsibility often extends
to new product development.
• New product committee:
• Part-time interdisciplinary management group reviews new product
proposals; advantages outweigh disadvantages because committee is
most common form of organizational structure for managing new
products.
• New product department:
• Specific department generates and evaluates new product ideas, directs
and coordinates development work, and implements field testing and precommercialization of new product; allows for maximum effort in new
product development, but at expense of major overhead costs.
• New product venture team:
• Task force representing various departments responsible for new product
development and implementation; normally dissolved once new product
is established in market.
Product Manager/
Marketing Manager Role
Old View:
Organize, coordinate, and control.
New View:
Calculated chaos and controlled
disorder
Communicate—Communicate—
Communicate: Make things happen.
Questions:
• What companies purchase products
from these producers?
• What would a Product Manager do to
facilitate these transactions and
relationships?
Product Life Cycle Concept
• Introduction:
• Create awareness
• Growth:
• Favorable image and create more buyers. Higher
sales.
• Maturity:
• Stable sales and declining unit costs of promotion
• Decline:
• Declining sales and profit
Product Life Cycle
Introduction Growth Maturity
Decline
As a strategy planning tool, a “PLC” diagram is a visual representation of
a tendency (many non-business systems tend to same shape, such as to
show income and height). On one level, it is a reminder to planner of what
is coming—if an inflection point is reached, you should know what is
coming (even though you only have actual life cycle to that point). In
business, PLC is often driven by experience curve, economies of scale,
competitive attraction to market opportunities, rate of diffusion factors,
and eventual market saturation. Planners must adjust for actual impact of
these factors on a particular product.
(continued)
Product Life Cycle
Introduction Growth Maturity
Decline
On another level, marketers continuously monitor and adjust their strategy
and tactics as product’s cycle progresses. As a reference, they can refer to
standard mix strategies for each PLC stage (usually represented in a table
directly under PLC diagram on most texts). Marketer’s objective is to adjust
strategy to changing life cycle situation to maximize the results. As maturity
approaches, marketer often decides to attempt a PLC extension by (1)
finding ways to increase current market’s usage, (2) finding totally new uses,
(3) finding new target segments, (4) developing new distribution, or (5)
perhaps a major product improvement and repositioning.
(continued)
Product Life Cycle
Actual PLC curves can be any shape—from product that doesn’t sell
at all, to fad that grows fast but has short life, to seasonal product, etc.
Company depends on its marketers to understand what factors
determine success and to make appropriate strategic decisions. It is
often tempting for new students to want to learn PLC superficially, but in
real world many people depend on in-depth understanding.
Experience Curve
Int. Growth Mat. Dec.
cost
production
Experience Curve Concept
Costs
Considerations
Costs Considerations
10-7
10-7
2,000
3
4
SRAC
4,000
2
3,000
1
1,000
Cost per unit
Cost Per Unit at Different Levels of Production Per Period
Quantity Produced per Day
 Copyright 1999 Prentice Hall
LRAC
Success of Industrial Products
•
•
•
•
•
•
Experience in effective product planning
Introduction of superior products
High level of marketing proficiency
Superior technological capabilities
Well defined target market
Coordination between marketing, production and
technological personnel
• Adequate financial resources
Failure of Industrial Products
• Absence of sound marketing orientation and
•
•
•
•
competitive strength
Lack of offering significant benefits over
competitors’ products
Inadequate and misdirected marketing
efforts
Technical difficulties
Higher prices
Determinants of the Product Mix
in Business Market
• Technology:
• Successful firms are also leader of introduction of new technology.
• It requires continuous contact with customers to inquire needs/wants.
• Competition:
• The challenge is the continuous changes of product mix of competitors.
• Barriers to entry may prevent this challenge.
• Changes in Levels of Business Activity:
• Business cycles and seasonal variations may be very effective in business
market; therefore, business-to-business firms add new products to their
product lines to meet the seasonal demand.
• Operating capacity:
• Under capacity in sales and marketing may suggest business-to-business firms
to improve their product mix.
• Market Factors:
• Changing in product mix of business-to-business marketers could present an
opportunity to sell additional products.
Stages in Adoption Process
• Awareness:
• Buyer learns of new product or service, but lacks information.
• Interest:
• Buyer seeks out or requests additional information.
• Evaluation:
• Buyer (or member of buying team) considers/evaluates usefulness
of product/service; consideration might be given to value-analysis
project or make-buy situation.
• Trial:
• Buyer adopts product or service on limited basis.
• Adoption:
• If trial purchase worked, then buyer decides to make regular use of
product/service.
Factors Influencing
Rate of Adoption-Diffusion
• Diffusion: Spread of new product, innovation, or
service throughout an industry over time.
• Diffusion speed varies among industries—fast in
electronics, slow in domestic steel.
• As the marketer you must know, evaluate impact
of, monitor, and where possible affect factors that
influence adoption/diffusion rate.
• Technical complexity/uncertainty of the new
product will slow down the diffusion process.
Product Portfolio Strategies
• Boston Consulting Group Matrix (BCG)
•
•
•
•
Question mark
Star
Cash cow
Dog
BCG SBU Portfolio Business Strategy
High
Business
strength,
Growth rate,
Cash use
Low
High
Low
Industry attractiveness,
Market share,
Cash generation
(continued)
BCG Business SBU Portfolio Strategy
High
Business
strength,
Growth rate,
Cash use
Low
Use cash
to make
into star
Defend
position
Nurture
to feed
cash to?
Fix or abandon
High
Low
Industry attractiveness,
Market share,
Cash generation
(continued)
BCG Business SBU Portfolio Strategy
(as might appear in your strategic planning documents)
High
Growth rate
Cash use
Low
Computers
Printers
Modems
Telephones
High
Low
Market share
Cash generation
Note: Size can indicate amount of sales.
(continued)
GE Strategic Planning Grid
High
Medium
Low
High
Business strength axis
Medium
Low
High
Medium
Low
Self-defined as a
function of: size,
growth, share,
profitability, image,
position, people, and
other factors of
business strength or
weakness
Industry attractiveness axis
Self-defined as a function of: size, market growth, strength of
competitors, industry profitability, technical strength, and
positive acting market environmental factors.
(continued)
Product Deletion Strategies
• Harvesting:
• It is a strategy that to cut the cost to improve the cash flow.
• Reduce maintenance, research and advertising costs.
• Eliminate small order customers.
• Line Simplifications:
• Trims the product lines to a manageable level.
• Divestment:
• Reverse acquisition.
• Allows the firm to have balance product portfolio.
• Balancing with high-growth businesses with low-growth ones.
Important Characteristics
of Business Services
• Intangibility:
• Freight forwarding, consulting, repair, etc. can seldom be tried
out/tested in advance of purchase; instead, buyers must view
advertising copy, listen to sales presentation, or consult current
users to gain insight into expected performance.
• Heterogeneity:
• A service is an experience and thus cannot be duplicated; difficult
to standardize and thus output quality may vary.
• Perishability and fluctuating demand:
• Services cannot be stored and markets fluctuate by day, week, or
season; idle service capacity is business that is lost forever—no
inventory buffer.
Important Characteristics of
Business Services (cont.)
• Simultaneity:
• Production and consumption of services are
inseparable; this typically puts marketer in very
close contact with customer, requiring them to be
highly professional.
Business Service Marketing:
Challenges and Opportunities
• Service Marketing Vs. Product Marketing:
• Business products should follow long development process.
• Business products should be packaged and distributed.
• Business services are developed, distributed and offered at the same
time.
• Product alteration is difficult for business product, but it is very easy
for business services.
• Positioning Strategy:
• Image of business services is in the mind of users.
• Competitive strategies of business services are implemented within
the target market areas.
• Bundling of Services:
• Selling maintenance/service contract with product.
Business Service Marketing
(cont.)
• Service Strategy and Marketing Mix:
• Product:
• Similar to products, improvements of services are required.
• It requires to recruit, train and manage the service employees.
• Price:
• It is related with the achievement motive of service provider.
• Pricing decision for business services are affected by the demand,
costs, and competitive pressure.
• Place:
• It should be convenient and available to users.
• It must be simple and shorter than business products.
• Promotion:
• It is inseparable from product; therefore, business services use
similar promotional tactics