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Chapter Eight: Developing New Products Chapter Objectives Identify the reasons firms innovate Describe the diffusion of innovation theory and how managers can use it to make product line decisions Explain the stages involved in developing new products and services Describe the product life cycle and summarize how it is used to make product line decisions Annotated Chapter Outline PowerPoint Slides Instructor’s Notes The chapter objectives and roadmap are intended to help students understand the content to be discussed. Topic One: Innovation and Value Innovation Transforms Ideas into Growth Projects. Innovation strategies may not work in the short run, but overriding long-term reasons compel firms to introduce new products and services. Benefits of new products As they add new products, firms can satisfy the changing needs of current and new customers. The longer a product exists in the marketplace, the more likely the market becomes saturated. Without new products, the value of the firm ultimately declines. An innovative product portfolio helps firms diversify risk and therefore enhances firm value better than a single product plan. A new product can be anything from a slight redesign to new-to-the-world offerings. Ask students: what is an example of a slightly redesigned product? What about a new-to-the-world product? Ask students: Think of a new product that interested you as a consumer. Did this new product alter your opinion of the firm that offered it? After revolutionizing the home computer industry, Microsoft set out to be a leader in the information technology home entertainment field. But one area in which Microsoft has been less successful is the search engine market. Ask students how do they choose which search engine to use? 1. Pioneer or breakthrough products establish a completely new market or radically change the rules of competition and consumer preferences. First movers are the first to create the market or product category. Despite first-mover advantages, pioneers often lose out to superior competitors. For example, DVD walkmans have been taken over by apple iPods. First movers must staunchly defend their territory. After establishing the market, they generally must switch to a defender mode to fend off newcomers. Answer A A. Topic Two: Diffusion of Innovation Innovations Diffuse Throughout a Market. Innovations Diffuse Over Time. Innovations Diffuse Across Categories. Innovations Diffuse Across Adopters. Innovators want to be the first to have the new product or service. Early adopters wait to purchase until after a careful review. The early majority, approximately 34% of the population, usually determines the success of new products. The late majority, approximately 34% of the market, enters a new product market last, after the product has achieved its full market potential. Laggards, roughly 16% of the market, avoid change and rely on traditional products until they are no longer available. Group activity: Have groups pick one product. Ask them; what group of innovative consumers are they in? Why? Example answer: Tivo—Tivo has been around for about 10 years, it is probably in the early or late majority stages. Cable television, on the other hand, is now appealing to laggards; whereas some new cell phones are appealing to innovators and early adopters. Disruptive products/services such as the Internet require a higher level of learning from consumers and offer much more benefits than predecessor products. Sony’s Walkman and Apple’s iPod are examples of pioneers or first movers. Answer B Using Diffusion of Innovation Theory. Relative advantage: If a product is perceived as better than substitutes, its diffusion will be relatively quick. Compatibility: If a product is similar to something currently on the market, it will diffuse more rapidly. Observability: Easily observed products communicate their benefits or uses efficiently. Complexity and trialability: Less complex products are relatively easier to try. This chart can be used to introduce the topic. More detailed slides follow. Different products diffuse at different rates. Various factors increase the speed of diffusion of a new product. Group activity: Continue with the previous group activity. Assess why some of the products chosen by the groups diffused more quickly than others by applying the four criteria in the boxes. The phone replaced the telegraph because it offered a clear benefit; it did not rely on just dots and dashes but could transmit voices. Visual demonstrations often clearly communicate product benefits and clarify complex products for which consumers require significant information before they will purchase and use them. New cell phones have become sufficiently complex so that some potential consumers, particularly older consumers, may be put off. Complicated contracts also make trialability difficult. Purse ‘n Boots (shown in the slide) is new product that lets women store their credit cards, keys and cell phones in their boots instead of having to carry a purse. However, because the valuables are hidden away, the benefits are not very observable. Furthermore, trialability is currently low as retailers have not yet started to carry them and so the boots are sold only online. Topic Three: How Firms Develop New Products This slide is designed to introduce the new product development process and the steps to follow. Group activity: Have each student group think of a new product. It need not be a “new-to-the-world” product. Then have them follow the steps in the New Product Development Process and describe what they would do at each step. This exercise might take an hour or so, so it may be used as an out of class assignment. Have students present their process to the rest of the group. Answer D A. Idea Generation Internal research and development R&D consortia help firms explore new ides or obtain new product solutions. With licensing, firms buy the rights to technology or ideas from research-intensive firms. Brainstorming involves group efforts to generate ideas, during which no idea can be immediately accepted or rejected. Reverse engineering takes apart a product, analyzes it, and recreates an improved product that does not infringe on competitors’ patents. Customer input, especially from lead users, suggests product modifications that better suit consumers’ needs. Firms must constantly scan the environment looking for new product ideas. Depending on the company strategy, they use different sources. This slide introduces the idea generation step. The slides that follow provide further detail. Larger firms often maintain their own R&D department and rely on it to generate new products that will lead the market. Firms license the use of new products, technology and processes. Small biotech firms frequently license their inventions to larger pharmaceutical firms. Many firms, such as 3M, foster a culture of creativity and give employees both the time and the freedom to develop new products and new ideas. The web link brings you to IDEO.com. Like Inventables from the chapter vignette, they are a design firm that helps clients generate new product ideas. Products with patents or other proprietary protections cannot be copied, so reverse engineered products must be substantively different from their source product. Fashion-based product lines often identify trend leaders and watch them to gather new ideas. Ask students: Have you ever modified a product, e.g., apparel, a car? Why did you do it? Concept Testing Presents a Concept to Potential Buyers to Obtain their Reactions. Concepts are presented to potential buyers or users to gauge their reactions. Marketing research techniques discussed in chapter 4 are used to test these concepts. A. Product Development Requires a Balance of Various Considerations. During alpha testing, the firm attempts to determine whether the product will perform according to its design and satisfy the need for which it was intended. Beta testing uses potential consumers, who examine the product prototype in “real use” settings to rate its functionality and performance, as well as potential problems. A prototype allows consumers to interact physically with the product. Some prototypes, such as the concept cars revealed at auto shows, never actually go into production. Before it released Vista, Microsoft began beta testing two years earlier to gather feedback from computer aficionados. Market Testing Must Come Next. Premarket tests determine how many customers will try and continue to use the product, according to small groups of potential consumers. Test marketing introduces the offering to a limited geographical area, which means it may provide an advantage to competitors. Premarket test are conducted by research firms, such as ACNielsen (BASES II). Because test marketing reveals a new product to competitors, it might be inappropriate to expose some new products this way. Ask students: Think of some products that you think should not be subjected to test marketing. Why not? Answer: incremental improvements on existing products (such as a new flavour of soda), small niche products because they only appeal to small market, products that could easily be copied by competition, etc. Answer B II. Product Launch Is the Most Crucial step of the new product development process because it requires a large financial investment and all aspects of the marketing mix must be coordinated. Launching a new product is part art and part science. Each of these products offered unique benefits. Ask the students if they feel each would be successful? Minute Maid Heart Wise was introduced in 2003 and has been extremely successful. Aquafresh Floss N’Cap has been expanded to other Aquafresh lines including whitening. However, Kellogg’s Drink’n Crunch turned out to be a high-innovation, low-sales product. The innovative packaging allowed consumers to consume their cereal and milk while on the move but didn’t sell. Getting the right proportion of cereal with the right amount of milk without it being a choking hazard is difficult. (Source: http://www.kellogg.northwestern.edu/news/hits/060515usn.htm) http://www.ecologicalchoice.ca/ Check out this website to see a variety of ecologically sound products. Clorox Canada gave consumers a way stay clean and green with the launch of the Green Works line of eco-friendly cleaners. An Ipsos-Reid survey, conducted on behalf of Clorox, found that Canadians were interested in “green” cleaning products but high prices, perceived efficacy and limited availability were preventing them from making the switch. The new line is 20% to 25% cheaper than other environmentally friendly cleaners currently in the marketplace and just as efficient as regular all-purpose cleaners. The product launched in the spring of 2008 and was a huge success. Entrepreneurial Marketing 8.1: Gourmantra Necessity, as they say, is the mother of invention. Rachna Prasad promised her friends a great home-cooked Indian meal. Her mother packaged up all the necessary spices and provided detailed cooking instructions. Rachna’s friends raved about the meal, leading to the launch of a line of spice blends under the Gourmantra brand which are sold at major North American food retailers. A. Promotion: Determine an appropriate integrated marketing communication strategy. Place: Ensure an adequate quantity of the product is available. Price: Get the price right. Timing: Find the right moment for the launch. The right product must hit the market at the right time and for the right price. It matters little how good a product is if the launch lacks sufficient resources. Group activity: Continue with the same products the students have been working with. Design the marketing mix required to launch it. How will you communicate its benefits? What types of distribution will you use? How will you determine the price? When will you launch? Evaluate the Results. Does it satisfy technical requirements, such as performance? Do customers accept it? Does it satisfy the firm’s financial requirements, such as sales and profits? Marketers cannot only celebrate success but also must understand failure. The question of why a product fails is just as important as why another succeeded. An underperforming product may require further development. Forrester Research statistics show that: Four out of five new products fail within the first three years of introduction. Have you ever heard of any of these products? No wonder. They both failed. Dunk-A-Balls cereal was shaped like basketballs so children could play with them before eating them. The Garlic Cake was supposed to be served as an hors d'oeuvre. But the company forgot to mention potential usage occasions to consumers, so people wondered why they would want to eat one. Crystal Pepsi was a caffeine-free, “clear alternative” to normal colas made by PepsiCo from 1992 to 1993 in the U.S. and Canada. It was promoted with the tagline "You've never seen a taste like this” but consumers found the taste was not significantly different from other colas. Gerber's Singles, a variety of fruits, vegetable and other entrees for adult consumers was launched in 1974 by the maker of baby food, but failed because adults didn't want to eat out of baby food jars. Topic Four: The Product Life Cycle The PLC represents an important tool managers use to plan their marketing activities. Introduction: Discuss the difficulties associated with the introduction stage, especially if the product is totally new to the world. Ask students: What challenges do firms face in this stage? Growth: Discuss the concept of the “tipping point”—the transition between introduction and growth when the product either gains market acceptance or must exit the market. The majority of new products fail at this point. Maturity: Many consumer packaged goods products are in the maturity stage, which means companies must engage in defending their market share. Ask students: What marketing activities should firms engage in at this stage? In the battle for soft drinks, a very mature market, a 1% market share switch between Coke and Pepsi can account for millions of dollars in revenue. 1. The Product Life Cycle Consists of Four Stages. Introduction stage. Innovators start buying. The firm suffers initial losses because of high start-up costs and low levels of sales revenue. If the product is successful, firms may start seeing profits toward the end of the stage. At each stage of the lifecycle, the marketing mix elements change in response to the marketplace. Group activity: List products that currently exist in each of the stages. What marketing mix would you design for each of these products? Ask students: If your company’s product were in its decline stage, how would you determine whether to update the product, continue offering it for a small segment, or exit the market completely? 1. Growth stage The product gains acceptance as more people adopt it. It experiences rapid sales growth. More competitors and competitive product versions enter the market. The market grows segmented; consumer preferences vary more. Innovators continue buying, and early majority consumers enter. Economies of scale increase. Clorox wipes compete in a market that is attracting many new offerings every year. They must continue to fight for customer acceptance and market share. Answer: C 1. Maturity stage Sales reach their peak. The late majority adopts the product, provoking intense competition for market share. Marketing costs increase as firms vigorously defend their market shares. Price competition intensifies. Profit margins begin to erode. Firms enter new markets or pursue new market segments that may be less saturated. Firms start to develop new products. 1. Decline stage Sales slow. Firms might position themselves for a niche segment of diehard consumers or those with special needs Alternatively, firms exit the market. Strategies for Extending the Product Life Cycle Develop new uses – Arm & Hammer (Click on the link to go to website) promotes its baking soda in many rooms in the house. Bounce fabric sheets are promoted as a way to keep closets, laundry hampers and gym bags smelling fresh (Procter & Gamble is pushing its Bounce fabric-softener with a contest that offers the chance for the winning entry to appear in an upcoming print ad. Modify product - Change quality, performance, packaging, e.g. iPod is continually coming out with smaller models or offering more colours Increase frequency of use – Campbells Soups publishes recipes that use soup as an ingredient in an entrée. You can also show how P&G encourages users to share their stories about how to use Bounce dryer sheets beyond the laundry room. Visit http://www.bounceeverywhere.com/index.jsp Increase # of users – Swiss Army Knife now comes with an LED light, USB key. Click on link to go to website. Find new users – as Roller Blade sales levelled off in the teen/young adult market, the company looked to market to elementary school children and older adults Reposition product – Vitamin D is now being marketed as a way to ward off cancer Tweak marketing strategy – may apply to all the 4Ps The PLC curve theoretically is bell shaped but can take many shapes, depending on market conditions. Theoretically the shape of the product life cycle curve is bell shaped. In reality, markets evolve in a variety of ways and the curve can take many shapes. Group activity: Propose different products whose PLCs might match those shown in this slide. 1. Caveats for strategies based on the PLC Managers are often unaware of where their product is located on the PLC. Misdiagnosing what stage the product is in can lead to a self-fulfilling prophecy. Understanding where your product is on the PLC is difficult. If a firm misdiagnoses the stage, it can mean trouble for the firm. Ask students: What happens to a product that is misdiagnosed as being in the decline stage? Answer: It will surely decline! Instructor Manual for Marketing Dhruv Grewal, Michael Levy, Shirley Lichti, Ajax Persaud 9780071320382, 9780070984929
