New-Product Development and Product Life-Cycle Strategies
Previewing the Concepts: Chapter Objectives
1. Explain how companies find and develop new product ideas.
2. List and define the steps in the new product development process.
3. Describe the stages of the product life cycle.
4. Describe how marketing strategies change during the product’s life cycle.
Just the Basics
For companies to succeed, they must be constantly developing new products and services. Even a company as strong in the marketplace as Microsoft must constantly innovate. Firms can either acquire new products through buying a whole company, a patent, or a license to produce a product, or through internal development in their own research and development department.
New product development should be a systematic process; this can lessen the probability of failure. New products fail at an alarming rate—some estimates are as high as 95% of all new products fail. To avoid that fate, companies follow a new product development process, which includes idea generation, idea screening, concept development and testing, marketing strategy development, business analysis, product development, test marketing, and commercialization. As each step is accomplished, a firm go/no go decision is made as to whether to continue. This is done because as each successive stage is passed, new product development costs increase. Therefore, it makes sense to cut the product development process short if it appears the product will not be a success in the marketplace.
All products follow a life cycle. Some go through the cycle quickly, others can take many years. The standard product life cycle (PLC) includes the phases of introduction, growth, maturity, and decline. The PLC concept can describe a product class, a product form, or a brand. Most products are in the mature stage of the PLC.
a. Microsoft dominates in the world of computer and Internet software and technology. Its Windows operating system has 97% of the PC market and more than 40% of the business server market. Microsoft Office has a 90% share in office applications suites.
b. These and other products have made Microsoft very profitable. But Microsoft knows that its future depends on its ability to conquer new markets with innovative new products. And so it is on a quest to discover tomorrow’s exciting new technologies.
c. A company has to be good at developing and managing new products. Every product goes through a life cycle—it is born, goes through several phases, and dies as newer products come along.
d. This product life cycle presents two major challenges: First, because all products eventually decline, a firm must be good at developing new products. This is the challenge of new product development. Second, companies must be good at adapting marketing strategies as products pass through life-cycle stages; this is the challenge of product life-cycle strategies.
2. New Product Development Strategy
a. A firm can obtain new products in two ways. One is through acquisition of a whole company, a patent, or a license to produce someone else’s product. The other way is through new product development in the company’s own research and development department.
b. New products are original products, product improvements, product modifications, and new brands that the firm develops.
c. New product development is risky. One source estimates that no more than 10% of new products are still on the market and profitable after three years. Failure rates for new industrial products may be as high as 30%.
d. There are several reasons new products fail. Although an idea may be good, the market size may have been overestimated. The actual product might not have been designed as well as it should have been. The product could be incorrectly positioned in the market. Sometimes the cost of development is higher than expected.
e. To lower these risks, companies need to set up a systematic new product development process for finding and growing new products. Figure 8-1 shows the eight major steps in this process.
f. New product development begins with idea generation, which is a systematic search for new product ideas. A company normally has to generate many ideas in order to find a few good ones.
g. Major sources of new product ideas include both internal and external sources.
1. The company can use internal sources to find new ideas through formal research and development. It can get the ideas from executives, scientists, engineers, manufacturing staff, and sales-people.
2. Good external sources include watching and listening to customers. The company can analyze the questions and complaints of customers to find new products. The company can also have engineers or salespeople meet and work with customers to get suggestions. It can also conduct surveys or focus groups to learn about customer needs and wants. Consumers can often create new products and uses on their own, and sometimes companies can give consumers the resources to design their own products.
h. For some products, especially technical ones, customers may not know what they need.
i. Competitors can be a good source of new product ideas. Companies can watch competitors’ ads to get clues about their products. They can purchase competing products, take them apart, analyze their sales, and decide if they should bring out a new product of their own.
j. Distributors and suppliers can also contribute new product ideas. Other sources include trade magazines, shows, and seminars, as well as government agencies, new product consultants, advertising agencies, marketing research firms, university and commercial laboratories, and individual inventors.
k. The search for new products should be systematic. Management can develop an idea management system that directs new ideas to a central point where they can be collected, reviewed, and evaluated.
l. Idea generation is all about creating a large number of ideas. Idea screening is the first idea-reducing stage. Product development costs rise rapidly in later stages, so companies want to go ahead with only the product ideas that will become profitable.
Concept Development and Testing
m. An attractive idea should be developed into a product concept. A product concept is a detailed version of the idea stated in meaningful consumer terms.
1. In concept development, several descriptions of the product are generated to find out how attractive each concept is to customers. From these concepts, the best one is chosen.
2. Concept testing calls for testing new product concepts with groups of target consumers. The concepts may be presented symbolically or physically. Table 8-1 lists some questions that might be asked of consumers after they have been exposed to the product concept. The answers will help the company decide which concept has the strongest appeal.
Marketing Strategy Development
n. Marketing strategy development entails designing an initial marketing strategy for introducing the product to the market. It consists of three parts:
1. The first part describes the target market, the planned product positioning, and the sales, market share, and profit goals for the first few years.
2. The second part outlines the product’s planned price, distribution, and marketing budget for the first year.
3. The third part describes the long-run sales, profit goals, and marketing mix strategy.
o. Now the company evaluates the business attractiveness of the proposed product. Business analysis involves a review of the sales, costs, and profit projections for a new product to find out whether they satisfy the company’s objectives.
1. To estimate sales, the company could look at the sales history of similar products, or conduct surveys of market opinion. It can then estimate the minimum and maximum sales to assess the range of risk.
p. If the product concept passes the business analysis stage, it moves into product development. Here, R&D or engineering develops the product concept into a physical product. There is now a large jump in investment, but this stage will show whether the product idea is workable.
q. Often, products will undergo rigorous tests to make sure that they perform safely and effectively. Tests might also show if consumers will find value in them.
r. This is the stage in which the product and marketing program are introduced into more realistic market settings. Test marketing gives the marketer experience with marketing the product before going to the great expense of a full introduction.
s. The amount of test marketing varies with each new product.
1. When introducing a new product requires a big investment, or when management is not sure of the product or marketing program, a company may do a lot of test marketing. Although these costs can be high, they are often small when compared to the costs of making a major mistake.
t. Commercialization involves introducing the product into the market. The first decision that needs to be made is timing. The second decision involves where to launch the product—a single location, a region, the national market, or the international market. Many companies will develop a planned market rollout.
Organizing for New Product Development
u. Under sequential product development, one company department works individually to complete its stage of the new product development process before passing the new product along to the next department and stage.
1. This orderly process can help bring control to complex and risky projects. But it can also be very slow.
v. The simultaneous product development (or team-based or collaborative product development) concept can be used to get products to market more quickly.
1. Company departments work closely together through cross-functional teams, overlapping the steps in the product development process to save time and increase effectiveness.
2. Teams usually include people from the marketing, financing, design, manufacturing, and legal departments. Sometimes even suppliers and customer companies are involved.
3. There are some limitations to this approach. Fast product develop-ment can be riskier and more costly than the more orderly process. There can also be increased organizational tension and confusion. The company must also ensure that quality is not sacrificed by rushing a product to market.
4. But the rewards outweigh the risks. Companies that get new and improved products to the market faster than competitors often gain competitive advantage.
3. Product Life-Cycle Strategies
a. A typical product life cycle (PLC) is shown in Figure 8-2. It shows the course that a product’s sales and profits take over its lifetime. There are five distinct PLC stages:
1. Product development begins when the company finds and develops new product ideas. Sales are zero in this stage and the company’s investment costs mount.
2. Introduction is a period of slow sales growth as the product is introduced into the market. Profits are nonexistent because of the heavy expenses of product introduction.
3. Growth is a period of rapid market acceptance and increasing profits.
4. Maturity is a period of slower sales growth because the product has achieved acceptance by most potential buyers. Profits level off or decline because of increased marketing outlays.
5. Decline is the period when sales fall off and profits drop.
b. Not all products follow this product life cycle. Some products are introduced and die quickly, others stay in the mature stage for a very long time. Some can enter the decline stage and then cycle back into the growth stage through strong promotion or repositioning.
c. The PLC concept can describe a product class, such as gasoline-powered automobiles; a product form, such as SUVs; or a brand, such as the Ford Explorer.
1. Product classes have the longest life cycles.
2. Product forms tend to have the standard PLC shape.
d. The PLC concept can also be applied to styles, fashions, and fads. Their special life cycles are shown in Figure 8-3.
1. A style is a basic and distinctive mode of expression.
2. A fashion is a currently accepted or popular style in a given field.
3. Fads are fashions that enter quickly, are adopted with great zeal, peak early, and decline very quickly. They last only a short time and tend to attract only a limited following.
e. Using the PLC concept for forecasting product performance or for developing marketing strategies creates some difficulties. Marketers could have trouble identifying which stage of the PLC the product is in, or in pinpointing when the product moves into the next stage. It can also be difficult to determine why the product moves through the stages. Using the PLC concept to development marketing strategy also can be difficult because strategy is both a cause and a result of the product’s life cycle.
f. The introduction stage starts when the new product is first launched.
g. In this stage, profits are negative or low because of low sales and high distribution and promotion expenses. Promotion spending is relatively high to inform consumers of the new product.
h. If the new product satisfies the market, it will enter a growth stage in which sales will begin climbing quickly. Early adopters will continue to buy, and later buyers will start following their lead.
i. New competitors will enter the market. This leads to an increase in the number of distribution outlets. Prices remain where they are or fall slightly. Companies keep their promotion spending at the same or a slightly higher level.
j. Profits increase during the growth stage as promotion costs are spread over a larger volume and as unit manufacturing costs fall.
k. As the product’s sales growth slows down, the product enters a maturity stage. This stage normally lasts longer than the previous stages. Most products are in the maturity stage of the life cycle, and therefore most of marketing management deals with the mature product.
l. Competitors begin marking down prices while increasing their advertising and sales promotions. They may also up their R&D budgets to find better versions of the product. These steps lead to a drop in profit.
m. Product managers should consider modifying the market, product, and marketing mix at this point.
1. In modifying the market, companies try to increase the con-sumption of the current product. It looks for new users and market segments.
2. The company may also try to modify the product by changing characteristics such as quality, features, or style to attract new users and to inspire more usage. Or the company could add new features to expand the product’s usefulness, safety, or convenience.
3. The company can modify the marketing mix to improve sales. It can cut prices, launch a better advertising campaign, or use aggressive sales promotions.
n. The sales of most product forms and brands eventually dip. This is the decline stage.
o. Sales decline for many reasons, including technological advances, shifts in consumer tastes, and increased competition. Some firms will withdraw from the market; others may prune their product offerings.
p. Marketers could decide to maintain the brand without change in the hope that competitors may leave the industry. Or management may decide to reposition or reformulate the brand in hopes of moving it back into the growth stage of the PLC. Marketers could also decide to harvest the product, which means reducing various costs while hoping that the sales hold up. Or the company could simply drop the product.
q. Table 8-2 summarizes the key characteristics of each stage of the product life cycle. It also lists the marketing objectives and strategies for each stage.
Discussing the Issues
1. Describe some general reasons for why so many new products fail. How can marketing managers use this information in the new product development process?
Several reasons are provided in the text, including: The market size may have been overestimated; the actual product was not designed as well as it should have been; the product was incorrectly positioned in the market; the product is priced too high, advertised poorly, or pushed through despite poor marketing research findings. Also suggested in the text is that the costs of product development may have been higher than expected, and sometimes competitors will fight back harder than expected.
2. Describe the major internal and external sources of new product ideas. Which source do you think develops the best ideas? Which source delivers the most ideas? Explain your answer.
Internal sources include getting new ideas through formal research and development and also picking the brains of its executives, scientists, engineers, manufacturing staff, and salespeople. External sources include customers, competitors, distributors, and suppliers.
3. Discuss the difference between the following terms: product idea, product concept, and product image. How are they related to each other?
A product idea is an idea for a possible product that the company can see itself offering to the market. A product concept is a detailed version of the idea stated in meaningful consumer terms. A product image is the way consumers perceive an actual or potential product.
4. Compare sequential product development to simultaneous product development. What are the advantages and disadvantages of each approach?
With sequential product development, one department works individually to complete its stage of the process before passing the new product along to the next department and stage. This orderly, step-by-step process can help bring control to complex and risky projects, but it has the disadvantage of being slow and risking other firms beating it to market. Simultaneous product development (or team-based or collaborative product development) has departments work closely together through cross-functional teams, overlapping the steps in the product development process to save time and increase effectiveness. Instead of passing the new product from department to department, the company assembles a team of people from various departments that stay with the new product from start to finish.
5. Describe product classes that you feel represent each stage of the product life cycle. For each product class you came up with, do you think it will progress through all five stages of the product life cycle?
Student responses to this question will vary. It may also be instructive to have students consider this question using product forms and brands instead of product classes.
6. Explain the difference between maintaining, harvesting, and dropping a brand. Why would a company select one of these strategies over the other in a declining market?
Management may decide to maintain its brand without change in the hope that competitors will leave the industry. Harvesting the product means reducing various costs (plant and equipment, maintenance, R&D, advertising, sales force) and hoping that sales do not drop too much (i.e., the cost savings is greater than the revenue loss). If successful, harvesting will increase the company’s profits in the short run. In dropping the product from the line, a firm will sell it to another firm or simply liquidate it at salvage value. The decision to use one strategy over another should be based on an analysis of profit potential under each scenario.
1. Develop this new product idea into three different product concepts: a sensor about the size of a quarter that measures ultraviolet rays from the sun and can sound an alarm when exposed to dangerous levels for a sustained time. Which product concept do you think is most viable? Explain your answer.
Student responses will vary. Examples may include a sticker that is applied to a sunbather’s skin to let him or her know when to come out of the sun or a device attached to a window that automatically lowers blinds when dangerous levels of UV rays are entering the window.
2. Take one of the product concepts you developed in the previous question and conduct a limited concept test by asking 10 people the questions in Table 8-1. The questions will have to be modified for your particular product concept. Summarize and report the results at the next class meeting.
Student responses will vary. An instructor can use this question when he or she would like to provide concept-testing experience to students. As a team assignment, groups of students could work together to develop the questions, collect data, conduct the analysis, and make the presentation.
3. Discuss a product that you feel has been modified to meet changing consumer needs and thus has been able to stay in the maturity stage of the PLC. What was modified: the market, the product, or the marketing mix? Explain your answer.
Student responses to this question will vary depending on the product they select. A television might be an illustrative example with modifications to size, weight, and picture and audio quality over the years.
Under the Hood/Focus on Technology
Instead of trying to figure out exactly what consumers want, some firms let consumers design their own products. Nike has done just that by allowing consumers to completely design the look and performance of its Air Pegasus 2000 running shoe over the Internet. Consumers can select the outer-sole to best suit the type of surface they run on, the density of the mid-sole for their foot shape, the shoe width, the color for eight different areas of the shoe, and even a personalized name on the heel of the shoe.
Go to www.nikerunning.com and click “create your own shoe” under the “gear” link (note that this feature requires the Macromedia Flash plug-in be installed on your computer—you will be prompted to download this if it is not currently installed). Go through the steps of creating an Air Pegasus 2000 running shoe and then respond to the following questions.
1. What do you think of the ability to create your own running shoe online? Do you think this capability provides a competitive advantage for Nike over rival running shoe manufacturers?
This can be a competitive advantage to the extent that it is difficult or costly for competitors to emulate it and to the extent that targeted consumers care about the ability to self-design the shoe.
2. Why doesn’t Nike just select several variations and sell those rather than allow consumers to customize the shoe? Describe the target market most likely to make its own shoes with this process.
The number of variations would be too large. Further, the act of customization may be a large part of what drives the sale, in addition to what the final product is. Technology-savvy customers who have high product involvement for running shoes are the likely market to use this feature.
3. What disadvantages might there be for Nike in allowing consumers to create their own running shoes? How can those disadvantages be minimized?
Student responses will vary. A couple of disadvantages: Shoe design could be sub-optimal compared to what is currently available. Will the consumer blame himself or Nike for the poorly designed shoes? Production costs are increased due to small batch sizes.
In 2004, Honda will become the first auto manufacturer to sell natural gas–powered cars to the general public. Typically these vehicles have been sold in small fleets to entities, often governmental organizations, which use them for short trips and have the capacity to own their own natural gas refilling locations. That will change as Honda introduces a device that will allow owners to refill their vehicles in their own garages. Honda envisions eventually selling tens of thousands of these natural gas–powered vehicles, mainly as a family’s second vehicle or as a commuter car. Natural gas vehicles cost about 80 percent of what it costs to run gasoline-powered vehicles.
This second “Under the Hood” exercise is provided for students unable to run the Nike site due to a lack of Flash technology being available.
1. Describe how you would construct a test market for this new product.
Students should discuss issues related to selecting markets with generalizability to the target group, how they will measure the success of the test market, how long it should last, and what will be considered a successful result.
2. What major activities will Honda need to accomplish to make the commer-cialization phase of this new product launch successful?
Major activities will include building or renting a manufacturing facility, developing distribution networks (or utilizing existing ones while making sure there is enough capacity to handle the added vehicles), pricing the new product, and increasing consumer awareness through promotional activities.
3. How should Honda position the new natural gas–powered vehicles relative to its traditional line of cars?
Student responses to this question will vary. Instructors should get students to consider how the new vehicle might positively or negatively impact existing products. For example, if positioned as an environmentally friendly car, this implicitly suggests that the gasoline-powered vehicles are not. While probably true in a relative sense, is that the message Honda wants to send?
Focus on Ethics
Beating competitors to the marketplace with a product can result in substantial first-mover advantages for the initial market entrant. At times, this places tremendous pressure on a company’s employees to speed through the product development process as fast as possible. In such cases, skipping or reducing the level of effort placed on stages in the development process (e.g., comprehensive safety testing) may become attractive alternatives for meeting tight timelines. Even the false reporting of outcomes associated with product testing may be encountered when employees are pressured to get a product to market as soon as possible.
1. What can a company do to ensure that all the necessary product development steps are adequately followed under the pressure of being first to market? What controls might be put in place?
Having standardized procedures in place regarding what specific information is presented and in what level of detail can help to have the same type of information available for different product development processes. The stan-dardized information may make spotting falsified data easier because managers will be used to the type of information available. Also designing the reporting structure of the organization to make sure that those doing the testing are autonomous from the users of the information would serve to eliminate some of the pressure.
2. Discuss the potential negative consequences of rushing a new product to market.
Perhaps the most important negative consequence is that rushing a new product to market may result in offering a product that is out of step with what the consumer wants and does not offer any advantages over current product offerings.
Barriers to Effective Learning
1. Understanding the systematic nature of the new product development process will cause problems for some students. They will have some difficulty understanding why a process is needed at all, and they will also not realize how development costs rise at each and every stage. Finally, the amount of analysis that goes into the screening phases might be a surprise to them. To overcome these barriers, come up with a new product idea in class and review how you might develop it into a viable product.
2. The commercialization phase of the new product development process could also be somewhat difficult for the students to comprehend. They may not be aware that not all products are launched nationally or globally when first introduced. Some examples of products that are available only regionally—food and drink products frequently are regional—may help them to understand the logistics of launching a new product.
3. The phases of the product life cycle, and the fact that it can apply to product classes, forms, and brands, can cause some difficulty. Discussing brands that are in each stage helps tremendously, as does discussing products that have successfully moved back from decline into maturity or growth (e.g., Arm & Hammer baking soda).
4. The differences among fads, fashions, and styles can be explained through asking the students to discuss clothing in those terms. Because these items are routinely discussed in terms of fashions and styles, students can easily internalize the differences in meaning of these terms.
1. Discuss the purpose for test marketing. What potential problems may complicate test marketing?
2. Discuss how you would use the Internet to collect new product ideas.
3. For your favorite soft drink, trace the product life cycle. Do enough research to be able to support your timeline and the stage it is in today.
Classroom Exercise/Homework Assignment
If ever a product class seemed to be in the maturity stage, it would be bottled drinks. They’ve been around for a long time, and it doesn’t seem like there’s much you can do to energize the category. But that’s not the case at all, as evidenced by the success of Snapple brand drinks. Named for a carbonated apple beverage, Snapple has achieved stunning success in its category. And it’s done that by being extremely innovative, developing and launching new products at breakneck speed. Snapple now offers juice drinks, teas, lemonades, and diet drinks. Review www.snapple.com to see their innovative marketing techniques as well as a full listing of their products.
1. Which of Snapple’s types of drinks and flavors would you think are in the mature stage of the product life cycle?
Snapple is constantly bringing new flavors to market. While iced tea as a product class and flavored teas as a product form would both seem to be in a mature stage, the flavors Snapple introduces, such as Kiwi Teawi, keep their brands in the growth stage. The same can be applied to their other drink categories as well, except for lemonades, in which there are only two flavors: traditional lemonade and pink lemonade. These could be considered mature products, and perhaps even in decline.
2. How is Snapple managing to keep so much of its product line in the growth stage?
Snapple uses innovative marketing techniques that most companies would steer clear of. For instance, when you go to their website, you don’t immediately see a display of their products; instead, you are launched into a make-believe town where you can meet all kinds of interesting characters.
Snapple has made their brand fun. And so they can capture the youth market, which spends the most on bottled drinks. They are also constantly launching new flavors and naming them sometimes-silly names. Again, this keeps the youth crowd returning for more.
3. How might Snapple generate ideas for new products and flavors?
Snapple gives ample opportunity on its website for customers to write in. They have also run story contests and are in the process (in 2003) of running “yard sales” across the country, where Wendy “The Snapple Lady” will meet and greet you, as well as haggle with you on the price for yard sale items (prices are in numbers of bottle caps). These events gather valuable information for the company on what the consumers like and don’t like.
Student responses can vary as to where Snapple can generate product ideas outside of the website and local events.
Classroom Management Strategies
This is a relatively short chapter, and so you have the luxury of really being able to focus on each section. Still, there is a lot of material to discuss, so effective use of time is important. The majority of class time should be spent on the New Product Development section, with slightly less than half being devoted to Product Life-Cycle Strategies.
1. An introductory 5 minutes should be spent on the discussion of Microsoft’s product development as an example of why companies need to continually offer new products and services.
2. Another 5 minutes should be spent discussing the reasons why a systematic new product development process is important, rather than developing products in a haphazard manner. Tie this discussion back to earlier in the term when you talked about marketing strategies, mission statements, and goals and objectives for the company as a whole.
3. Spend about 35 minutes going through the eight stages of the new product development process. At each phase, using examples from your own and the students’ experience will help tremendously. Having a guest speaker from a company that has developed and launched several products is a unique way of driving home the importance of a systematic process.
4. Finally, spend 15 minutes discussing the PLC and the marketing strategies that can accompany each stage. Going online and looking at websites for various kinds of products at each of the different stages could make this more interesting for the students, while also providing a more detailed introduction to the meaning of a product life cycle.