Chapter 12: Developing New Products

Objectives:

• Identify the reasons why firms create new products,
• Describe the different groups of adopters articulated by the diffusion of innovation theory,
• Describe the various stages involved in developing a new product or service,
• Explain the product life cycle. 

I. Why do Firms Create new products:

• Innovation: The process by which ideas are transformed into new products and services that will help firms grow. 

"Without innovation and its resulting new products and services, firms would have only two choices: continue to market current products to current customers or take the same product to another market with similar customers."

Changing Customer Needs: Firms can create and deliver value more effectively by satisfying the changing needs of their current and new customers or by keeping customers from getting bored with the current product or service offering.

Market Saturation: The longer a product exists in the marketplace, the more likely it is that the market will become saturated, and without new products or services, the value of the firm will ultimately decline.

Managing Risk Through Diversity: Through innovation, firms often create a broader portfolio of products, which help them diversify their risk and enhance firm value better than a single product can. Firms with multiple products can withstand external shocks, including changes in consumer preferences or intensive competitive activity.

Fashion Cycles: Industries that rely on fashion trends and experience short product life cycles - including apparel, arts, books, and software markets - most sales come from new products.

"Consumers of computer software and video games demand new offers because one they have beaten the game, they want to be challenged by another game or experience the most recent version."

Improving Business Relationships: New products do not always target end consumers; sometimes they function to improve relationships with suppliers.

II. Diffusion of Innovation:

• Diffusion of Innovation: The process by which the use of innovation, whether a product or a service, spreads throughout the market group over time and over various categories of adopters. 

The theory surrounding diffusion of innovation helps marketers understand the rate at which consumers are likely to adopt a new product or service. It also gives them means to identify potential markets for their new products or services and predict their potential sales, even before they introduce the innovations.

• Pioneers/breakthroughs: New product introductions that establish a completely new market or radically change both of the rules of competition and consumer preferences in a market.
• First Movers: Product pioneers that are the first to create a market or product category, making them readily recognizable to consumers and thus establishing a commanding and early market share lead.

Innovators: Those buyers who want to be the first to have the new product or service. These buyers enjoy taking risks and are considered highly knowledgeable. Innovators keep themselves very well informed about the product category. Are crucial to the success of any new product or service. 

Early Adopters: The second subgroup of consumers in the diffusion of innovation model, after innovators, to use a product or service innovation; generally don't like to take as much risk but instead wait and purchase the product after careful review. Often regarded as the opinion leaders for particular product categories.

Early Majority: A group of consumers in the diffusion of innovation model that represents approximately 34 percent of the population; members don't like to take much risk and therefore tend to wait until bugs are worked out of a particular product or service; few new products and services can be profitable until this large group buys them. When early majority consumers enter the market, the number of competitors in the marketplace usually also reaches it's peak, so these buyers have many price and quality choices.

Late Majority: The last group of buyers to enter a new product or service market; when they do, the product has achieved it's full market potential.

Laggards: Consumers who like to avoid change and rely on traditional products until they are no longer available.

Using the Diffusion of Innovation Theory: Firms can predict which types of consumers will buy their product or services immediately after its introduction as well as later as the product is more and more accepted by the market. With this knowledge, the firm can develop effective promotion, pricing, and other marketing strategies to push acceptance among each customer group. However, because different products diffuse at different rates, marketers must work to understand the diffusion curve for each new product and service as well the characteristics of the target customers in each stage of diffusion.

"If the early adopter group is small, the number of people who ultimately adopt the innovation likely will also be small."

• Relative Advantage: If a product or service is perceived to be better than substitutes, then the diffusion will be relatively quick. 
• Compatibility: A diffusion process may be faster or slower depending on various consumer features, including international cultural differences. 
• Observability: When products are easily observed, their benefits or uses are easily communicated to others, which enhances the diffusion process. 
• Complexity and Trialability: Products that are relatively less complex are also relatively easy to try. These products will generally diffuse more quickly and lead to greater/faster adoption than those that are not so easy to try. 

III. How Firms Develop New Products:

Idea Generation: Development of viable new product ideas. Firms that want to be pioneers rely more extensively on R&D efforts, whereas those who adopt a follower strategy are more likely to scan the market for ideas. 

• Internal Research and Development: Where scientists work to solve complex problems and develop new ideas. For firms that use R&D, the cost for product development are high and the resulting product or service is likely to be a technological or market breakthrough. 
• R&D Consortia: Groups of other firms and institutions, possibly including government and educational institutions, to explore new ideas or obtain solutions for developing new products. Here, the R&D investments come from the group as a whole. 
• Licensing: Firms buy the rights to use the technology or items  from other research-intensive firms through a licensing agreement. 
• Brainstorming: Firms often engage in brainstorming sessions during which a group works together to generate ideas; where no idea can be either rejected or accepted until the end of the session. 
• Outsourcing: What companies use when they have trouble doing any of the above mentioned techniques. 
• Competitors' products: A new product entry by a competitor may trigger a market opportunity for a firm, which can use reverse engineering to understand the competitor's product and then bring an improved version to market.
• Reverse Engineering: Involves the taking apart of a product, analyzing it, and creating an improved product that does not infringe upon the competitors patents, if any exist. 
• Consumer Input:  Listening to customers in both B2B and B2C markets is essential for successful idea generation. B2B customers are few so following their trends and needs to improve products and services is relatively easy. 
• Lead Users: Innovative product users who modify existing products according to their own ideas to suit their specific needs. 

Concept Testing:

• Concepts: Brief written description of a product or service; it's technology, working principles, and forms; and what consumer needs it would satisfy. 
• Concept Testing: The process in which a concept statement that describes a product or a service is presented to potential buyers or users to obtain their reaction. 

"If the concept fails to meet customers' expectations, it is doubtful it would succeed if it were to be produced and marketed."

Product Development:

• Product Development/Product Design: Entails a process of balancing various engineering, manufacturing, marketing, and economic considerations to develop a product's form and features or a services features.

"Ben and Jerry's Ice Cream alpha tests all of its proposed new flavors on its own (lucky) employees at its corporate headquarters in Vermont."

• Prototype: The first physical form or service description of a new product, still in rough or tentative form, that has the same properties as the new product but is produced through different manufacturing processes, sometimes even crafted individually. 
• Alpha Testing: An attempt by the firm to determine whether a product or service will perform according to it's design and whether it satisfies the need for which it was intended; occurs in the firm's R&D department.
• Beta Testing: Having potential consumers examine a product prototype in a real-use setting to determine its functionality, performance, potential problems, and other issues specific to it's use.

Market Testing:

• Premarket tests: Conducted before a firm brings a product or service to market to determine how many customers will try and then continue to use the product or service according to s mall group of potential consumers. 
• Test Marketing: Introduces a new product or service to a limited geographical area (usually a few cities) prior to a national launch. 

Product Launch: if the parket testing returns with positive results, the firm is ready to introduce the product to the entire market. Requires extensive financial investment and coordination of all of the marketing mix. 

• Promotion: Test results help the firm determine the appropriate integrated marketing communication strategy. Promotions of new products is required at each step of the supply chain. 
• Trade Promotions: Advertising to wholesalers or retailers to get them to purchase new products, often through special pricing incentives.
• Introductory Price Promotions: Short-Term price discounts designed to encourage trials.
• Trade Show: Major events attended by buyers who choose to be exposed to products or services offered by potential suppliers in an industry. 
• Place: The manufacturer coordinates the delivery and storage of the new products with its retailers to ensure that it is available for sale when the customer wants it, at the stores the customer is expecting it to be sold at, and in sufficient quantities to meet demand. 
• Price: Setting prices is a supply chain-wide decision. 
• Manufacturer's Suggested Retail Price: The price that manufacturers suggest retailers use to sell their merchandise. 
• Slotting Allowance: Fees firms pay to retailers simply to get new products into stores or to gain more or better shelf space for their products. 
• Timing: The timing of the launch may be important, depending on the product.

Evaluation of Results: After product is launched, the marketers must undertake a critical postlaunch review to determine whether the product and its launch were a success or failure and what additional resources or changes to the marketing mix are needed, if any. For products that do move through the system, firms can measure the success of a new product through three interrelated factors: 1) satisfaction of technical requirements, 2) customer acceptance, 3) its satisfaction of the firms financial requirements, such as sales and profits. 

IV. Product Life Cycle:

• Product Life Cycle: Defines the stages that new products move through as they enter, get established in, and ultimately leave the marketplace and thereby offers marketers a starting point for their strategy planning. 

Introduction Stage: Usually starts with a single firm.

• Introduction Stage: Stage of the life cycle when innovators start buying the product.

Growth Stage: Marked by a growing number of product adopters, rapid growth in industry sales, and increases in both the number of competitors and the number of available product versions.

• Growth Stage: Stage of the product life cycle when the product gains acceptance, demand and sales increase, and competitors emerge in the product category. 

Maturity Stage: Characterized by the adoption of the product by the late majority and intense competition for market share among firms.

• Maturity Stage: Stage of the product life cycle when industry sales reach their peak, so firms try to rejuvenate their products by adding new features or repositioning them. 
• Entry into new markets or market segments: Because the market is saturated at this point, firms may attempt to enter new geographical markets, including international markets, that may be less saturated. However, even in mature markets, firms may be able to find new market segments. 
• Development of new products: Despite market saturation, firms continually introduce new products with improved features or find new ones for existing products because they need constant innovation and product proliferation to defend market share from intense competition. 

Decline Stage: Firms with products in the decline stage either position themselves for a niche segment of the diehard consumers or those with special needs, or they completely exit the market.

• Decline: Stage of the product life cycle when sales decline and the product eventually exits the market. 

The Shape of the Product Life Cycle Curve: In theory, is bell shaped with regard to sales over time. However, each product or category has its own individual shape, where some move more rapidly through their product life cycle depending on the product and the market, and other variables.

Strategies based on Product Life Cycle: Some Caveats: Although the product life cycle concept provides a great starting point for marketers, it must be treated and used with care. New research, based on history of dozens of consumer products, suggests that the concept of the product life cycle is indeed valid.