Chapter 8 New-Product Development and Product Life-Cycle Strategies

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Chapter 8 New-Product Development and Product
Life-Cycle Strategies

• Professor Marshall
• Queens College

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Example Microsoft

• Owns 97 of Operating System Market
• Owns 90 of office applications Market
• Internet Explorer, MSN, Hotmail
• How does Microsoft stay on top?

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Answer

• They dont just sit back.
• Microsoft continues to pour resources into
  Research Development.
• New Products that have or will launch soon
• .NET (allows unrelated websites to communicate)
• Smartphone (allows users to email, instant
  message, listen to music, surf the web, etc.)
• Face mapping (for gamers)
• The digital home (connects everything in the
  house)

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To Stay in Business

• Companies have to be good at developing and
  managing products.
• Each product goes through a product life cycle
• its born, matures, and eventually dies as newer
  products come along that serve consumers better
• Firms must be good at developing new products to
  replace older ones.
• As products go through these life-cycle stages,
  firms must be good at adapting marketing
  strategies to consumers changing tastes, new
  technology, and competition.

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Stages in The Product Life Cycle

• Product development
• Introduction
• Growth
• Maturity
• Decline

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New-Product Development Strategy

• Strategies for Obtaining New-Product Ideas
• Acquisition
• Buying a whole company, patent, or license
• New Product Development
• Creating Original products, improvements,
  modifications, or new brands, through your own
  RD department
• Modifications are not always adding features
  may also be taking away features!

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Acquisition - Examples

• Merger of Cingular and ATT
• Buying a whole company
• Handheld PDAs buy Palm OS Operating System
  software from Palm to use on competing products.
• Buying a license or buying a patent

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New-Product Development Failures

• Only 10 of new products still on the market and
  profitable after 3 years.
• 250,000 new consumer food, beverage, beauty and
  health care products are developed each year.
  Only 40 of them will be around 5 years later.
• Innovation is very risky- Ford lost 350 million
  on the Edsel automobile.
• Examples of failures
• Gerber food for Adults
• Ben-Gay Aspirin
• Exxon Fruit Punch
• Smuckers premium Ketchup
• Fruit of the Loom Laundry Detergent

http//www.newproductworks.com/product_poll/produc
t_poll.html
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Why do New Products Fail?

• Overestimation of market size
• Design problems
• Incorrectly positioned, priced, or advertised
• Pushed despite poor marketing research findings
• High development costs
• Competition might be too fierce

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Major Stages in New-Product Development
Concept Development Testing
Marketing Strategy Development
IdeaGeneration
IdeaScreening
Business Analysis
Product Development
Test Marketing
Commercialization
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Idea Generation
For every 1000 ideas, only 100 will be turned
into a small-scale experiment. From those
experiments, only 10 will warrant financial
commitment. Of those, only one or two will be
successful.

• Where do Product Ideas Come From?
• Internal
• Company employees example 3M allows 15 of
  employee time to be spent working on projects of
  personal interest. Post-it notes evolved from
  this.
• External
• Customers analyze customer complaints
• Competitors
• Distributors can pass along consumer problems
• Suppliers can provide insight on materials and
  techniques to use in new product development

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Ways to foster Idea Generation

• Creating an Idea Management System that directs
  ideas to a central location for review
• Set up a public toll-free number or website for
  anyone who wants to send ideas
• Set up a rewards program for those who contribute

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Idea Screening

• Process to spot good ideas and drop poor ones.
• Develop system to estimate market size, product
  price, development time and costs, manufacturing
  costs, and rate of return.
• Evaluate these findings against set of company
  criteria for new products.
• Example of questions to ask
• Is the product truly useful to consumers and
  society?
• Is it a good move for our company?
• Does it mesh with our company objectives and
  strategies?
• Do we have the resources, people, and skills to
  make it succeed?
• Does it deliver more value to customers than
  competitive products?
• Is it easy to advertise and distribute?

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Concept Development Terminology

• Product Idea idea for a possible product that
  the company can see itself offering.
• Product Concept detailed version of the idea
  stated in meaningful consumer terms.
• Product Image the way consumers perceive an
  actual or potential product.
• Attractive Product Ideas are developed into
  Product Concepts.

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Concept Development Example

• DaimlerChrysler is getting ready to commercialize
  its experimental fuel-cell powered electric car.
  It is highly efficient and environmentally
  superior to gasoline powered cars. The company
  is currently road testing prototypes.
• DaimlerChryslers task is to develop this new
  product into alternative product concepts, find
  out how attractive each concept is to customers,
  and choose the best one.

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Concept Development Example

• Concept 1 - A moderately priced subcompact
  designed as a second family car to be used around
  town. Ideal for running errands and visiting
  friends.
• Concept 2 A medium-cost sporty compact
  appealing to young people.
• Concept 3 An inexpensive subcompact green
  car, appealing to environmentally conscious
  people who want practical transportation and low
  pollution.
• Concept 4 A high-end SUV appealing to those who
  love the space SUVs provide but hate the poor gas
  mileage.

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Concept Testing

• Testing new product concepts with groups of
  target consumers.
• Products may be presented physically or
  described. Some marketers use virtual reality
  programs. Physical tests are the most reliable.
• For Concept 3
• An efficient, fun-to-drive, fuel-cell powered
  electric subcompact car that seats four. This
  methanol-powered high-tech wonder provides
  practical and reliable transportation with
  virtually no pollution. It goes up to 90 mph
  and, unlike battery-powered electric cars, it
  never needs recharging. Its priced,
  fully-equipped, at 20,000.

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Questions for Target Consumers of Concept Test to
Answer

• Do you understand the concept of a fuel-cell
  powered electric car?
• Do you believe the claims about the cars
  performance?
• What are the major benefits of the fuel-cell
  powered electric car compared to a conventional
  car?
• What improvements would you suggest?
• For what uses would you prefer a fuel-cell
  powered electric car to a conventional car?
• What would be a reasonable price for such a car?
• Who would be involved in your decision to buy
  such a car? Who would drive it?
• Would you buy such a car? (definitely, probably,
  probably not, definitely not)

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Studying the Results

• Answers to the questions give marketers insight
  as to which concept has the strongest appeal.
  They can use the answers to the would you buy
  question to project sales for the entire target
  audience.

AcuPOLL http//www.acupoll.com/homenglish/pag1engl
ish3.html is a market research company that tests
new products for client companies and rates them
based on the results of the test.
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Marketing Strategy Development

• Now that we have chosen a concept, we can design
  an initial marketing strategy for introducing the
  product to market.
• Part One Describes
• The target market, planned product positions. It
  also contains sales, market share, and profit
  goals.
• Part Two Outlines the First Years
• Products planned price, distribution, and
  marketing budget
• Part Three Describes Long-Run
• Sales and profit goals, marketing mix strategy

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Marketing Strategy for the Electric Car

• Part 1 target market, positioning, slaes market
  share, profit goals for first few years
• Target market is younger, well-educated, moderate
  to high income individuals, couples or small
  families seeking practical environmentally
  responsible transportation. The car will be
  positioned as more economical to operate, more
  fun to drive, and less polluting than other cars.
  It is also less restricting than battery powered
  electric cars which frequently have to be
  charged. The company aims to sell 100,000 cars
  in the first year, at a loss of not more than 15
  million. In the second year, the company will
  aim to sell 120,000 cars and profit 25 million.

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Marketing Strategy for the Electric Car

• Part 2 price, distribution, marketing budget
• The vehicle will be offered in three colors
  red, white, and blue. It will have optional air
  conditioning and power drive features. It will
  sell at a retail price of 20,000 with 15 off
  the list price to dealers. Dealers who sell more
  than 10 cars per month will get an additional 5
  discount on each car sold that month. An
  advertising budget of 50 million will be split
  50-50 between national and local advertising.
  Advertising will emphasize the cars fun spirit
  and low emissions. During the first year,
  100,000 will be spent on market research to find
  out who is buying and their levels of
  satisfaction.

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Marketing Strategy for the Electric Car

• Part 3 long run
• DaimlerChrysler intends in the long run to
  capture a 3 share in the total auto market,
  realizing a 15 net return on investment. To
  achieve this, product quality will start high and
  improve over time. Price will be raised in the
  second and third years if competition permits.
  The total advertising budget will rise each year
  by about 10. Market research will be reduced to
  60,000 per year after the first year.

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Business Analysis

• Involves a review of the sales, costs, and profit
  projections to assess fit with company
  objectives.
• To estimate sales, the company will look at sales
  of similar items and conduct surveys to gather
  market opinion. Generally it will come up with a
  minimum and maximum range of sales to asses risk.
• Then the company can assign costs (marketing,
  RD, operations, accounting, and finance costs).
• If yes ? move to the product development phase.

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Product Development

• Develop concept into physical product
• Calls for large jump in investment
• Prototypes are made (can take days, weeks, even
  years)
• Prototype must have correct physical features and
  convey psychological characteristics
• Prototypes have to undergo many tests to ensure
  performance and safety
• New product testing is often conducted by
  volunteers in focus groups or individually.
  Often subjects are paid to test new products. At
  Gillette, employees can volunteer to test new
  products.

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Test Marketing

• Once the product passes initial testing ? it
  moves on to Test Marketing
• Product and entire marketing program (pricing,
  positioning distribution, advertising, etc.) are
  introduced in a more realistic market setting.
• Not needed for all products.
• Can be expensive and time consuming, but better
  than making major marketing mistake.

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Commercialization

• Commercialization introducing a new product
  into the market
• Must decide on timing (i.e., when to introduce
  the product).
• Must decide on where to introduce the product
  (e.g., single location, state, region,
  nationally, internationally).
• Must develop a market rollout plan. Small
  companies might enter cities one by one, while
  larger companies might enter the national market
  more quickly or all at once.

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Organizing New-Product Development

• Sequential Approach each stage completed before
  moving to next phase of the project.
• Simultaneous Approach Cross-functional teams
  work through overlapping steps to save time and
  increase effectiveness. Riskier - Must be
  careful not to rush and lose product quality.

Concept Development Testing
Marketing Strategy Development
IdeaGeneration
IdeaScreening
Business Analysis
Product Development
Test Marketing
Commercialization
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Video Case

• eGo Vehicles
• (14 minutes)

http//www.egovehicles.com/
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Thoughts

• How does eGos strategy differ from say Coca-Cola
  introducing a new flavor to the market?
• The marketing of beverages are fairly
  straightforward consumers have a basic
  understanding of the use of the product, and
  marketers can use existing channels of
  distribution. A brand new product, such as eGo
  has to pave the way by educating consumers about
  the product and creating its own distribution
  channels.
• Who is eGos likely target market?

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Stages in The Product Life Cycle

• Product development finding and developing a
  new product no sales yet and high costs
• Introduction slow sales growth as the product
  is introduced in the market due to heavy
  expenses, profits are not realized yet
• Growth rapid market acceptance and increasing
  profits
• Maturity sales growth slows down because the
  product has been accepted by most potential
  buyers. Profits level off or decline because of
  increased marketing expenses to defend against
  competition
• Decline sales fall off and profits drop

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Stages in The Product Life Cycle
Many products never make it past introduction.
Others stay in Maturity for a long time. Some
products enter the decline stage and later come
back to the growth stage through strong promotion
or repositioning.
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Stages in the Adoption Process (from chapter 5
buyer behavior)
Introduction Growth
Maturity Decline
34Early Majority
34Late Majority
2.5 Innovators
13.5Early Adopters
16Laggards
X - 2s X - s
X X s
Time of adoption of innovations
Suspicious of change
Try new ideas at some risk.
Before the average person
Opinion Leaders adopt new ideas early but
carefully
Only after majority has tried it
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Product Life Cycle Applications

• Product class (ex gas-powered cars) has the
  longest life cycle stays in the mature stage
  for a very long time
• Product form (ex SUVs) tends to have the
  standard PLC shape pass through each of the
  stages in the
• Brand (ex Ford Explorer) can change quickly
  because of changing competitive attacks and
  responses

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Product Life Cycle Applications

• Style is a basic and distinctive mode of
  expression (ex clothing formal, casual) once
  a style is born it may last for generations
  passing in and out of vogue
• Fashion is a popular style in a given field (ex
  business casual) tends to grow slowly, remain
  popular for a while and decline slowly
• Fad is a fashion that enters quickly, is adopted
  quickly, and declines fast (ex lava lamps,
  Pokeman)

Style
Fashion Fad
Sales
Sales
Sales
Time
Time
Time
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Practical Problems of PLC

• Hard to identify which stage of the PLC the
  product is in and when the product will move to
  the next stage.
• Hard to identify factors that affect products
  movement through stages.
• Hard to forecast sales level, length of each
  stage, and shape of PLC.
• Strategy is both a cause and result of the PLC.

When used carefully, the PLC can help in
developing good marketing strategies for
different stages of the product life cycle.
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Stages in The Product Life Cycle

• Product development
• Introduction
• Growth
• Maturity
• Decline

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Marketing Example
http//www.apple.com/ipod/
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Introduction Stage of PLC

• Sales low
• Costs high cost per customer
• Profits negative
• Marketing Objective create product awareness and
  trial
• Product offer a basic product generally want
  to educate consumers without confusing them can
  add additional features later
• Price use cost-plus formula (little more than
  break-even)
• Distribution Attract distributors Consumers
  drive the demand ? causing distributors to supply
  the product
• Promotion heavy to inform consumer and entice
  product trial aim the promotion toward early
  adopters

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Stages in The Product Life Cycle

• Product development
• Introduction
• Growth
• Maturity
• Decline

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Marketing Example
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Growth Stage of PLC

• Sales rapidly rising
• Costs average cost per customer
• Profits rising
• Marketing Objective maximize market share
  build awareness and interest in the mass market
• Product offer extension, service, warranty
• Price penetration strategy remain where they
  are or fall slightly to compete
• Distribution increasing distribution
• Promotion depends on the market situation
  generally reduce to take advantage of demand
  (unless competition is fierce)

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Stages in The Product Life Cycle

• Product development
• Introduction
• Growth
• Maturity
• Decline

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Marketing Example
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Maturity Stage of PLC

• Sales peak
• Costs low cost per customer
• Profits high but may drop due to competition and
  RD spending to improve product
• Marketing Objective maximize profits while
  defending market share Usually a lot of
  competition in this stage - stress brand
  differences and benefits
• Product diversify brand and models
• Price match or beat competitors
• Distribution keep building more intensive
  distribution
• Promotion Increase to encourage brand switching

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Mature Stage

• How can we increase consumption (sales and
  profits) in this stage?

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Maturity Stage of the PLC

• Modifying the Market Increase the consumption of
  the current product.
• How?
• Look for new users and market segments
• Reposition the brand to appeal to larger or
  faster-growing segment
• Look for ways to increase usage among present
  customers

http//www.wd40.com/Brands/wd40.cfm
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Maturity Stage of the PLC

• Modifying the Product Changing characteristics
  such as quality, features, or style to attract
  new users and to inspire more usage.
• How?
• Improve durability, reliability, speed, taste
• Improve styling and attractiveness
• Add new features
• Expand usefulness, safety, convenience

http//www.heinz.com/jsp/new_prod.jsp
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Maturity Stage of the PLC

• Modifying the Marketing Mix Improving sales by
  changing one or more marketing mix elements.
• How?
• Cut prices
• Launch a better ad campaign
• Move into larger market channels
• Offer new or improved services to buyers

http//www.spammobile.com/
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Stages in The Product Life Cycle

• Product development
• Introduction
• Growth
• Maturity
• Decline

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Marketing Example

• Blockbuster Ticker BBI
• How have their ads changed?

http//www.ifilm.com/player/?ifilmId2419643pgsu
perbowl2002skindefaultrefsitedefaultmediaSize
defaultcontextproductlaunchVal1datanullrea
lId2419643bw300mtWMP
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Decline Stage of PLC

• Sales declining
• Costs low cost per customer
• Profits declining
• Marketing Objective reduce expenditures and milk
  the brand - just try to retain the hard-core
  loyals
• Product phase out weak items
• Price cut price
• Distribution selective--phase out unprofitable
  outlets
• Promotion reduce to minimal level

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Decline Stage of PLC

• Management may decide to drop the product
  altogether (selling it to another firm or simply
  liquidating it).
• Alternatively, it may decide to maintain it
  hoping that competitors will leave the market.
• PG remained in the liquid soap business while
  competitors withdrew.
• Management may decide to reposition the brand and
  bring it back to the growth stage.

http//www.crackerjack.com/home.htm
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Are there any Age-Defying Products?

• Barbie
• Crayola Crayons
• These products have remained in the marketplace
  for generations.
• How did they do it?

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• They may seem like they defy the PLC, but
  actually, Barbie continually adds new dolls and
  collections (product lines).
• Crayola has added new colors, shapes, sizes and
  packages. Crayola also extended the brand to new
  markets (scissors, paints, pens, stamps,
  stickers, etc.)
• Bottom Line
• To stay in business, companies must adapt their
  strategies to a constantly changing environment.

http//www.barbiecollector.com/showcase/
http//www.crayolastore.com/category.asp?NAVDRAW