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

Chapter 8 New-Product Development and Product Life-Cycle Strategies Professor Marshall Queens College 1

Example: Microsoft Owns 97% of Operating System Market Owns 90% of office applications Market Internet Explorer, MSN, Hotmail How does Microsoft stay on top? 2

Answer: They don’t 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) 3

To Stay in Business… Companies have to be good at developing and managing products. Each product goes through a product life cycle – it’s 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. 4

Stages in The Product Life Cycle Product development Introduction Growth Maturity Decline 5

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 R&D department – Modifications are not always adding features – may also be taking away features! 6

Acquisition - Examples Merger of Cingular and AT&T – 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 7

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 Smucker’s premium Ketchup Fruit of the Loom Laundry Detergent http: //www. newproductworks. com/product_poll. html 8

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 9

Major Stages in New-Product Development Idea Generation Business Analysis Idea Screening Concept Development & Testing Product Development Marketing Strategy Development Test Marketing Commercialization 10

Idea Generation Where do Product Ideas Come From? – Internal Company employees – example: 3 M 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 11

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 12

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? 13

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. 14

Concept Development Example Daimler. Chrysler 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. Daimler. Chrysler’s 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. 15

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. 16

Concept 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. It’s priced, fully-equipped, at $20, 000. 17

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 car’s 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 not, definitely not) 18

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. Acu. POLL http: //www. acupoll. com/homenglish/pag 1 english 3. html is a market research company that tests new products for client companies and rates them based on the results of the test. 19

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 Year’s: – Product’s planned price, distribution, and marketing budget Part Three Describes Long-Run: – Sales and profit goals, marketing mix strategy 20

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. 21

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 car’s fun spirit and low emissions. During the first year, $100, 000 will be spent on market research to find out who is 22 buying and their levels of satisfaction.

Marketing Strategy for the Electric Car Part 3 – long run: Daimler. Chrysler 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. 23

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, R&D, operations, accounting, and finance costs). If yes move to the product development phase. 24

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. 25

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. 26

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. 27

Organizing New-Product Development Sequential Approach: each stage completed before moving to next phase of the project. Idea Generation Business Analysis Idea Screening Concept Development & Testing Product Development Marketing Strategy Development Test Marketing Commercialization Simultaneous Approach: Cross-functional teams work through overlapping steps to save time and increase effectiveness. – Riskier - Must be careful not to rush 28 and lose product quality.

Video Case e. Go Vehicles (14 minutes) http: //www. egovehicles. com/ 29

Thoughts How does e. Go’s 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 e. Go has to pave the way by educating consumers about the product and creating its own distribution channels. Who is e. Go’s likely target market? 30

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 31

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 32 the growth stage through strong promotion or repositioning.

Stages in the Adoption Process (from chapter 5 – buyer behavior) Introduction 2. 5% Innovators Growth 34% Early Majority 13. 5% Early Adopters X - 2σ Maturity Decline 34% Late Majority 16% Laggards X-σ X X+σ Time of adoption of innovations Try new ideas at some risk. Before the average person Opinion Leaders – adopt new ideas early but carefully Suspicious of change Only after majority has tried it 33

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 34

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) Time Fad Sales Fashion Sales Style Time 35

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 product’s 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 36 different stages of the product life cycle.

Stages in The Product Life Cycle Product development Introduction Growth Maturity Decline 37

Marketing Example http: //www. apple. com/ipod/ 38

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 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 39

Stages in The Product Life Cycle Product development Introduction Growth Maturity Decline 40

Marketing Example 41

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) 42

Stages in The Product Life Cycle Product development Introduction Growth Maturity Decline 43

Marketing Example 44

Maturity Stage of PLC Sales: peak Costs: low cost per customer Profits: high but may drop due to competition and R&D 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 models Price: match or beat competitors Distribution: keep building more intensive distribution Promotion: Increase to encourage brand switching 45

Mature Stage How can we increase consumption (sales and profits) in this stage? 46

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. wd 40. com/Brands/wd 40. cfm 47

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 48

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/ 49

Stages in The Product Life Cycle Product development Introduction Growth Maturity Decline 50

Marketing Example http: //www. ifilm. com/player/? ifilm. Id=2419643&pg=superbowl 2002&skin=default&refsite=default&media. Size=default&context=product&launch. Val=1&data=null&real. Id=2419643&bw=300&mt=WMP Blockbuster Ticker: BBI How have their ads changed? 51

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 52

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. • P&G remained in the liquid soap business while competitors withdrew. Management may decide to reposition the brand bring it back to the growth stage. http: //www. crackerjack. com/home. htm 53

Are there any Age-Defying Products? Barbie Crayola Crayons These products have remained in the marketplace for generations. How did they do it? 54

They may seem like they defy the PLC, but actually, Barbie continually adds new dolls and collections (product lines). http: //www. barbiecollector. com/showcase/ Crayola has added new colors, shapes, sizes and packages. Crayola also extended the brand to new markets (scissors, paints, pens, stamps, stickers, etc. ) http: //www. crayolastore. com/category. asp? NAV=DRAW Bottom Line: – To stay in business, companies must adapt their strategies to a constantly changing environment. 55