chp 7 new product development and plc

MM – Instructor Manual

CHAPTER 7 – NEW PRODUCTS

KNOWLEDGE OBJECTIVES

1. Understand the Importance of New Products2. Identify the Various Stages of the Product Development Process 3. Introduce the Concept of the Product Life Cycle4. Explain Diffusion of Innovation and its Implications5. Stress the Relationship between New Products and Marketing Strategy6. Examine Trends in the Global Marketplace and their Potential Impact7. Discuss the Impact of Word of Mouth Effects on New Products

CHAPTER OUTLINE

Why New Products are Important New Product Development Process Product Life Cycle New Products and Strategy Trends Word-of-Mouth Effects Summary

1. New Products and their Importance

Section relates to knowledge objective #1

There are many reasons why firms introduce new products: corporate pride, to demonstrate it is innovative, a way to better satisfy existing customers, attract new customers, to fend off competition. New products increase a company’s long-term financial performance and the firm’s value.

2. How New Products are Developed and Introduced


Corporate culture and industry both play a role in how new products are developed. Some firms in pharmaceuticals and engineering among others take a top down approach to new products. This style of new product development consists of three steps: idea generation, design and development, and commercialization. Marketing typically is only involved in the commercialization and launch phase. Top down approach is also referred to as the “inside out” approach because the idea comes from within the firm and the feedback is received later in the process from outside sources.

Alternatively, a firm can take a more marketing oriented approach (also referred to as an “outside in,” “bottoms up,” or co-creation). In this approach customer feedback is sought at most phases

© 2010 South-Western, a part of Cengage Learning 1


of the new product development process. This approach can have many more steps than the top down approach: idea generation, in-house winnowing and refinement, concept testing, repeated in-house winnowing and refinement, product development, product testing, further refinement, test marketing, and launch.

Figure 7.1 New Product Development (NPD) Process

This figure applies to knowledge objective #2

Figure shows the steps in both the top down and bottom up approaches. Customers and marketing research are involved at the concept testing, product testing, and test marketing stages and marketing management is involved throughout.

A. Idea Creation

Ideas can come about through a variety of methods. They can happen by accident, they can be through observation of others, or through brainstorming. Ideas are subsequently screened for their feasibility with respect to such things as: plausibility in construction, compatibility with company goals, and likelihood of marketplace success.

Figure 7.2 New Product Development (NPD) Process


Figure shows both internal and external sources for ideas. These include various employees, customers, business partners, and competitors.

B. Concept Testing

Focus groups or Web surveys are often used to gain feedback about which ideas are most promising. When employing either method, mock-ups, verbal descriptions, or photographs can be used. A conjoint analysis can also be used in order to determine which combination of attributes sound best. In some instances, further concept testing may be required.

C. Product Testing

A test version of the product is made available for trial. Product should be used in a setting as similar to actual usage situations. At the same time, marketing materials should be developed including positioning information, advertising copy, pricing, and distribution.

D. Test Marketing

Test marketing attempts to simulate a real-world setting to enhance the chance that customer response will be similar to actual purchasing behavior at launch. Area test



markets are small metropolitan areas that are reflective (demographics, socio-economic) of the entire country. Products are launched in the area with full marketing support. The test runs from 3 to 12 months and are expensive. Due to their cost, area test marketing is not frequently used. Electronic test markets get around some of the issues associated with area test markets so that differences between households can better be attributed to advertising or product access. Simulated test markets use real products in either on off-line or on-line setting with both product and competitive advertising included.

E. Forecasting

After test marketing, the customer data is used in an attempt to predict the likelihood of the product being successful.

Figure 7.3 Forecasting


Figure provides a formula for forecasting a new product’s potential. Formula is given as: $SP = MP x PI x Pr where, $SP is Sales Potential (ceiling), MP is market potential, PI is an estimate of purchase intention in the target segment, and Pr is price of the new product. The figure $SP is not a sales estimate, but maximum on sales.

F. Timing

The time from genesis to launch is context dependent. Consumer product line extensions may be rather quick, while the creation and launch of a blockbuster drug may take years due to rigorous testing and FDA approval.

3. The Product Life Cycle (PLC)


The product life cycle illustrates the duration of the product being in the marketplace. Upon market introduction, the product is supported by heavy marketing spending. It could be priced either high or low depending upon the firm’s strategy. Distribution tends to be limited. The next phase, market growth is reflected by accelerating sales and profits (at least at first). Customer awareness increases, distribution coverage increases. At this stage, advertising is intended to persuade customers of the brand’s superiority. Competition may also increase. The next stage is market maturity. Advertising continues to try to persuade, but also remind. Product extensions may occur in order to satisfy more segments. Due to competition, marketing expenditures have increased, so while sales are strong, profits may be sagging. In addition, while the product is mature, it is likely that the market has matured as well. It is possible due to market crowding, that customers see little difference among the products in the market. Finally, there is market decline. Sales and profits both decline. The firm must decide whether to divest, harvest or revamp the product. The product life cycle is not without criticism. Critics note that product life



spans can vary greatly. Movies may last a week or two at the box office, Ivory soap has been around for over 100 years.

Figure 7.4 Product Life Cycle (PLC)


Figure provides a graphical representation of the PLC. With $ on the vertical and time on the horizontal, the product passes through the four stages: introduction, growth, maturity, and decline. Sales are depicted as a slightly elongated S function. With profits being a similar, though smaller S function. Figure provides some general information for the goals, product, price and promotion at each stage.

Diffusion of Innovation is the term used by marketers to explain the process by which a the adoption of a new product spreads throughout the marketplace.

Figure 7.5 Diffusion of Innovation

This figure applies to knowledge objectives #4 & #5

Figure depicts the diffusion process as a normal curve and partitions the customer base into 5 groups. Number of adopters in a given period is on the vertical axis and time on the horizontal axis. The first group to adopt are the “innovators” and represent 3 to 5% of all adopters. The next group are “early adopters” and represent 10 to 15% of all adopters and are the most influential group. The early majority represents approximately 34% of all adopters and the final group are considered “laggards” or “nonadopters” and represent the remaining 5 to 15%.

Figure 7.6 Cumulative Diffusion


Figure shows diffusion as a cumulative distribution function (S-curve). Cumulative sales are on the vertical axis and time (year) on the horizontal. The inflection point of the curve represents where sales begin to “take off” and is often referred to in business as the “tipping point” or where the product becomes mainstream. Figure 7.7 Model of Diffusion


Figure provides an equation (Bass model) for determining the number of people adopting at any given time. Equation is given as: nt = [ p + q (Nt – 1 / M)] (M – Nt – 1) where, is nt the number of people adopting at any given time, p is a coefficient of innovation, q is a coefficient of imitation, Nt – 1 is the number of people have already adopted, and M is the total number of customers in the given market (segment) all of whom will ultimately adopt. Key to the model are the terms p and



q. p represents the people that will adopt based upon marketer information. q represents the people that adopt due to word of mouth effects (WOM). This model of diffusion has been used in two ways, the first manner in which it has been used is by using existing sales data for the product to predict future sales. The second has been to use data for similar products to predict sales of a product prior to launch. Lastly, imitation effect is usually about ten times larger than the innovation effect which explains the same of the curve in figure 7.5.

4. How New Products fit in Marketing Strategy


Marketers need to consider how each new product fits into the marketing and company portfolio. Paths to growth can be through either remaining with the current product mix and targeting new segments, or by creating totally new products.

Figure 7.8 Growth Strategies


Figure provides a 2 x 2 classification scheme for growth strategies. A growth strategy can either involve new products, or existing products, new markets or current markets. A current market, current product growth strategy is referred to as a penetration strategy. A current market, new product growth strategy is a product development strategy. A new market, existing product growth strategy is referred to as a market development strategy and a new market, new product growth strategy is a diversification strategy.

In a market penetration growth strategy, firms often suggest new ways to use the product. Firms may also use a new media and/or promotional campaign, implement price changes, or increase availability.

TEACHING NOTE: Arm & Hammer made by Dwight and Church is the frequently cited example of a firm using a market penetration strategy by finding and communicating new uses for an existing product. Baking soda is rising agent used in baking. It also has deodorizing properties and the firm suggested to the market that its Arm & Hammer baking soda could be used to combat a variety of odors in freezers, refrigerators, sink drains, and carpets among others. Most people were already buying the product, but now some bought two units – one for baking and one for the refrigerator or freezer, or both. Some people may have not bought the product previously as a baking product, but once informed, bought the product as a deodorizer. So in this instance it is more of a market development growth strategy.

5. Trends and Their Impact


Marketers continually watch the environment to detect trends that could impact future business activity. Such trends typically fall into the categories of demographic, lifestyle, and cultural



trends. These trends can impact the fortunes of existing products and services as well as any new product launch. General noteworthy trends include: the continued aging of America and Western Europe, the continued increasing multiculturalism in the United States and the increasing purchasing power of minorities in the U.S. Other trends include the continued globalization of the world’s economies and the increased wealth among many of the worlds emerging economies, increased concern over environmental issues and depletion of the world’s natural resources. All of these issues can impact marketing such as the drive to use more recycled and/or renewable/sustainable materials.

TEACHING NOTE: Bamboo flooring represents one product that is growing in acceptance among home owners and contractors. Bamboo flooring products have been engineered to mimic the appearance of natural tongue and groove hardwood floors and can be more dent and scratch resistant than many hardwoods, such as oak. The advantage of bamboo is that it is less costly and bamboo plants re-grow after the bamboo shoots have been harvested. Bamboo also grows at a much faster rate than hardwood trees, so they are considered a sustainable product. It should be noted that cork flooring is considered sustainable and environmentally friendly as well and has been re-engineered to better match consumer preferences.

6. Word of Mouth (WOM) Effects


Word of mouth effects can have a tremendous impact on the rate of diffusion of new products. Due to information technology, especially in the form of blogs and online social networks, marketing communications is becoming less a one-way (firm to customer) form of communication and more interactive, and even more beyond the control of the firm. However, increasingly firms are trying to at least start or create WOM on their own. The advantage of WOM is that it seems more “authentic” and credible because the comments and opinions are expressed by users rather than the company. Two manners in which companies attempt to create WOM are 1) providing free products to “brand agents” and 2) offering incentives to users for referrals.

Figure 7.9 Diffusion and Word-of-Mouth Networks


Figure provides a network diagram of links and nodes for an individual and their social connections as well as their friends’ social connections. Each person is a node and the relationship is a line or link. One note of interest, is that the figure doe not show reciprocal relationships which could be interpreted to mean that you might be “friends” with someone, but they may not be friends with you, or a person might consider you a friend, but you may not consider them a friend.



TEACHING NOTE: A good instructional device to demonstrate the power of word of mouth and its relation to diffusion effects and the parameters of p (innovation) and imitation (q) in the model of diffusion is provided in the following simple example. Ask students to start with them self and suppose that they talk to 3 friends on Monday about a new product. If each person who is informed about the tells 3 people the next day, at the end of 11 days how many people will have heard about the product. Provide a line graph to illustrate the effect.Day 1 - Monday = 3 , Tuesday = 9, Wednesday = 27, Thursday = 81, Friday = 243, Saturday = 729, Sunday = 2187, Monday = 6561, Tuesday = 19683, Day 10 -Wednesday = 59049.A simply line graph:

The graph assumes that there is only one form of information, each person tells exactly 3 people all in a single day, and no person included in the graph had previously heard about the product. Graph illustrates the beginning of the S-curve in Figure 7.6, or the first portion of the curve in Figure 7.5. As people become aware, the curve will begin to tail or reach its saturation point. Also, note that this is NOT a cumulative distribution function, it represents only those that “hear” on any given day, NOT the total have heard to date!

7. Summary

New products are developed through a process. The process may be long or short and have few steps or several. New products are critical for continued firm growth and success. Products seem to have an evolution, much like a life cycle: introduction, growth, maturity, and decline. The duration of a product’s life can be impacted by the marketer’s ability to reinvigorate and reformulate. Diffusion models can be used to forecast sales and product success can depend on word-of-mouth.

SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

For the questions that follow, consider these noteworthy lifestyle trends:1. Demographics

a. U.S. baby boomers are beginning to retire and experience health problems.b. The world is smaller and feels more diverse than ever.

2. Psychological



a. People care about the environment, hence more green marketing and more organic products.

b. Everyone wants to feel special, so indulgence, hedonic, and luxury or faux luxury sales are on the rise.

c. Everyone wants purchases that are good “value” (good quality at good prices).d. There is a somewhat greater tolerance of a variety of lifestyle choices. e. People are wearing more casual clothing, even at work.f. Adults and families are experiencing less leisure time.g. People are spending less time reading newspapers.h. There are concerns for health and nutrition (e.g., less smoking).

3. Technologicala. IT helps the marketer (e.g., CRM) and customer (e.g., decision making).b. There are more forms of media, and customers are taking control, in time- and

place-shifting (e.g., when to watch what is on TV).c. e-things:

i. More shopping is done from home rather than at stores and malls.ii. It’s accessible and acceptable to buy almost anything online.

iii. More time is spent online, doing anything

Using the previous trend observations, answer the following questions:

1. Choose one fact that seems most relevant to your business and forecast (conceptually) how that trend will affect your marketplace, company direction, competitive offerings, etc.

U.S. baby boomers are beginning to retire and experience health problems.

As was noted in the text, as people age, these individuals, and their loved ones will need financial planning, health care and medicine, assisted living facilities, and activities and pursuits (travel) directed towards them. Such items might include such things as exercise facilities that cater to an “older crowd” – think of it as the “mature” equivalent of “curves”. This would also require physical trainers that specialize in the “mature” exercise participant and the special needs they may have such as nutrition, joint pain, decreased flexibility, strength and endurance.

The world is smaller and feels more diverse than ever.

People need to be made to feel special, yet connected at the same time. This could mean more individual tailored marketing appeals, both in the form of products and communications. It would require increased ability on the part of marketers to recognize this diversity and understand what it means. Marketer sponsored events and networks would help with this issue.

People care about the environment, hence more green marketing and more organic products.



Continued and increased demand for locally grown products. Forces mainstream grocers to search for quality local sources with sufficient supply to meet demand at competitive prices. Also will present an opportunity for creative chef’s and restaurants to provide seasonal menu variation as a way to promote “locally grown” and distinguish themselves from restaurants with static (set/fixed) menus. Also presents a challenge as in how to get people to eat root vegetables that they typically don’t eat (turnips, rutabagas, etc).

2. Have a friend choose any two of the trends randomly, and imagine creating a new product to address that combined new need.

Eco-friendly roof design and installation service. With a greater number of people desiring to live an eco-friendly lifestyle, “Eat-Off-Your-Roof” is a company that designs roofs that consist of low water-needs vegetation that can be consumed by humans. This allows families to live an eco-friendly life and to be more self-sufficient. So, the two trends are: eco-friendly life and “eat locally grown products.”

3. Surf to (a) find three more new trends and (b) identify the (likely) “top-10” trends (it’s okay to include the trends listed earlier) for the next 10 years (and reasons why you believe they’ll be the most important).

There are a near infinite number of trends to watch in any number of categories that could affect marketing behavior. Any of the above trends is likely to have a counter-trend as well (with few exceptions). Such trends: with respect to on-line behavior there could be a backlash to technology with some people rejecting being electronically connected (no cell phones, cable, internet, web-based social networks, there will continue to be those individuals that reject the notion of consumerist culture. One potential trend will be growth in micro-trends these are small trends adopted by a relatively few number of people, that may also exist for a relatively short period of time. But the shear number of categories make trends difficult to evaluate: technology, political, economic, consumer, technology, medical.

SUGGESTED ANSWERS TO MARKETING PLAN QUESTIONS

Take the new products perspective of this chapter and build on the answers you compiled in Chapters 5 and 6.Product: fill in descriptions here:

Choose high-end quality or basic-quality level: Product1

This example has elected to pursue a high-end quality energy drink. This is due to the reasoning that the target group (women) would be more accepting of a quality product rather than a lesser quality-lower priced product. This may in part be due to potential resentment of having a low-quality product made for directly to them. “Complete Energy” (Total Energy was rejected due to potential conflict with the cereal brand “Total”) is an energy drink for today’s active woman. In today’s frenetic, multi-tasking world, women need an energy supplement formulated especially for them. Complete energy is that drink. The description would continue



to detail: taste, number of calories and carbohydrates, nutrients, and caffeine level. “It gives you the kick, without the crash.”

Use conjoint on target segments to determine primary attributes/features: Product2

Primary attributes could be: flavor, serving size (8, 12, 16 or some other size), amount of caffeine, nutritional supplements, type of sweetener (sugar, substitute), caloric level, package type, and price.

What are our brand associations, and what do want to trade in/out: Product3

It would appear that possible brand associations the product marketers would want would include: strength vs. femininity (which do NOT have to be mutually exclusive), active vs. passive, endurance vs. quickness among others. The product wants to distinguish itself from the more masculine products on the market, yet should appeal to “strong, independent, successful women.” Another key trade-off is between the speed at which the energy boost will kick in versus the duration of the effect. For other product categories, students need to think in terms of competitive advantage: is the product cheaper, better, or different. How do those strategies translate in to brand meaning and associations among customers. Again, encourage students to ask others what they think. A simple and effective procedure is to create a semantic differential and have students ask others what words they think most relate to the product or product category. Alternatively, a simple word association test may also be beneficial.

Where are we in the product life cycle; is it time to jumpstart: Product4

Depending on approach either a) new product concept (yet to be tested and launched) or if existing most likely in the late growth stage as the energy drink market still has double digit annual growth. For other product categories, have students conduct secondary research to determine if they can find such things are number of years on the market, annual sales volume (both unit and dollar) for the past several years. These could be provide rough approximations of where the product is in the product lifecycle.


chp 7 new product development and plc

Documents