Transcript Chapter8 - QC Economics

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 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)
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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
– 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.
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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
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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!
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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
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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:
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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/product_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
Idea
Generation
Business
Analysis
Idea
Screening
Concept
Development
& Testing
Product
Development
Test
Marketing
Marketing
Strategy
Development
Commercialization
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Idea Generation
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.
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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:
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–
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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.
DaimlerChrysler’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.
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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. It’s 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 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, 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/pag1english3.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:
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The target market, planned product positions. It also contains
sales, market share, and profit goals.
Part Two Outlines the First Year’s:
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Product’s planned price, distribution, and marketing budget
Part Three Describes Long-Run:
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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 car’s fun spirit and
low emissions. During the first year, $100,000 will
be spent on market research to find out who is
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buying and their levels of satisfaction.
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.
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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.
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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.
Idea
Generation
Business
Analysis
Idea
Screening
Concept
Development
& Testing
Product
Development
Test
Marketing
Marketing
Strategy
Development
Commercialization
Simultaneous Approach: Cross-functional teams work
through overlapping steps to save time and increase
effectiveness. – Riskier - Must be careful not to rush
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and lose product quality.
Video Case
eGo Vehicles
(14 minutes)
http://www.egovehicles.com/
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Thoughts
How does eGo’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 eGo
has to pave the way by educating consumers
about the product and creating its own distribution
channels.
Who is eGo’s 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
32 to
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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
Decline
34%
Late
Majority
16%
Laggards
X-σ
X - 2σ
Maturity
X
X+σ
Time of adoption of innovations
Try new ideas at some risk.
Suspicious of change
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)
Time
Fad
Sales
Fashion
Sales
Sales
Style
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
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
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different stages of the product life cycle.
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
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 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?
–
–
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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?
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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?
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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
http://www.ifilm.com/player/?ifilmId=2419643&pg=superbowl2002&skin=default&refsite=default&mediaSize=default&context=product&launchVal=1&data=null&realId=2419643&bw=300&mt=WMP
Blockbuster Ticker: BBI
How have their ads changed?
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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.
•P&G 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).
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.
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