Chapter 7

7

New Product Development,

Management, and Strategy

McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

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Agenda Product Lines Business New Product Development Organization of the New Product Effort Product Life-Cycle Analysis Determinants of the Product Mix The Product Adoption–Diffusion Process Product Portfolio Classification, Analysis, and

Strategy Product Deletion Strategy Marketing of Business Services

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Product Lines Defined

Proprietary or catalog• Standard products offered to many customers and

usually inventoried in anticipation of sales orders. For example, the DoAll Company keeps a large inventory of model No. C916A Band Saws to ensure quick delivery to customers.

Custom-built • Different variations of accessories and options to

complement proprietary or catalog products offered. For example, the DoAll company fills a request from a major company for a custom, made-to-order saw with a larger motor size, larger table size, and automatic indexing.

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Product Lines Defined

Custom-designed• Products designed for (and usually only for) a particular

user. For example, DoAll designed a unique band saw with a custom-fixtured table and remote-control operation for U.S. Army to use to cut up live ammunition.

Industrial services• Intangibles, i.e., maintenance, machine repair, consulting.

For example, DoAll provides a saw and coolant specialist who makes courtesy inspections at customers’ plants to assist in using DoAll in product applications.

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Custom Product Versus Proprietary Standard Line Manufacturers

Custom: BMW designs a windshield washer fluid container for their new model and sends part prints to a custom plastics component manufacturer. Manufacturer must build production equipment but BMW owns molding dies and rights to product. Supplier sales build relationship, work with customer on design, finalize terms of sale.

Proprietary standard line: BMW picks a standard wheel bearing for its new model and orders it directly from manufacturer. Manufacturer sells same wheel bearing to others. Supplier sales build relationship, work with customer on application, finalize terms of sale.

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Business New Product Development

New Product Approaches

• Technology Push - When perceived value of particular technology is great; firm has only a vague notion of possible applications, and usually not much more.

• Market Pull - Primarily the result of marketing research methodologies of interviewing potential users about their needs, then developing solutions to those perceived market needs.

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The New Product Development Process

Idea and concept generation

Screening and evaluation

Business analysis

Product development

Product testing

Product commercialization and introduction

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Marketing Activities at Each Phase

1. Idea and concept generation: involves the search for product ideas and concepts that meet company objectives

2. Screening and evaluation: involves analysis to determine which ideas submitted are pertinent and merit a more detailed study of potential feasibility and market acceptance

3. Business analysis: return-on-investment criteria are examined along with competition and the potential for market entry

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Marketing Activities at Each Phase

4. Product development: involves taking the product from an idea generated during a brainstorming session to a state of readiness for product and market testing

5. Product testing: involves conducting commercial experiments necessary to verify earlier business judgments

6. Product commercialization and introduction: includes launching the new product through full-scale production and sales and committing the company's reputation and resources to the product's success

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Organization of the New Product Effort

Product Manager• Individuals responsible for marketing mix decisions for Individuals responsible for marketing mix decisions for

specific product line as it travels through life cyclespecific product line as it travels through life cycle

New Product Manager• Plan, organize, implement, and control new product Plan, organize, implement, and control new product

development.development.

New Product Committee• Part-time interdisciplinary management group reviews new Part-time interdisciplinary management group reviews new

product proposals; advantages outweigh disadvantages product proposals; advantages outweigh disadvantages because committee is most common form of organizational because committee is most common form of organizational structure for managing new products.structure for managing new products.

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Organization of the New Product Effort

New Product Department• Specific department generates and evaluates new Specific department generates and evaluates new

product ideas, directs and coordinates product ideas, directs and coordinates development work, and implements field testing development work, and implements field testing and pre-commercialization of new product; allows and pre-commercialization of new product; allows for maximum effort in new product development, for maximum effort in new product development, but at expense of major overhead costs.but at expense of major overhead costs.

New Product Venture Team• Task force representing various departments Task force representing various departments

responsible for new product development and responsible for new product development and implementation; normally dissolved once new implementation; normally dissolved once new product is established in market.product is established in market.

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Product Life-Cycle (PLC) Analysis

Introduction Market Growth Market Maturity Sales Decline

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Introduction Growth Maturity Decline

Product Life Cycle

A “PLC” diagram is a visual representation of a tendency. If an inflection point is reached, you should know what is coming (even though you only have actual life cycle to that point). In business, PLC is often driven by experience curve, economies of scale, competitive attraction to market opportunities, rate of diffusion factors, and eventual market saturation. Planners must adjust for actual impact of these factors on a particular product.

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Introduction Growth Maturity Decline

Product Life Cycle

Marketer’s objective is to adjust strategy to changing life cycle situation to maximize the results. As maturity approaches, marketer often decides to attempt a PLC extension by (1) finding ways to increase current market’s usage, (2) finding totally new uses, (3) finding new target segments, (4) developing new distribution, or (5) perhaps a major product improvement and repositioning.

(continued)

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Product Life Cycle

Actual PLC curves can be any shape—from product that doesn’t sell at all, to fad that grows fast but has short life, to seasonal product, etc. Company depends on its marketers to understand what factors determine success and to make appropriate strategic decisions.

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Determinants of the Product Mix

Technology Competition Changes in Levels of Business Activity Operating Capacity Market Factors

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The Product Adoption-Diffusion Process

Stages in the Adoption Process• Awareness - Buyer learns of new product or

service, but lacks information.

• Interest - Buyer seeks out or requests additional information.

• Evaluation - Buyer (or member of buying team) considers/evaluates usefulness of product/service; consideration might be given to value-analysis project or make-buy situation.

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Stages in the Adoption Process• Trial - Buyer adopts product or service on limited

basis.

• Adoption - If trial purchase worked, then buyer decides to make regular use of product/service.

• Diffusion Process – goes beyond the adoption process and represents the spread of a new product, innovation, or service throughout an industry over time.

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Factors Influencing the Rate of Adoption-Diffusion• Perceived risk• Perceived advantage• Incompatibility with existing products/behavior• Uncertainty

Diffusion speed varies among industries—fast in electronics, slow in domestic steel.

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Product Portfolio Classification, Analysis, and Strategy

What is a Product Portfolio? Diagnosing the Product Portfolio Product Portfolio Strategies

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BCG SBU Portfolio Business Strategy

Low

High

High Low

Industry attractiveness,Market share,

Cash generation

Businessstrength,Growth rate,Cash use

(continued)

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BCG Business SBU Portfolio Strategy

Low

High

High Low

Industry attractiveness,Market share,

Cash generation

Nurture to feed cash to?

Use cash to make into star

Defend position

Fix or abandon

Businessstrength,Growth rate,Cash use

(continued)

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BCG Business SBU Portfolio Strategy (as might appear in your strategic planning documents)

Low

High

High LowMarket share

Cash generation

Growth rateCash use

Computers PrintersModemsTelephones

Note: Size typically indicates amount of sales.

(continued)

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GE Strategic Planning Grid

Business strength axis

Self-defined as a function of: size, growth, share, profitability, image, position, people, and other factors of business strength or weakness

Self-defined as a function of: size, market growth, strength of competitors, industry profitability, technical strength, and positive acting market environmental factors.

High

Medium

Low

High Medium Low

High Medium Low

Industry attractiveness axis

(continued)

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Coca-Cola* as a part of the cola market

*Coca-Cola does not sell directly to consumers


High

Medium

Low

High Medium Low

High Medium Low

Problem #1: SBUs Can Be Repositioned by Redefining Axes


(continued)

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High

Medium

Low

High Medium Low

High Medium Low


Coca-Cola as a part of the soft drink market


(continued)

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High

Medium

Low

High Medium Low

High Medium Low


Coca-Cola as a part of the all types of drinks market


(continued)

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Bottom line: SBU market share and market strength change as market is redefined; also possible that industry attractiveness changes.

Note: Coca-Cola slides are for the purpose of demonstrating the concept of SBU position shifting as axes are redefined; they do not represent actual strategic position of Coca-Cola.


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Problem #2: Doing What the Grid Position Indicates When portfolio models were first introduced, marketers did what

the grid position indicated rather than using them as a tool to help visualize company’s mix of SBUs, interrelationships, relative strengths, etc.

If a larger percentage of business is in products in which company is not strong, margins are low, and market is not attractive, they may still be providing important coverage of fixed overhead. Don’t automatically get rid of “dog”-quadrant products.

Bottom line: Two-factor portfolio models are not decision models; they are tools to help marketers with their thinking. Even with multiple-factor computer decision support systems, the decision is still the marketer’s.

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Product Deletion Strategy

Harvesting Line Simplification Divestment

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Important Characteristics of Business Services

Intangibility• Freight forwarding, consulting, repair, etc. can

seldom be tried out/tested in advance of purchase; instead, buyers must view advertising copy, listen to sales presentation, or consult current users to gain insight into expected performance.

Perishability and fluctuating demand• Services cannot be stored and markets fluctuate by

day, week, or season; idle service capacity is business that is lost forever—no inventory buffer.

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Important Characteristics of Business Services

Simultaneity• Production and consumption of services are

inseparable; this typically puts marketer in very close contact with customer, requiring them to be highly professional.

Heterogeneity• A service is an experience and thus cannot

be duplicated; difficult to standardize and thus output quality may vary.

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Business Service Marketing – Challenges and Opportunities

Service Marketing vs. Product Marketing

Positioning Strategy

Bundling of Services

Service Strategy and the Marketing Mix• Product• Price• Place (Distribution)• Promotion

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Business Service Marketing – Challenges and Opportunities

New Service Development• Share Building• Market Extension• Line Extension• New Business

Chapter 7

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