Product Innovation:Product Innovation:Opportunity Identification Opportunity Identification

Idea Generation, and DesignIdea Generation, and Design

Dr. Yushan ZhaoDr. Yushan ZhaoCollege of Business and EconomicsCollege of Business and Economics

UW-WhitewaterUW-Whitewater

Spring 2006Spring 2006

New Product Development Process

Opportunity IdentificationOpportunity Identification

DesignDesign

TestingTesting

IntroductionIntroduction

Life-cycle ManagementLife-cycle Management

Evaluate at eachstage to determinewhether to proceed.

Key is to managerisk of introducing afailure or not introducing asuccess.

Proactive vs. Reactive

Go/No Go

Go/No Go

Go/No Go

Go/No Go

Expected Costs

Expected costs =Cost of individual phase

Rate of Complete Success at the Beginning of that Phase

Table 3.7: (page 65)

Costs for Phase

Likelihood of Success in Phase

Expected Costs

Proportion of Total Expected cost

Phase 1

$700 50% $5,400 15%

Phase 2

4,100 57 15,800 44

Phase 3

2,600 70 5,700 16

Phase 4

5,900 65 9,000 25

Total 13,300 13 35,900 100%

Expected Time

Expected Time =Time of individual phase

Rate of Complete Success at the Beginning of that Phase

Table 3.7: (page 65)Time for Phase

Likelihood of Success in Phase

Expected Time

Phase 1

5 months

50% 39 Months

Phase 2

6 57 23

Phase 3

12 70 26

Phase 4

4 65 6

Total 27 13 94

High-Tech Market

1. Assessing market opportunity in high-tech markets

2. Selected strategies: Growth, first mover

Strategic Planning for High-tech Products

Market OpportunityAssessment

New Product and Technology Strategies

Projects

Projects

Aggregate ProjectPlan

Assessing Market Opportunity

1. Product-market characteristics

• Market size/growth potential

• Unmet customer needs

• Entry barriers

• Competitive attractiveness

• Profit potential

• Risk

2. Organization’s capabilities and position

Size/Growth Potential in High-Tech Markets

Heavy reliance on:

• Expert opinion

• Analogous product sales history

• Diffusion estimates

• Customer measurement in NPD process

Speeding Innovation Diffusion

Significant advantage over existing products

Compatible with existing values, and past experiences

Easy to understand Easy product trial Benefits from using product highly

visible and easily communicated to others

Bass Diffusion Model

• Forecasts market size and growth characteristics for first time product purchases in a new product category.

• Assumes innovators who adopt new products without influence from others, and imitators who rely on word-of-mouth from earlier adopters of the product.

Bass ModelBass Model• First developed in 1969 by Frank Bass. • Predicts future product class sales for good

s(t) = pm + [q-p]Y(t-1) – (q/m) [Y(t-1)2]

s(t): sales in period tp: initial probability of adoption (about 0.04)m: total numbers of potential buyersq: a diffusion rate (about 0.3)Y(t-1): total number of purchases by last period

Using p and q from Analogous Product Sales History

Time

MarketSales(000)

Color TV

B&W TV

Formula: St = pM + [q-p] Yt-1 – ( q/M ) Yt-12

Fit and solve for p and q: St = ß0 + ß1 Yt-1 + ß2 Yt-12

Examples: p q

B&W TV 0.028 0.25Color TV 0.002 0.66VCR 0.025 0.60Home PC 0.12 0.28

Forecast HDTV Using Color TV Growth Characteristics

Innovation Imitation parameter parameter 2000 2000 (p) (q) Forecast Actual

HDTV Using -> 0.002 0.66 550K 630K

Total Potential (M) = 100 million households

New Product: High Definition Television

HDTV Market Opportunity Forecast

Using Bass Diffusion Model and Reported Historical Color TV Diffusion Parameters

1998 1999 2000 2001 2002 2003 2004 2005 2006Housholds 100 100 100 100 100 100 100 100 100Cumulative HDTV Sales 0.20 0.53 1.08 1.98 3.46 5.86 9.68 15.64 24.51

HDTV Sales Forecast (M units) 0.20 0.33 0.55 0.90 1.48 2.40 3.83 5.95 8.88 HH Penetration Forecast 0.20% 0.53% 1.08% 1.98% 3.46% 5.86% 9.68% 15.64% 24.51%HDTV Actual Sales (M units) (CEA) 0.63

Bass Diffusion Parameters using Analogous Color TV (1954-1970) Product

p 0.002

q 0.66

m 100.00

q-p 0.658

q/m 0.0066

p*m 0.20

HDTV Forecast using Bass Model

Customer Measurement in NPD Testing

Test environments:

• Concept test descriptions, graphics, prototypes

• Simulated shopping

• Test markets Measure preferences for product

alternatives, purchase intentions, after-use satisfaction, trial and repeat purchase rates

Issues in Customer Measurement of Opportunity

Is the target market(s) well represented in the sample?

Can customers give you accurate responses? Do they lack understanding of the new product and its benefit.

Does the test environment/procedure approximate purchases/purchase process well?

How well are competitor’s moves incorporated?

Entry Barriers

• Experience curve/economies of scale

• Brand image

• Cognitive advantage

• Customer switching costs

• Proprietary technology/knowledge

• Legal protections

• Other (e.g. pricing, shelf space, production capacity, investment requirements)

Competitor Analysis in High Tech Markets

Potential competitors may be as important as existing competitors (technology-enabled)

Capabilities (skills and knowledge) are critical

Strategic “intent” of competitor must be assessed. “What are they likely to do? They could, but would they?”

Market Attractiveness Matrix

Criteria: Product-Market 1

Product- Market 2

Product-Market 3

Product- Market 4

Size/Growth O O

Unmet Needs O

Entry Barriers

Competitive Attractiveness

Organizational Fit O O O

Profit potential

Risk O O

Other: New market O

Overall Rating O

GoodO Fair Poor

Growth Strategies

Market Penetration Strategy

Product Development Strategy

Market Development Strategy

Diversification Strategy

Existing Products New Products

ExistingMarkets

NewMarkets

Technology Influence on Growth Strategies

Existing Products New Products

ExistingMarkets

NewMarkets

Technology opportunitieslead to new products

And often lead to new market opportunities

ExamplesExisting Products New Products

ExistingMarkets

NewMarkets

IBM/business computer -> Line of bus. computers Epson/printers -> Color ink-jet printersMicrosoft/PC software -> Word processing SWPalm/PDA -> Color-enhanced PDA

- Personal computers- Digital photography- Home entertainment- Voice communications

Growth: Strategic Questions

Is market saturated?Can you take sharefrom competition?Do you have superior

marketing skills?

Unmet needs in existing market?Product line holes?Do you have superior R&D skills?

Leverage skills/position into new markets? Able to do “battle” with new competitors?Rate of diffusion of innovations? (new to cust.)

Existing Products New Products

ExistingMarkets

NewMarkets

Growth Strategy Wisdom

• Avoid “incumbent inertia” (complacency, conservatism and conceit)

• Beware of “cannibalization phobia”

• New markets can be shaped

• Early market entrants (first movers or fast followers) can have enduring advantages

First Mover vs. Fast Follower

First Mover Fast Follower

Scale economies Significant Not significant

or acquirable

Firm’s competency Innovation Promotion,Production

Imitation costs High LowProtection mechanisms High LowPreemption of scarce resources Likely Not likelyPreferences can be shaped earlyYes No and endure Customer switching costs High Not

prohibitiveLearning from first mover Difficult Easy

Idea Generation Exercise Please take a few minutes to think

problems you have in your life or work such as shopping, dining, phone, grooming, pet management, transportation, car maintenance, etc. Then, generate at least three new product ideas to solve the problems.

Teams are required to present ideas generated to class.

Source of Ideas Methods of Idea Generation

TechnologyMarket/user solutionProduction/serviceCompetition/other firmsChannels of distributionSuppliersManagers/employees

Direct searchInnovationExploratory user studyFacilitate lead usersCreative methodsNational policyAlliance acquisition

Idea Generation

Idea Generation: Empathic Methods

Empathic methods are methods which provide an

understanding user needs through empathy with the user world rather than from user articulation of needs.

Methods:- Observation of users’ behaviors- Ethnographic exploration - NPD designers

immersed user’s environment

Empathic Method

1. Critical observation

2. Capture the data

3. Reflection and analysis

4. Brainstorm solutions

5. Develop prototypes of possible solutions

Source: Leonard and Rayport (1997)

Empathic Information

1. Triggers of use – what prompts usage

2. Unarticulated user needs

3. Interactions with the user’s environment

4. Customization of products

5. Intangible product attributes

Source: Leonard and Rayport (1997)

“Day-in-the-Life” Experiences

Learn from doing what they do in everyday and extraordinary situations

Use your own and your competitor’s products

Acquire training and background similar to your customers

Lead Users

1. Lead users have needs ahead of the general marketplace. They face needs that will be general in a marketplace - but face them months or years ahead of the bulk of the marketplace.

(and)

2. Lead users expect to benefit significantly from a solution to those needs.

Lead Users

Lead users can be any of the following:

1. Lead users in the target application.

2. Lead users in analogous markets.

3. Lead users of important related attributes of products (e.g. technology experts)

Lead-User Process

1. Project Preparation and Planning • achieve top management support and form cross-

functional team• background research on product category

2. Identify Trends and Customer Needs • identify markets and core needs• identify leading-edge expertise

3. Explore Lead User Needs and Solutions • identify lead users; interview and screen• generate concepts in lead user workshops• test concepts with typical users

4. Refine Concept Solution • finalize solution and create strategic plan

Lead User ExamplesProduct Trends Lead users Outcome

Wall pipe hangers Easy to installActuated interlocking fastenersLight non-corrodible materials

Expert pipe hangers from industrial plumbing firms who concurred with the trends and made improvements to existing products

Advanced new pipe hanger system rating high on originality, feasibility and comprehensiveness.

Printed Circuit Board CAD software

Chip density 

Expert engineers who performed more complex designs and often developed their own systems

Product which had direct links to CNC machine, easy input interfaces, stored data centrally, full function simulation, more board layers, routing thin line.

Snack food Healthy foods“Weekend” amateur athleticism

Nutrition scientist with experience in an elite Navy combat groupNational medal winning weightlifterCompetitive bike racer

Novel line of healthy snacks for weekend athletes

Lead User Examples (cont.)

Hearing aids Cosmetic appeal (target those in their 50’s)Customizable, low-cost tubingLow acoustical feedbackEase of purchase

Cosmetic dentistry specialistCostume jewelry manufacturerMedical tubing supplierSuppliers of amplifiers for prof. football teams Video/music industry specialistOpticians with mass retailer experienceRetailer of eyeglasses

     

?

Identify Lead Users

GatoradeWhite-out fluidLaser PrinterSofaMountain bikesSurf boardsYour Businesses

Lead User Communities

• “if you want something done right, do it yourself”

• “Sticky” information is difficult to transfer to manufacturers

• Needs are changing, and innovation evolves over time

• Lead users willing to reveal innovations freely

Source: von Hippel

Lead Users: Advantages and Disadvantages

Advantage: Lead users able to articulate future needs and possibly solutions for the general market.

Disadvantages:

1) Lead users can be difficult to identify. 2) Lead users may not cooperate.

Form Function Customer Benefits

Computer Records Office Record concertsFax Entertain Businessmen show moviesVCR documents Traveler Show how to cookTelephone Teach House wives show techniquesTV Train Gardener transmitPrinter Receive CarpenterProjector MusicianCopier KidsCamera StudentsHandicam

Idea Generation Matrix

Idea Evaluation

I =T x C x P

D

I: index of attractivenessT: probability of successful technological developmentC: probability of commercial success given that it is technically successfulP: profit if successfulC: cost of development

NEWPROD Scoring Model Developed by Dr. Robert Cooper Database of projects from 100 Canadian

industrial firms (2500 new product projects) Found 8 factors which were significantly

related to product success Weights for the factors were estimated using

regression analysis Managers rate projects on each factor, and the

project score is derived from these rating and factor weights.

NEWPROD ExampleFactor Project Project Score

Factors: Weight Score x WeightProduct superiority/differentiation 1.744 1.19 2.08Overall product/firm/resource compatibility 1.138 -.16 -.18Market need, growth, and size0.801 .88 0.70Economic advantage of product to end user 0.722 -.49 -.35Technological resource compatibility 0.342 -.19 -.07Product scope 0.225 0.90 0.20Market competitiveness -.301 -1.82 0.55Newness to the firm -.354 -.24 0.09

3.02

Relative importance of factors can be judged by comparing their scores.Score of this project can be compared with alternative projects for funding.Score of this project can be compared with past successful projects.