Sensing the Market to Thrive in New Product Development

Sensing the Market to thrive in New Product Development

Jesus Mascareno

Imran Mohyuddin

2

1. Introduction

Innovation has been an important issue in contemporary business, it allows companies to

differentiate from competitors, renew the product portfolio and in today’s changing

environment it has become a strong tool to cope with those changes. Researchers have pointed

out the importance of excelling in such process, for instance Stalk (1988) mentions that firms,

the most successful ones, know how to keep moving and always stay on the cutting edge. Also

Ho and Chen (2007) pointed the fact that some firms’ survival depends on their ability to

manage new product launches. In fact in 2004, the average percent of firm’s total sales

attributable to new products developed within the last three years is about 33%. The relevance

of innovation is also found in Forrester Research’s Report on New Product Development 2006

which reveals that 90% of CEOs feel that new product innovation is very or extremely important

to growth.

Despite the great benefits provided by innovation not all companies can have access them, this

is derived from the fact that in fast-paced, globally competitive environments, consumer needs,

technological opportunities, and competitor activity are constantly in a state of flux.(Teece;

2007. This constantly moving environment affects the new product development process of

firms, in fact product failure is a latent problem for many companies. Authors like Karayaka and

Kobu (1994) mention that product failure ranges between 37% and 80%. While Crawford (1977)

gathered information from different sources and found that in new drugs the rate of failure was

approximately of 60%, in the new consumer goods the rate was of 57%, in the new products

category the arte was of 90%, while the lowest rate was in the new industrial goods with a rate

of 30%. Despite the range of the rates and discrepancies of the authors the fact is that the

switch to exploration still represents a challenge for firms.

From the success rate the problem doesn’t seem promising as well, since according to a Booz

Allen’s study, firms have increased their innovation success rate from one successful product

against 58 ideas in 1968, to one successful product from as few as 7 ideas by 1981 (Sarin and

Kapur; 1990).

This paper seeks to advance insight into how firms can detect preventive indicators of failure

for new products and if the first steps towards a model can be drawn in order to reap

innovation’s benefits. The paper is divided as follows, first we will explore possible hypothesis

of which activities firms are failing in new product development and what the outcomes of such

low performance will position the firms. Second two new product development failures are

analyzed in order to understand the reason behind it. Third the findings will be compared

against the hypothesis in order to see if they were accurate. Finally we will conclude by

stressing the importance of deepen the studies in sensing capabilities in order to develop a

market indicator tool.


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Imran Mohyuddin

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2. Hypotheses

Sensing Capabilities

This paper focuses in the identifying indicators of new trends, opportunities and threats during

the product development process that could help firms to launch successful new products.

There are some emerging marketplace trajectories that are easy to recognize. In

microelectronics this might include miniaturization, greater chip density, and compression and

digitization in information and communication technology. However, most emerging

trajectories are hard to discern (Teece; 2007).

The group of activities a firm performs to identify oportunities, interpret new developments

and take actions from it, it is what Teece (2007) calls sensing capabilities, also stressing that

sensing capabilities are process within the company. Day (1994) reinforces the link between

firm’s decisions and the market by mentioning that the failure to anticipate a change in

competitive forces or customer requirements results from a deficient market-sensing capability

or inadequate links to key customers.

Market sensing activities are made possible by an organization’s internal capabilities to

understand, process and use this information (Heusnikvel et al.; Kok et al., 2003). Cravens,

Piercy and Prentice (2000) taking a more market oriented approach described market sensing

when referring to the importance of identifying potential shifts in customer preferences. Trends

such as changing life styles, population shifts, and other demographics often forecast critical

transitions in consumer markets. Changes in business-to-business markets may be signaled by

actions of industry leaders, changes in business designs, and other initiatives. In order to track

these trends, executives should employ market-sensing processes to identify and respond to

these market changes. Cravens, Piercy and Prentice (2000)

In order to better understand the market trajectories a firm must traduce the market sensing

process into activities so they can develop successful products aligned to these trajectories. In

accordance with Teece (2007) sensing (and shaping) new opportunities, is very much a

scanning, creation, learning, and interpretive activity. Investment in research and related

activities is usually a necessary complement to this activity. This activity not only involves

investment in research activity and the probing and reprobing of customer needs and

technological possibilities; it also involves understanding latent demand, the structural

evolution of industries and markets, and likely supplier and competitor responses.

Cravens, Piercy and Prentice (2000) presents a more intern view of the process by positioning

the sensing capabilities in the culture of the company when they wrote “There is mounting

evidence indicating that a company which builds a market-driven culture and effective

processes for collecting, sharing, interpreting information, and making decisions will be more

effective in creating a future vision about the market and competitive space. Companies that

achieve superior performance also display characteristics of constant learning and innovation

that continually refine market sensing and the vision of the future”. Harreld, O’Really and

Tushman (2007) in their study on IBM’s recovery after a major crisis found that the path the

Sensing the Market

company followed was to link their strategy to the customers by developing a “ma

Market insight according to them i

opportunities are with the ability to do the things necessary to accomplish them.

The market sensing described below can be summarized in detectin

and calibrating. These activities

capability of identifying new trends, opportunities, and threats in the stage of new product

development.

Hypothesis 1:

Main reasons for new product development

low performance in executing their sensing capabilities: detecting, filtering,

implementing and calibrating

Market Position

As we have seen a there is a cause

market position a firm could obtain. This means a firm with a high sensitivity of the market

could find itself in a better position

so. Firms that failed to perform their sensing capabilities

and have no connection with the market.

hypothetical market connection

between prestige and functionality and the horizontal line

the price ranges.

The disconnection of the market can happen when a firm

up with the fast changing environment and it is viewed by the

see figure 1) and the second case is when a new product has no market since it is seen by the

market as an unnecessary luxury

Figure 1. Market connection matrix.


4

was to link their strategy to the customers by developing a “ma

Market insight according to them it is the connection of knowing with great accuracy what the

are with the ability to do the things necessary to accomplish them.

described below can be summarized in detecting, filtering

ing. These activities implemented systemically within a firm could increase the

new trends, opportunities, and threats in the stage of new product

ew product development failures are directly related to

executing their sensing capabilities: detecting, filtering,

implementing and calibrating.

As we have seen a there is a cause-effect relationship between the sensing capabilities and the


ter position to have a successful new product than other

rm their sensing capabilities therefore will eventually lose ground

the market. In order to better exemplify we have developed a

market connection matrix in which the vertical line represents the continuum

nctionality and the horizontal line represents the continuum between

disconnection of the market can happen when a firm launch a product that couldn’t keep

up with the fast changing environment and it is viewed by the market as a commodity (firm A,


an unnecessary luxury (firm B, see figure 1).

Jesus Mascareno

Imran Mohyuddin

was to link their strategy to the customers by developing a “market insight”.

t is the connection of knowing with great accuracy what the

are with the ability to do the things necessary to accomplish them.

ing, implementing,

implemented systemically within a firm could increase the

new trends, opportunities, and threats in the stage of new product

directly related to firm’s

executing their sensing capabilities: detecting, filtering,

the sensing capabilities and the


than others that do not do

ntually lose ground

In order to better exemplify we have developed a

represents the continuum

represents the continuum between

a product that couldn’t keep

market as a commodity (firm A,



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Imran Mohyuddin

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Hypothesis 2:

If a firm don not perform properly their sensing capabilities its new product

development attempts will be positioned either beyond the market spectrum

where no customers can follow, on the contrary if a firm innovates to a lower

degree than the market trends, then these firms will find it selves behind the

market expectations.

3. New Product Failures Analysis

It is widely assumed that any business entity can learn more from the failures as to the

successful endeavors. According to Stead and Smallman (March, 1999), that what organizations

should seek from exploring their behaviors before and during crises is termed as `generative

learning'. Through this approach organizations expand their capability by finding new ways to in

business and opportunities. Also McGrath, 1999, suggested that people seek success and avoid

failure, and those efforts can introduce errors in learning and interpretation processes.

Paradoxically, such errors often make failure more likely or more expensive than it need have

been. In related industries while developing strategy or products, historical failures can help to

devise successful strategy or winning product.

In new product failures it is often easier to pinpoint why a failure has occurred than to explain a

success, making failure analysis a powerful mechanism for resolving uncertainty (Sitkin, 1992).

Therefore, in this paper a number of product failures in its development stage have been

explored (see table1), from this list of failures the Betamax and New Coke have been selected

among the rest of the products to be analyzed in depth, this derived of the fact that sufficient

information and data to analyze both failures was found in academic research.

Product Company

Betamax JVC

The Edsel Ford

DeLorean DMC

Lisa PC Apple

Atari 2600 Atari

The Newton Apple

Arch Deluxe McDonalds

SSA Computer Systems Paradyne

New Coke The Coca Cola Company

Table 1. Product Failures


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Imran Mohyuddin

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The Betamax

In the mid 70´s the first commercial home VCR (Video Cassette Recorder) appeared in the

market and from its appearance, the VCR surpassed color television to become the largest

single consumer electronics product in terms of sales by the early 1980s (Cusumano, Mylonadi

and Rosenbloom; 1992). Soon three models become the dominants in the VCR market, Beta

from Sony, Phillips V-2000 and JVC’s VHS model.

Among the main competitors Beta was the first compact, inexpensive, reliable, and easy-to-use

VCR; soon this product it accounted for the majority of VCR production and enjoyed steadily

increasing sales (Cusumano, Mylonadi and Rosenbloom; 1992). Beta had several advantages

over the other two main competitors, it had better product quality and it had a strong brand

position. Sony apparently believed that the superior picture quality of its Beta technology,

together with its strong position in the consumer electronics industry, meant that Beta would

eventually dominate the marketplace (Besen and Farrell; 1994).

However Sony did not have the sufficient production capability to address the mass market, so

they look for possible partners to solve this issue. First, Sony demonstrated the Betamax to

representatives of RCA, an American video pioneer. At the same time, Sony began talking to

JVC and Matsushita, its partners, about "joint development" of a home video format. However

Sony did not manage these relationships well. When it approached the other firms, Sony had

already begun tooling up for the Betamax, signaling to prospective partners a commitment to

proceed with mass production irrespective of their support. This made Sony less flexible,

because altering the design of its machine would require expensive changes in manufacturing

equipment (Cusumano, Mylonadi and Rosenbloom; 1992).

The discussions with RCA accomplished one of Sony's objectives by persuading RCA to kill its

own VCR development program, but they also brought to light the most vulnerable aspect of

the initial Beta design, its limited playing time. RCA had given two hundred of its own VCRs to

U.S. customers in a market test and concluded that a minimum two-hour playing time was

necessary for commercial success. When Sony demonstrated the Betamax to Matsushita and

JVC, Matsushita also questioned the adequacy of a one-hour playing time (Cusumano, Mylonadi

and Rosenbloom; 1992).

Sony managers eventually realized that they were not in a strong bargaining position and

decided to modify the Betamax for two-hour recordings. But this was already late, since JVC

already started to commercialize a VCR with two hours length and they also convince

Matsushita and RCA to use their VHS technology. JVC’s VHS became the market standard in the

VCR industry leaving eventually Sony without any possibility to match its product success and

by 1985 this product was not anymore in the market.


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Imran Mohyuddin

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The New Coke

In April 1985, management of Coca-Cola, decided to change its flavor of its flagship brand. The

reason to reformulate Coca-Cola was the rivalry between Coca-Cola and its traditional runner-

up in market Pepsi Cola. Pepsi’s consumer research discovered in blind taste test that a

majority of consumers preferred the taste of Pepsi over that of Coke (Schindler, 1992). This test

revealed that majority of loyal Coke drinkers preferred Pepsi during the tests. Pepsi decided to

communicate those findings through advertisement using media coverage. Consequently, the

campaign lead to significant decline in market share of Coca-Cola and steady decline.

To manage current situation the management of Coca-Cola decided to start a research on the

possibility of reformulating Coca-Cola to respond perceptions about consumer tastes. However,

by 1984 the researchers had arrived at a new formula for Coke which in blind taste test beat

Pepsi by as much as six to eight percentage points. When the coca cola company decided to

replace its flagship product with a new cola drink, the new flavor had outscored all its

competition, including victory over the traditional coca cola flavor by margin of 2 to 1 (Leven

and Levine, 1996). At overall, management of Coca-Cola believed that they are following the

best approach with thoroughly conducted market research. Furthermore, during April, 1985

Coke announced the reformulation through a press conference.

The initial response from consumers was positive and reported from distribution centers that

the sales of Coke are much higher than expected. However, on the other hand there was

intense media coverage of consumers who did not like the new Coke and had some reservation

about the product change. This resulted into old Coke loyalists sponsored protest rallies and

boycotts and received widespread media attention. According to Kotler (1994) that

reformulating venerable brands is risky and noted that there are reasons why companies may

prefer to make alterations without announcements—for example, the risk of buyers rejecting

the “improvement” claim or of losing customers who prefer the former version. After the

couple of months of launch of new Coke management of Coca-Cola started realizing that

customer dissatisfaction with reformulation is increasing.

In July, 1985 Company decided to respond to public pressure and bring back the old Coke

formula with name of Coca-Cola Classic. Consequently the results showed that the sales of

Coca-Cola Classic were started more than then new Coke. According to Nazlin (1999) that a

food company is required to further develop both areas; product development and market

orientation, in order to achieve a positional advantage in the food market. Consumers were

found to reject the new product because they were more comfortable with the image of the

original cola drink and even felt threatened by the introduction of the New Coke.

Pepsi in the overall market had increased, mostly due to the continued success of Diet Coke and

introduction of Cherry Coke (Schindler, 1992). There was a clear question raised during that

time which one is the flagship brand of Coca-Cola now. The response to this question from

management was, the company had adopted a megabrand strategy in which some promotion

expenditure were directed at enhancing the image of the company’s entire line of cola drinks

(Schindler, 1992).


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Imran Mohyuddin

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During the following years the market share of Coca-Cola steadily declined, when they finally

decided to go back to the original formula, Coke already had lost significant market share and

for Pepsi they had increased sales and market share. By 1990, the company started to test new

Coke with the name of Coke II to cover market image of Coca-Cola. In the market, indirect

emotional factors, such as memories associated with expected taste, were more important

than itself. Moreover, buying was different from tests because Coca-Cola was so confident in its

research that they made old coke unavailable (Leven and Levine, 1996).

4. Findings

Hypothesis 1

In the Betamax case, Sony failed to perform an accurate identification of the customer’s needs

because Sony assumed that users were more concerned with image quality than they were

with the number of hours that could be recorded on a single tape. (detecting)

The Coke reformulation attempt was a dramatic example how consumer awareness of the

reactions of other consumers can play a critical role in the success or failure of a new or altered

product (Schindler, 1992). The Coke decided to respond Pepsi’s new offerings with enough

sufficient research on consumer behavior. But they overlooked the anticipated response of

consumers who already have using Pepsi’s brand by doing this they failed to perform correctly

their filtering activities. There was lack of exploratory research within individual and groups

prior to the launch of New Coke. (Filtering)

Another important finding in New Coke case was that Coca-Cola Company was altering its star

product which still had a growing strong brand image among consumers. This lack of sensing

capability leads them to filter the wrong information, implement and calibrate a strategy that

was miss interpreted from the beginning.

As a result of our findings we found that the hypothesis 1 probed to be in the right direction,

The reasons behind the failure of Sony´s Betamax are directly related to firm’s low performance

in executing their sensing capabilities, specifically in detecting and filtering information.

Hypothesis 2:

As we seen below in the Betamax case, Sony felt that people would be willing to pay more for

this quality, so the price of the Beta VCRs and tapes were set slightly higher than those of their

VHS competitors (Dennis and Bryan A. Reinicke, 2004). This lack of market sensing lead the

product to a position of higher functionality and also to a higher price position, both were

higher than market expected, reason why it completely failed.

Sony apparently believed that the superior picture quality of its Beta technology, together with

its strong position in the consumer electronics industry, meant that Beta would eventually

dominate the marketplace. These high confidences in the product characteristics lead Sony to

overlook the necessity to sense the market from their possible supplier’s perspective. As a

result, Sony apparently saw less need than did JVC to encourage other firms to employ its


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Imran Mohyuddin

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technology, assuming that it would eventually reap the benefits of a Betamax standard. In

particular, Sony sought to monopolize further product development, while JVC did not, which

discouraged other manufacturers from adopting the Betamax standard.

In the New Coke case the company failed to understand their product life cycle and did not

allow the market to mature. They launched a redesigned product while the growth of the

product was still developing. It is very important for an organization having a high brand image

among consumers to beware of tampering with their core brand and a brand which has high

demand in market. If there is an extreme requirement of change in product, then major

changes in product should not be introduced after discarding the existing product(Day, 1981).

In matching the hypothesis 2 with the cases’ results we found only in one of the two cases

evidence that corroborates that Sony’s failures in the sensing activities lead it into a position

beyond the market spectrum where no customers can follow: customers preferred a cheaper

and lower quality product (VHS) over the Betamax. Therefore this hypothesis could not be

sustained and further studies need to be done to probe the market connection matrix and its

different positions.

5. Conclusion

As we have discussed at the beginning of the present paper innovation presents a portfolio of

opportunities for companies, nevertheless successful product development presents strong

difficulties for firms. Evidence was presented to relate the new product development success

with the sensing capabilities a firm performs. Since there is evidence indicating that a company

which builds a market sensing culture can achieve superior performance and also display

characteristics of constant learning and innovation that continually refine market sensing and

the vision of the future (Cravens, Piercy and Prentice; 2000).

The findings in the cases sustained the relationship between new product development failures

and firm’s low performance in executing their sensing activities. Therefore high performance in

such activities should be nurtured across firms specially in those with a innovation oriented

strategy. The main objective of performing them should be to obtain indicators of market

trajectories, trends, opportunities and threats could be found in these activities. Results

obtained from these sensing activities therefore are critical inputs for the new product

development process. There is no previous research that focuses in identifying such market

indicators in a comprehensive model therefore we want to stress the need to carry further

studies in the sensing activities, this in order to identify the key market indicators and develop a

holistic market indicator model that allows firms to:

1. Receive accurate information of which direction there new product development

projects should focus.

2. Identify when it is the right time to innovate.

3. Measure the level of innovation a product must follow in a specific point in time.


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Imran Mohyuddin

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Study limitations

The present study was not applied in a sufficient number of products so we could clearly

identify a pattern in the failures behavior. The study could have been complemented with

information on technology push products which were launched successfully without matching

the market needs. This is build around the idea that not always the market knows what is the

right for it and even though they know what they want it does not assures it will be bought by

the market.


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Imran Mohyuddin

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Sensing the Market to Thrive in New Product Development

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