New Products

MARKETING MATERIAL

Gap Analysis Usage Gap Market Potential Existing Usage Distribution Gap

Product Gap Competitive Gap Market Gap Analysis Beyond the Trends

Product Modification Corporate Response Financial Performance

Investment Potential Human Factors Materials Supply Cannibalism Time

Marketing Response Price & Quality Distribution Patterns Seasonality

Creating New Products Customers Innovative Imitation Product Development Process

Strategic Screen Qualitative Screen Make or Buy Financial Analysis

Concept Test Product Development Product Test Test Market Risk

Product Replacement Non-Profit New Products

9436 MARKETING Chapter 6

- New Products

Introduction

In theory at least, the first stage in developing new products or

services is to undertake a `gap analysis', to establish what the

new offering will need to provide. This need may well be best met

by a `feature modification' of an existing product or service;

and most `new product development' is, in fact, incremental

development of existing brands rather than totally new

offerings.

Following the usual (Western) approach, a new development has

first to be judged against corporate needs, and then against the

product factors which the organization can handle. The `creative'

steps of developing new products are also described, as are the

subsequent screening and testing stages, to ensure that the --

very real --risk is minimized.

Major caveats are, firstly, that brand stability implies there

should be more emphasis on the further development of existing

brands than on totally new ones --contrary to conventional

teaching --and, secondly, that the Japanese approach is to

launch many more `new products' without following any of the

stages of testing described here.

The one common element of life-cycle theory and portfolio

management that is uncontroversial --indeed, is almost

universally accepted --is that products or services which remain

unchanged will sooner or later die. The consumers' tastes or

circumstances may change, or the product may be superseded. The

inevitable outcome is that any organization that plans to be

around for more than a few years has to move into the area of

`new product development', even if it is only to redevelop its

existing product or service, so that its life-cycle is

indefinitely extended.

'Indeed, it should be noted that the most successful new

product development typically revolves around the revitalization

of existing products'. Launches of totally new products

generate the drama, but the profit is more likely to come from

the more mundane relaunches. Rothwell and Gardiner - 1 -

illustrate the point with a diagram (figure 8.1).

In this chapter, as elsewhere in this book, the term `product'

includes services and non-profit activities. In the service

sector, just as in the manufacturing sector, there is a

continuing need to develop the offerings that are made to

customers or clients, even though there is normally much less

activity in terms of new product development to be observed in

the service sector.

(Fig 8.1 near here)

Gap Analysis

The need for totally new products or, perhaps more realistically,

for additions to existing lines, may have emerged from the

portfolio analyses, in particular from the use of the Boston

Matrix (see chapter 7). The gaps in the projected cashflow

demonstrated by that exercise could have provided sufficient

stimulation. More probably, that need will have emerged from the

regular process of following trends in the requirements of

consumers. At some point a gap will have emerged between what the

existing products offer the consumer and what the consumer

demands. That gap has to be filled if the organization is to

survive and grow.

To locate such a gap in the market the technique of gap

analysis can be used. In figure 8.2 the thick descending line

shows what the profits are forecast to be for the organization as

a whole. The rising dotted line shows where the organization (in

particular its shareholders) 'wants' those profits to be.

The shaded area between these two lines represents what is called

the planning gap: this shows what is needed of new

activities in general and of new products in particular.

The planning gap may be divided into four main elements:

(Fig 8.2 near here)

The relationship between these is best illustrated

diagrammatically:

Usage Gap

This is the gap between the total potential for the market and

the actual current usage by all the consumers in the market.

Clearly two figures are needed for this calculation:

market potential

existing usage

Market potential

The most difficult estimate to make is probably that of the total

potential available to the whole market, including all segments

covered by all competitive brands. It is often achieved by

determining the maximum potential individual usage, and

extrapolating this by the maximum number of potential consumers.

This is inevitably a judgement rather than a scientific

extrapolation, but some of the macro-forecasting techniques,

which were discussed in chapter 5, may assist in making this

`guesstimate' more soundly based.

The maximum number of consumers available will usually be

determined by market research, but it may sometimes be calculated

from demographic data or government statistics. Ultimately there

will, of course, be limitations on the number of consumers. The

cosmetics market, for example, is currently limited to most women

and girls over the age of 12. But it also needs to be considered

whether the boundaries will not shift in the future. Not so long

ago the lower age boundary was something over 16 years. Who is to

say that men will not at some time in the future also take up

cosmetics? After all, they have in recent years taken up the use

of perfume, albeit suitably camouflaged as `aftershave'.

For guidance one can look to the numbers using similar products.

Those wishing to sell the newly developed compact disc must have

paid great attention to the existing sales of record and cassette

decks. Alternatively, one can look to what has happened in other

countries. It is often suggested that Europe follows patterns set

in the USA, but after a time-lag of a decade or so. The increased

affluence of all the major Western economies means that such a

lag can now be much shorter.

The maximum potential individual usage, or at least the maximum

attainable average usage (there will always be a spread of usage

across a range of customers), will usually be determined from

market research figures. It is important, however, to consider

what lies behind such usage. One consumer panel produced some

very high averages when one of the panel members decided to feed

her flock of turkeys on a specific brand of porridge oats: the

resulting dramatic increase in usage was included in the overall

results.

Existing usage

The existing usage by consumers makes up the total current

market, from which market shares, for example, are calculated. It

is usually derived from marketing research, most accurately from

panel research such as that undertaken by A. C. Nielsen but also

from 'ad hoc' work. Sometimes it may be available from

figures collected by government departments or industry bodies;

however, these are often based on categories which may make sense

in bureaucratic terms but are less helpful in marketing terms.

The 'usage gap' is thus:

usage gap = market potential -existing usage

This is an important calculation to make. Many, if not most

marketers, accept the 'existing' market size, suitably

projected over the timescales of their forecasts, as the boundary

for their expansion plans. Although this is often the most

realistic assumption, it may sometimes impose an unnecessary

limitation on their horizons. The original market for video-

recorders was limited to the professional users who could afford

the high prices involved. It was only after some time that the

technology was extended to the mass market.

In the public sector, where the service providers usually enjoy a

`monopoly', the usage gap will probably be the most important

factor in the development of the activities; although, as we

shall shortly see, the product gap should not be ignored. But

persuading more `consumers' to take up family benefits, for

example, will probably be more important to the relevant

government department than opening more local offices.

The usage gap is most important for the brand leaders. If any of

these has a significant share of the whole market, say in excess

of 30 per cent, it may become worthwhile for the firm to invest

in expanding the total market. The same option is not generally

open to the minor players, although they may still be able to

target profitably specific offerings as market extensions --as

Amstrad and Compaq have in their particular new extensions to the

PC market.

All other `gaps' relate to the difference between the

organization's existing sales (its market share) and the total

sales of the market as a whole. This difference is the share held

by competitors. These `gaps' will, therefore, relate to

competitive activity.

Distribution Gap

The second level of `gap' is that posed by the limits on the

distribution of the product or service. If it is limited to

certain geographical regions, as some draught beers are, it

cannot expect to make sales in other regions. At the other end of

the spectrum, the multinationals may take this to the extremes of

globalization. Equally, if the product is limited to certain

outlets, just as some categories of widely advertised drugs are

limited by law to pharmacies, then other outlets will not be able

to sell them. A more likely outcome is that, not being the market

leader, a brand will find its overall percentage of distribution

limited. The remedy for this is simply to maximize distribution.

Unfortunately, maximizing distribution is not quite as easy as it

sounds, except for the obvious market leaders. It is true that

additional salesforce effort, backed by suitable sales

promotional activities, should be able to increase distribution

somewhat, although there will still have to be some balance

between the benefits to be gained and the costs to be incurred.

But the prime barrier to distribution will probably be the

resistance of the distribution chains to stock anything other

than the bestsellers. This can partially be overcome in the short

term by offering better terms and higher margins, so that the

distributors make more on each sale. But the distributors have

long since learned that their biggest profits come from

concentrating on the main brands. They, above all, live by the

80:20 Rule.

Product Gap

The product gap, which could also be described as the segment or

positioning gap, represents that part of the market from which

the individual organization is excluded because of product or

service characteristics. This may have come about because the

market has been segmented and the organization does not have

offerings in some segments, or it may be because the positioning

of its offering effectively excludes it from certain groups of

potential consumers, because there are competitive offerings much

better placed in relation to these groups.

This segmentation may well be the result of deliberate policy. As

we have already seen, segmentation and positioning are very

powerful marketing techniques; but the trade-off, to be set

against the improved focus, is that some parts of the market may

effectively be put beyond reach. On the other hand, it may

frequently be by default; the organization has not thought about

its positioning, and has simply let its offerings drift to where

they now are.

The product gap is probably the main element of the planning gap

in which the organization can have a productive input; hence the

emphasis on the importance of correct positioning in chapter 6.

Competitive Gap

What is left represents the gap resulting from your competitive

performance. This competitive gap is the share of business

achieved among similar products, sold in the same market segment,

and with similar distribution patterns --or at least, in any

comparison, after such effects have been discounted. Needless to

say, it is not a factor in the case of the monopoly provision of

services by the public sector.

The competitive gap represents the effects of factors such as

price and promotion, both the absolute level and the

effectiveness of its messages. It is what marketing is popularly

supposed to be about. But, as we have already seen, the product

or service itself will still be the prime focus of marketing

activity.

Gap analysis is a tool to help you examine as thoroughly and

objectively as possible your current marketing position and the

strategies which you could follow, to improve them in line with

overall company strategies. It is very likely to direct you to

fresh product or market strategies, and to the need to develop

new and improved products.

Market Gap Analysis

In the type of analysis described above, gaps in the product

range are looked for. Another perspective (essentially taking the

`product gap' to its logical conclusion) is to look for gaps in

the 'market' (in a variation on `product positioning', and

using the multidimensional `mapping' described in chapter 6)

which the company could profitably address, regardless of where

its current products stand.

Many marketers would, indeed, question the worth of the

theoretical gap analysis described earlier. Instead, they would

immediately start proactively to pursue a search for a

competitive advantage, say.

AUDIT 8.1

Carry out a gap analysis on your organization's ranges of

products or services.

What total gap is there in future profit projections? (In the

non-profit sector, what gap is there in the future provision of

services for clients?)

Does this come from overall usage, distribution, `product' or

competitive position?

What do you think needs to be done to rectify this gap?

Beyond the Trends

Even the widening of perspective described in the previous

section does not, however, cover the major developments in

markets which result in quantum leaps, which overturn the long-

standing positions in those markets. These brilliant innovations,

IBM's development and marketing of the 360 range of computers,

which established its dominant position, or Henry Ford's

invention of the assembly line, typically cannot be deduced from

extrapolation of existing trends (and will often fly in the face

of them, to become the subject of derision from more sensible

experts).

Indeed, even after the idea has emerged, it often cannot be

adequately explored by market research; since the respondents,

the general public, have no understanding (based upon previous

experience) of what it may mean. Educating the customer is

frequently the first objective of such product or service

launches.

For instance, as described by Carol Kennedy, - 5 - even after

3M's laboratory technician, Spencer Silver, had discovered the

glue now used on `Post-It Notes' and his colleague, Arthur Fry,

had made the intellectual leap of applying this to the `Notes'

themselves:

Conventional test marketing still failed, however, until the two

executives took a hand. Enthusiasts themselves for the product,

they realized its potential indispensability would only be

appreciated if it got physically into the hands of potential

customers. They gave away wads of little notepads to secretaries,

receptionists, bank clerks and businessmen, saying `Here, try

this', and watched people becoming literally addicted to the

product.

The role of the product champion, the executive who drives the

development of the product (often against the odds) is frequently

a critical element of new product success.

These dramatically innovative new `products' have had major

impacts in a number of markets. Their influence, in these

markets, has been vastly greater than that of the evolving

products or services; `supernovas' outshining the `stars'. What

is more, as we have seen, they follow few of the rules of

conventional marketing. Even market research is of little use in

the basic decisions (although it still is of considerable use in

helping to determine the exact details of the launch). The main

requirement is for faith in the new development. The most

successful organizations try to create the sort of environment in

which such creativity is nurtured. They also foster the attitude

of mind which will quickly recognize the merits of such

outstanding innovations.

As a result of the lack of conventional marketing input to these

important new developments, a number of practitioners, as well as

some academics, have recently tended to play down the importance

of conventional marketing. That is a mistake. With the distorting

benefit of hindsight, we tend to notice the few major

developments. We do not see the many hundreds of failures, which

were just as sincerely believed in by their creators.

(Fig 8.5 near here)

Booz, Allen and Hamilton's 1981 research - 6 - measured the

proportions as follows:

NEW TO THE WORLD PRODUCTS (entirely new markets) 10%

NEW PRODUCT LINES (new products in existing markets) 20%

ADDITIONS TO EXISTING LINES 26%

IMPROVEMENTS IN/REVISIONS TO EXISTING PRODUCTS 26%

REPOSITIONING (existing products in new segments/markets) 7%

COST REDUCTIONS (similar performance at lower cost) 11%

They continue, to show the role of these new products graphically

(figure 8.5).

'Above all, it should be remembered that, despite the glamour

of the new product process, it is the plodding (steadily

regenerated) `cash cow' which continues to dominate even the

`development' process in most markets'.

Product Modification

In practice, most `new' products are modified existing ones. How

many times have you seen a television commercial that tells you

`New Brand X now has added Y!'? Such changes are incremental,

often barely even that, and follow somewhat different rules to

genuine new products. Typical modifications may include:

'Feature modification'. Sometimes called `functional

modification', this approach makes changes (usually minor ones)

to what the product or service does. Manufacturers of compact

disc players added `programming' and remote control to these

basic devices --to make them marginally more attractive to users

(but a margin that gave them a competitive advantage).

Frequently, the main element of the modification will simply be a

change in packaging. It may, though, be expanded into the major

message needed to rejuvenate a jaded advertising campaign.

'Quality modification'. As consumers grow more

discriminating, many suppliers (often led by their Japanese

competitors) have gradually increased the quality of the basic

product. This may be more difficult to convey to consumers,

particularly if the product already has a bad image. However, it

can be very powerful if successful --as the Jaguar Car Company

demonstrated in the 1980s.

'Style modification'. This is perhaps the most frequent

modification; at least in style-conscious industries (which

covers a very wide range; from Coca-Cola through to IBM PCs). An

`old-fashioned' product may be unsaleable in some markets;

although it may find a niche in more conservative ones.

'Image modification'. This may also be associated with style

modification (or `perceived quality' changes), but in essence the

product or service itself remains unchanged; and some image

modifications may actually stress this (Ovaltine and Bovril in

the 1980s, for example). `Image modification' concentrates on

changing the `non-product attributes'; so that consumers feel

that the `total package' has changed. Image is often the most

important element of that package.

AUDIT 8.2

What product or service modifications has your organization

undertaken recently? How were these planned and developed? How

did this compare with the process used for new products?

How much development effort is expended upon such modifications,

as compared with that on totally new products?

How much of the overall business is accounted for by `brands'

regularly modified in this way? How much by recently (within the

last five years, say) launched new products?

What `product' modification plans does your organization make?

What should it do?

Corporate Response

Assuming that the gap analysis has shown the need for a specific

new product or service, or for some marketing activity to improve

performance in some other area, the next stage will be to

determine whether such a product or service, or activities, can

be `profitably' developed.

The first consideration will be how it `meshes' with the existing

activities undertaken by the organization. The context for this

examination should be that of the formal `corporate strategy';

the statement of where the organization has decided it is going.

Some of the `internal', corporate, factors which may, therefore,

need to be taken into account in the further investigations will

be:

Production capabilities

Financial performance

Investment potential

Human factors

Materials supply

Cannibalism

Time

Production Capabilities

Whether the new product or service can actually be produced will

depend upon what is available within the organization. Adding

extra demand on to equipment which is already being run close to

full capacity may either place impossible demands on production

or lead to a disproportionately large investment. The existing

plant may in any case be unsuitable, or simply located in the

wrong place. One furniture plant, picturesquely situated in the

centre of an old town, was tripled in capacity --at considerable

cost --only for it to be discovered that the bridge across the

river, which was the plant's only possible entrance and exit,

could only handle double the original output. As a result, a

third of the expensive new capacity was forced to remain idle.

The limitations on services might at first sight appear to be

less serious; although expansion of local branch premises, if

needed, may not be a trivial matter. But the constraints imposed

by the availability of human resources, especially those

involving specialist skills, may prove to be just as severe.

Financial Performance

This is, in large part, what the Boston Matrix is about. The

question to be asked is whether the organization can afford the

proposed changes. This is not just a matter of potential profits,

but of cashflow. The extra investments in stock and debtors, let

alone in plant or promotion, may be too much for a strained

cashflow or departmental budget to support.

Investment Potential

The Boston Matrix relates to cash generation for investment, from

internal cashflows. This represents the usual form of investment

for most larger organizations: the stock market has declined in

importance as a primary source of investment funds. On the other

hand, in some situations external finance (now more usually

obtained from banks rather than the stock market) will be needed.

The standing of the organization with the financial community

then becomes an important factor.

This phenomenon is particularly problematic for those medium-

sized businesses which are still too small to challenge the major

players effectively; but which have grown to have overheads which

mean that they can no longer survive as small `niche' players.

New product policy is particularly important in this situation;

as are mergers and acquisitions --which may (at least in theory,

but not always in practice) offer a more immediate solution.

Human Factors

As described above, the availability of manpower may be a factor,

and will become an increasingly important one with the

demographic changes which are taking place. The chances are that

new developments will require skilled personnel, who are becoming

increasingly difficult to recruit. It may just be possible for

the existing workforce to be retrained, but this would mean that

the marketing plans may have to take the organization's training

capabilities into account.

Materials Supply

The availability of raw materials or components, or subcontracted

services, may be critical. Producers increasingly depend on

outside suppliers for the greater part of the final product or

service that they are assembling. Even the insurance broker

depends upon the underwriters who will do business with him or

her, and the fast food outlet will have a whole range of

suppliers; from the wholesale butchers who provide the meat to

the employment agencies which constantly cope with the high staff

turnover. If suppliers are scarce, or erratic, they will pose

major problems.

Cannibalism

One often neglected factor is how much of the new brand's

business will come from those of existing brands. Such

`cannibalism' - 7 - must be taken into account where there is

any degree of overlap; and if the organization is building on its

strengths there often will be (and should be) significant

overlap.

Time

One of the factors often overlooked in any process of innovation

is just how long it may take. For instance, IBM may be able to

develop a new feature for an existing product and bring it to the

market in a few months, but developing and testing even the

simplest complete mainframe is likely to take between three and

five years; and bringing in a new technology (a new `generation'

of computers) is likely to need a development period nearer to a

decade.

AUDIT 8.3

Think back to some recent `products' launched by your

organization. How did they match the `production' capabilities,

financial performance, human factors and `materials' supply?

If some of the `products' did not match all of these

requirements, why do you think they were launched? Should they

have been?

Marketing Response

At a more detailed level, the `mesh' with the existing marketing

factors will need to be considered:

Match with existing ranges

Price and quality

Distribution patterns

Seasonality

Match with Existing Ranges

`New products' will be easier to sell if they complement the

existing ranges. Then they will be able to build on existing

distribution patterns, and may even be able to capitalize upon

existing awareness and favourable consumer attitudes. The `new

products' may possibly help sell more of the existing ones,

because they make the range more comprehensive. A range of

slimming foods will benefit from new additions; since these offer

a wider choice for the consumer, who may have become bored by the

narrower selection previously available. They may also obtain a

larger display (`facings') at the point of sale, up to the point

beyond which the retailer will not stock additional packs.

Price and Quality

There has to be at least a rough comparability with the existing

products or services, in terms of consumer perceptions of what

price (and quality) range the organization lies in. This is

particularly true of introducing a cheaper product into a high-

quality range. The buyers of the existing range may see this as

reflecting a reduction in quality of their normal products; and

this may have a disastrous effect overall. It may not even help

the new product, for consumers in general may assume that, in

line with the price, quality has been abandoned. In the 1970s,

following merger, the then very successful range of Rover cars

was drowned in the overall mediocrity of the rest of the British

Leyland range --without any noticeable increase in sales of the

cheaper ranges.

At the other extreme, adding a higher-priced product to a cheap

range will probably not be a successful strategy either; for the

obvious reason that it is out of line with the overall strategy,

and is unlikely to meet the needs of the existing customers who

are, presumably, interested in price. Both the Fine Fare

supermarket chain and Fortnum & Mason in the UK were at one time

owned by Garfield Weston. He, wisely, did not publicize this

link, for the simple reason that it probably would have damaged

the sales of both.

Distribution Patterns

Clearly, as we have already seen, if existing channels of

distribution can be used then costs will be minimized; and the

product or service will be built on existing strengths. If new

channels are needed, then development of these may pose

significant costs, and will lead to a learning curve in the

handling of those channels, a factor which is not necessarily

understood by managements.

Seasonality

The ideal organizational trading pattern is an even one, with no

seasonal variation, so that resources may be most efficiently

utilized; without the unproductive problems posed by having to

meet peaks and troughs of sales. A new product or service will,

therefore, ideally not be seasonal; or, even better, be one which

complements existing seasonal patterns --making its peak sales

when the others are in a trough, and vice versa. It was

reportedly for this reason that, many years ago, Walls decided to

complement its range of ice creams, with its summer peaks, by

starting a sausage business, with its peaks in winter.

AUDIT 8.4

Return to the `products' you considered in audit 8.3. How did

these match up in terms of the match with existing range(s),

price and quality, distribution patterns and seasonality?

Again, if some of the `products' did not match all of these

marketing factors, why do you think they were launched? Should

they have been?

Innovation is important (indeed essential) to the future of most

organizations. However, it must be kept in context. Tom Peters

and Robert H. Waterman Jr's - 10 - well-known exhortation still

offers sound advice:

Stick to the knitting ... While there were a few exceptions, the

odds for excellent performance seem strongly to favor those

companies that stay reasonably close to the businesses they

know.

`Focus', as it is now more fashionably known, is a sound policy.

More important, perhaps, is a keen awareness that the future

usually also depends on the existing products (albeit so --

incrementally --changed over time that they would be

unrecognizable to today's customers!).

In this context it is worth nothing that Robert Cooper's

research, - 11 - among 140 companies in Canada, identified five

new product strategy scenarios:

'Technologically driven strategy' (26.2 per cent of firms).

A strategy based on technological sophistication, but lacking

marketing orientation and product fit/focus. New products ended

up in unattractive, low-synergy markets; with `Moderate results:

high impact on firm, but low success rate...'

'Balanced, focused strategy' (15.6 per cent of firms). This

'winning strategy' featured a balance between technological

sophistication, orientation and innovation and a strong marketing

orientation. The programme was highly focused, and new products

were targeted at very attractive markets. `By far the strongest

performance...'

'Technologically deficient strategy' (15.6 per cent of

firms). A `non-strategy': weak technology, with low technological

synergy, yet involving new markets, and new market needs. `Very

poor results...'

'Low budget, conservative strategy' (23.8 per cent of

firms). A low level of R&D spending, involving `me-too' products, but with a `stay-close-to-home' approach --high technological synergy, and high product fit/focus. A safe, efficient but undramatic programme. `Moderate results: good success rate and profitability, but low impact...'

'High budget, diverse strategy' (18.9 per cent of firms). A

high level of R&D spending, but poorly targeted; new (highly

competitive) markets to the firm; no programme focus. `Very poor

results...'

The ideal approach, as they identify, is that well-planned one

which nicely balances all these factors (which is, in its own

way, the strategy towards which this book is building). On the

other hand, the authors do seem to dismiss the `conservative

approach' too glibly. This may not have the `impact' (glamour?)

of the other, but if you do not yet know the well-planned,

balanced route, better stay where you are until you can find it!

Creating New Products

In the 1960s and 1970s, when marketing was a relatively young

profession, it was often claimed that the best new products were

bound to be those which were specifically created to meet the

needs of the marketplace. This was clearly spelled out by

Professor Corey of the Harvard Business School:

...the form of a product is a variable, not a given, in

developing market strategy. Products are developed and planned to

serve markets. - 12 -

Ideally, such products originated with the market researcher

discovering unsatisfied wants. It is still held to be true that

new product ideas, once they have emerged, should be rigorously

tested against the needs of the market, before the organization's

full resources are committed.

However, marketing practice has since shown that the really

creative ideas can rarely be turned on like a tap, to meet the

market researcher's specifications. They come, instead, from

every direction, sometimes emerging from the least likely of

places. They may come from technical developments in the

laboratories (according to one story, the Sony Walkman was

created by an engineer for his own fun), they may come from the

salesforce, or they may come from practice in other countries or

other industries. 'It turns out that the secret of finding new

products is not to be able to specify them but simply to be able

to recognize them'.

This means, then, that the managers of new products must be

constantly scanning the sources available to them, particularly

the literature, to find these new ideas. The need is, therefore,

for an open mind: the Sony Walkman was eventually shown to Akio

Morita, Sony's chairman, who had the very good sense to back its

commercial development. The NIH (Not Invented Here) syndrome is

the worst enemy of new product development.

Peter Doyle - 13 - makes the very sensible point that:

Perhaps the most common means of building an outstanding brand is

being first into a market.

He adds the very important footnote, however:

This does not mean being technologically first, but rather being

first in the mind of the consumer. IBM, Kleenex, Casio and

McDonald's did not invent their respective products, but they

were first to build major brands out of them and bring them into

the mass market.

Customers

By far the greatest sources of new product ideas are customers.

After all, they are the users of the product or service; and the

new uses they make of it, or the changes in specification they

demand, are both the most potent forces on the product

development process and its richest source of ideas.

This customer `information' will normally be received from the

salesforce (or even through correspondence). This may be in the

form of descriptions of what the customer is actually doing with

the `product' (which may indicate new uses for it), or requests

from the customer for specific new products or services.

Eric Von Hippel's research - 14 - (into the rather specialized

area of innovation in the scientific instruments market) reported

that:

... in 81 per cent of all the innovation cases studied, we found

that it was the user who perceived that an advance in

instrumentation was required; amended the instrument; built a

prototype; improved the prototype's value by applying it; and

diffused detailed information on the value of the invention...

He found that the pattern was repeated in the process equipment

industry, but it was not universal (two of his students found

that the reverse was true in parts of the polymers industry,

where it would have been difficult for users to undertake the

development).

He continued to make a plea for separating `all users' into

`routine users' and `innovative users', with extra effort devoted

to the latter (in view of their importance for product

innovation).

Innovative Imitation

Theodore Levitt - 15 - points out that, despite the rhetoric,

most so-called innovation in the field of product development is

actually imitation:

... by far the greatest flow of newness is not innovation at all.

Rather it is 'imitation'. A simple look around us will, I

think, quickly show that imitation is not only more abundant than

innovation, but actually a much more prevalent road to growth and

profits. IBM got into computers as an imitator; Texas Instruments

into transistors as an imitator: Holiday Inns into motels as an

imitator ... In fact, imitation is endemic. Innovation is

scarce.

Peter Drucker - 16 - also explains the advantages of this

principle:

Like being `Fustest with the Mostest', creative imitation is a

strategy aimed at market or industry dominance. But it is much

less risky. By the time the creative imitator moves, the market

has been established and the new venture has been accepted.

Indeed there is usually more demand for it than the original

innovator can easily supply. The market segmentations are known

or at least knowable. By then, too, market research can find out

what customers buy, how they buy, what constitutes value for

them, and so on. Most of the uncertainties that abound when the

first innovator appears have been dispelled or can at least be

analyzed and studied

What they do 'not' add is that the Japanese are perhaps the

most successful exponents of this technique. For instance, as

reported by Pascale and Athos, - 17 - Matsushita deliberately

adopts a policy of `followership'. This has most clearly been

demonstrated by the company's domination of the video-recorder

market using its VHS format (together with its Panasonic and RCA

brands) to displace the original (arguably more technically

innovative, Betamax brand) pioneered by Sony; so that Matsushita

now has more than two thirds of this market.

Sony learned an important lesson in defence from this experience.

Only six months after it launched its revolutionary palm-sized

camcorder, Matsushita launched an even lighter look-alike. Within

weeks, on this later occasion, Sony hit back by launching two new

models; one even lighter still and the other with new features.

It was able to do this because it had invested in 'parallel

development' --it had been developing the next generation of

product even while it was still introducing the previous one.

Kotler and Fahey - 18 - provide the wider picture:

Succinctly stated, Japanese marketing revolves around the

management of product market evolution. They manage not only the

product life cycle of individual products, but the evolution of a

complex of product lines and items. They carefully choose and

sequence the markets they enter, the products they produce, and

the marketing tactics they adopt.

An alternative approach, still based upon `imitation', is to find

(by market research) what are the major problems associated with

existing products in a market; and then develop a product which

resolves these (or at least resolves those which are seen by

consumers as having the highest priority). However, this approach

will not work against the majority of brand leaders.

AUDIT 8.5

How does your organization search out ideas for new products or

services?

More specifically, think back to one of your company's recent

launches (or, better still, hunt out any internal news items

about one). Where, from the evidence, do you think the `product'

idea came from?

Having found an idea, how does your organization assess the

viability of the new product(s) or service(s)?

With the benefit of hindsight (i.e. what you have learned so far

in this module), how would you change or adapt your

organization's procedures?

The Product Development Process

For the purposes of this chapter, the complete development process

can be conveniently split into a number of stages:

Scanning

Idea generation

Strategic screen

Concept test

Product development

Product test

Test market

Launch

The importance of formalizing the process is highlighted by

Booz, Allen and Hamilton's comment - 20 - that: `According to

our survey results, companies that have successfully launched

new products are more likely to have had a formal new product

process in place for a longer period of time.'

The first two of the above activities, `scanning' and `idea

generation', have already been described. The others are

outlined below.

Strategic Screen

Much of the subsequent process comprises steps which are

designed to minimize the risk. Indeed, the very next stage is

that of the initial screening of these ideas. The contexts for

this screening process are the corporate and marketing

strategies. We examined the requirements imposed by these in some

detail at the beginning of this chapter. The potential new

`products' which have been found are now simply matched against

these requirements. This can be handled as a two-stage process.

Qualitative screen

This simply involves qualitative study of the ideas; to examine,

at the broadest level, whether they are in conflict with the

overall corporate or marketing strategies. This need not demand

major effort, since the key characteristics of the new `product'

will usually be obvious; as will those of the relevant parts of

the strategies --always assuming that the organization takes

notice of its own planning documents. A match or mismatch should,

thus, be fairly obvious.

'Make or buy'

This is also the stage at which the decision either to `make' or

`buy-out' is likely to be taken. Traditionally, organizations

only offered the products or services which they themselves

`manufactured'. In recent years, on the other hand, many

organizations have adopted a wider perspective; and have marketed

products (either in part or totally) made by other organizations;

because those other organizations had the special expertise

necessary or simply because their costs were lower.

Financial analysis

If the qualitative screen reveals no significant problems, the

acid test --at this early stage --is to forecast the financial

performance of the new brand. The best way to achieve this is to

prepare a dummy profit and loss statement, together with the

associated balance sheet and the traditional further analyses

such as cashflow. With the advent of spreadsheets on personal

computers this should now be a relatively simple process;

especially if a standard `skeleton' is already available.

The great potential benefit of such spreadsheets, but one which

is rarely capitalized upon, is the ability to carry out `What

if?' tests very easily. This means that there should no longer be

any excuse for not examining all of the alternatives.

This carefully controlled approach has generally been successful

in the West; where there may be heavy penalties, to brand or

corporate image in particular, in backing failures. In Japan,

however, the reverse is often true. Rather than screening out

potential failures, 'many' new products may be launched (as

many as 1000 new soft drinks a year, for example). This process,

called `product churning', apparently works well in Japan,

because their corporations develop new products in a half to a

third of the time, and at a quarter to a tenth of the cost, of

their Western counterparts. In addition, the Japanese public has

been persuaded to accept, indeed to want, new developments at

this break-neck pace.

Concept Test

'Research has shown that more than 80 per cent of new product

ideas fail'. The proportion which never make it into

development is probably at least as high so that, overall,

possibly less than 5 per cent of new product ideas are

successful. It is important, therefore, that the 95 per cent of

failures are culled as early as possible, before large sums are

invested in them.

The most widely quoted, and indeed definitive, research has been

that conducted by Booz, Allen and Hamilton. - 21 - Figure 8.9

shows the `mortality' rate at various stages of the new product

process. This shows that, in 1981, only one in seven new product

ideas resulted in a successful new product introduction. It is

perhaps even more interesting that this was a dramatic

improvement on their equivalent survey of 1968; when the success

rate was only one in 58.

It appears that this dramatic improvement may have come about

because

(Fig 8.9 near here)

(Fig 8.10 near here)

of the improvement in screening procedures at the earliest stage

of the new product process --an improvement which may, in part,

have been stimulated by that earlier report. Indeed, in the later

report they note that the success rate of new products once

launched had not varied (at 65 per cent). Beyond this, their

research showed a number of factors contributing to the success

of new products (figure 8.10). They also found a significant

`learning curve' (`experience effect'), where each doubling of

the number of new products introduced apparently led to a decline

in the cost of introduction by 29 per cent.

The `concept test' is the first true consumer filter to be

applied. At least in theory, it should be applied before any

significant amount of product development is undertaken;

particularly as such development can be very expensive (perhaps

hundreds of millions of dollars for a new pharmaceutical). The

test is usually undertaken by conventional market research. The

aim is simply to find ou4 from consumers what their attitudes to

the new `pr/duct' would be; and (the acid test) whether they

would be likely to buy it. This is easier said than done, because

consumers will not usually be able to draw upon existing

experiences. They have enough difficulty communicating how they

feel about brands that they have actually purchased.

Market researchers use a battery of different techniques to try

to overcome the problem. They may produce dummy versions of the

product. More likely, they may produce a rough commercial,

perhaps just in `story-board' form; since this also reflects the

difficulty of conveying the concept to the consumers --always a

major consideration for a really innovative

product. The better finished the vehicle used to carry the

concept, the more representative are the responses from the

consumers involved likely to be.

Despite the lack of precision in any of these techniques, they

are useful in weeding out products or services which have little

chance of success. This is potentially very valuable; since their

creators, who have probably fought many hard battles to reach

even this stage, usually can no longer be considered to be

objective.

Product Development

Having a viable concept is one thing, but having a developed

product is quite another. Between the two may lie a number of

years and millions of dollars of research expenditure. Such

development should, ideally, be driven by the product parameters

which were determined by the earlier market research (and, in

particular, by the outcome of the concept tests). The reality,

though, is that product development is often more of a creative

art rather than a scientific certainty; and what emerges may only

be the best possible approximation to what is needed. Indeed, it

is probably true to say that the majority of new products are

developed (on the basis of creative inspiration) 'before'

any market research is undertaken; and the subsequent market

research is only carried out to test their viability (and

probably to `justify' their launch).

Devendra Sahal - 23 - makes the point, however, that:

To begin with, it is apparent that innovations depend upon a

multitude of causes rather than any one single factor at the

exclusion of all others. Thus success in innovative activity

critically depends upon pursuing several small-scale scientific

and technical experiments at the same time. In essence variety in

innovative activity is best stabilized through variety in R&D

activity.

On the other hand, the most important change to the product

development process over recent years, led by the Japanese, has

been 'speed'. As Ralph Gomory - 24 - explains:

One cannot overestimate the importance of getting through each

turn of the [development] cycle more quickly than a competitor.

It takes only a few turns for the company with the shortest cycle

time to build up a commanding lead.

Japanese corporations have reportedly achieved this on the back

of a highly trained workforce, a willingness to build from off-

the-shelf components and very close relationships with their

suppliers; as well as by approaches such as joint development

teams and parallel development. But whatever the reasons, this

competitive advantage poses a major challenge to their Western

counterparts.

It is worth noting that many organizations in the service sector

do not have the equivalent of new product development

departments. This may be understandable in view of the less

tangible and more transitory nature of their `products'. It may,

however, also represent an inherent weakness in their marketing

armoury; and leaves them very exposed to the developments being

explored by their more sophisticated competitors, who are

learning 'all' the lessons of conventional marketing.

Product Test

With luck, a workable new product or service will be delivered by

the product development team. However, there still remains the

investment to be made in the launch itself. To reduce the risk, a

further round of testing is normally undertaken. This takes the

new product or service and tests it on potential consumers, in

much the same way as the concept was tested earlier. The testing

may, however, be more detailed now; since the output of this

research can be used to modify the `product' itself to best match

the consumers' needs.

Test Market

The test market ideally aims to duplicate 'everything' --

promotion and distribution as well as `product' --on a smaller

scale. The technique replicates, typically in one area, what is

planned to occur in a national launch; and the results are very

carefully monitored, so that they can be extrapolated to

projected national results. The `area' may be any one of the

following:

'Television area'

'Test town'

'Residential neighbourhoods'

'Test sites'

A number of decisions have to be taken about any test market:

'Which test market?'

'What is to be tested?'

'How long a test?'

'What success criteria?'

The decision so far has revolved around a simple go or no-go

decision; and this, together with the reduction of risk, is

normally the main justification for the expense of test markets.

At the same time, however, such test markets can be used to test

specific elements of a new product's marketing mix; possibly the

version of the product itself, the promotional message and media

spend, the distribution channels and the price. In this case,

several `matched' test markets (usually small ones) may be used,

each testing different marketing mixes.

Clearly, all test markets provide additional information in

advance of a launch and may ensure that launch is successful: it

is reported that, even at such a late stage, half the products

entering test markets do not justify a subsequent national

launch. However, all test markets do suffer from a number of

disadvantages:

'Replicability'. Even the largest test market is not totally

representative of the national market, and the smaller ones may

introduce gross distortions. Test market results therefore have

to be treated with reservations, in exactly the same way as other

market research.

'Effectiveness'. In many cases the major part of the

investment has already been made (in development and in plant,

for example) before the `product' is ready to be test marketed.

Therefore, the reduction in risk may be minimal; and not worth

the delays involved. 'Competitor warning'. All test markets

give competitors advance warning of your intentions, and the time

to react. They may even be able to go national with their own

product before your own test is complete. They may also interfere

with your test, by changing their promotional activities (usually

by massively increasing them) to the extent that your results are

meaningless.

'Cost'. Although the main objective of test markets is to

reduce the amount of investment put at risk, they may still

involve significant costs.

Risk

It has to be recognized that the development and launch of

almost any new product or service carry a considerable element of

risk. Indeed, in view of the on-going dominance of the existing

brands, - 28 - it has to be questioned whether the risk

involved in most major launches is justifiable. In a survey of

700 consumer and industrial companies, Booz, Allen and

Hamilton - 29 - reported an average new product success rate

(after launch) of 65 per cent; although it had to be noted that

only 10 per cent of these were totally new products and only 20

per cent new product lines --but these two, highest risk,

categories also dominated the `most successful' new product list

(accounting for 60 per cent).

New product development has therefore to be something of a

numbers game. A large number of ideas have to be created and

developed for even one to emerge. There is safety in numbers;

which once more confers an advantage to the larger

organizations.

Risk versus Time

Most of the stages of testing, which are the key parts of the

new `product' process, are designed to reduce risk; to ensure

that the product or service will be a success. However, all of

them take time.

In some markets, such as fashion businesses for example, time is

a luxury which is not available. The greatest risk here is not

having the `product' available at the right time, and ahead of

the competitors. These markets consequently obtain less benefit

from the more sophisticated new product processes, and typically

do not make use of them at all.

'When' to enter a market with a new product should, in any

case, be a conscious decision. In relation to competitors there

are two main alternatives:

'Pioneer'. Being first into a market carries considerable

risks. On the other hand, the first brand is likely to gain a

major, leading and on-going, share of that market in the long

term. Pioneering is often the province of the smaller

organizations, on a small scale, since their investment can be

that much less than that of the majors.

'Latecomer'. This offers the reverse strategy. The risk is

minimized since the pioneer has already demonstrated the

viability of the market. On the other hand, the related reward,

that of becoming the market leader, may also be missed. The

solution to this, as practised by IBM for instance, may be to

move into a market as soon as it is proven, and then to invest

heavily to wrest leadership from the pioneer before it becomes

impregnable. This is not a cheap solution, since all the

development work has to be undertaken anyway, and the battle for

the command of the new market may be very expensive. Even then it

may not succeed, as IBM found when Compaq consolidated its

position in the portable PC market (and went on to successfully

assault the desktop PC market as well).

To a certain extent this discussion has now been overtaken by

events. As has already been pointed out, Japanese corporations

have led the way in reducing development time dramatically, and

even to halving it in the very mature car industry. To quote

George Stalk - 30 - of the Boston Consulting Group:

The effects of this time-based advantage are devastating; quite

simply, American companies are losing leadership of technology

and innovation ... Unless U.S. companies reduce their product

development and introduction cycles from 36--48 months to 12--18

months, Japanese manufacturers will easily out-innovate and

outperform them.

Accordingly, the choice to pioneer or to follow no longer exists

in a number of industries. 'The only way for an organization

even to survive may be to shorten development times below those

of its competitors'.

Product Replacement

One form of `new product launch' which is little discussed, but

is probably the most prevalent --and hence most important --of

all, is that of replacement of one product by a new one; usually

an `improved' version. The risk levels may be much reduced,

since there is an existing user base to underwrite sales (as long

as the new product doesn't alienate them --as `New Coca-Cola'

did in the US and `New Persil' did in the UK). Such an

introduction will be complicated by the fact that, at least for

some time, there will be two forms of the product in the

pipeline. Some firms may opt for a straight cut-over; one day the

old product will be coming off the production line, and the next

day the new product. Most will favour parallel running for a

period of time, even if only because this is forced upon them by

their distribution chains. This ensures that the new really does,

eventually, replace the old; and it may reveal that both can run

together.

Saunders and Jobber's research - 31 - shows the length of the

average `parallel running' (table 8.1).

AUDIT 8.6

Describe the stages your organization goes through in its new

product or service launches. It will probably help to concentrate

on one or two of the latest launches.

Does it follow all of the stages described above? If not all the

stages, which does it follow? Why does it not follow the others?

What improvements might you suggest to your organization in

future new product launches?

AUDIT 8.7

We now come to the next major exercise, that of producing the

full product (or service) strategy, including the elements of new

product development. This consists of two parts.

You should already have done most of the work of the first part

when you produced the outline product plan of audit 7.10.

In the first part you should spell out the objectives of the

strategy: where you would like to see the products or services in

three years' time. Where should they be positioned? In what

segments? What should be the portfolio, and how should the

various life-cycles (if any) be dealt with? What branding

policies will be followed? What will be the penetration and brand

share targets? What new products or services are needed to fill

any gaps?

In the second part you should follow these objectives through

into a positive strategy --a plan that states how these

objectives should be attained over the three years. Some of the

topics which might be addressed across both parts are:

segmentation (viability)

positioning

branding

portfolio (Ansoff Matrix, Boston Matrix)

product mix

service strategy

new products (launches, development programme)

Non-profit `New Products'

With many of the commercial pressures removed, and probably with

no competitive challenges in sight, one might ask why this

sophisticated new product process should apply, for example, to

the public sector. The answer is that most, if not all, of the

elements are just as applicable; in the context of making sure

that the `product' is the best possible match to the clients'

needs --and is the most productive use of resources.