Chapter 8: New Product Development
Chapter Objectives
After reading this chapter, students should understand:
·Why new products are important to organizations
·Factors affecting new-product success and failure
·Three major approaches to developing new products: the linear process, the
rugby approach, and the target costing method
·The steps in bringing new products to market
·The impact of the Internet on new-product development processes
·Special topics in new product development, such as the importance of shorter
development cycles and better integration of marketing and R&D
Chapter Overview
The purpose of this chapter is to highlight the importance of new products to firms
and to describe alternative new product introduction processes.
Chapter Outline and Key Terms
New Product Development
Key Terms:
·New-to-the-world
·New-to-the-company
·Target costing
·Lead users
·Co-creation
·Product definition
·Concept development
·Primary needs
·Secondary needs
·Tertiary needs
·House of quality
·Parfitt-Collins model
Copyright© 2011 Pearson Education, Inc., publishing as Prentice Hall 1
A. Definitions
1. New-to-the-world: A product that has not been marketed by any company
previously.
2. New-to-the-company: A product that has not been marketed by the company
but has been marketed by another company.
3. Target costing: In new product development, an alternative approach to
setting the price of a new product, in which the ideal selling price is
determined, the feasibility of meeting that price is assessed, and costs are
controlled in order to produce the product that can be sold at the target price.
4. Lead users: The first buyers of an innovation in industrial marketing
situations; also called innovators.
5. Position: The communication of the value proposition to the customer,
which differentiates the product from competition in the mind of the
prospect.
6. Co-creation: Using people outside of the organization to help develop new
7. Product definition: A stage in the new product development process in
which concepts are translated into actual products for further testing based
on interactions with customers.
8. Concept development: Making further refinements to a new product
concept.
9. Primary needs: Biological or physiological needs that a person must meet in
order to survive.
10. Secondary needs: Social or psychological needs that can remain unsatisfied
without any immediate danger to life or health.
11. Tertiary needs: A type of customer need considered in new product
development; the operational needs related to the engineering aspect of
actually making the product.
12. House of quality: A matrix used in new product development that illustrates
how customer needs and engineering characteristics influence one another.
13. Parfitt-Collins model: A simple market share forecasting model that uses an
estimate of the eventual penetration rate, an estimate of the ultimate repeat
rate, and an estimate of the relative product category usage rate of buyers of
the new brand to determine eventual market share.
B. New Product Development – Issues and Processes
1. Issues involved launching new products
·What are the sources of ideas for new products
·How do you take the large list of possible ideas and winnow it down to a
more feasible set?
·How d you go from product concept to prototype?
·How do you forecast the demand for a new product?
·What is the ideal organizational form for new product success?
·Once the new product is finalized, how do you introduce it into the
marketplace?
·How can the entire process from idea generation to introduction be done
more quickly?
2. New products are commonly divided into three categories
·Classically innovative products (new-to-the-world)
·Two subcategories:
·Truly new products that are revolutionary
·New products that create new categories
·New-category entries or new-to-the-company: Product category already
exists but firm is just entering it.
·Additions to product lines or line extensions: New versions of products
existing products already marketed
3. Product changes could also result in what are thought of as new products;
·Product improvements: “New and improved” products
·Repositionings: Products repositioned for new use or benefit
·Cost reductions: Only change to product is reduction in cost.
C. Factors Affecting New Product Success or Failure
1. List of factors correlated with successful new product introductions:
·Superior product with unique product benefits
·Strong market orientation throughout the new product development
process
·Sufficient time on up-front activities before the product is launched
·Sharp product definition
·High-quality execution of the steps of the process
·Appropriate organizational structure
·Good project prioritization process
·Care launch planning
·Strong support by top management
·Fast time-to-market
·Detailed new product development process
·Table 8.3 Page 215 New Product Success Factors Expands on list
above.
· Illustration: FluMist (www.flumist.com) Page 215
C. Approaches to New Product Development
1. Classic linear approach: Firm goes through it using a series of processes that
occur one after the other.
·These processes include:
·Opportunity identification
·Idea generation
·Initial design and concept screening
·Business analysis
·Testing and concept development
·Commercialization
·Life cycle management
·Figure 8.3 Page 216 New Product and Service Development Process.
Demonstrates the classic linear approach to product development.
2. Rugby approach: Much like a rugby game in which there is constant of
multi-disciplinary team from beginning to introduction.
·Companies using this approach exhibit six characteristics in managing
their new product development processes:
·Built-in instability
·Self-organizing project teams
·Overlapping development phases
·Multi-learning
·Subtle control
·Transfer of learning
3. Target costing approach: Approach sets estimated price that the target
segment is willing to pay
·Figure 8.4 Page 220 The Target Costing Process. Demonstrates the
target costing approach to product development.
D. Steps in the New Product Development Process
1. New Product Concept Generation
·Sources of ready-made concepts: Figure 8.5 Page 221 Sources of
Ready-Made New Product Concepts Outlines the multiple sources a
company might have readily available from which to develop new
product concepts.
·Illustration: Virgin Mobile (www.virginmobileusa.com) Page 221
·Illustration: Levi’s 501 (www.levis.com) Page 221
·Illustration: Crushpad (www.crushpadwine.com) Page 222
·Illustration: Lego (www.lego.com) Page 222
2. Screening new product concepts include:
·Concept testing:
·Surveys
·Focus groups
·Demonstrations
·Concept testing using conjoint analysis: A marketing research method
that enables that helps determine how customers value different levels of
product attributes
·Table 8.4 Page 225 Conjoint Analysis Illustration Demonstrates
conjoint analysis obtained from one subject.
·Table 8.5 Page 22 Conjoint Analysis Illustration Results This
illustration is more information since it shows the utilities for the
different levels of attributes and the overall importance weights of
the attributes.
3. Product definition/concept development
·After concept testing and conjoint analysis, the next stage is product
definition/concept development
·Figuring out what customers really want. Customer needs are divided
into three types:
·Primary needs: Main strategic benefits that the product or service
attempts to deliver
·Secondary needs: More tactical needs associated with the primary
perceptual benefit
·Tertiary needs: Operational needs related to the engineering aspect of
making the product
·Table 8.6 Page 227 Hierarchy of Needs Demonstrates these needs
·House of quality: Matrix used in new product development to illustrate
how customer needs and engineering characteristics influence one
another
·Figure 8.6 Page 228 and Table 8.7 Page 228 Demonstrate the
connection between customer needs and engineering characteristics
·Figure 8.7 Page 229 House of Quality Is an example of a house of
quality matrix
E. Business analysis: forecasting demand
1. Product use tests: producing the product and getting potential customers to
try it.
2. Market tests: ultimate in realism.
·Major measures to track are:
·Trial rate
·Repeat rate (for frequently purchased products)
·Usage rate or number bought per customer
·Also usually monitored: awareness, attitudes, and distribution
·Decisions to be made in designing a market test include:
·Action standards
·Where
·What to do?
·How long?
·How much?
·Information gathering
3. Sales forecasting
·Many of the sales forecasting models rely on:
·Awareness
·Trial
·Repeat
·Usage rate
·Parfitt-Collins market share forecasting model
·3 key elements:
·An estimate of eventual market penetration (P)
·An estimate of the ultimate repeat rate (R)
·An estimate of the relative product category usage rate of
buyers of the new brand (U)
·The formula is: (P X R X U)
·Predicting the success of more radical innovations is more difficult
because customers may have difficulty understanding the product and its
benefits.
·Illustration: Nestle (www.nestle.com) Page 234
4. Launching the new product
·Similar to the description of the complete marketing strategy shown in
Chapter 2:
·Set an objective
·Develop a strategy (target market(s), competitor targets, value
proposition)
·Plan the implementation (marketing mix)
·Illustration: BMW23 (www.bmw.com) Page 237
·Illustration: Volvo (www. www.volvocars.com/us) Page 237
·Illustration: Pepsi Tava (www.pepsi.com) Page 237
F. Topics in new product development
1. Importance of shorter product development cycles
·Quicker times to market become a competitive advantage (little
evidence exists that faster cycle times are positively correlated with firm’s
financial performance.)
·Factors negatively correlated with shorter cycle times are the newness
of the project
·Two important factors in shortening the cycle time: establishment of
formal new product planning process and use of interfunctional teams
·Impact of technologies help shorten cycle times
·Table 8.9 Page 239 Reported New Product Introduction Time
Reductions Shows reductions in new product cycle times from 1988 – 1992
·Illustration: Microsoft Xbox (www.xbox.com) Page 240
2. Importance of product design
·Innovative design has become a key way to distinguish a new product
from the competition
·IDEO’s design process is well known and includes the following:
·Observation
·Brainstorming
·Rapid prototyping
·Refining
·Implementation
3. New product development over the product life cycle
·Introductory: disruptive technology or product improvement
·Growth: focus on product innovation (making improvements and
differentiating from existing competitors
·Maturity: Invest in marketing differentiation. New products at this stage
can feature design. New products could improve customer experience.
Line extensions used heavily in this stage.
·Decline: Market can still be large. Product development should focus on
product enhancements and line extensions.
4. Improving the integration of marketing and R&D
·Increased levels of cooperation between marketing and R&D result in
higher levels of corporate success. Success can result from:
·Analyzing customer needs
·Generating and screening new ideas
·Developing new products according to the market’s needs
·Analyzing customer requirements
·Reviewing test market results
·Some approaches for improving cooperation between marketing and
R&D are:
·Relocation and facility design: relocate both groups so they are in
close proximity
·Personnel movement: Give personnel in both departments
temporary assignments in each other’s departments