An organized new-product development process
Identifying and developing new-product ideas – and effective strategies to go with them – is often the key to a company’s success and survival. But the costs of new-product development and the risk of a failure are high. Experts estimate that consumer packaged-goods companies spend at least $20 million to introduce a new brand-and 70% to 80% percent of these new brand flop. That is a big expense and a waste. In the service sector, the front-end cost of a failed effort may not be as high, but it can have a devastating long-term effect if dissatisfied customers turn elsewhere for help.
A new product may fail for many reasons:
- Most often, companies fail to offer a unique benefit or underestimate the competition
- Sometimes the idea is good but the company has design problems – or the product cost much more to produce than was expected
- Some companies rush to get a product on the market without developing a complete marketing plan
- Some companies move too slow. With the fast pace of change for many products, speedy entry into the market can be a key to competitive advantage
To move quickly and avoid expensive new product failures, companies should follow an organized new-product development process. The following 5 steps describe such a process:
- Idea Generation
- Idea Evaluation
- Development (of product and marketing mix)
This 5 step organized process is similar for both consumer and business markets – and for both goods and services.
An important element in the new-product development process is continued evaluation of a new idea’s likely profitability and return on investment. The hypothesis tested is that the new idea will not be profitable. Applying this process requires much analysis of the idea before the company spend money to develop and market a product/service. This is the mayor departure from the product-oriented approach in which a company develops a product first and then asks sales to “get rid of it”.
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STEP 1: IDEA GENERATION
Finding new product ideas should not be left to chance. Instead, companies need a formal procedure to generate a continuous flow of ideas. New ideas can come from company’s own sales or production staff, middleman, competitors, consumer survey, or other sources such as associations, marketing agencies… By analyzing new and different views of the company’s markets, and studying present consumer behaviors, a marketing manager can spot opportunities that have not yet occurred to competitors or even potential customers.
Here are a few examples of idea generation:
- Ideas for new service concept may come directly from analysis of customer
- Pay attention to what competitors are doing. Some companies use what is called the reverse engineering. For example Ford Motors Company buy other companies cars as soon as they are available on the market and then they take the car apart to look for new ideas or improvements.
- Many companies “shop” in international markets for new ideas, and then they adopt the idea for the current markets they operate in.
STEP 2: SCREENING
Screening involves evaluating the new idea with the SWOT analysis and product-market screening criteria. This criteria include the combined output of a resources (strengths and weaknesses) analysis, a long-run trends analysis, and a thorough understanding of the company’s objectives. Further, a “good” new idea should eventually lead to a product (and marketing mix) that will give the company a competitive advantage – hopefully, a lasting one.
Some companies screen based on consumer welfare
Screening should consider how a new product will affect customer over time. Ideally, the product should increase consumer welfare, not just satisfy whim.
Safety must be considered
Real acceptance of the marketing concept prompts managers to screen new products on the basis of how safe they are. Safety is not a casual matter. Product safety complicates strategy planning because not all customers – even those who want better safety features are willing to pay more for safer products.
Products can turn to liabilities
Product liability means the legal obligation of sellers to pay damages to individuals who are injured by defective or unsafe products. Liability settlements may exceed not only a company’s insurance coverage but its total assets!
ROI is a crucial screening criterion
If many ideas pass the screening criteria, a firm must set priorities to determine which ones go on to the next step in the process. This can be done by comparing the ROI (Return on Investment) for each idea assuming the company is ROI oriented. The most attractive alternatives are pursued firs.
STEP 3: IDEA EVALUATION
When an idea moves past the screening step, it is evaluated more carefully. Note that the actual product has not yet been developed. For help in idea evaluation, companies use concept testing – getting reactions from customers about how well a new-product idea fits their needs. Concept testing uses marketing research – ranging from informal focus groups to formal surveys of potential customers.
Companies can estimate likely costs, revenue, and profitability at this stage. And marketing research can help identify the size of the potential markets. Have in mind that in this hypothesis-testing process, we are looking for any evidence that the idea is not a good opportunity for the company and should be rejected. Product planners have to have in mind all participants in the supply chain, from suppliers to retailers.
Idea evaluation is more precise in business markets. Potential customers are more informed and their needs focus on the economic reasons for buying rather than emotional factors.
Whatever research methods are used, the idea evaluation step should gather enough information to help decide whether there is an opportunity, whether it fits with the company’s resources, and whether there is a basis for developing a competitive advantage. With such information, the company can estimate ROI in various market segments and decide whether to continue the new-product development process.
STEP 4: DEVELOPMENT
Product ideas that pass the screening and idea evaluation steps must be analyzed further. This involves R&D and engineering to design and develop the physical parts of the product. In the case of a new service offering, the company will work out the details of what training, equipment, staff, and so on will be needed to deliver on the idea. A manufacturer may build a model of the product or produce limited quantities; a service company may try to train a small group of service providers. Product test with customers may lead to revision, before the company commits to full-scale efforts.
Some companies don’t do market tests because they just aren’t practical. In fashion markets, for example, speed is extremely important, and products are usually just tried in market. Another example of “go directly to market” are durable products which have high fixed production costs and long production lead time. In this cases it is extremely important that the early steps be done carefully to reduce the chances for failure.
STEP 5: COMMERCIALIZATION
A product idea that survives this far can finally be placed on the market. Putting a product on the market is expensive, and success usually requires cooperation of the whole company. Manufacturing or service facilities have to be set up. Goods have to be produced to fill the channels of distribution, or people must be trained and/or hired to provide services. Furthermore, introductory promotion is costly especially if the company is entering a very competitive market.
Because of the size of the job some companies decide not to cover the whole market at once, but rather introduce their products / services in a gradual “rollout” – city by city, region by region, until they have complete market coverage.
Following this 5 step new-product development process will most probably give you an organized and a very firm base for future success of your new product or service. You should also take in consideration the following factors that will have a high influence in the overall development process and will directly impact the success of your product / service. See picture below.
References: Basic Marketing, A Global-Managerial Approach, William D. Perreault, Jr. & E. Jerome McCarthy
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