The introduction of innovative products carries high financial risks. Indeed, a major American management consulting company, Booz, Allen & Hamilton1, once suggested that only 1 in 100 new product ideas succeeds in the marketplace. However, the estimaties of new product failures vary enormously, but such variation need not be of concern here. The point of interest is that there are a great many more new product failures then new product successes. what makes organisations take the risks attached to innovation is the possibility of high rewards. Moreover, as will shortly be explained, a certain amount of innovation is necessary in all organisations operating in competitive markets.
This chapter on new product development is designed to provide the reader with an understanding of:
Why organisations are motivated to accept the risks of product innovations
A model of the new product development process that can be used to manage the risks of innovation
The methods and techniques commonly employed in determining which products ought to be launched on to the market
The major factors which tend to influence the level and rate of adoption of new products.
The chapter opens by explaining how and why a commercial organisation's profitability is likely to fall as its portfolio of products ‘ages’ and enters into decline. There then follows a description of a model of the new product development process which is commonly used to manage the inherent risks of innovations. The model involves a sequence of steps. At each step in this sequential model the investment cost increases and the organisation must judge whether the chances of success outweigh the risks of failure. Each step is discussed in some detail within the chapter. Thereafter the discussion moves on to the adoption process. Drawing from empirical evidence reported in the marketing literature, various categories of adopters of innovations are identified. These range from those who tend to be among the first to accept the innovation through to those who lag behind until the new product, service or system has been tried and tested beyond question. The latter part of the chapter examines the product characteristics that tend to either accelerate or retard the rate of adoption of an innovation.
In the 1960's, the Boston Consulting Group growth-share matrix2 was developed as an analytical tool for assessing the performance of an organisation's (BCG) portfolio of products. Portfolio analysis focuses upon the rate of growth of a market in which an organisation participates and the strength of that organisation within that market, as measured by its share of the total sales volume of the market. Thus, the Boston Portfolio Analysis takes the form of a growth-share matrix in which an organisation's market share is plotted against the rate of growth of the market in which it has invested. Figure 4.1 depicts the growth-share matrix.
The cut-off point at which a low growth market becomes a high growth market is entirely arbitrary, but conventionally this is set at 10 percent. An organisation's share of the market is measured relative to that of the largest competitor. The ratio between the two determines whether the organisation is placed in the high or low share category. The share dimension is measured on a logarithmic scale where the cut-off point is 1.0. At this point, the market share of a company is exactly the same as that of the biggest competitor. An index number greater than 1.0 indicates market leadership, whilst the lower the index the greater the extent to which the organisation trails behind competitors.
Figure 4.1 Portfolio analysis
The growth-share matrix is divided into quadrants and these can be applied to products, groups of products, divisions within a large corporation or whole businesses within an economy. These quadrants have been given the somewhat colourful, but therefore memorable, labels of rising stars, cash cows, problem children and sick dogs.
Rising stars: The upper left quadrant contains products or businesses operating in high-growth markets. Products or businesses located in this quadrant will require large amounts of cash to sustain their position in this market and to maintain the momentum of market growth. Even though rising stars may generate high sales volumes and revenues, these are likely to be outstripped by the amounts of cash required to support the product or business during the fast growth stage. At this stage substantial amounts of money are likely to be necessary to create awareness of the new product and to establish a distribution network, etc. Therefore, rising stars tend to be net cash absorbers. This is perhaps better appreciated if businesses are aware of the product life cycle (PLC) concept. The concept applies to products at an industry level rather than at an individual company or brand level.
Marketing theory suggests that products have a 4-stage life cycle: introduction (slow growth), rapid growth, maturity and decline. During the early stage sales volumes and revenues increase very slowly because the target market only gradually becomes aware of the product and its benefits. Assuming that the product is perceived to provide meaningful benefits, it may then enter into the rapid growth stage where sales volumes escalate fast. However, cash outflows are likely to be substantial because of the investment in such items as raw materials, production, packaging, transportation, organising a channel of distribution, promotional activities, etc. Moreover, there is likely to have been a sizeable investment in capital equipment, research and development and in buildings etc. The product will be in the market sometime before these costs are fully recouped.
Figure 4.2 The product life cycle - entire industry
It is only when the product has gathered its own momentum and perhaps needs less marketing support, much of the initial capital investment has been recouped, unit costs fall due to efficiencies realised through cumulative production experience and competition has come to be based on factors other than price that rising stars become cash cows.
The concepts of rising stars and the PLC have a number of implications for businesses. Whilst rising stars are always needed, because these become the cash cows of tomorrow, having too many rising stars can create cash flow problems. At any point in time, there needs to be a balance in the portfolio between cash absorbers and cash generators. It also has to be recognised that no matter how successful a product or business is, it will eventually come to the end of its life cycle. Before it does so, new products must have been introduced to take its place. The figure below illustrates a situation where a portfolio of products which have generated revenues and profits in the past are experiencing declining sales without a programme of planned replacement. As more of these products go into decline, the gap between target and realised profits widens.
Figure 4.3 A widening profit gap due to decline across the product portfolio
Cash cows: Products or businesses located in the bottom left quadrant are those with high market shares in low growth markets. Because the market is mature, the cash requirement is lower and products or businesses in this quadrant become net cash generators. Where there are cash cows, there is the danger of complacency, with little thought being given to the need for forward planning of the business portfolio.
Problem children: Low share businesses in high growth markets represent problem children (elsewhere known as wildcats or question marks). Problem children are cash absorbers, in the short-run, because of the resources required to increase their market share (e.g. advertising, special promotions, discounts etc.). If these products cannot be converted to rising stars, they will become a long term, cash absorbing sick dog when the market matures. Only so many ‘problem children’ can be supported at any point in time and it may be better, in the case of at least some of them, if they are sold off or starved of resources and milked for whatever cash they can generate.
Sick dogs: Low-share businesses, in low growth markets, exhibit weak performance and so are termed sick dogs. Such businesses yield very low profits, and sometimes losses. Because market growth is slow, attempts to increase their market share are usually very costly and so it is rarely attempted. Sick dogs are net cash absorbers and can become a perpetual ‘cash trap’.
Two alternative courses of action may be pursued with respect to sick dogs. A ‘dog’ can become a star and then a cash cow by switching to a niche market which the product/business can dominate. For example, suppose we have a plant producing fermented milk for sale to low-income consumers but the product is struggling in a highly competitive, but low growth market. Our strategy might be to repackage the product and target it at high-income consumers as a substitute for soured cream in baking or cooking. Other options would be to sell the product to another manufacturer or to make no further investment but to milk the product for whatever cash can be generated.
As an analytical tool, the growth-share matrix has the advantage of being both simple and quantifiable. It is therefore a useful first step in portfolio analysis. Growth was selected by the BCG to indicate attractiveness of a market because it directly relates to the stage which a product has reached in its life cycle. The PLC is a key strategic consideration. The market share dimension is important because empirical evidence indicates a direct relationship with profitability.
In the long run, organisations which do not innovate whilst their competitors do will eventually find that their growth and profitability begins to falter as their existing products go into decline. If an organisation is active in launching new products it must be careful to ensure a balance between products within its items product portfolio
It should be noted that whilst this chapter focuses upon new product development, management must not forget that innovations take other forms which have implications for marketing. Kohls and Uhl3 describe an innovation as:
“…the discovery and application of a new idea. Three types of innovation have been important for food manufacturers: (1) new marketing methods and techniques-which often increase operational efficiency (2) new products or services - which add more consumer value to products and (3) new business organisations- such as the cooperative food processor, joint ventures between firms, or new marketing channels.”
Kohls and Uhl go on to cite the development of frozen orange juice in the 1940s as an example of an innovation which exemplifies each of these forms of innovation. Because the product was concentrated and reduced the volume of product to be transported and stored, the marketing costs were reduced. In addition, certain types of consumer preferred the concentrate to either fresh oranges or single strength juice and a new processing industry came into being.
Figure 4.4 depicts the new product development process. The objective of these steps is to avoid costly failures by continually reviewing the prospects for the new product/product idea, and give the company several discrete points in time at which the decision to drop the product and cut their losses can be made. The most expensive mistake which can be made is to launch a product which ultimately proves unsuccessful. By the time a product is launched, all of the development costs have been incurred and investments have been made in production equipment. Heavy marketing costs have also been incurred in setting up the distribution system, promotional expenditure and so forth.
Figure 4.4 The new product development process
The objective of idea generation is to gather as many ideas as possible and from any and all possible sources. Possible sources include:
|R & D department, committee or task force||Suppliers or market intermediaries|
|Production staff||Freelance inventors|
|Other company employees||Consultants|
|Noncompetitive firms||Patent applications|
In addition, there are a number of marketing research techniques that may be used when an organisation purposefully seeks to generate new product ideas. These include brainstorming, synectics, morphological analysis, scenario writing and Delphi forecasting.a
The emphasis, at this stage, is upon the quantity of ideas with no source, nor idea, being rejected. The natural tendency to evaluate new ideas the moment they are generated has to be resisted. The process of making judgements about ideas is treated separately and in this way, the number of good ideas which are rejected either because no one can immediately see how it could be made to work or cannot conceive what its applications might be, is reduced. It frequently happens that an idea unusable in its original form can be made to work either in another form or used in a different context. It is remarkable, for example, that Alexander Fleming, who is credited with the discovery of penicillin, did not realise its practical application as an antibiotic. This development was left to others scientists and it did not happen for a decade after Fleming first observed the chance killing of a bacterial culture on a dish. Likewise, it is said that when ICI first developed polystyrene no one knew what to do with it.
Having generated a number, -sometimes a large number- of ideas, the filtration process must begin. The objective is to identify new product ideas which are weak in terms of their chances of market success or their potential return-on-investment. The important point here is that product ideas must be evaluated against the company's objectives. A company must have a clear mission and know what business it is in. Only then can product ideas be matched with company objectives and resources.
Consider the example, of a manufacturer of processed meat products (sausages, hamburgers, corned beef etc.) Who developed an improved binding agent based on rolled oat rather than rusk. Wishing to fully exploit this development, some individuals, within the company, wanted to market the new binding agent to other food manufacturers as well as making use of it to improve their own meat products. On the face of it this proposition made good sense since it appeared to meet a market need but the idea was rejected because it did not fit the company's objectives or resources. First, whilst the rolled oat based product was unquestionably superior in performance to rusk binding agents it cost almost twice as much. Substantial resources would have had to be devoted to marketing the product to others. Second, the company had expertise in consumer marketing but no experience in industrial marketing. Third, the company profit objectives were tied to exploiting volume markets through mass marketing. In contrast, the new binding agent was only likely to appeal to a niche market i.e. those food companies with premium quality meat products where the cost of the value added by the improved binder could be recouped.
a. An account of these methods is outwith the scope of this text but readers who wish to learn about them will find a brief bibliography at the end of this chapter.
Product development policy covers such points as compatibility, market potential and financial objectives. These can be put into check-list format for screening purposes. Figure 4.5 illustrates the point by providing a partial check-list.
Figure 4.5 A checklist for screening new product ideas
|Very desirable||Very undesirable|
|In terms of effectively using our R & D know how, the product is......|
|In terms of effectively using our marketing know how the product is......|
|In terms of effectively using our production know how the product is......|
|Qualified personnel are :||Available||Unavailable|
|R & D......|
|Significant advantage||Significant disadvantage|
|Our raw material position will create a......|
|Our ability to handle physical distribution will create a......|
|The manufacturing facilities which will be used will yield a......|
Of course, the checklist in figure 4.5 is far from complete but it does serve to illustrate the types of objectives and resources with which new product ideas have to be matched. Moreover, product policy is not forever fixed. Once established it can be modified but this should be done with care and only for good reasons. For instance, a manufacturer of whose defined business is savoury food snacks might later move into confectionery markets because of saturation in their traditional markets and the close match between the distribution arrangements, service levels, profitability etc. in the two sectors.
If it is conducted well, the screening process will enable the organisation to determine which new product ideas are right for it. The question remaining, at this point, is which products would be right for the customer.
Many factors contribute to the failure of new products but a principal cause is the inability to predict customer response to new products and services. Systematic tests can be used to reduce expensive failures. These include; concept testing, market positioning tests, product testing and market testing.
Another word for ‘concept’ is idea, and so Moore4 says that the chief purpose of concept tests is:
“…to estimate customer reactions to a product idea before committing substantial funds to it.”
The product idea has to be converted to a product concept. It is often possible to develop several product concepts from a single product idea. Consider the following product idea:
“A powdered product that adds considerable nutrition when mixed with milk.”
A cross-section of the general public could be asked to respond to this product idea and may be able to comment on the intrinsic appeal of the idea and, more especially, could make suggestions as to where it would best be positioned in the market. However, the statement conveys only a basic product idea. It could give rise to several quite different product concepts, for example:
Concept 1: A snack food for people who, on specific occasions, find that they have insufficient time to consume a full meal. (The statement could be further elaborated to specify whether it is intended as an alternative breakfast food or to be taken at other times of the day).
Concept 2: A food high in energy, protein and minerals capable of effecting a rapid recovery in malnourished children as part of a nutrition intervention programme.
Concept 3: An easily digested and nutritious food for people whose medical condition prevents them from eating solid foods.
Concept 4: A health food intended for people active in sports.
Concept 5: A food for babies to sustain health and promote rapid growth.
It can be seen from these examples that a product concept statement will often reveal where the product is to be positioned in the market. Each product concept would engage a different set of competitors. If only one concept statement is used then this may or may not position the product in the market in which it has the best chance of success or where potential profits are greatest.
Concept tests can vary in form. The new product concept may be presented as a simple statement presented to a sample of potential users, it could be a mock advertisement to which people are asked to respond or a line drawing or even a model of the proposed product. Moreover, concept tests never test concepts. Since concepts are ideas, they are in someone's mind. These ideas are translated into statements, visual aids or models and it is the respondent's reaction to those ideas which is in fact measured. The distinction is important. The task of translating ideas into a concept statement, visual medium or physical model that adequately conveys the essential characteristics (some of which could well be sensory) and benefits of the product is not an easy one. Very often researchers will make use of one or more focus groups or a series of personal interviews to help in making this translation. During the interviews respondents might be shown a preliminary concept statement, visual representation or model and asked to respond to it. The researcher is trying to find answers to determine whether or not the concept statement, visual medium or model conveys the essence of the new product idea without ambiguity and with potency.
It is important to be clear as to what exactly is being measured. This could be a response to the basic product idea (a concept test), the proposed use and target customer group (a product positioning test) or to the physical properties and characteristics of the product itself (a product test). If there is a lack of clarity on the precise objectives of the test, it is impossible to draw conclusions from the test. A negative response leaves unanswered the question of what it is that the sample has rejected the basic idea, the particular position in the market presented to them or some, or all, of the physical characteristics of the product and this makes it difficult to take corrective action. Similarly, a positive result is of limited value since it cannot be established whether or not the optimal formula with regard to concept, positioning and product has been achieved. Typical questions that are addressed through a concept test are:
Do they understand the concept?
Do they believe the concept?
Is the concept different from other products in an important way?
Do they like or dislike the concept and why?
What could be done to make the product more acceptable?
How would they like to see the product (colour, size, etc.)?
Would they try it?
What would be their pattern of usage in terms of purpose, frequency, place of usage etc.?
Where would they expect to purchase such a product?
With which existing products do they tend to compare this product concept?
If the likely positioning of the product has already been decided upon, then this becomes an explicit component of the product concept and questions which require respondents to compare this new product to existing products can be added, since marketing managers should have some notion of where the competition will come from. However care has to be taken when interpreting the information. After all, at this point the proposed product will still be conceptual to the respondents, unless of course they have been able to try it, whereas they may well have actual experience of competing products. Even if respondents have been given the opportunity to try the product, limited trials are not directly comparable to extended use of a product.
A commonly voiced complaint about concept tests is their apparently poor performance in predicting market success. This is in part due to:
the product failing to provide the benefits perceived to have been promised in the concept statement
changes in the concept, positioning or physical product between the concept test and the introduction of the product
changes in the legal and/or social environment between the point in time when the concept test was undertaken and the time when the product was launched on to the market.
There is a fourth reason. When a concept test is conducted, a vital component is omitted, i.e. the dynamics of the marketplace. At most the product has been tested but not the marketing mix. This is something that is done much later in the new product development process and is known as test marketing. It is for this reason that concept tests are recommended for use as an early screening device to obtain some guidance on likely customer reaction to an idea and to predict trial rate.
A concept test will not reveal what the potential market is in numerical terms. At best it answers the sorts of questions previously listed. Even if the positioning of the product has been determined there are difficulties in projecting the likely market share or sales since much depends upon the acceptability of the physical product and, just as importantly, the marketing strategy and marketing mix. At the same time, to omit concept tests and jump straight to quantitative studies which begin from the premise that the organisation has got the concept right carries great risks. Such research can be expensive but won't reveal those occasions when a modification to either the way in which the idea is projected or the positioning would result in a greater degree of success. Similarly, research may discover, for example, a real growth in the market for frozen ready prepared meals at the top end of the market, and projections of sales based on assumptions as to the minimum market share likely to be captured may be made. Later it could be discovered that whereas competing premium brands are used on everyday occasions the new product is perceived as being so special that it is served only on special occasions and therefore total volume is significantly lower.
By this stage, a number of new product ideas which do not match company objectives and/or resources will possibly have been screened out and others will have been modified as a result of the concept and/or positioning tests. Sometimes no product ideas remain after screening but assuming one or more ideas remain, and that decisions have been made as to where in the market the product might be positioned, the next task is to prepare a business analysis. Such an analysis would involve an assessment of the total capital investment cost, the likely return-on-investment and the payback period. Where at all possible this should be carried out before a physical product has been manufactured or otherwise produced. The objective at this stage is not to produce precise sales forecasts but to establish the broad order of magnitude of probable sales volumes, revenues and expenses. After all, in many instances no physical product will have yet been produced or tested among potential customers. This being the case, it is virtually impossible to arrive at precise sales or profit forecasts for the product. Instead, the analysis is likely to concentrate on the broad prospects for the product class within which the proposed product would fall and from that some crude estimates of sales and profits for the specific product might be made.
The business analysis phase typically involves the use of a set of pro forma financial statements showing what future income and expenses would be if a new product idea were fully developed and marketed. To show the risks, opportunities and payback periods, short-run (6 months - 1 year), intermediate (1–3 years) and long-range estimates (3–5 years) may be prepared.
In addition to quantitative data, and organisation considering the development of a new product is likely to assess qualitative information. Figure 4.6 shows some of the qualitatives questions which would be addressed during the business analysis phase and would accompany the financial analysis.
Figure 4.6 Key issues to be addressed as part of the business analysis phase in new product development
|Demand for the product rests on..................||Necessity||Weak desire|
|The product's unique ability to satisfy a need is..................||Clearly understood||Vaguely recognised|
|Our product's unique ability to satisfy a need is||Great||Slight|
|The degree to which customers can be attracted by our product's unique features is..................||Great||Slight|
|Competitors can match the unique features of the product with..................||Great Difficulty||Great ease|
|The number of competing products is expected to..................||Decline Difficulty||Grow rapidly|
|Price cutting competitiors are expected to be a..................||Minor problem||Major problem|
|The number of customers buying this type of product is..................||Very large||Very small|
|The geographic distribution of customers will be a..................||Marked advantage||Serious disadvantage|
|In relation to customer's annual purchases, this type of product constitute a..................||Large share||Small share|
Although the questions appearing in figure 4.6 are but a sample of those which would be asked as part of the screening process, it can be seen that these are of two types; those which can be asked internally and those which require data from prospective consumers. As well as screening out product ideas which do not match company objectives and/or resources, management will be anxious to either drop or modify product ideas which consumers either do not understand or do not value. In other words, the company will want to test the product idea, or concept, before proceeding to technical development of that idea/concept.
In this phase the product concept is translated into a prototype or trial formulation in the case of a food product, animal health treatment or agrochemical. At any one time, only one product idea is likely to undergo technical development. Nonetheless, as the, company enters the technical development stage its level of investment is likely to involve a quantum increase. Prior to this phase little capital will have been invested in materials or equipment. This being so, it is vital that ideas/concepts have been critically screened and a through economic analysis of the project undertaken.
Technical development is not solely a production activity. Marketing personnel are involved in conducting, or at least commissioning, product tests to contribute information on consumer needs, preferences and behaviour. From this stage technical personnel will want to use the prototype/trial formulation to assess the feasibility of producing the product, to arrive at the most cost effective method of manufacturing/processing and to estimate actual production costs. Marketing personnel will be interested in gauging customer reaction to one or more prototypes/formulations and will want to feed the results of these investigations back into the product development process.
Many comparative studies of product successes and failures have been conducted in an attempt to identify those factors which determine whether or not a product is successful in the marketplace. One of the earliest of these studies was Project SAPPHO6. The most important discriminators between successful and unsuccessful product innovations were:
understanding of user's needs
attention to marketing
efficiency of development
effective use of outside technology, and
seniority and authority of the managers overseeing the new product development process.
Thus, Project SAPPHO drew attention to the importance of allowing customer needs to direct the technical development of new products. At the same time, the study emphasised the need for organisations to tightly control the efficency of development activities whilst remaining open to making use of technologies and technical facilities belonging to other organisations. Interestingly, also among the leading success factors was the involvement in the product development process of high ranking managers. Senior managers are able to make high risk decisions and to commit the organisation's resources. Moreover when senior management is assigned to new product development projects it is a signal to both those within the organisation and to external parties of the importance it attaches to innovation.
The main aim of test market studies is to provide a real-world, in-market exposure for evaluating the product and its marketing programme. In essence the marketing manager is taking a proposed national programme, with all of its separate elements, and evaluating them in a smaller, less expensive situation. He/she is seeking to determine whether or not the potential profit opportunity outweighs the potential risks by a considerable margin.
Although more often associated with consumer markets, test marketing can be applied to industrial markets. For example, new forms of packaging could be test marketed with food manufacturers and processors; agrochemicals can be tested among farmers; and innovative bulk handling systems for grains can be tried out among elevators. Capital goods are less amenable to test marketing since their markets are likely to be geographically dispersed. However, it is also the case that not all consumer products can be effectively test marketed. For example, it would be dangerous for manufacturers of consumer durable goods to engage in test marketing. If the product failed the firm would be committed to providing a certain level of service and spare parts to a product which had been withdrawn or the corporate image would be adversely affected.
Ideally a test market should be capable of providing information on such factors as:
market share of product and/or volume estimates
who buys the product, how often and for what purpose
from where purchases are made, and at what price
what response was made by competitors
what effect the new item has on existing product lines or brands, including one's own.
Test marketing offers at least two important benefits:
It provides an opportunity to obtain a measure of a product's sales performance under reasonably natural market conditions. Market share can be estimated and used as the basis of the decision as to whether or not the product is launched nationally.
It provides an opportunity for management to identify and correct product or marketing strategy weaknesses before a national launch takes place.
Despite these benefits, certain issues need to be considered before making the decision to test market. To begin with test marketing is an expensive exercise. The product has to be manufactured, as does its packaging, and because this is on a limited production run, economies of scale are not possible. Moreover there are the costs of the marketing programme itself. There is also a series of indirect costs which should be considered. These can be categorized as (1) opportunity costs - e.g. revealing a new product idea to a competitor (2) exposure costs - the name of the company is exposed along with the brand, and (3) internal costs - diversion of employee time and activities (rarely taken into account when the cost of test marketing is estimated). Whether to test market is a trade-off between reducing uncertainly by collecting additional information at considerable direct and indirect cost and immediately introducing the product nationally by avoiding any delays.
There are 5 factors which should be considered when deciding on the benefits and disadvantages of test marketing:
If the costs and risks of product failure are low, then a national launch should be considered Alternatively, high costs coupled with great uncertainty suggest the test market approach is best.
If in setting up pilot production runs for a test market the company incurs the great part of the investment costs necessary to supply the national market, then it would probably be as well to go straight to the national launch stage.
Management must consider the likelihood and speed with which competitors will be able to copy the new product and attack its national and/or foreign markets.
In addition to the investment in plant and machinery which may be involved, every new product launch is accompanied by a substantial marketing investment that varies with the scale of the launch. Typically, new product launches call for heavy expenditure on promotion; they require sales-force time and attention; and they need shelf-space in wholesale and retail outlets, sometimes gained only at the expense of the space already given to the company's existing products. Moreover, if the new product fails, such costs as rebating and reclaiming unwanted stock from customers must be incurred, along with write-off costs of dealing with unwanted and unsaleable materials and packaging.
Management must also take into account the possible damage that a new product's failure can inflict on the company's reputation, which is a real if not quantifiable cost.
After the decision to test a proposed new product or product line extension, a number of basic steps should be followed to achieve the desired results with minimum cost and time. The basic steps about to be outlined should be followed in sequence and no steps should be omitted.
Step 1: Define the objectives: Clearly, there is a relationship between the type of new product that is to be tested and the risks and rewards associated with ultimate market failure or success. The product being tested could be:
a “me-too” product - essentially the same as other brands already on the market
an improved product - an improvement over other brands/products currently on the market
a category extension - a “new” type of brand as compared to other brands currently offered to the market e.g. a new kind of instant coffee which doesn't rely on the use of potentially hazardous chemicals to decaffeinate it
a truly innovative product - the product under test may be radically new, bearing no relation to existing products or brands e.g. a food additive which prevents the fat in foodstuffs from being absorbed by the human body.
If the proposed new product entry is a “me-too” item, its introduction will require far less cost and time than if the product were entirely innovative and, therefore requiring time and marketing effort to gain market acceptance. Typical test market objectives are to forecast such key market indicators as unit sales, market share and revenues. Frequently, these indicators are supplemented by estimates of inventories and measures of shelf location, facings, price variation and distributor's/retailer's promotional activity. In effect, test markets measure what is happening in the marketplace at the retail level.
Step 2: Plan strategy: Once management has decided how the new product entry will be manufactured, consideration turns to how it will be promoted in the marketplace. With a “me-too” product, advertising is critical, since in large measure positioning, strategy and execution determine its market success or failure. On the other hand, with an innovative product promotional activities such as free samples and money-off offers are likely to be more effective. Getting people to try new products is a crucial step in the success of innovative products.
Media selection is another important part of developing an overall testing strategy. For example, if the national media plan for a new product uses magazines, then the test market area must have a representative sampling of printed media so that the necessary projections can be made.
Step 3: Determine methodology: With test marketing, management attempts to manipulate certain marketing elements whilst holding others constant in a real-world environment. There are three main methods from which to choose. These are:
|Simulated test market||This Involves various groups of preselected respondents being given product samples and then interviewed and their behaviour monitored. In addition, respondents may be exposed to various media messages in a controlled environment. The objective of simulated test markets is to project how the new product would perform if launched nationally.|
|Standard test market||The company's own sales force would be responsible for distributing the new product in the selected test market areas. Sales force personnel would stock the shelves and return at periodic intervals to restock and count movement.|
|Control test market||The entire test market project is handled by an external agency. The agency guarantees distribution of the new product in stores that represent a predetermined percentage of the market, hence the term controlled panel store. They provide warehouse facilities and use their own field representatives to sell the product and are responsible for shelf-stocking and counting product movement. Because the guaranteed distribution allows marketing managers to begin advertising and promotion two weeks after a retailer agrees to stock the new product (instead of the usual 60–90 days it takes to go through regular distribution channels), faster readings are possible.|
Step 4: Select markets: One of the most important decisions to be made is where to test the marketing programme. The normal practice in test marketing is to choose medium-sized cities that in all important respects reflect national demographics, industry/business, media and distribution. There appear to be four overriding factors to consider in selecting a test market:
|Number of markets to use||The more markets that can be used the better. Results will be more reliable and more variations can be tested. Geographically dispersed markets should be used where practicable. When testing an existing product, the general approach is to use a “matched market” strategy in which two markets are chosen for their similarities on several selection criteria such as demography, geography, climate, and competitive brand use.|
|Size of markets to use||Reliability and cost are the key: selected markets should be large enough to give reliable results, but not so large as to be prohibitively expensive. The standard practice is to use multimarkets comparable in demographics that collectively represent about 2–3% of the population.|
|Markets with representative demographics||Several criteria are important, for example, family size, age levels, income, buying habits, etc. In general the test market environment should be consistent with the environment within which the new product will have to compete when rolled out.|
|Markets that are isolated||The test market should be relatively isolated in terms of media and physical distribution so as to minimise waste and maximise security. That is, as far as possible cities which share or overlap their media and distribution should be avoided. Otherwise, marketing effort can be going into an area in which the product is not available.|
Step 5: Execute the plan: Test marketing must be carried out as a legitimate test. There should be no undue attempt to guarantee success. In this regard there are two tendencies to guard against. First, over-attention can cause the new product to do better in the test market than it will when rolled out nationally. Cadbury's, for example, had a biscuit product failure which was due to their inability to produce on a commercial scale the product which had done so well when manufactured in their pilot plan. Another form of over-attention is where sales personnel are instructed to give the new product a level of support that they will be unable to sustain in the long term because they have a large number of products to promote. Thus over-attention can take several forms and can occur in both production and marketing.
Secondly, care should be taken to avoid placing undue emphasis upon initial repeat purchase incidence. Repeat purchase of a new product is critical to its success. Frequently, the temptation is to abort a test when the initial repeat purchase cycle incidences look good. Whether good or bad, repeat purchase rates should be examine carefully to detect the “cause” (such as special deals or high value redemption coupons, the media mix, advertising etc.). The test should be allowed to continue until the results begin to stabilise. Moreover, it has to be borne in mind that test marketing is not simply about quantification of markets. Cadbury's experience with the failed biscuit product serves to underline the fact that analysis has to be qualitative as well as quantitative. It is difficult, if not altogether impossible, to establish why consumers do or do not buy a particular product without recourse to qualitative methods of analysis.
Step 6: Evaluate the results: There are four critical areas to keep in mind when test market results are being evaluated. These are:
|Customer awareness levels and their attitudes towards the product or service||The key questions here are: Do potential customers know the product exists? Do they know what the product does? Do they know how much the product costs and where to get it? Do they believe the unique selling proposition? Do they have any interest in acquiring the product?|
|Purchase measures||Another key factor in evaluating the test is trial and repeat purchase incidences. Purchase measures, particularly trial, indicate whether or not the advertising and promotion plan has worked.|
|The effect on competition||It is very important to monitor the actions of competitors during the testing period. As indicated earlier, competitors can act to distort the results of a test market by offering sample products, price reductions, coupons, and the like.|
|The effect on other products||Care has to be taken to avoid cannibalising the sales of other products or brands belonging to the innovating organisation. That is, market share may simply be taken from the company's established lines. Where this occurs thought has to be given either to repositioning the product or, if this cannot be done, withdrawing the new product.|
|Decision making||After evaluating test market results, the organisation may decide to proceed and launch the product, go back to R & D and request product improvements or to abort the entire project.|
Assuming that the market test is positive, the full-scale production, introduction and marketing (i.e. commercialisation) of the product can take place. The company has to decide whether, in the light of all available information, it should be commercialised. Commercialisation commits the company to spending sizeable sums of money. A full scale manufacturing facility has to be acquired. The actual size of that facility will depend upon the forecasted sales of the new product and the amount of faith that management has in that forecast.
To protect itself against the risks of over-production in relation to actual demand, a food company might elect to build plant capacity below that of projected sales. The danger is that if the company stimulates a demand which it cannot then satisfy, it can alienate distributors, retailers and/or consumers. Moreover, competitiors may be in a position to act quickly and take advantage of the surplus demand. Another strategy is for the food company to pay another food processor, with excess production capacity, to manufacture the product on their behalf. However, this prevents the innovating company from having as much control over the new product in terms of quality standards, changes in production runs, etc. A more common practice, among larger food companies, is to farm out their well established products to other manufactures. This makes room for the new product within the company's own production facility and the necessary care and attention to getting it right can be given.
The third production alternative is for the company to place confidence in its forecast and test markets to the extent that it invests in the necessary production facilities. This is the most costly option but gives the greatest level of control and flexibility.
Another major cost of commercialisation is marketing. Radically new products require heavy investment to make consumers aware of the product, adequately convey its unique selling proposition and get consumers to try the product.
The main marketing management tasks in the commercialisation phase are:
The development of a detailed marketing plan.
Allocation of authority and responsibility for carrying out the marketing plan and managing the product.
A detailed timetable for launching the product. Product success depends upon timing and coordinating.
The design and implementation of an information system to audit and report on the product, its progress and problems. With a steady flow of management information, the product manager can adjust and modify the marketing mix.
In some organisations there is a tendency for new product development programmes to develop a momentum of their own, making it difficult for management to abandon them before it has been conclusively proved that they should never have got as far as they have. Some managers will have staked their reputations, and some their careers, on the success of this or that new product idea and, as a consequence, will push it relentlessly even when the symptoms of failure have become apparent. The organisation to which this manager belongs is sometimes also motivated to sustain the development of new products when indications are that the more prudent decision would be to terminate the programme. The further down the line that a new project gets, the higher the amount which the organisation has invested and the stronger the tendency to ignore the warning signs of failure and to continue in the hope that a product launch will enable it to recoup at least part of the investment.
Any discussion of the new product development process would be incomplete without consideration of how customers learn about new products, try them and either adopt or reject them. Clearly, an understanding of these processes is vitally important to marketers seeking to build an effective marketing strategy.
Rogers and Shoemaker8 have contributed much to theories of adoption and diffusion, including the concept of the early adopter. This theory holds that just as some firms are more innovative than others, so some individuals are more ready to try new products than others. Its two other main premises are:
Early adopters have characteristics which distinguish them from others.
Early adopters tend to be ‘opinion leaders’ and are therefore able to play a major role in promoting the new product to others.
It has been suggested that an adoption curve9 like that in figure 4.7 is representative of the way new products diffuse through a population or market segment.
Figure 4.7 The adoption curve
As can be seen, the adoption process is represented as a normal distribution when plotted over time. In the earliest stages it takes time for the market to become aware of the product and only the more adventurous consumers prove willing to try that which is new. These are the innovators. It is hypothesised that this group will represent around two percent of those who eventually buy the product. The next wave of acceptance comes from early adopters.
Rogers and Shoemaker8 suggest that the 5 adopter groups differ in their value orientations. Innovators are perceived by Rogers to be Risk-takers who are keen and able to try that which is new. Early adopters tend, according to Rogers, to be opinion leaders within their communities. They adopt innovations fairly early on but do so with some care and are then in a position to influence the adoption behaviour of others. Marginally more deliberate in their decision as to whether or not to try the product are those classified by Rogers as the early majority. The early majority adopt certain innovations before the average person but they are rarely leaders. The late majority are rather more sceptical or averse to risk than those mentioned in the foregoing groups. They wait until the product or perhaps its technology - is in some way proven. Their proof usually takes the form of positive experiences on the part of those who have earlier adopted the product. Roger's final group are termed the laggards. Laggards are less open to change, are more traditional and usually adopt the ‘innovation’ when it has taken on a measure of tradition itself.
Clearly it is the innovators and early adopters which would seem to be the prime targets for a firm launching a truly new product. However, no matter how intuitively appealing Rogers' hypotheses regarding the separable characteristics of these 5 groups, no one has established the existence of traits unique to innovators or early adopters. Rather, empirical evidence suggests that individuals tend to be innovators in some respects and laggards in others. Hence, we encounter the housewife who is sceptical about the new methods of education which her children are being subjected to, but is the first in the neighbourhood to experiment with the dishes she presents on important social occasions when, if she makes a mistake, it could all go badly wrong.
Thus, the challenge for companies is to identify the characteristics of ‘early adopters’ in its product areas. Fortunately, there are some research findings to encourage the manufacturer in this pursuit. There are studies which appear to have shown that, for example, innovative farmers tend to be better educated than their contemporaries. Other studies have concluded that innovative housewives are more gregarious and of a higher social status than their not so innovative contemporaries. Rogers9 put forward the following hypothesis about those who are quicker to adopt innovations:
“The relatively earlier adopters in a social system tend to be younger in age, have a higher social status, a more favourable financial position, more specialised operations, and a different type of mental ability from late adopters. Earlier adopters utilise information sources that are more impersonal and cosmopolitan than later adopters and that are in closer contact with the origin of new ideas. Earlier adopters utilise a greater number of different information sources than do later adopters. The social relationships of earlier adopters are more cosmopolitan than for late adopters, and earlier adopters have more opinion leadership.”
Whilst the conclusions reached by Rogers offer some hope to marketers, there remains the problem of measuring some of these ‘indicators’. For example, the are no reliable indices of phenomena such as gregariousness, cosmopolitan outlook and degree of opinion leadership.
A widely accepted hypothesis is that the characteristics of an innovation affects its rate of adoption. Five characteristics have been suggested as being particularly influential in determining the rate of adoption of any innovation.
|Relative advantage||The degree to which the product is perceived to be better than alternatives will directly influence the speed of adoption. Thus, the truly innovative product, which offers a meaningful benefit to consumers, is likely to gain widespread adoption more quickly than a “me-too” product. Hence the level of acceptance of long-life milk among rural populations since the product has the advantages of longevity, hygiene and convenience (i.e. no need to own a refrigerator) over fresh liquid milk.|
|Compatibility||Any innovation which closely matches the target audience's values and experiences is better placed to be accepted. When microwave ovens were first introduced they met resistance because of traditional values and experience. When International Harvester launched the Axial Flow Combine Harvester it met strong resistance because of the new machine's unconventional style of operation. The technique employed when operating a conventional combine harvester is to ease slowly into the crop and to gradually gain speed as the material feeds through the machine. The technique for operating an axial flow harvester is the complete opposite. That is, the axial flow combine harvester enters the crop field at high speed. For many combine operators the change to the new technique was not easy to make since it was incompatible with practices that had become intuitive. It simply did not ‘feel right’ to operate a combine harvester in the way required by the axial flow machine and the operators became a serious barrier to adoption.|
|Complexity||Where the innovation is relatively difficult to understand or use adoption tends to be slow. Hence the slow and difficult progress achieved by extension workers who sought to encourage peasant farmers in Peru to adopt agrochemicals. The machinations of chemistry were, and probably remain, a mystery to those farmers. Since they could not understand how or why it should work, the farmers were consequently slow to take up the practice of applying expensive powders, liquids and pellets to the land.|
|Divisibility||Innovations which can be tried on a limited basis thereby limiting the risk in adoption diffuse much more rapidly. In this respect, agrochemicals and new seed varieties have an advantage in that a farmer can apply them to a part of his/her acreage and observe the results.|
|Ease of communication||The extent to which the results of using an innovation are observable and/or describable to others greatly influences the rate of adoption. Thus, since fungicides take effect over time and their chemical action is incomprehensible to most peasant farmers, their adoption rates tend to be slow. Conversely, the concept of fermentation of milk is well known, even amongst rural peoples, and so the concept of long-life milk is readily understood among both urban and rural populations.|
It would be misleading to suggest that these 5 factors are the only influences on the rate of adoption; initial cost, maintenance cost, risk, uncertainty and social approval are mere examples of other influential factors. However, the 5 outlined would appear to be central considerations in the case of all innovations.
Whilst new product innovations carry a substantial level of risk, due to the high failure rate of new products, business enterprises which complacently continue with their existing portfolio of products are, in the long run, likely to struggle to sustain profitability and growth. This becomes apparent when it is recognised that products have a life cycle with an infancy, a period of fast growth, before entering their mature phase, but ultimately falling into decline and coming to an end. However, commercial enterprises that do introduce new products must strive to maintain a balance between innovative products, which are likely to be net cash absorbers, and more mature products with the capacity to generate cash.
At each stage, as innovations move from an idea to a marketed product, the costs for the innovating organisation increase substantially. Therefore, innovators would be well advised to implement a procedure for new product development that provides them with the opportunity to abandon a potential innovation at each stage of that process if the information available suggests that the likelihood of failure outweighs that of success. The marketing literature provides a template of just such a procedure: idea generation, idea screening, concept testing, business analysis, technical development and test marketing. Each of these discrete stages in the new product development process provides the prospective innovator with the information necessary to adjudicate between continuance and abandonment of the prospective innovation.
The study of the new product development process is not only about innovation, it also involves seeking an understanding of the adoption and diffusion processes. Research suggests that adopters of an innovative product can be classified as innovators, early adopters, the early majority, the late majority and laggards. Innovators tend to be risk-takers, the early adopters are likely to be opinion leaders within their community, the early majority deliberate more over their acceptance or rejection of a new product, the late majority are rather more averse to risk and laggards are less open to change, taking on an ‘innovation’ when it has become somewhat traditional itself. Clearly then, the key to market penetration for a new product is to identify and persuade likely innovators and early adopters of its benefits, bearing in mind that individuals will be innovators/early adopters with respect to some types of new product but late adopters of others.
It is widely held that the inherent characteristics of an innovation greatly influence whether it is adopted and the rate of its adoption. The key characteristics appear to be the innovation's relative advantage over alternative products or technologies, compatibility with existing practices and values, the complexity of the innovation, the extent to which it can be tried on a limited basis and the degree of ease with which both the characteristics and benefits of the innovation can be communicated.
|Adoption process||Concept tests||New product development|
|Boston matrix||Diffusion||Niche markets|
|Cash absorbers||Growth-share matrix||Product life cycle|
|Cash generators||Idea generation||Product portfolio analysis|
What do concept tests measure?
Name the 4 categories of products to be found in the Boston portfolio matrix.
Why might it be disadvantageous having a number of products whose sales are increasing rapidly?
What sort of information might a test market provide?
List the 5 aspects of a new product which greatly influence its rate of adoption.
List the 6 steps of a test market.
Name 3 possible sources of new product ideas internal to an organisation.
What are the 4 reasons why concept tests sometimes perform badly in predicting market performance?
Name the 5 categories of adopters of innovations hypothesised by Rogers.
What are the main tasks of marketing managers prior to the launch of a new product?
1. Booz, Allen and Hamilton (1982), New Products Management For The 1980s, New York.
2. Heldey, B. (1977), “Strategy And The Business Portfolio”, Long Range Planning, February 1977, p. 12.
3. Kohls, R.L. and Uhl, J.N. (1990), Marketing Of Agricultural Products. (7th ed), Macmillan Publishing Company, New York, p 76.
4. Moore, W.L. (1982), “Concept Testing,” Journal of Business Research, No. 10, pp. 279– 294.
5. Curtis, R. and Gunetileke, K.G. (1986), “Market Need For Vegetable Drying In Sri Lanka”. In: Market Research For Food Products And Processes In Developing Countries. (Eds.) Young, R.H. and MacCormac, C.W. International Development Research Centre, pp. 31– 37.
6. Rothwell, R. (1972), “Factors For Success In Industrial Innovations”. In: Project SAPPHO - A Comparative Study Of Success And Failure In Industrial Innovation. (Ed.) Rothwell, R. Brighton, Sussex, Science Policy research Unit.
7. Kasenge, V. (1984), “Developing A Marketing Plan For Certified Seed In Uganda”, Unpublished M.Sc. Thesis, Silsoe College, Cranfield University, Bedford, UK.
8. Rogers, E.M. and Shoemaker, F.F. (1971), Communication Of Innovations, Free Press, New York.
9. Rogers, E.M. (1962), Diffusion Of Innovations, Free Press, New York.
10. Cardino, A. (1986), “Market Need For Grain Drying In The Phillipines”. In: Market Research For Food Products And Processes In Developing Countries. (Eds.) Young, R.H. and MacCormac, C.W. International Development Research Centre, pp. 93–100.
Bibliography - New product idea generation techniques
Arnold, J.E. (1962), “Useful Creative Techniques”, In: Source Book For Creative Thinking, S.J. Parnes and H.F. Harding (eds.), Scribners, New York.
Greenhalgh, C. (1971), Research For New Product Development.
Lanatis, T. (1970), “How To Generate New Product Ideas,” Journal Of Advertising Research, 10, June 1970, pp. 31–35.
McGuire, P.E. (1972), Generating New Product Ideas, The Conference Board, New York.
Osborn, A.F. (1963), Applied Imagination. (3rd ed.)
Tauber, E.M. (1975), “Discovering New Product Opportunities With Problem Inventory Analysis,” Journal Of Marketing, January 1975.