Chapter 12- Developing New Products

Question 1

What is innovation?

Answer 1

The process by which ideas are transformed into new products and services that will help firms grow

Question 2

Why do firms create new products?

Answer 2

• New market offerings provide value to firms and customers
• Changing customer needs
  How? identify problems, develop products customers never knew they needed
• Market saturation
  Happens when a product is in the market for a long time
  So companies need to innovate and revamp their products often

Offers opportunities for a company willing to adopt a new process, enter niche markets- fosters growth

• Managing risk through diversity
  Innovation allows firms to create a broader portfolio of products: diversify risk, enhance firm’s value

Multiple products: withstand external shocks e.g. changes in consumer preferences, intensive competitive activity

• Fashion cycles
  Most sales come from new products in insures that rely on fashion trends and experience short product life cycles (e.g. arts, books, software)
  E.g. fashion houses produce entirely new product selections a few times per year
• Improving business relationships, improve relationship with suppliers

Question 3

How do new products spread through a population?

Answer 3

Diffusion of innovation:
bell-shaped curve

Purchasers divided into 5 groups according to how soon they buy the product after it has been introduced:
innovators, early adopters, early majority, late majority, laggards

Question 4

What is diffusion of innovation?

Answer 4

Process by which the use of an innovation- whether a product, service or a process- spreads throughout a market group, over time and across various categories of adopters.

Question 5

What are pioneers or breakthroughs?

Answer 5

New product introductions that establish a completely new market or radically change both the rules of competition and consumer preferences in a market

However, not all pioneers succeed. In many cases, imitators capitalize on the weaknesses of pioneers, subsequently gaining advantage in the market.

Also, since first product, often has less sophisticated sign, priced relatively higher

Question 6

What are first movers?

Answer 6

Product pioneers that are the FIRST to create a market or product category, making them readily recognizable to consumers and thus establishing a commanding and early market share lead.

Question 7

Reasons most new products fail?

Answer 7

• Firms fail to assess the market properly bc they neglect appropriate product testing
• Targeting the wrong segment
• Poor positioning
• Overextend their abilities by venturing into products inconsistent with their brand image

Question 8

Break down of categories of customers in Innovation Diffusion model:

Answer 8

Innovators:
Buyers, representing approx. 2.5% of the population, who want to be the first to have the new product/service

Early adopters:
The second group of consumers in the diffusion of innovation model to use a product/service innovation. Represent approx 13.5% of population

Early majority:
A group of consumers in the diffusion of innovation model that represents about 34% of population
Don’t like to take much risk and therefore tend to wait until bugs are worked out of a particular product/service.

Late majority: Last group of buyers to enter a new product market, represents approximately 34% of population. When they enter, product has already achieved its full market potential

Laggards:
Consumers, represent approximately 16% of pop.
Like to avoid change, rely on traditional products until they are no longer available.
Sometimes they never adopt a product/service

Question 9

Factors enhancing diffusion of innovation model:

Answer 9

1. Relative advantage
   Diffusion will be fairly quick if product is perceived to be better than substitutes

Rogers: perceived benefit of an innovation relative to the alternative it seeks to replace
(e.g. reduced cost, greater productivity etc)
can be economic, social
as the relative advantage increases, so does the rate of adoption

2. Compatibility
   Diffusion process may be faster/slower depending on various consumer factors
   e.g. international cultural differences
   Rogers: degree to which an innovation is perceived as consistent with its existing values and experiences of the potential adopter
   Compatibility can be with values and beliefs, or one’s needs (can be compatible or incompatible)
   As compatibility increases, so does the rate of adoption
3. Observability
   Rogers: “the degree to which the results of an innovation are visible to others”
   When products are easily observed, their benefits or uses are easily communicated to others. This enhances the diffusion process.
   e.g. Blendtech YT campaign: Will it Blend?
4. Complexity and trialability
   Less complex products are relatively easy to try
   The less complex and the easier to try, the better (rate of adoption increases)
   e.g. put space in stores to allow customers to try using household products

Question 10

Steps of the product development process?

Answer 10

1. Idea generation
2. Concept testing
3. Product development
4. Market testing
5. Product launch
6. Evaluation of results

Question 11

Parts of idea generation?

Answer 11

use R&D, reverse innovation (turning to subsidiaries in less developed markets for new product ideas) R&D consortia (groups of other firms and institutions), brainstorm, licensing (buy the rights to use a technology/idea from another firm), outsourcing (hire outside firm to generate ideas and dev. new products and services) e.g. IDEO

Also:
Competitor’s products: reverse engineering: taking apart a product, analyzing it and creating an improved product that does not infringe on competitor’s patents

Customer input: listen to customer in B2B and B2C markets
e.g. online feedback, surveys or analyze lead users: innovative product users who modify existing product according to their ow ideas to suit their specific needs

Question 12

Parts of concept testing

Answer 12

Concept testing: process in which a concept statement that describes a product/service is presented to potential buyers or users to obtain their reactions

use the research techniques to conduct e.g. qualitative + quantitative

Most important question: respondent’s purchase intentions if the product/service were made available

Question 13

Parts of Product development?

Answer 13

Entails a process of balancing various engineering, manufacturing, marketing and economic considerations to develop a product’s form and features or a service’s features.

First develop prototype: first physical from or service description of new product

Alpha testing: attempt by the FIRM to determine whether a product will perform according to its design and whether it satisfies the need for which it was intended. Occurs in R&D dept.

Beta testing: Have potential CONSUMERS examine a product prototype in real-use setting.
(determine functionality, performance, potential problems, other than issues specific to its use)

Question 14

Parts of market testing?

Answer 14

1.Premarket tests
2. Test marketing

Question 15

Premarket tests?

Answer 15

conducted by firm to determine how many customer will try and continue to use the product
e.g. NIELSEN BASES (customers exposed to the marketing mix variables, surveyed and given a sample of product to try). Then asked with they would buy/use the product again

Sometimes also simulate the introduction of the product through advertising

Question 16

Test marketing?

Answer 16

Method of determining the SUCCESS POTENTIAL of new product
- introduces offering to limited geographic area prior to a national launch
- includes all elements of marketing mix

Study actual purchase behavior
Includes promotions and advertising

Question 17

What happens at product launch?

Answer 17

Happens if market testing returns with positive results:

Decides how product will be positioned (using data gathered + marketing mix)
Finalize remaining marketing mix variables including marketing budget for first year

Question 18

How is evaluation of results carried out?

Answer 18

• Panel data to estimate market demand

For products that move on:
Look at:
- satisfaction of technical requirements
- customer acceptance
- satisfaction of firm’s financial requirements e.g. sales and profits

Question 18

Stages of product life cycle?

Answer 18

1. Introduction
2. Growth
3. Maturity
4. Decline

*not evert product follows the same life cycle curve. Many products, e.g. home appliances, stay in the maturity stage for a very long time

Question 19

Detail the introduction stage of the product life cycle:

Answer 19

Innovators start buying the product
Usually starts with a single firm

Sensing the viability and commercialization possibilities of some-market creating new product, other firms soon enter the market with similar or improved products at lower prices.

Initial losses to the firm, low levels of sales revenue

Successful products’ firms may start seeing profits toward the end of this stage

Question 20

Detail the growth stage of the product life cycle:

Answer 20

Product gains acceptance, demand and sales increase, and competitors emerge in the product category.

Growing no of product adopters
Market becomes more segmented

Firms attempt to reach new consumers by studying their preferences, producing different product variations: ride rising sales trend, firmly establish firm’s brand so not be outdone by competitors

Question 20

Detail the maturity stage of the product life cycle:

Answer 20

Industry sales reach their peak, so firms try to rejuvenate their products by adding new features/repositioning them

Adoption of product by late majority, intense competition for market share among firms

Increase in marketing costs
Intense competition on price

Market has become quite matured

Firms will pursue various growth strategies e.g. market dev, diversification, product dev, market penetration and entry into new markets/market segments

Question 21

Detail the decline stage of the product life cycle:

Answer 21

Sales decline, product eventually exits the

Either position themselves for a niche segment of die hard consumers, those with special needs or completely exit the market

Question 22

What is the shape of the product life cycle curve?

Answer 22

Bell-shaped BUT every product/service category has their own individual shape
Depends on how different the category is from offerings currently in the market and valuable it is to the consumer

Question 23

Some caveats of product life cycle?

Answer 23

Hard to tell where product is in the cycle Hard to tell what shape the product's life cycle is e.g. if decline, could be because of poor strategy or increased competition (issues that could be solved with better marketing support)

Question 24

What are Roger's five factors?

Answer 24

Five product-based characteristics that explain why some products diffuse faster than others 1 Relative advantage 2. Compatibility 3. Complexity 4. Triability 5. Observability Look at these as the perceived by the potential adopter