CHAPTER 6

Product Commercialisation
Introduction

The aim of commercialisation is to change the final product prototype into an innovative
commercial product that can be launched onto the market. This is still a creative
procedure but it is extremely focussed so that the marketing is integrated with the
production, and finance is making the funds available but controlling expenditure. It is an
expensive stage and needs good financial control to ensure that resources are available at
the right time and that costs do not overrun.

Time also needs to be planned and controlled so that there is no delay. Time is of the
essence because there is now a launch date to be considered, and once that is determined
then activities are timed and their timing controlled. The aim is to launch at a specific
time. If the length of time for commercialisation is increased, either the launch may have
to be delayed perhaps up to a year in order to market at the correct season, or everyone
rushes to launch and the product is not of the correct quality, or production cannot
produce it in sufficient quantities or marketing cannot obtain the correct distribution.

Outcomes and activities in product commercialisation

From the product specifications, the marketing strategy and the final prototype product,
commercialisation builds into three important functional plans (marketing, production
and finance) and then into an overall operational plan. These are combined together as
shown in Figure 6.1, which shows the different outcomes needed in each plan. The
outcomes from the three plans are combined in an operational plan for the launch. After
the launch there is a review of the final outcomes.

MARKETING PLAN PRODUCTION PLAN FINANCE PLAN OPERATIONAL PLAN

Objectives Product qualities Costs, prices profits Production capacities and
inventories
Product description Raw materials Cash flows Selling organization
Market strategy Processing Capital investment Promotion organization
Market channels Process control Working capital Finance and financial
controls
Physical distribution Storage & transport Return on investment Full scale introduction
Pricing Quality assurance Risk analysis Post-launch evaluation
Knowledge required for the marketing plan

The following operating functions are included in the marketing plan:

 Market information - market research and analysis, particularly the targets to be
set for the launch and post-launch and the methods to monitor these;
 Product - product proposition (product concept), packaging, branding, image;
 Market channel and distribution - choice, control and development of market
channels, transportation, storage;
 Pricing - price range, relation of price to demand, margins, discounts, specialing;
 Promotion - retailer and consumer promotion, advertising, public relations;
 Sales - methods of selling, terms of sale, sales reporting, analysis and forecasting.

Market information
The aim of information is to provide knowledge of both the consumer and the retailer as
the basis for a successful marketing strategy, and also to predict the number of units that
will be sold and revenue generated in order to set the targets for the post-launch analysis
of the success of the marketing. The questions to answer are:
 What will be the consumers' purchasing and repurchasing behaviour?
 What will be the consumers' reactions to the prices, the promotions?
 What are the predicted pessimistic, most likely and optimistic sales units and
revenue over the next months, years?
 What are the predicted competitive reactions?
 What are the predicted market shares?
Before the marketing plan is developed, there should already be a comprehensive
description of the potential consumers in the target market segment. With the 'line-filler'
type of product, the company will know the consumer from previous marketing efforts.
For the innovative product, market research, using either a survey or a product test or
both, will provide information to predict the potential consumption rate. For the purpose
of sales forecasting, the company needs to know the total number of potential customers
and the potential consumption rate. From this type of data and allowing for direct
competition, it is possible to make an estimate of the probable sales in conjunction with
estimates from other sources.

There are short-term or launch forecasts and also monthly or yearly long-term forecasts.
The intervals of forecasting depend on the predicted product lifecycle. If it is a one-
season product with a life between three and six months then monthly sales at least need
prediction. For the longer life product of five to ten years, then monthly sales for the first
year and yearly predictions after that are often used.
Product
The aim is to have a product the consumers will buy. Some of the questions to answer
are:
 Is the product what the consumers want?
 Does it have the benefits wanted by the consumers?
 Does it have the desired characteristics wanted by the consumer (sensory, ease
of use, safety, nutrition, psychological)?
 Is it packaged correctly?
 Is the pack the right size?
 Is the pack attractive at the point of sale?
 Are the product and the pack legal? ethical?
 Does the brand suit the product?
The product characteristics, benefits, packaging type and size, brand and packaging
aesthetics, product image and the final product proposition to be presented to the retailer
or the industrial customer are identified and then integrated into the complete product
description for the market plan. The services provided for the industrial customer need
to be identified such as delivery, packaging, technical help.

Packaging

The aim of packaging is to present a unique design which will stand out on the retailers'
shelves and in the kitchen, encouraging consumers to buy and use the product. The
packaging design consists first in choosing a brand and a product name, and then
developing a graphic package design. In choosing the brand, there is the decision
whether to use a family brand name or a product brand name or both. Products have been
seen on supermarket shelves with three brand names, but this is confusing to the buyers!
A family brand name gives recognition and reassurance to the consumer but must have
strong associations with the new product. The product name needs to be readily
recognised by the target consumers and instantly related to their food preferences and
also related to the benefits they see in the product. Name selection is achieved through
the typical process of idea generation and screening, with strong involvement by the
consumer. The graphic design should be attractive but also informative, giving details on
the ingredients, the nutritional value and how to use the product. There are also legal
requirements from the Food Regulations which must be followed.
Market channel and distribution

The aim is to make the product available at the right price at the right place at the right
time. The questions to answer on the marketing of the product are:
 Who will sell it?

 How will it be sold?

 How much will be sold?

 How will it be transported?

 How will it be stored?

 How will it be displayed?

 How will it be promoted by the retailer?
The type of market channel will have been identified but there is also a need to analyse
the people/organisations involved so that the product can be sold effectively with
control over and integration of selling and buying.
The overall system of food production is so complicated today, with international
movement of raw materials, ingredients and consumer products, that the whole system
from the agricultural and marine producers to the final consumer needs to be studied,
not just the immediate market channel of the product from the company to the retailer.
The domination of large multinational agricultural companies, processing companies,
supermarkets and fast food restaurants means that they control or at least strongly
influence the market channels. But there are still many small companies such as family
bakeries, restaurants, coffee shops, market stalls, family stores, which need to be
reached and the distributing company has to decide if they do this themselves or work
through agents and wholesalers. Small companies, especially in food exporting, need to
have agents or distributors to organise their market channel.

In studying the market channel, the coverage of the target market achieved is
determined, the costs estimated and the sales predicted for the different types of outlets
in the market channel. The logistics are important, especially in export marketing. The
locations of the plants, storage facilities and the customers in the distribution system,
the transport available, the inventory held in the total distribution system and the losses
in quantity and quality of product in the system need to be investigated so that the
optimum system for quality of product, sales and costs can be determined.

Most companies have an established distribution system and cannot change it to suit one
new product. However, the launch of a new product is a good opportunity to study the
alternatives if there are any. In the marketing of pre-packaged consumer food products,
the supermarket has become the all-important means of achieving distribution, but there
may be an opportunity to look at alternatives such as home selling.
Pricing
The price aim is to have a product giving 'value for money' for the consumer but at a
price that will produce the desired sales revenue and profit for the company. Company
pricing issues include the list price, discounts, allowances, payment period and credit
terms. The list price is based not only on the company costs plus the profit and the
advertising budget, but also on external factors that affect price. The questions to answer
are:
 What price range will the consumer accept?
 Does the consumer have any psychological attitudes to price?
 What is the relationship between sales forecasts and prices?
 How does the price relate to competitors' prices?
 What are retailer and wholesaler margins, agent percentage?
 What price specials, discounts may be needed?
 What are the subsidies, the taxes, the exchange rate?
 What are the basic company costs, the advertising allowances, the company
profit? Do they vary at different levels of outputs and sales?

Pricing is not a simple matter for a new product because of the many factors to be taken
into account, but in food marketing there is little scope for a great deal of movement in
price once the company has decided on its basic cost structure, pricing policy and the
position of the product on the market. A major decision is where to position the product
in the price range for this type of product: at the top as high quality, in the centre as
good quality or at the bottom as 'cheap'. In launching new products, two pricing policies
are particularly important: market skimming, where the price is set high to recover
development costs quickly, and market penetration where the price is set so that the
consumers will buy quickly and the main market is penetrated before competitors can
react.

6.3.4 Promotion
The aim of promotion is to make the consumers aware of the product and encourage
them to buy the product at the rate of sales growth desired by the company. Promotion
includes advertising, personal selling, sales promotion and publicity. The questions to
answer are:
 Who are the target consumers?
  What is the product image?
 What is the message that has to reach the consumers?
 What promotion is needed to convey this message?
 What promotional methods are available?
 What budget is there?
For a food innovation, the consumer is made aware of the product, educated about its
use and benefits, and encouraged to try it. Although TV advertising is often used for
new food products because it reaches a large number of consumers very quickly, it may
not be the most effective choice. Demonstrations and tasting can encourage the
consumer to try the product and to remove some of their doubts about it because of its
‘newness’. Promotion is also to the retailer, an important intermediary on the way to the
consumer. Because of the difficulty of persuading supermarket managers and owners to
give shelf space to a new product, retailer promotion is being given a larger proportion
of the promotional budget.
The promotional budget is the sum of money available for spending on the launch and
is usually calculated as the amount needed for a given annual sales target rather than a
fixed percentage on expected sales. Promotion as percentage of turnover may be as high
as 30% or 40% in the initial stages of a product's life; this may be justified as being
necessary to achieve maximum distribution quickly and to bring notice to the company's
other products as a whole. How much should be allocated to a new product for the
purpose of the launch is difficult to decide rationally - there is seldom a model
correlating sales with promotion for a new product. The next step is to assess whether
or not the product is worth such a promotional budget, taking into account the purpose
for which the product is being introduced. If it is not, then either work on a reduced
sales forecast and budget or leave the market to someone who will find it worthwhile.
As can be seen in some of the Case Studies throughout the text, even some large
companies have not learnt this lesson. The whole situation is rather unsatisfactory but
there are techniques to put the promotional budget decision on an analytical footing if
the company and the industry has collected the requisite data.

Selection of the advertising mix presents similar problems to budget determination, and
sometimes precedes it. Decide what you want to do and then allocate the budget to do
it! The obvious prerequisites to the selection of methods of promotion are to know
whom the promotion is aimed at and what it is trying to do. The people to influence are
usually the purchasers and all those who affect their decisions, and of course the final
consumers who eat the food. The aims of the promotion may be to produce immediate
sales, to stimulate brand recognition and to 'educate' the consumer on a new type of
product benefit or characteristic. When the target people and the reasons for the
 promotions are decided, logical selection of media can commence. There are reasonably
good quantitative techniques for this task, but it is still frequently left to experience and
value judgements.

6.3.5 Sales
The sales aim is to achieve the sales targets that have been predicted at the budgeted
costs. This needs organisation of the sales areas and the sales personnel. Sales targets
are set for the sales areas and the individuals, and the sales people are organised to
achieve these sales. Training is provided before the market launch, so that sales people
have knowledge of the product, the market research, pricing and promotion and know
how to sell the product. Sales calls before the launch and merchandising (shelf display
organisation) during the launch are needed to achieve the necessary shelf space for the
new products. In the marketing plan the number of such special calls must be detailed to
allow adequate planning by the area managers.
The product proposition is the material presented to the buyer by the sales person. This
will include the product itself, written and oral details of the research behind the
product, the advertising programme, the margins and suggested retail price and any
introductory offer. In supermarkets, the sales person will contact the buyer who then
has the choice of whether to recommend the product to the new products selection
committee or to make the decision themselves. Some companies will sell through a
wholesaler, a food broker or a manufacturers' agent. The sales person has to be
equipped with facts which will convince the buyer, the wholesaler or the agent that the
product is a 'must' to enable them, in turn, to 'sell’ the product to the buying committee.
6.1 The marketing plan

There are several factors that need to be considered when developing the market plan:

 product position in the market;

 stage of the lifecycle for the product class, and therefore the position of the new
product on the product class lifecycle;
 relationship of the new product marketing mix to the overall company
marketing mix;
 interaction of the parts of the marketing mix - market channel with price,
promotion with price, product with promotion;
 quantitative relationship between sales volumes and the various parts of the
marketing mix;
 marketing profitability and efficiency of the marketing mix;
 reactions to the marketing mix of the industrial, social, legal and political
 environments.

A summary of the parts of the market plan is shown in Table 6.1.

Table 6.1 Summary of a marketing plan for a new product

Overall Marketing Plan

Objectives: volume of sales, market area, profit.
Predicted environment: economic, political, social, industrial.
Place of product in product mix (product line): type of product, quality level, price
range, place in line (leader, minor product).
Market segment(s): type(s), location, size, characteristics.
Market channel: type of channel, retail, food service, institutional, industrial;
intermediate organizations (wholesalers, agents, brokers); geographical positions of
all organizations in the channel.
Marketing strategy: strategy outline, target markets, marketing mix, marketing
expenditure level.

Product plan
Product: proposition, uses, characteristics.
Packaging: branding, information, legal requirements, size(s), aesthetics.
Costs and prices
Costs: fixed and variable costs, marginal costs.
Prices: company list price, distributors' margins, retail price.
Sales and distribution plan
Sales organization: personnel, training, launch, post-launch.
Physical distribution: transport, store location, inventory plan.
Sales: reporting, analyzing, forecasting.
Sales targets and budgets: area targets, sales persons' targets, areas and sales
budgets.
Sales promotion: merchandising, sales communications.
Sales evaluation: targets and costs analysis.
Advertising and promotion
Message selection: creative development.
Consumer advertising: press, television, cinema, radio, outdoor posters, public
relations, internet
Consumer promotions: price specials, reduced price offers, competitions, coupons,
free samples
Point-of-purchase: display material, tasting, cooking demonstration.
Trade promotions: incentive schemes, display competitions, sales contests.
Trade advertising: trade journals, trade displays, conferences, publications.
Schedules
Production: times, quantities, quality, losses
Distribution: times, quantities, quality, losses.
Selling: times, launch quantity, future predicted quantities.
Promotion and advertising: times.

In preparing the marketing plan, there are some points to remember:

  The promotional artwork must be completed before the package manufacture.
 There must be sufficient capital to finance the stocks of product and the
introduction costs - the money available will set the limits on your
marketing plan.
 The sales force must be adequately trained before product stocks are built up in
the different distribution centres but after the promotion has been designed.
 Adequate stocks of the product must be available at the time of introduction.
 The promotion should give sales which are related to the sales forecast but also
the production capacity of the plant.

The marketing plan is summarised in a marketing programme, which is an integrated

plan of all activities together with their timing and costs. It includes a marketing budget
with the sales forecasts - volume, revenue and the costs and the gross profits. The plan
is evaluated before final approval. Is it feasible, comprehensive and flexible? Does it
include a schedule, a budget? Is it in written form, in line with company policy? Does it
provide for effective implementation? Has it been carefully reviewed and agreed by the
people who will carry it out? Is it integrated with the production plan?

Practice questions
1. Imagine you are the general manager of the company and you have been presented
with this market plan.
a) Do you think this should be a single product launch or a product line launch?
b) Do you agree with a new brand name? How would you test the suggested name?
c) Do you want to sell high priced, top of the market product when you only go to the
cheap convenience market at the moment?
d) What changes would you suggest to the market plan?
e) Would you give permission for the product launch?

2. Discuss the differences between the market plans for an innovative product, an
improved product and a me-too product.
3. Show diagrammatically the main sections of the three plans.
6.2 Knowledge required for the production plan

A production plan is developed along the same lines as the market plan to ensure that all
the tasks are carried out and completed in time. The main areas in production planning
are:
 raw materials;
 processing;
 quality assurance.

6.5.1 Raw materials

The aim here is to ensure that the raw materials are delivered at the right time and in the
right quantities and of the right quality and at the right cost so that the process runs
successfully. The factors to be considered when sourcing raw materials for both the
product and the packaging are:
 location of the source relative to the plant;
 level of quality required for the raw material;
 price that the product can afford;
 reliability of the supplier regarding specifications and delivery;
 services provided by the supplier;
 uniqueness of the supplier for this raw material.
These factors are listed in order of importance. The most important factor is met first
and so on down the list to determine the most suitable supplier(s) for each raw material.
The raw material might need to be of a specified quality but as it is highly perishable it
needs to be sourced near the plant. Therefore quality and location would be considered
first when choosing suppliers. An important decision is to have either a long-term
association with a supplier or to choose the supplier according to the factors as
conditions change.

It is important to determine the timing and the quantities of ordering, arrival, storage
and use of the raw materials. Some raw materials have very long lag times before
delivery, especially packaging materials and imported ingredients, therefore a schedule
for ordering materials is made out and followed so that all the materials arrive in time to
start production. It is also important that the materials do not arrive too early as this can
cost the manufacturer a great deal for inventory and also materials may deteriorate in
storage. There has been a great deal of emphasis on ‘just-in-time’ production in recent
years, but this can cause a great deal of trouble when starting production for a new
product. It is easier to manage a less tight schedule as it is never certain what is going to
happen. The quantity to be ordered and held in stock depends on the time from order to
delivery, the costs of delivery and storage, the quantity required for a production run
and the number of experimental runs planned. It is preferable to have the same raw
materials for all runs so that the processing effects can be studied.

Another important factor in raw material planning is to study if alternative raw materials
can be used and also if raw materials from different suppliers can be substituted for the
first choice. Then if there are any problems in supply, there are alternatives which can
be obtained quickly. If the product is a greater market success than predicted, it would
be embarrassing and might even kill the product if production had to stop because of
lack of a raw material.

The ways of handling, sorting and preparing raw materials are very important in
the food industry. There is a need to study the materials handling so that it is not
labor intensive and fits into the main process. Also in-line sorting equipment gives
a tighter control and reduces human sorting and judgment.

6.5.2 Processing/manufacturing
The aim of processing/manufacturing is to produce the right quality and quantity of
product at the right time and cost, not only for the launch but for the months ahead.
After the production trial at the end of product design and process development, many
problems will have been identified and discussed with production staff and hopefully
solved in order to make 'start up' as trouble-free as possible. However, just because it
works, it may not be the most efficient and effective way of producing the product. The
factors which need to be studied in processing can be grouped under technical,
economic and human reactions.

Technical factors to consider are the plant design and commissioning, and the process
analysis and control. New plant or new equipment may be needed and this has to be
designed and built or bought; in both cases there need to be engineering specifications
based on the processing requirements, mechanical/electrical design and computer
control. The plant layout and supply of services is important. Sometimes imaginative
new thinking in this area can increase product quality and yields and improve the
overall efficiency and conditions of the plant. It is too easy to be complacent, so look
carefully at movement of materials, employment of staff and bottlenecks in
production.
Economic factors in processing can be summarised as initially setting the lowest
practicable capital and running costs and the required financial returns from the project,
and then ensuring by constant monitoring and fine-tuning that the budget is
implemented. Experience during the development may show a need for reconsideration
of the budget; if a change is required then it is essential that all implications for prices,
profits, predictions and so on are fully explored, understood and taken into account.
Human reactions in a processing line are critical both in getting a new development
off the ground and in the evolving stages. Commitment is a most important ingredient
in implementing change, and development always means change. If the staff want to
make it work then they will, and often this means an extensive selling job to staff at all
levels from the most senior manager to the floor operators. This needs to be done
systematically and comprehensively, and the more effectively it is done the more
smoothly the product development project will move.
In commissioning new plants, several points to remember are:
 Does the product meet specification in terms of quantity, quality, consistency?
 Can the plant be operated and controlled reliably, conveniently, without stress?
 Are the running costs for services, staffing and maintenance as planned?
 Do the plant components match the design stipulations, pricing schedules?
 Has adequate information material been prepared for the instruction of
operating, quality assurance, trouble shooting and maintenance staff?
 Have arrangements been made to remove ‘out of spec' products and other waste
materials from the plant without loss of secrecy?

6.5.3 Quality assurance

The aim of quality assurance is to ensure a product correct for its intended use. Quality
and safety are absolutely essential elements which must be built into new products. The
first step in analysing product safety and quality is to set up systems for Hazard
Analysis Critical Control Points (HACCP) or Hazard Analysis/Risk Assessment
(HARA) or Hazard Analysis and Operability (HAZOP). The steps in studying a
process using HACCP are as follows:
 Establish full specifications for raw materials, processing, product, packaging
and distribution.

 Identify and quantify risks.

 Prepare a full flow diagram for the process.
 Identify critical control points (CCPs) along the processing and distribution line
using risk assessment techniques.
 Establish measurements and set points and limits necessary at each CCP for
adequate and safe control.
 Establish and define criteria for tolerable departure from set points, and
corrective action to be taken to maintain control.
 Establish a monitoring regime; review the procedures for the HACCP system.
HACCP was originally introduced to ensure the safety of food, but it is now also used to
ensure product quality. Process control is based on the HACCP system, using computer
controls, total process modelling systems and process optimisation, and in-line testing.
Process control techniques are improving rapidly and will make this area of the product
development process more quantitative and less empirical. The process study also needs
to ensure that there is integration of the new process technology into the existing system
with minimum disruption and cost.

From these studies a quality assurance plan is developed, which includes the controls
and testing required during the process and the testing of the final product. Quality
assurance includes the sampling, testing and control procedures, the targets for each,
and the statistical control methods needed to study any changes that are occurring.
Companies must decide how far to take these when choosing the quality assurance
standard (ISO 9001, 9002, 9003) for their production. There may be a need for new
testing equipment and certainly for the training of staff. Once the plant is running,
tolerance limits will be finalised but they should be provisionally set well before then.
Production as well as quality assurance staff need to know the new requirements as they
are often the first to notice ‘out-of-specification' product. Quality assurance is integrated
into the company's TQM (total quality management) which takes into consideration all
aspects of the business that affect quality. Process analysis is one of the most important
tools in TQM.

The most important factor in building quality into production is the staff and the
communications between them. There is a need to have regular exchanges of
information both verbal and written between production and marketing, but especially
between the designers of the process and the production and quality assurance staff.
There should be cooperation between staff. Nothing is more likely to be disastrous
than the design team running the production trials. The production staff needs to run
the production with back-up and technical advice from the designers. Accurate and
timely information is not only crucial for effective management control, but it also
improves staff commitment and morale across departments.
A set procedure is needed; the production trial will require details from the design and
production managers on:
 quantity required, plant capacity/capability;
 reasons for trial;
 trial control methods;
 review methods for problems;
 personnel involved and contact methods.
  contingency plans;
 contamination and safety potential.

Other useful communication methods include factory trial requests, production sheets,
quality assurance sheets, product costing and a planning schedule, as well as the
production specifications and an outline marketing strategy. The regular critical
decision points should be identified so that all understand when production
development is to continue and when it is to stop. Staff education about the new process
is important.
There are information security problems during these trials, as there is a need to keep
information away from competitors, so there will be constraints on communication and
staff must fully appreciate and respect the need for confidentiality.

6.3 The production plan

The production plan includes careful consideration of:

 product specifications,
 raw materials,
 processing,
 distribution,
 quality assurance,
 personnel,
 costs,
 Timing schedules.

The production trial is developed after trial runs have solved any problems with the raw
materials and processing. This may be just two or three runs if a standard process is to
be used but many months even years for an innovative process. The initial production
plan usually is gradually changed as the production outputs are increased. The product
developers should cooperate with the production staff in developing the plan, but
responsibility for the production plan is with the production/technical manager.

6.4 Knowledge required for the financial plan

From the marketing and the production studies comes information on the costs, prices,
quantities and investment needed to launch the product and to continue producing and
marketing the product in the future. There are predictions on the relationship between
production outputs and costs, the fixed costs and variable costs, the price range and the
relationship between price and demand, the capital investment for new plant, the
investment needed for launching both by production and marketing, and the working
capital needed during the launching and post-launch.
 From this information the finance team, with its knowledge of loans, interest rates,
taxes, subsidies, import duties and exchange rates, can determine inward and outward
cash flows (sales revenue and costs) for future years and the investment costs during
the same periods. From this, they can determine the profits and the total investment,
and then determine the return on the investment. The cash flows are usually discounted
so that future cash flows are brought to present-day values. These predictions are
compared with the company's financial targets and constraints. As these are predictions,
it is important that the probabilities of achieving them are estimated.

6.5 The financial plan

This consists of the prediction for the next few years of:
 costs;
 prices;
 profits;
 inward and outward cash flows;
 investments, both investment capital and working capital;
 returns on investment;
 predictions of financial variations due to product, market, company and economic
changes.

Possible changes in technology and consumer expectations also have to be taken into
account in developing the production and market plans (see Case Study 6).

6.6 The pre-launch trial

The next stage is to integrate the production, market and financial plans in one pre-
launch trial. Once the results of this are known, the final overall operational plan for the
launch can be organised. With a product which is using the existing production and
marketing facilities, there may not be a need for additional test production and marketing
and the product will go straight into the launch; or if there is some doubt there can be a
'rolling' launch, with the product introduced into a series of areas. But there is still a need
to research the production and the marketing so that it can be improved as the launch
proceeds.
Test marketing is not undertaken when:
 Time into the market must be as short as possible because the product is
vulnerable to competitors who can easily copy the product and launch their
competing product onto the market;
 Research is convincing that the product will be successful and it does not
justify the extra expense;
 The new product is a line-filler or a me-too; the launch costs will not be high
and so the losses are small in the event of a failure;
 There is confidence that any technical problems will not affect the product quality.

Production and market testing brings the product through the production sequence in the
production plan and puts the product on the market under the market plan in controlled
conditions in a restricted area. On the production side, the raw material quality and
quantity need to be monitored along with, most importantly, the yield and quality of the
product. Any equipment problems such as breakdowns and the staff needed also need to
be monitored. Also there is a need to monitor the process variables and to identify any
tendency to wander outside the set limits, either intermittently or in a set pattern.

It is very important to monitor not just the sales of the product, but to check how the
product is performing in distribution, storage and in the supermarket, the retailers'
attitudes to the product and their placement and promotion of the product in the
supermarket, and of course the consumers' attitudes and behaviour towards the product.
Are they buying again? How much are they buying? What do they like/dislike in the
product?

This monitoring usually leads to improvements in product, production and quality

assurance and also often signals desirable changes in distribution and marketing
methods. The pre-launch trial is a time of constant improvement of the product, of
reduction in production costs and of increase in the effectiveness of the marketing
methods. In industrial marketing, the general stages are the same but the product is
being developed for use by a customer in their process or the chef in food service,
so there has to be knowledge of how the ingredient is behaving in the customers'
processes and their products. Product testing is preferably undertaken with the
customer in their own plant, but because of the customer's needs for secrecy it
may have to be undertaken in the supplier's pilot plant. Other factors to consider
are the area of market testing and the length of time the marketing and production
testing will last. The test market area needs to be representative of the total market
in terms of the consumers, the retailers and the marketing mix. The time for the
 market test depends on the average repurchase period, the competitive situation
and the cost. It is necessary to observe a few repeated purchases of the product to
see if the product will be a long-term success. If this period is likely to be very
long, then buyer interviews can be used to predict repeat purchasing. Competition
may come in very fast and either launch their product or upset the market by
pricing specials, forcing the test to be shortened. Production testing is continued
until the process stabilises.

The test market can be in one or two market areas, or just in one or two supermarkets.
The sales of competitive products are determined before the new product is introduced
and during the test both the competitive products and the new product sales are
monitored. With two areas, one area can have the product introduction and the other
area does not; this gives some idea if the observed effects arise from the product or from
some other cause in the whole market. Usually as well as undertaking a retail sales
audit, consumer panels or buyers' surveys are conducted to determine consumer
reactions.

From the production and market tests, information can be found on production
efficiency, product quality variations, costs, market share, and relationship of new
product to main competing products in terms of consumer acceptability and sales, and
also the predicted sales for the total market. The company will then have a realistic idea
of how the product will fare in the national market, and of any minor improvements
needed to the production and the marketing.

6.7 Overall operational plan

The overall operational plan gives the final directions for the production and marketing.
It contains information on:
 building production capacities and inventories,
 organising selling and promotion
 organising financial controls,
 full-scale introduction,
 post-launch evaluation.
The different activities in the operational plan are shown in Table 6.2.
Table 6.2 The operational plan
Building production capacities and inventories
 Complete production facilities and organise raw materials
 Organise warehouses, stores and shipping patterns
 Determine inventory levels
 Ensure production is operating to specification
 Ensure quality assurance is operating to specification
 Produce and distribute the required volumes
Organising selling
 Organise the market area
 Organise the selling method
 Set targets for areas and individuals
 Decide on approach to buyers
 Train the sales people
 Make introductory visits
Organising promotion
 Finalise promotion design
 Book television and radio time
 Prepare television films and radio sound tracks
 Design and print in-store promotional material
 Design newspaper and magazine advertisements
 Negotiate space in newspapers and magazines
 Distribute final material to merchandisers and media
Table 6.2 The operational plan (cont.)

Organising finance and financial controls

 Organise capital investment funds
 Organise working capital
 Set cost targets
 Set price targets
 Set sales revenue
 Set profits
 Set returns on investment
Full-scale introduction
 Organise sales meetings
 Introduce generally to trade
 Introduce to specific retailers by sales people
 Deliver stock to retail stores and ensure it is displayed correctly
 Start advertising and promotions
 Release the product
Post-launch evaluation
 Quantitative targets
 Qualitative targets

These marketing, production and financial activities need to be coordinated, and time
and resources allocated to them. The development of a critical path network of the
activities ensures the completion of the launch at the correct time as the critical
activities can be recognised and taken into account. It is important to set the standards
and methods for the post-launch evaluation before the launch that is in the operational
plan.

6.8 Financial analysis

By this stage costs are more accurate. Predictions can be made of costs at different
production levels and of the sensitivity of costs to changes in raw material prices,
energy prices and personnel wages. The price range and the different types of discounts
necessary will have been confirmed. This means that the profit per unit can be
predicted. Also the sales of units at the launch and in the future will have been predicted
from the test market, so the total sales revenues over time can be forecast. From the
sales and costs, the profits can be determined and the cash flows for the next few years
set out.

Financial analysis is vital before the decision is taken to launch the product. Product
development requires adequate resourcing, paid for through financing which has to be
planned.

Both the capital investment and the working capital investment are determined for
the launch and also to support the future. It may take some time before the cash flow
becomes positive and there needs to be cash available to overcome this. For small
companies failure in new product introductions is often the result of insufficient cash
reserves or an inability to borrow money to sustain the project through this period of
loss.

The return on investment can be predicted and compared with the company's policy.
Usually discounted cash flows are used in analysing the return on investment. The risk
is also assessed by setting probabilities on the most pessimistic, most likely and most
optimistic cash flows.

Important aspects of financial analysis are:

Finance quantity, in that sufficient capital or credit has to be assured to meet the total
costs of the project as they arise and as the project progresses. In a large organisation,
this may be met from R&D budgets, by effectively borrowing resources from other
operational parts of the company, through short-term credits from suppliers, overdrafts
and so on. Smaller organisations may have to formally borrow from outside, even set up
a new corporate structure and raise external funds by the sale of shares. In any event,
what can be thought of as the project balance sheet has to balance. In the longer term it
is expected to generate profits and pay its way in full.

Finance quality, in that the cash is provided when the need occurs. Each time a
decision is made to proceed a further step with the project, new resources are
committed, and when these are actually bought, appropriate payments must be made at
that time. It should be borne in mind that new steps are generally more costly than
those
taken already, that the launch is probably the most costly, and that income only comes
after sales. Negative cash flows will accumulate and accelerate and the debt balance is
expected to peak around launch time.

Working capital must be adequate to pay for work in progress, production, marketing,
storage, distribution, wages and overheads. It is easy to underestimate and if insufficient
can lead to cutting the very corners which are essential to the speedy conclusion and
success of the project.