Chapter 8

INNOVATION AND NEW PRODUCT STRATEGY

 Learning Objectives

1. Discuss the Planning of new products beginning with a

discussion of innovation as a customer-driven process.
2. Describe the steps in new product planning.
3. Discuss the different test marketing options that are
available to marketers.
 Innovation as a Customer-Driven Process
New product opportunities that offer superior value to customers range
from totally new innovations to incremental improvements in existing
products. We discuss the different types of innovations, the
importance of finding customer value opportunities, and essential
drivers of successful innovations.
Types of Innovation: Innovations can be classified according to
newness to the market and the extent of the value created, resulting in
the following types of innovations:
Transformational innovation: Product that are radically new and the
value created are substantial. Example includes CNN news channel,
automatic teller machine etc.
Substantial innovation: Product that are significantly new and create
important value for customers. Example includes Kimberly
clarkHuggies/nappies and diet coke.
Incremental innovation: new product that provide improved
performance or greater perceived value (or lower cost), include new
flavor coca-cola.
 The interesting innovation initiatives persuaded by Google is given
in below:
INNOVATION FEATURE: Managing Googles Idea Factory
As director of consumer Web products Marissa Mayer is a champion
of innovation. She favors new product launches that are early and
often. She joined Google in early 1999 as a programmer when the
workforce totaled 20. By 2007 Google had 5,700 employees with
expected sales of $16 billion.
How Google Innovates
The search leader has earned a reputation as one of the most
innovative companies in the world of technology. A few of the ways
Google hatches new ideas are:
Free (Thinking) Time: Google gives all engineers one day a week to
develop their own pet projects, no matter how far from the
companys central mission. If work gets in the way of free days for a
few weeks, they accumulate. Google News came out of this process.
 The Ideas List: an ideas mailing list, available companywide for
input and vetting. But beware: Newbies who suggest familiar or
poorly thought-out ideas can face an intellectual pummeling.
Open Office Hours: Think back to your professors office hours in
college. Thats pretty much what key managers, including Mayer, do
two or three times a week, to discuss new ideas. One success born of
this approach was Googles personalized home page.
Big Brainstorms: As it has grown, Google has cut back on
brainstorming sessions. Mayer still has them eight times a year, but
limits hers to 100 engineers. Six concepts are pitched and discussed
for 10 minutes each. The goal: to build on the initial idea with at
least one complementary idea per minute.
Acquire Good Ideas: Although Google strongly prefers to develop
technology in-house, it has also been willing to snap up small
companies with interesting initiatives. In 2004 it bought Keyhole,
including the technology that let Google offer sophisticated maps
with satellite imagery.
 Finding Customer Value Opportunities:
Customer value requirements provide important information for
determining where opportunities exist to develop new products.
Market segment identification and analysis help find segments
which offer new-product opportunities to the organization.
Customer value analysis: Customers value requirements provide
important information for determining where opportunities exist to
develop new product. The objectives of customer value analysis are
to identify needs for: 1) New products, 2) Improvements to existing
products, 3) Improvements in production processes,
4) Improvements in supporting services.
Finding new product opportunity:
A difference between expectations and use experience may indicate
a new product opportunity. The figure below shows that a
difference between expectations and experience may indicate new
product opportunity:
 Matching capabilities to value opportunities: Each value opportunity
should be considered in terms of whether the organization has the
capabilities to deliver superior customer value. Organizations will
normally have the capabilities needed for product line extensions and
incremental improvements. Developing products for new product
category requires realistic assessment of the organizations
capabilities concerning the new category.
The Evolution of the Creative Company: How a creative company
evolves is discussed ion below:
STEP 1: Technology and information become commoditized and
globalized. Suddenly, the advantage of making things faster,
cheaper, better diminishes, and profit margins decline.
STEP 2: With commoditization, core advantages can be shipped
abroad. Outsourcing to India, China, and Eastern Europe sends a
growing share of manufacturing and even the Knowledge Economy
overseas.
 STEP 3: Design Strategy begins to replace Six Sigma as a key
organizing principle. Design plays a key role in product differentiation,
decision-making, and understanding the consumer experience.
STEP 4: Creative innovation becomes the key driver of growth.
Companies master new design thinking and metrics and create products
that address consumers unmet, and often unarticulated, desires.
STEP 5: The successful Creative Corporation emerges, with new
Innovation DNA. Winners build a fast-moving culture that routinely
beats competitors because of a high success rate for innovation.
Characteristics of Successful Innovators:
Certain company seems to consistently excel over others in developing
successful new products; successful innovators often pursue similar
initiatives. The characteristics of a successful innovator are given
below, which are good predictors of successful innovative organizations
based on research studies, management judgment and experience, and
analysis of specific companies innovative experience:
 Developing a Culture and Strategy for Innovation:
Open communications throughout the organization and high level
of employee involvement and interest are characteristics of
innovative cultures.
Creating an Innovation Culture: Creating an Innovation Culture can
be encouraged by several interrelated management activities:
Innovation Workshop for top executives to develop an
innovation plan.
Innovation Statement highlighting objectives and senior
managements role and responsibilities.
Training programs for employees and managers.
Communicate the priority of innovation.
Speakers to expose employees to innovation authorities.
 The Innovation Strategy Spells Out Managements Priorities
for New Product Opportunities. A successful new product
strategy includes:
Set specific New Product Objectives (Sales, profit contribution,
market share, etc.).
Communicate the role of New Products in contributing to goals
of business throughout the organization.
Define the areas of strategic focus in terms of product scope,
markets and technologies
Include longer-term discontinuous projects in the portfolio
along with incremental projects
 New Product Planning Process
The new product development process is given below:
 Responsibility for New Product Planning: Various organizational
designs may be employed to coordinate inter-functional
interactions that are necessary in developing successful new
product including:
Coordination of new product activities by a high-level general
manager
Inter-functional coordination by a team of new product planning
representatives
Creation of a project task force responsible for new product
planning
Designation of a new products manager to coordinate planning
between departments
Formation of matrix structure for integration new product
planning with business functions
Creation of a permanent design center.
 Idea Generation:
Guided by the new product innovation strategy, finding promising new ideas
is the starting point in new-product development process. Idea generation
ranges from incremental improvements of existing products to
transformational products.
Sources of ideas: new-product ideas may come from many sources: Limiting
the search for ideas to those generated by internal research and development
activities is far too narrow an approach for most firms. Sources of new-
product ideas include R&D laboratories, employees, and customers,
competitors, outside inventors, acquisition, and value chain members.
Search process: Answering the following questions is helpful in developing
the generation program:
Idea search: targeted or open-ended?
How extensive and aggressive?
What specific sources are best for generating a regular flow of new
product ideas?
How can new ideas be obtained from customers?
Where will responsibility for the new product ideas search be placed?
What are potential threats from alternative (or disruptive) technologies?
 Methods of generating ideas: A company considers multiple
options in generating product ideas:
Search: Utilizing several information sources may be helpful in
identifying new-product ideas. New-product idea publications are
available from companies that wish to sell or license ideas they do
not wish to commercialize. New technology information is
available from commercial and government computerized search
services. New sources may also yield information about the new-
product activities of competitors. Many trade publications contain
new-product announcement.
Marketing research: Surveys of product users help to identify
needs that can be satisfied by new products. The focus group is
useful technique to identify and evaluate new-product concepts\,
and this research method can be used for both consumer and
industrial products. Another research technique that is used to
generate new-product ideas is the advisory-panel. The panel
members are selected to represent the firms target market.
 Internal and external development: Research and development
laboratories continue to generate many new product ideas. New-product
ideas may originate from development efforts outside the firms. Sources
include inventors, government and private laboratories, and small high-
technology firms. Strategic alliances between companies may result in
identifying new-product ideas.
Other idea-generation methods: Incentives may be useful to get new-
product idea from employees, partners, and customers. Management also
guard against employees leaving company and developing promising
idea elsewhere. Finally, acquiring another firms offer a way to obtain
new-product ideas.
 Screening, Evaluating, and Business Analysis
Management needs a screening and evaluation process that will
eliminate unpromising ideas as soon as possible while keeping the
risks of rejecting good ideas at acceptable levels. The objective is to
eliminate the least promising ideas before the too much time and
money are invested in them. However, the tighter the screening
procedure, the higher the risk of rejecting a good idea.
Screening: A new product idea receives an initial screening to
determine its strategic fit in the company or business unit. Two
questions need to be answered: 1) is the idea compatible with
organizations mission and objectives; and 2) is the product
initiative commercially feasible? The compatibility of idea considers
factors such as internal capabilities (e.g. development, production
and marketing), financial needs and competitive factors.
Commercial feasibility considers market attractiveness, technical
feasibility, financial attractiveness, and social and environmental
concerns. Screening eliminates ideas that are not compatible or
 feasible for the business. Management must determine how narrow or
wide the screening boundary should be. After identifying relevant
screening criteria, scoring and importance weighted technique may be
used to make a composite evaluation of the factors considered in the
screening process. By summing the weighted scores, an evaluation is
obtained for each idea being screened.
Concept evaluation: The boundaries concerning idea screening,
concept evaluation and business analysis are often not clearly drawn.
These evaluation stages may be combined, particularly when only a
few ideas are involved. After completing the initial screening each
idea that survives becomes a new product concept and receives a more
comprehensive evaluation, including the buyers reaction to the
proposed concept. A team representing different business functions
should participate in concept evaluation.
The importance of concept evaluation: Extensive research on
companys new-product planning activities highlights the critical roles
of extensive market and technical assessment before beginning the
development of a new-product concept.
 These up-front evaluations should result in a clearly defined
new product concept indicating its market target, customer value
offering, and positioning strategy. Research concerning product
failures strongly suggests that many companies do not devote
enough attention to up-front evaluation of product concept.
Concept test: Concept tests are useful in evaluation and refinement
of the characteristics of proposed new products. The purpose of the
concept test is to obtain reaction to the new product concept from a
sample of potential buyers before the product is developed. More
than one concept test may be used during the evaluation process.
The technique supplies important information for reshaping,
redefining and coalescing new-product ideas. Concept tests help to
evaluate the relative appeal of ideas or alternative product
positioning, supply information for developing 5the product and
marketing strategy, and identify potential market segments.
 Business Analysis: Business analysis estimates the commercial
feasibility of new product concept. It includes:
Revenue Forecasts: The newness of product, the size of the
market, and the competing products all influence the accuracy of
revenue projections. In case of established market such as snack foods
estimates of total market size are usually available from industry
information. The more difficult task is estimating the market share
that is feasible for a new-product entry. In certain situations major
difficulties may exists in forecasting the demand for new product.
Preliminary Marketing Plan: An initial marketing strategy should
be developed for business analysis. Included are market target,
positioning strategy, and marketing program plan. While, this plan is
preliminary, it is an early guide to strategy development and
coordination among marketing, design, operations, and other business
functions.
 Cost Estimation: Several different costs occur in the planning
and commercialization of new products. One way to categorize
the costs is to estimate them for each stage in new-product
planning process. The costs increase rapidly as the product
concept moves through the development process.
Profit Projections: Analyses appropriate for new-product
evaluation include break-even, cash flow, return on investment,
and profit contribution. Management can use break-even analysis
as a basis for assessing whether it is feasible to reach and exceed
break-even. Business analysis estimates should take into
consideration the probable flow of revenues and costs over the
time span in the analysis.
Product and Process Development
After completing the business analysis, management must decide
either to begin product development or to abort the project.
During the development stage the concept may be transformed
into one or more prototypes.
 Product development process: Development of the new product
includes: product design, industrial design, process design,
packaging design, decisions to make or purchase product
components. Development typically consists of various technical
activities, but also requires continuing interactions among R&D,
marketing, operations, finance and legal functions. The relative
importance of the activities differs according to the product
involved.
Product Specifications: Product Specifications describes what
the product will do rather than how it should be designed. This
information indicates the product planners expectations regarding
the benefits provided by the product based on customer analysis,
including essential physical and operating characteristics.
Industrial Design: many companies are placing increasing
emphasis on the ease of use and style of the products. Design
consultants assist companies on various design initiatives.
Industrial design has become a major part of the new-product
development process for many products.
 Prototype: The technical term uses the product specifications to
guide the design of one or more physical products. Similar
information is needed to guide software design and design of new
services. At this stage product is called a prototype, since it is not
ready for commercial production and marketing. Many of the parts
may be custom-built, and material, packaging, other details may
differ from the commercial versions.
Use Tests: When testing of the prototype is feasible, designers
can obtain important feedback from users concerning how well the
product meets the needs that are spelled out in the product
specifications. A standard approach use testing is to distribute the
product to a sample of users, asking them to try the product.
Follow-up occurs after the test participant has had sufficient time to
evaluate the product.
Process development: The process for producing the product in
commercial quantities must be developed. Manufacturing the
product at desired quality level and the cost is critical determinant
of profitability. The new product may be feasible to develop at the
laboratory but, not on full-scale basis because of costs, production
rates, and other considerations. The feasibility to mass customize and
modularize may have a major impact on product and process design.
Mass customization enables customizing product offerings at relatively
low costs. Modularity involve developing and producing a product
using interrelated modules, thus facilitating mass customization
Marketing Strategy and Market Testing
Developing the marketing strategy for anew product varies depending
on whether it is incremental improvement or new to the market/ or the
company. The latter requires complete targeting and positioning
strategies.
Marketing Strategy Decisions: Evaluation effort conducted during
concept evaluation and product development supply information that
may be helpful in designing the marketing strategy. Examples of useful
planning guidelines include user characteristics, product features, and
advantages over competing products, types of use situations, feasible
price range, and potential buyers profiles. Marketing strategy decisions
includes:
 Market Targeting: Selection of market target for new product range
from offering a new product to an existing target, to indentifying an
entirely new group of potential users. Examining available marketing
research information for new product may yield useful insights as to
targeting opportunities.
Positioning Strategy: The core of this strategy is how the
management wants the new product to be positioned in the eyes and
minds of the target buyers. Several p positioning decisions are made
during marketing strategy development. Issues such as packaging,
name selection, size and other aspects of product must be decided.
Value chain determines the customer access channel to the product.
Market Testing: A test market is controlled experiment conducted in a
carefully chosen marketplace (e.g. websites. stores, town or other
geographical locations), to measure marketplace response and predict
sales or profitability of product. Market testing can be considered
after the product is fully developed; assuming product is suitable for
market testing. It includes:
 Simulated Test Marketing: The distinguishing feature of simulated test
marketing is that they are conducted in a simulated shopping
environment, and may be used in place of or before a full-scale market
test. Typically, a research facility is used to provide a stimulated
shopping experience in order to obtain feedback from the participants.
Scanner Based Test Marketing: These tests are conducted in an
actual market environment. The test product must be available in each
test cities. Companies use cable television and a computerized database
to track new product during these test. The system uses information and
responses from recruited panel members from each city. Each member
has n identification card to show to participating store cashiers.
Conventional Test Marketing: This method of test marketing
introduces the product under actual market conditions in one or more test
cities. It is typically used for frequently purchased consumer products.
The time required for the test ranges from a year to 18 months or more.
Test marketing employs a complete marketing program including
advertising and personal selling. Product sampling is often an important
factor in launching the new product in the test market.
 Testing Industrial Products: market testing can be used for
industrial product. Selection of test cities may need to extend
beyond one or two test cities to include sufficient market coverage.
Web-enabled test: While this test offers less control than other
test, they are increasingly used due to speed and relatively low
costs.
Selecting Test Sites: Test cities for consumer product should
exhibit the buyer and environmental characteristics of market
target.
External Influences: Competitors may attempt to drive test market
result away by increasing or decreasing their marketing efforts.
 Commercialization
Introducing new product into the market requires finalizing the
marketing plan, coordinating market entry activities across
business functions, and implementing the marketing strategy, and
monitoring and controlling the product launch.
The Marketing Plan: market introduction requires a complete
marketing strategy that is spelled out in marketing plan. The plan
should be coordinated with the people and business functions
responsible for the introduction including salespeople, sales and
marketing managers, and managers from other functional areas
such as, operations, distributions, finance and human resource.
Monitoring and Control: Real time tracking of new product
performance ant the market entry stage is extremely important.
Information is collected through store audit, consumer dairy panel
and scanner services. The internet is rapidly becoming an essential
new product information gathering and monitoring capability.