February 4, 2013
CHAPTER 8: Developing New Products
Innovation and Value
Why do firms create new products?
- Market Saturation
- Managing Risk through Diversity
- Fashion Cycles: You must change and you have to keep changing. They create new products
because it is expected by the consumer.
- Changing Customer Needs
New Product Introductions
- Pioneers or breakthroughs
- First movers
- Despite first-mover advantages, pioneers often lose out to superior competitors
- First movers must staunchly defend their territory. After establishing the market, they - generally
must switch to a defender mode to fend off newcomers.
- Apple and Microsoft
New Products.. that Didn't Sell
- The Butter Stick - too much like a glue stick
- Gun shaped Takila shot - you don't put guns like that in public places
- You have to be aware of what will actually sell
New Product... that did sell
The Pet Rock - people made pet rocks as a gag gift. It just hit at the right time.
It was a low risk production because the cost of production was really low and they only made
them as the orders came in
New Product: Red Bull
Challenge: Introduce a new type of beverage to the world
Answer: Red Bull energy drink based on Thai health tonic. It was like no other beverage on the
Results: It is estimated that they own 70% of the energy drink category in the US (which is
estimated to be $500 million). Why are they still doing so well after so long? Because they out
Video: Mom's Healthy Secrets
What obstacles did she have to try to overcome to get her new product to market? Getting
Financial Resources. Time constraints: the customer may have a seasonal time cycle for buying
and if you miss it you are done. New packaging. Designing a brand that jumps out to consumers.
Create a marketing plan for the new line.
How did the existing brands make her market entry more difficult? She is an unknown commodity
competing with brands that are very well known.
1 Diffusion of Innovation or Consumer Adoption Cycle
The majority of consumers typically don't buy something new right away. There are a number of
different stages of buyers (see graph on slides):
The innovators: people who will buy a product simple because it is new.
Early adopters: they look to innovators. They need to have some proof that it works and then they
will buy it.
The Early Majority: they see it and that it is becoming popular and they buy it.
*Many people will market to the innovators because when they buy the product it allows the
company some early integration into the market.
Using the Diffusion of Innovation Theory Factors:
Relative Advantage: How does each new communications evolution offer relative advantage? It is
a challenge because mobile phones do almost everything.
Compatibility: How did compatibility affect diffusion of Starbucks brand? Perfectly - it was
completely compatible with the people they were targeting - available everywhere
Observability: The easier the benefits are to communicate the faster the product will diffuse!
Complexity/Trialbility: the more complex the product the longer it takes to diffuse. Products that
can be sampled will diffuse faster.
How Firms Develop New Products
1 - Idea generation: development of viable new product ideas.
Sources of ideas:
Internal R&D: High product development costs. Often the source of new breakthrough products.
Larger firms often maintain their own R&D department and rely on it to generate new products
that will lead the market.
Licensing: Firms purchase the rights to technology or ideas from other research-intensive firms.
Ex: Android operating system on Samsung phones. University research centers also often provide
Brainstorming: Groups work together to generate ideas. No idea can be immediately dismissed.
Competitor's products: Reverse engineering (buys the competitor’s product and takes it apart,
build your own from that). Products with patents or other proprietary protections cannot be copied,
so reverse engineered products must be substantially different from their source product. "Me
Too" or copycat products are normal.
Customer Input: Customer research is a great source. Ex: the mail shredder from Staples
2 - Concept Testing: testing the new product idea among a set of potential consumers
Concept is a brief written description of the product. Customers' reactions determine whether or
not it goes forward. Triggers the marketing research process.
3 - Product Development
1: Prototype: basic model that is meant to be used to get feedback on the product
2: Alpha testing: a limited, controlled test. It is an internal test in a controlled environment so that
2 any problems will be kept close
3: Beta testing: Release it to a small group of what would be the end users and get their feedback.
It goes out to the first customers, no marketing, just testing. It gives you a lot of marketing
information that you can use if it gets released.
4 - Market Testing
Premarket Tests: Customers exposed, customers surveyed, firm makes decision
Test marketing: Mini product launch, more expensive than premarket tests, market demand and
5 - Product Launch
Kellogg's Drink'n Crunch failed because those who were testing may have thought that it was cool
but they wouldn't have paid money for it in a store.
New Product Marketing Mix: Place, Price, Promotion, Timing
Evaluation of Results (3 things to consider)
Satisfaction of technical requirements: Did it work technically?
Customer acceptance: How fast did it diffuse (to get past the innovators and into the major market
Satisfaction of the firm's financial requirements: Just because a product diffuses quickly doesn't
mean it was profitable.
Why do new products fail?
Too small target market, poor design, low product quality, incorrect positioning, wrong price
strategy, poor marketing communication, competition
Product Life Cycle (PLC)
Introduction Growth Maturity Decline
Sales Low Rising Peak Declining
Profit Negative or low Rapidly rising Peak to declining Declining
Typical Innovators Early adopters late majority Laggards
Consumers and early
Competitors One or few few but High number of low number of