ADM 2320 Lecture 8: ADM2320 - Chapters 8-16 (1)

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CHAPTER 8 DEVELOPING NEW PRODUCTS
Product: anything that is of value to a consumer and can be offered through a marketing exchange. (Goods, services,
places (hotels), people, or communities that create value for consumers in their respective competitive marketing
arenas.
WHY DO FIRMS CREATE NEW PRODUCTS?
New market offerings provide value to both firms and customers. But the degree to which they do so depends on how
new they really are.
When we say a new product, we don't necessarily mean that the product has never existed before; It is more useful
to think of the degree of newness of a product on a continuum from new-to-the-world such as the repositioning of
Kraft's Capri Sun brand of ready-to-drink beverages, which was repackaged in a bigger pouch to appeal more to teens.
Regardless of where on the continuum a new product fits, firms have to innovate.
Innovation: process by which ideas are transformed into new products and services that will help firms grow.
Without innovation and its resulting new products and services, firms would have only two choices: continue to
market current products to current customers or take the same product to another market with similar customers.
Changing Customer Needs
When they add new products to their offerings, firms can create and deliver value more by satisfying the changing
needs of their current and new customers or simply by keeping customers from getting bored with the current
product or service offering.
Sometimes, companies can identify problems and develop products that customers never knew they needed.
Firms take a well-known offering and innovate to make it more interesting.
Market Saturation
The longer a product exists in the marketplace, the more likely it is that the market will become saturated.
Without new products or services, the value of the firm will ultimately decline.
Likewise, car companies can't expect that people will keep their cars until they stop running. Since few consumers
actually keep the same car until it stops running. Car companies revamp their models every year. This change lets
firms sustain their growth by getting consumers excited by the new looks.
Managing Risk Through Diversity
Through innovation, firms often create a broader portfolio of products, which helps them diversify their risk and
enhance firm value better than a single product can.
If some products in a portfolio are doing poorly, others may be doing well.
Firms with multiple products are better able to withstand external shocks, including changes in consumer preferences
or intensive competitive activity.
Fashion Cycles
In industries that rely on fashion trends and experience short product life cyclesincluding apparel, arts, books, and
softwaremost sales come from new products.
If the same selection of books were always available for sale, with no new titles, there would be no reason to buy more.
Consumers of computer software and video games demand new products in much the same way that fashion mavens
demand new apparel styles.
Innovation and Value
New product introductions, especially new-to-the-world products that create new markets, can add tremendous value
to firms. These new products, services, or processes are called pioneers, breakthroughs or disruptive because they
establish a completely new market or radically change both the rules of competition and consumer preferences in a
market.
Disruptive products require a higher level of learning from consumers and offer much more benefits than predecessor
products.
Pioneers have the advantage of being first movers; as the first to create the market or product category, they become
readily recognizable to consumers and thus establish a commanding and early market share.
Market pioneers can command a greater market share over a longer time period than later entrants can.10
All pioneers don’t succeed because imitators capitalize on the weaknesses of pioneers and gain advantage in the
market. Because pioneering products and brands face the uphill task of establishing the market alone, they pave the
way for followers, which can spend less marketing effort creating demand for the product category and instead focus
directly on creating demand for their specific brand.
Also, because the pioneer is the first product in the market, it often has a less sophisticated design and may be priced
relatively higher, leaving room for better and lower priced competitive products.
Some new products fail because:
o They offer consumers too few benefits compared with existing products;
o They are too complex or require substantial learning and effort
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o Bad timingintroduced at a time when consumers are not ready for such new g/s.
Even if they succeed, new-to-the-world products are not adopted by everyone at the same time. Rather, they diffuse or
spread through a population in a process known as diffusion or adoption of innovation.
ADOPTION OF INNOVATION
Diffusion of innovation or adoption of innovation: The process by which the use of an innovation (product or a
service) spreads throughout a market group, over time and over various categories of adopters.
The theory of diffusion or adoption of innovation helps marketers understand the rate at which consumers are
likely to adopt a new product or service.
It also gives them a means to identify potential markets for their new products or services and predict their
potential sales, even before they introduce the innovations.
The consumer adoption cycle shows the number of users of an innovative product or service over time and
generally follows a bell-shaped curve.
A few people buy the product or service at first, then increasingly more buy, and finally fewer people buy as the
degree of the diffusion slows.
Innovators
Innovators are those buyers who want to be the first on the block to have the new product or service.
These buyers enjoy taking risks, highly knowledgeable, and are not price sensitive.
Firms that invest in the latest technology, either to use in their products or services or to make the firm more efficient,
also are considered innovators.
Typically, innovators keep themselves very well informed about the product category by subscribing to trade and
specialty magazines, talking to other experts, searching the )nternet, and attending product-related forums,
seminars, and special events.
Rep only about 2.5 percent of the total market for any new product or service.
Innovators are crucial to the success of any new product or service because they help the product gain market
acceptance. Through talking and spreading positive word of mouth
Early Adopters
They generally don't like to take as much risk as innovators but instead wait and purchase the product after careful
review.
Early adopters tend to enjoy novelty and often are regarded as the opinion leaders for particular product categories.
Members of this group, which represents about 13.5 percent of all buyers in the market, act as opinion leaders who
spread the word to the next big groups: early majority and late majority.
If the early adopter group is relatively small, the number of people who ultimately adopt the innovation likely will also
be small.
Early Majority
Crucial because few new products and services can be profitable until this large group buys them. If the group never
becomes large enough, the product or service typically fails.
)ts members don't like to take as much risk and therefore tend to wait until the bugs are worked out of a particular
product or service.
They experience little risk, because all the reviews are in, and their costs are lower.
When early majority customers enter the market, the number of competitors in the marketplace usually also has
reached its peak, so these buyers have many different price and quality choices.
Late Majority
Last group of buyers to enter a new product market
The product has achieved its full market potential.
These movie watchers wait until the latest movie is always in stock or just put it on Netflix
By the time the late majority enters the market, sales tend to level off or may be in decline.
Laggards
Laggards may never adopt a new product or service.
These consumers avoid change and rely on traditional products until they are no longer available. Very few companies
actively pursue these customers.
Using the Adoption Cycle
With the diffusion of innovation theory or adoption cycle, firms can predict which types of customers will buy their
new product or service immediately after its introduction, as well as later as the product gets more and more accepted
by the market.
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With this knowledge, the firm can develop effective promotion, pricing, and other marketing strategies to push
acceptance among each customer group.
Since different products are adopted at different rates, marketers must understand what the diffusion curve for the
new product looks like, as well as the characteristics of the target customers in each stage of the diffusion.
Relative Advantage: If a product is perceived to be better than substitutes, then the diffusion will be relatively quick.
Compatibility: Ex: the ritual of having a coffee is well ingrained in many cultures, including Canadian culture.
(aving a coffee is consistent with peoples past behavior, their needs, and their values. Since people are accustomed
to drinking coffee, it has been relatively easy for Starbucks to acquire customers in Canada.
Observability: The ubiquitous Starbucks logo can be easily seen on cups in and around Starbucks stores. When
products are easily observed, their benefits or uses are easily communicated to others, & enhances the diffusion
process.
Complexity and Trialability: Products that are relatively less complex are also relatively easy to try. These products
will generally diffuse more quickly than those that are not.
The diffusion of innovation theory comes into play in the immediate and long-term aftermath of a new product or
service introduction.
HOW FIRMS DEVELOP NEW PRODUCTS
The new product development process begins with the generation of new product ideas and culminates in the launch
of the new product and the evaluation of its success.
In reality, the process is iterative, consisting of a number of feedback loops at various stages.
Generally the process is a team effort with the new product team composed of members from various functions:
marketing, design, engineering, manufacturing, procurement, and finance, all of whom play different roles at different
stages of the process.
Marketing plays a crucial role in the new product development process by communicating customer needs and wants
and marketplace preferences and attitudes to the research and development (R&D) and engineering group.
Product Development Process:
o Not always necessary to take a new product through each stage in the process. Substantially new products
will follow the process fairly closely, while products imitating a successful product from a competitor or
involving incremental changes (line extensions) may skip one or more steps.
Skipping stages in the new product development process is very risky, companies often do it to reduce costs or launch
new products quickly.
Step 1: Idea Generation
To generate ideas for new products, a firm can use its own internal R&D efforts, collaborate with other firms and
institutions, license technology from research-intensive firms, brainstorm, research competitors' products and
services, and/or conduct consumer research.
Sometimes new product ideas come from employees, customers, suppliers, and partners or are generated by
attending trade shows and conferences.
Companies also generate ideas by using reverse engineering or, in more extreme cases, even by digging through a
competitor's garbage. Firms that want to be pioneers rely more extensively on R&D efforts, whereas those that tend to
adopt a follower strategy are more likely to scan the market for ideas. Let's look at each of these idea sources.
Internal Research and Development
Many firms have their own R&D departments, where scientists work to solve complex problems & develop new ideas.
The product development costs for firms are quite high, and the resulting new product or service has a good chance of
being a technological or market breakthrough.
Firms expect such products to generate enough revenue and profits to make the costs of R&D worthwhile
R&D investments generally are considered continuous investments, so firms may lose money on a few new products.
In the long run though, firms bet that a few extremely successful new products, generate enough revenues and profits
to cover the losses from other introductions
Licensing
For many new scientific and technological products, firms buy the rights to use the technology or ideas from other
research-intensive firms through a licensing agreement.
Saves the high costs of in-house R&D, but it means that the firm is banking on a solution that already exists but has not
been marketed.
These firms are content to obtain some development financing and royalties on sales of their product
Brainstorming
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Document Summary

Why do firms create new products? new they really are: new market offerings provide value to both firms and customers. Innovation: process by which ideas are transformed into new products and services that will help firms grow. Kraft"s capri sun brand of ready-to-drink beverages, which was repackaged in a bigger pouch to appeal more to teens. market current products to current customers or take the same product to another market with similar customers. Sometimes, companies can identify problems and develop products that customers never knew they needed: firms take a well-known offering and innovate to make it more interesting. Since few consumers actually keep the same car until it stops running. This change lets firms sustain their growth by getting consumers excited by the new looks. Managing risk through diversity: through innovation, firms often create a broader portfolio of products, which helps them diversify their risk and enhance firm value better than a single product can.

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