Marketing Notes Chapter 8.docx

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Western University
Management and Organizational Studies
Management and Organizational Studies 2320A/B
Kenneth Bowlby

Marketing Notes Chapter 8 Developing New Products: Why Do Firms Create New Products? New market offerings provide value to both firms and customers. Useful to think in degree of newness of a product on a continuum: “new to the world” to “slightly repositioned.” Innovation is the process by which ideas are transformed into new products and services that will help firms grow. Changing Customer Needs Firms can create and deliver value 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. Example: Dove Beauty Bar extended their brand into hair, face, and skin-care 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 Managing Risk Through Diversity Firms with multiple products are better able to withstand external shocks, including changes in customer preferences or intensive competitive activity. For example firms such as 3M demand that a specific percentage of their sales each year must come from new products introduced within the previous few years. Fashion Cycle In industries that rely on fashion trends and experience short product life cycles, (including apparel, arts, books, and software) most sales come from new products. Innovation and Value Pioneers are new product introductions that establish a completely new market or radically change both the rules of competition and consumer preferences in the market; also called breakthroughs or disruptives. Generally, disruptive products require a higher level of learning from consumers and offer much more benefits than predecessor products. Pioneers have advantage of being first movers; as the first to create the market or product category, they become readily recognizable to consumer and thus establish a commanding and early market share lead. 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. New to the world products are not adopted by everyone at the same time, rather, they diffuse or spread through a population in the process known as diffusion or adoption of innovation. Adoption of Innovation: Diffusion of Innovation (Adoption of Innovation): The process by which the use of an innovation – whether a product or a service – spread throughout a market group, over time and over various categories of adopters. It is the rate at which customers are likely to adopt a new product or service. It identifies potential markets for their new products or services and predicts their potential sales, even before they introduce the innovations. Innovators Buyers who want to be the first on the block to have the new product or service These buyers enjoy taking risks, are regarded as highly knowledgeable, and are not price sensitive. Represent 2.5% of total market for new product or service. Early Adopters Second subgroup that begins to use a product or service innovation is the early adopters. They generally don’t like to take as much risk as innovators but instead wait and purchase the product after careful review. 13.5% of buyers in the market. Early Majority Represents approximately 34% of the population, is crucial because few new products and services can be profitable until this large group buys them. Its members don’t like to take as much risk and therefore tend to wait until “the bugs” are worked out of a product or service. Late Majority Last group of buyers to enter a new product market; when they do, the product has achieved its full market potential. 34% of the market. Laggards Make up roughly 16% of the market. These consumers like to avoid change and rely on traditional products until they are no longer available. Using the Adoption Cycle The speed with which products are adopted depends on product charecteristics:  Relative Advantage-if a product is perceived to be better than substitutes then the diffusion will be relatively quick o Superior substitue  Compatibility-Most business professionals and executives have to make decisions in a timely fashion and be able to communicate their decisions in a timely manner also; they need real-time information to do this.  Observability-When products are easily observed, their benefits or uses are easily communicated to others, thus enhancing the diffusion process.   Complexity and Trialability-Product that are relatively less complex are also relatively easy to try. o These products will generally diffuse more quickly than those that are not.  The diffusion of innovation theory thus comes into play in the immediate and long-term aftermath of a new product or service introduction. How Firms Develop New Products: 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. 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 forms, brainstorm, research competitors’ products and services, and/or conduct consumer research.  Internal Research and Development-Many firms have their own R&D departments, in which scientists work to solve complex problems and develop new ideas. o 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. o R&D investments generally are considered continuous investment.  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. o This approach 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.  Brainstorming-Firms often engage in brainstorming sessions during which a group works together to generate ideas. o One of the key characteristics of a brainstorming session is that no idea can be accepted or rejected.  Competitors’ Products-A new product entry by a competitor may trigger a market opportunity for a firm, which can use reverse engineering to understand the competitor’s product and then bring an improved version to market. o Reverse engineering involves taking apart a competitor’s product, analyzing it, and creating an improved product that does not infringe on the competitor’s patents, if any exist.  Consumer Input-Prior studies have found that as much as 85% of all new B2B product ideas come from customers. o Because customers for B2B products are relatively few in numbers, firms can follow their use of products closely and survey them often for suggestions and ideas to improve those products. o This joint effort between the selling firm and the customer significantly increases the probability that the customer eventually will buy the new product. o A particularly successful customer input approach is to analyze lead users, those innovative product users who modify existing products according to their own ideas to suit their specific needs. Concept Testing Ideas with potential are developed further into concepts, which in this context refer to brief written descriptions of the product; its technology, working principles, and forms; and what customer needs it would satisfy. Concept testing refers to the process in which a concept statement is resented to potential buyers representative of the target market or users to obtain their reactions. These reactions enable the developer to estimate the sales value of the product or service concept, possibly make changes to enhance its sales value, and determine whether the idea is worth further development. Marketers usually collect some demographic info so they can analyze which consumer segments are likely to be most interested in the product. Product Development Product development or product
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