Chapter 8 Developing New Products
Why do Firms Create New Products
New market offerings provide value to both firms and customers.
Innovation is the process by which ideas are transformed into new products
or services that will help firms grow.
Firms innovate got a number of reasons:
Changing Customer Needs: When they add new products to their offerings,
firms can create and deliver value more effectively by satisfying the changing
needs of their current and new customers, or by keeping current customers
from getting bored.
Market Saturation: The longer a product exists in the marketplace, the more
likely it is that the market will become saturated.
Managing Risk Through Diversity: Through innovation, firms can often
create a broader portfolio of products, which help them diversify their risk
and enhance firm value better than a single product can.
Fashion Cycles: In industries that rely on fashion trends and experience
short product life cycles, most sales come from new products.
Innovation and Value: new product introductions can add tremendous
value to firms.
o Pioneers: New product introductions that establish a completely new
market or radically change both the rules of competition and
consumer preferences in a market.
Adoption of Innovation
Diffusion of Innovation: the process by which the use of an innovation
spreads throughout the market group, over time and over various categories
Purchasers can be divided into five groups according to how soon they buy the
product after is has been introduced:
Innovators: Those buyers who want to be the first to have the new product or service.
o These buyers enjoy taking risks, are regarded as highly
knowledgeable, and are not price sensitive.
Early Adopters: the second group of consumers in the diffusion of
innovation model, after innovators, to use a product or service innovation.
o Generally don’t like to take as much risk as innovators but instead
wait and purchase the product after careful review.
Early Majority: A group of consumers in the diffusion of innovation model
that represents approximately 34 percent of the population
o Members don’t like to take too much risk and therefor tend to wait
until bugs are worked out.
o In the group never becomes large enough, the product typically fails Late Majority: The last group of buyers to enter a new product market.
Laggards: Consumers who like to avoid change and rely on traditional
products until they are no longer available
Using the Adoption Cycle
Using the diffusion of innovation theory or adoption cycle, firms can predict
which types of customers will buy their new product or service.
The speed in which products are adopted depends on several product characteristics:
Relative Advantage: If a product is perceived to be better than substitutes,
then the diffusion will be relatively quick.
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
Observability: Logo’s being very visible on various fronts. When products
are easily observed, their benefits or uses are easily communicated to others,
thus enhancing 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.