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Chapter 8

Management and Organizational Studies 2320A/B Chapter Notes - Chapter 8: Observability, Brainstorming

Management and Organizational Studies
Course Code
MOS 2320A/B

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Chapter 8 Notes
Developing New Products
Why Firms Innovate
- Changing Customer Needs
oBy adding new products they’re delivering value more effectively to the changing needs of their current
and new customers
oAlso keeping current customers from getting bored with the current product offering
oDove successfully extended its brand from the beauty bar to hair face and skin-care lines, all under the
Dove umbrella
- Market Saturation
oThe longer a product exists the more likely it is that the market will become saturated. Without new
products the value of the firm will ultimately decline.
oAssume Reebok only made one style of shoe. Because shoes don’t ware out that often no one has any
incentive to buy more shoes. People tend to get tired of the same thing and seek variety. By introducing
new lines several times a year, Reebok is able to sustain its growth
- Managing Risk Through Diversity
oThrough innovation firms create a broader portfolio of products, which helps them diversify their risk and
enhance firm value better than a single product
- Fashion Cycles
oIn industries that rely on fashion trends like clothing, art, books and software, most sales come from new
products. If there were no new styles, there would be no need to buy more.
- Innovation and Value
oPioneers (breakthroughs or disruptive) – new product introductions / new products to the world
They establish a completely new market or radically change both the rules of competition and
consumer preference in a market
Pioneers have the advantage of being first movers, as the first to create the market they become
readily recognizable to consumers and establish an early market share lead
Not all pioneers succeed, in many cases imitators capitalize on the weaknesses of pioneers and
subsequently gain advantage in the market
Their prices are usually higher and their designs are more simple
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
oThe majority of new products are failures
As many as 95% of all consumer goods fail
Products across all markets and industries suffer failure rates of 50-80%
oWhy do these failures exist?
They offer consumers too few benefits compared with existing products
They are too complex or require substantial learning and effort before consumers can use them
Bad timing, they are introduced at a time when consumers are not ready for such new products
oEven if they succeed, new products are not adopted by everyone at the same time. They diffuse or spread
through a population in a process known as diffusion/adoption of innovation
Diffusion of Innovation (Adoption of Innovation)
- The process by which the use of an innovation spreads through a market group over time and over various
categories of adopters is referred to as diffusion of innovation. It helps marketers understand the rate that
consumers are likely to adopt a new product
- The number of users of an innovative product spreads through the population over time and generally follows a
bell-shaped curve. A few people buy the product at first, and then more, then less and less people buy it as the
degree of diffusion slows.
- Purchasers can be divided into five groups according to how soon they buy the product after its release:
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Buyers who want to be the first on the block to have the new product
Enjoy taking risks, are regarded as highly knowledgeable, and are not price sensitive
i.e. a person who stood in line for days to be sure to get the new product on its release date or
firms that invest in the latest technology
they keep themselves very well-informed about the product (subscribing to newsletters, etc.)
typically innovators represent only about 2.5% of the total market for any new product
they’re crucial though because they help the product gain market acceptance through them talking
and spreading positive word of mouth. They’re instrumental in bringing in the next adopter
oEarly Adopters
Don’t like to take as much risk as the innovators and instead purchase the product after careful
They wait to read the reviews of the movie before going out and buying a ticket
Members represent about 13.5% of all buyers in the market, act as opinion leaders who spread the
word to the next big groups: early and late majority
As a result, early adopters are crucial for bringing the other three buyer categories to the market.
If the early adopter group is relatively small, the number of people who ultimately adopt the
innovation likely will also be small
oEarly Majority
Represents about 34% of the population
Crucial group because few new products can be profitable until this large group buys them. If the
group never becomes large enough, the product typically fails
The group is very different from the first two, they don’t like to take as much risk and therefore
wait until the bugs are worked out of a particular product before purchase
Consider the movie example: this group probably waits until the latest Harry Potter movie is
available to rent in stores. Thus they experience little risk because all the reviews are in and their
costs are lower because they’re renting the movie instead of going to the theatre
When early majority customers enter the market, the number of competitors in the marketplace
usually also has reached its peak, so these buyers have lots of choice
oLate Majority
Represents another 34% of the market
Last group of buyers to enter a new product market. When they do the product has achieved its
full market potential.
Perhaps these movie watchers wait until the latest movie is always in stock or just put it low on
their Netflix queue, to be delivered after the other consumers interested in watching it have
already seen it, by the time the late majority enters the market sales tend to level off or maybe
even decline.
Roughly 16% of the market
These consumers like to avoid change and instead rely on traditional products until they are no
longer available
In some cases laggards may never adopt a certain product. When the Harry Potter movie shows up
on regular TV they are likely to go ahead and watch it.
Or a household that still listens to music on CDs because they don’t have iPods.
Very few companies actively pursue these consumers
- Using the adoption cycle:
oBy using it firms can predict which types of customers will buy their product immediately after its
introduction as well as later as the product gets more and more accepted by the market
oWith this knowledge the firm can develop effective marketing strategies to push acceptance among each
customer group
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