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Chapter 8

Chapter 8 - Developing New Products

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Department
Business
Course
BU352
Professor
Dave Ashberry
Semester
Fall

Description
Chapter 8: Developing New Products  Our lives are defined by the new P/S developed through scientific and technological advances  How do firms add value to their P/S through innovation and  How does a firm change its marketing mix as a product moves through the life cycle WHY DO FIRMS CREATE NEW PRODUCTS?  New market offerings provide value to both firms and customers  Useful to think of the degree of newness of a product on a continuum from “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  Long-term reasons compel firms to introduce new P/S (innovation doesn’t always work in the short-run) Changing Customer Needs  By adding new products to their offerings, the firm can deliver more value by changing the needs of their current and new customers or by keeping customers from getting tired of their current offering  Companies can identify problems and develop products that customers never knew they needed  Companies can also take well known offering and innovate to make it more interesting Market Saturation  The longer the product is in the market, the more likely that the market becomes saturated  The value of a firm will decline without new products or services  Change lets firms sustain their growth by getting consumers excited Managing Risk through Diversity  Portfolio of products diversifies risk and enhances firm value better than a single product can  Firms with multiple products are better able to withstand external shocks Fashion Cycles  Some industries rely on fashion trends and experience short product life cycles, as a result most sales come from new products  E.g. apparel, arts, books, and software Innovation and Value  Pioneers: breakthroughs; new product introductions that establish a completely new market or radically change both the rules of competition and consumer preferences in a market (e.g. eBay, BlackBerry, Micorsoft’s operating system, Windows) o Have the advantage of being first movers = first to create market or product category, making them readily recognizable to consumers and thus establishing a commanding and early market share lead o Not all pioneers succeed; imitators capitalize on the weaknesses of the pioneer and gain advantage in the market place o They’re often less sophisticated and may be priced relatively higher, leaving room for better and less expensive competitive products  Majority of new products are failures o Offer consumers too few benefits compared to existing products o Too complex or require substantial learning and effort before consumers can use them o Bad timing – they are introduced at a time when consumers are not ready for such a product or service ADOPTION OF INNOVATION  Diffusion of innovation: process by which the use of an innovation, whether a P or S, spreads throughout a market group over time and over various categories of adopters o This theory helps marketers understand the rate at which consumers are likely to adopt a new P/S o Follows bell-shaped curve  Purchasers are divided into 5 groups according to how soon they buy the product after it’s been introduced ADOPTION CYCLE Those who want to be the first to have the product or service; take Innovators risks, highly knowledgeable, not price sensitive Firms who use latest technology Crucial b/c they help product gain market acceptance Early Adopters Don’t like to take as much risk so they wait and purchase product after careful review; regarded as opinion leaders who spread the word to the next 3 groups Early Majority Few new products can become profitable until this group buys If this group doesn’t become large enough, the product usually fails; 34%; don’t like risk and wait for product to be mastered without “the bugs”; more competitors once they buy so they have more price and quality choice Late Majority 34%; when they buy the product has received full market potential; sales level off or may be in decline; last group Laggards Customers who avoid change and rely on traditional product until they’re no longer available Using the Adoption Cycle  Create effective promotion, pricing techniques to push acceptance among each customer group  The speed with which products are adopted depends on several product characteristics o Relative Advantage – if product is perceived to be better than substitutes, the diffusion will be quick o Compatibility – must be compatible with people’s needs, values, and past behaviours (e.g. Starbucks being popular in North America, but not in China and Japan where tea is the primary drink) o Observability – when products are easily observed, their benefits/uses are easily communicated to others, thus enhancing the diffusion process o Complexity and Trialability – products that are less complex are easier to try and diffuse more quickly HOW FIRMS DEVELOP NEW PRODUCTS  The process involves various functions of the organization  Marketing plays a crucial role by communicating customers’ needs and wants  Substantially new products will go through the whole process, but line extensions (example) will not Concept Product Market Product Evaluation of Idea Generation Testing Development Testing Launch Results Idea Generation  Use the following methods to come up with new ideas: o Internal R&D – large investments that may or may not pay off; continuous investments o Licensing – firms buy the rights to use the technology and ideas from other research-intensive firms through a licensing agreement; saves high costs of in-house R&D, but risk in marketing o Brainstorming – group works together to generate ideas; no ideas are immediately accepted/rejected o Competitors’ Products – reverse engineering involves taking apart product and analysing it and creating an improved product that doesn’t infringe on copyright patents o Customer Input – this joint effort between the producer and the consumer will enhance the probability
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