Chapter 10: Developing New Products
Innovation – the process by which ideas are transformed into new products and services that will help
Innovation may not work in the short-run, however overriding log-term reasons compel firms to
introduce new products. As they add new product offerings, firms can create and deliver value more
effectively by satisfying the changing needs or current and new markets. The longer a product exists in
the marketplace, the more likely it is that the market will become saturated. The portfolios of products
that innovations can help create helps the firm diversity its risk and therefore enhances the firm’s value
better than a single product.
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
- generally require higher level of learning from consumers and offer much more benefits then
First Movers - product pioneers that are the first to create a market or product category, making them
readily recognizable to consumers and thus establishing an early and commanding market share lead
Because pioneering products use their resources to establish the market alone, they pave the way for
followers who spend less money on creating demand for the product category and more money on
creating demand for their specific product.
Diffusion/Adoption of Innovation - the adoption or diffusion of innovation is the process by which the
use of an innovation, whether a product or service, spreads throughout a market or group over time and
over various categories of adopters
The theory helps marketers understand the rate at which consumers are likely to adopt as well as giving
them means to identify potential markets, and predict sales before they introduce innovations as well as
design marketing campaign to push adoption through each consumer category.
Categories of Consumer Adoption
1. Innovators (2.5%) - those buyers who want to be the first to have the new product or service
- enjoy taking risks, and are regarded as highly knowledgeable, and are not price sensitive
2. Early Adopters (13.5%) - second to adopt after innovators; they generally don’t take as much risk but
instead wait and purchase the product after careful review
3. Early Majority (34%) – don’t take on much risk and therefore tend to wait until all initial bugs are
4. Late Majority (34%) – the last group of buyers to enter a new product market
- when they do so, the product has achieved full market potential
5. Laggards (16%) – tend to avoid change and rely on traditional products until they are no longer
- laggards may never adopt a product or service Factors Affecting Diffusion
a) Compatibility - if a product is consistent with peoples past behaviour, their needs and what they
value then the diffusion should happen relatively quickly
b) Observability - when products can be easily observed in use, their benefits or applications are easily
communicated to other potential consumers thus enhancing the diffusion process
c) Complexity and Trialability – products that are relatively less complex are also relatively easy to try.
These products will generally diffuse more quickly than products that are complex and that cannot be
d) Relative Advantage - if a product is perceived to be better than substitutes, then the diffusion will be
The Product Development Process
Idea Concept Product Market Product Evaluation
Generation testing Development Testing Launch of Results
The new product development process begins with the generation of new products ideas and
culminates in the launch of the new product and the evaluations of its success. Generally process is a
team effort with the team comprised of representatives from the firms various functions (marketing,
R&D, Finance etc.).
1) Idea Generation – To generate ideas for new products or services firms can use their own R&D
departments efforts, licensing technology from research firms, brainstorm, research competitor’s
products/services, and/or conduct consumer research
a) Internal R&D – Many firms have their own R&D departments in which scientists work to solve
complex problems and develop new ideas. IBM in computer industry, Rubbermaid in the consumer
goods industry and 3M in industrial goods are all examples of firms that rely on internal R&D.
- Product development costs are extremely high
- Resulting products have good chance of becoming pioneers or breakthroughs
- Firms anticipate that blockbuster breakthroughs will generate enough revenue to make up for all of the
introductions that did not perform in the market.
b) Licensing – for many new scientific and technological products, firms purchase the rights to use
technology or ideas from other research-intensive firms through a licensing agreement. This approach
saves costs of in house R&D, but it means that the firm is banking on a solution that already exists but
has not yet been marketed.
c) Brainstorming – Firms often engage in brainstorming sessions during which a group works together to
generate ideas. One key characteristic is that no idea can be immediately accepted or rejected.
Moderator may direct focus but only at the end are the best ideas accepted. d) Competitors Products – New product entry by competitor may trigger opportunity for another firm.
This firm can reverse engineer to understand the competitors’ product and produce an improved
version to offer to consumers
Reverse engineering – involves taking a competitor’s product, analyzing it, and creating and improved
version that does not infringe on the competitors patents.
e) Consumer Input- Listening to consumer is essential for successful idea generation. The firms design
and development teams work on consumer suggestions or trends to develop products that have a
significantly greater chance of being adopted by the consumer.
Lead users- innovative product users who modify existing products according to their own ideas to suit
their specific needs.
2) Concept Testing - Ideas that