Chapter 9 New-Product Development and Product Life-Cycle Strategies

Learning Objectives 1. Explain how companies find and develop new-product ideas. 2. List and define the steps in the new-product development process and the major considerations in managing this process. 3. Describe the stages of the product life cycle. 4. Discuss two additional product and service issues: socially responsible product decisions and international product and services marketing. Chapter Overview This chapter will focus on two topics: developing new products and managing products through their life cycles. New products are the lifeblood of an organization. However, new-product development is risky, and many new products fail. The first part of this chapter lays out a process for finding and growing successful new products. In the second part of the chapter, we see that every product passes through several life-cycle stages and that each stage poses new challenges requiring different marketing strategies and tactics. Finally, we look at two additional considerationssocial responsibility in product decisions and international product and services marketing. Chapter Outline 1.0 INTRODUCTION Google is spectacularly successful. Despite formidable competition from giants like Microsoft and Yahoo!, Googles share in its core businessonline searchstands at a decisive 66 percent, 2.5 times the combined market shares of its two closest competitors. The company also captures 86 percent of the mobile-search market and 60 percent of all search-related advertising revenues. Googles mission is to organize the worlds information and make it universally accessible and useful. That idea unifies what would otherwise appear to be a widely diverse set of Google projects. At many companies, new-product development is a cautious, step-by-step affair that might take a year or two to unfold. In contrast, Googles freewheeling new-product development process implements major new services in less time than it takes competitors to refine and approve an initial idea. According to Google CEO Eric Schmidt, when it comes to new-product development at Google, there are no two-year plans. The companys new-product planning looks ahead only four to five months. Schmidt says that he would rather see projects fail quickly than see a carefully planned, long drawn-out project fail. Googles famously chaotic innovation process has unleashed a seemingly unending flurry of diverse products: ranging from Gmail, Google Blog Search, Google Checkout, Google Picasa, Google Android, Chrome, Google Maps, and Google Earth. Google is open to new-product ideas from about any source. What ties it all together is the companys passion for helping people to find and use information. Innovation is the

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responsibility of every Google employee. Google engineers are encouraged to spend 20 percent of their time developing their own new-product ideas. And all new Google ideas are quickly tested in beta form by the ultimate judgesthose who will use them. In the end, at Google, innovation is more than a processits part of the companys DNA. The marvel of Google is its ability to continue to instill a sense of creative fearlessness and ambition in its employees. Prospective hires are often asked, If you could change the world using Googles resources, what would you build? This isnt a theoretical question: Google wants to know because thinking and building on that scale is what Google does. Opening Vignette Questions 1. What is Googles mission? 2. How would you describe Googles new-product development process? 3. How does Google test ideas for new products? Every product seems to go through a life cycle: it is born, goes through several phases, and eventually dies as newer products come along that create greater value for customers. This product life cycle presents two major challenges: First, because all products eventually decline, a firm must be good at developing new products to replace aging ones (the challenge of new-product development). Second, a firm must be good at adapting its marketing strategies in the face of changing tastes, technologies, and competition as products pass through stages (the challenge of product life-cycle strategies). We first look at the problem of finding and developing new products and then at the problem of managing them successfully over their life cycles. 2.0 NEW-PRODUCT DEVELOPMENT STRATEGY A firm can obtain new products in two ways. One is through acquisitionby buying a whole company, a patent, or a license to produce someone elses product. The other is through the firms own new-product development effortsoriginal products, product improvements or modifications, and new brands. New products are important to customers because they bring new solutions and variety to their lives. For companies, new products are a key source of growth. Yet innovation can be expensive and risky, as new products face tough odds and high chances of failure. 3.0 THE NEW-PRODUCT DEVELOPMENT PROCESS Companies must develop new products, but the odds weigh heavily against success. In order to create successful new products, a company must carry out strong new-product planning and set up a systematic, customer-driven new-product development process for finding and growing new products (see Figure 9.1, p. 285 in the textbook). 3.1 Idea Generation New-product development starts with idea generationthe systematic search for new product ideas. Major sources of new-product ideas include internal and external sources, such as customers, competitors, distributors, suppliers, and others.

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3.1.1

Internal Idea Sources

Using internal sources, the company can find new ideas through formal research and development. It can pick the brains of employeesfrom executives to scientists and engineers, and manufacturing staff to salespeople. 3.1.2 External Idea Sources

Companies can also obtain good new-product ideas from any of a number of external sources, such as distributors and suppliers or even competitors. Other sources include trade magazines, shows, and seminars; government agencies; advertising agencies; marketing research firms; university and commercial laboratories; and inventors. Perhaps the most important source of new-product ideas is customers themselves. The company can analyze customer questions and complaints, or it can invite customers to share ideas and suggestions. 3.1.3 Crowdsourcing

Many companies are developing crowdsourcing or open-innovation new-product idea programs. Crowdsourcing invites broad communities of people to provide input for the new-product innovation process. Truly innovative companies dont rely on only one source or another for new-product ideas. Instead, they create extensive networks for capturing inspiration from every possible source. 3.2 Idea Screening The purpose of idea generation is to create a large number of ideas. The purpose of succeeding stages is to reduce that number. The first idea-reducing stage is idea screening, which helps spot good ideas and drop poor ones as soon as possible. Product development costs rise greatly in later stages, so the company wants to go ahead only with those product ideas that will turn into profitable products. 3.3 Concept Development and Testing It is important to distinguish between a product idea, a product concept, and a product image. A product idea is an idea for a possible product that the company can offer to the market. A product concept is a detailed version of the idea stated in meaningful consumer terms. A product image is the way consumers perceive an actual or potential product. 3.3.1 Concept Development

Suppose a car manufacturer has developed a practical battery-powered, all-electric car. The marketers task is to develop this new product into alternative product concepts, find out how attractive each concept is to customers, and choose the best one. 3.3.2 Concept Testing

Concepttesting calls for testing new-product concepts with groups of target consumers. The concepts may be presented to consumers symbolically or physically, after which those consumers may respond to those concepts by answering questions about them. Their answers help the company decide which concept has the strongest appeal.

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3.4 Marketing Strategy Development Marketing strategy development is designing an initial marketing strategy for introducing this all-electric car to the market. The marketing strategy statement has three parts. The first part describes the target market; the planned value proposition; and the sales, market share, and profit goals for the first few years. The second part outlines the products planned price, distribution, and marketing budget for the first year. The third part describes the planned long-run sales, profit goals, and marketing mix strategy. 3.5 Business Analysis Oncemanagementhasdecidedonitsproductconceptandmarketingstrategy,itcan evaluate the business attractiveness of the proposal. Business analysis involves a review of the sales, costs, and profit projections for a new product to find out whether they satisfy the companys objectives. If they do, the product can move to the product development stage. 3.6 Product Development In product development, R&D or engineering develops the product concept into a physical product. This step calls for a large jump in investment. To show whether the product idea can become a workable product, the R&D department will develop and test one or more prototypes of the product concept. This process can take days, weeks, months, or years depending on the product and prototype methods. Marketers often involve actual customers in product testing to make sure that the new product will have the required functional features and convey the intended psychological characteristics. 3.7 Test Marketing Test marketing is the stage at which the product and the marketing program are introduced into realistic market settings. Test marketing lets the company test the product and its entire marketing program. However, test-marketing costs can be high, and it takes time that may allow competitors to gain advantages. As an alternative to extensive, costly standard test markets, controlled test markets allow the testing of new products and tactics among controlled groups of customers and stores. Companies can also test new products using simulated test markets, in which researchers measure consumer responses to new products and marketing tactics in laboratory stores or simulated shopping environments. 3.8 Commercialization If the company goes ahead with commercializationintroducing the new product into the marketit will face high costs. The company must first decide on the timing of the introduction, a decision that will be influenced by its existing product line, the economy, competitors, and more. Then, it must decide on where to launch the new productlocally, regionally, nationally, or internationally. 4.0 MANAGING NEW-PRODUCT DEVELOPMENT New-product development involves more than just going through a series of steps. Instead, companies must manage this process holistically, in order to ensure that the new-

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product development process is a customer-centered, team-based, systematic effort. 4.1 Customer-Centered New-Product Development Successful new-product development begins with a thorough understanding of what consumers need and value. Customercentered newproduct development focuses on finding new ways to solve customer problems and create more customer-satisfying experiences. Customer involvement has a positive effect on the new-product development process and product success. Therefore, innovative companies get out of the research lab and mingle with customers in the search for new customer value. 4.2 Team-Based New-Product Development Effective new-product development also requires a total-company, cross-functional effort. Under the sequential product development approach, one company department works individually to complete its stage of the process before passing the new product along to the next department and stage. This systematic process can help control complex and risky projects; however, it also can be dangerously slow. In order to get their new products to market more quickly, many companies use a team based newproduct development approach. Under this approach, company departments work closely together in cross-functional teams, overlapping the steps in the product development process to save time and increase effectiveness. Instead of passing the new product from department to department, the company assembles a team of people from various departments that stay with the new product from start to finish. Although this approach does have some limitations, the rewards of fast, flexible product development far exceed the risks. 4.3 Systematic New-Product Development The new-product development process should be holistic and systematic, rather than haphazard and compartmentalized. In pursuit of these goals, a company can install an innovation management system to collect, review, evaluate, and manage new-product ideas. This approach yields two favorable outcomes: (1) it helps create an innovationoriented company culture, and (2) it will yield a larger number of new-product ideas. Moreover, successful new-product development requires a whole company commitment. 4.4 New-Product Development in Turbulent Times During difficult economic times, management may be tempted to reduce spending on new-product development. However, such thinking is usually shortsighted. In difficult times, innovation more often helps than hurts in making the company more competitive and positioning it better for the future. 5.0 PRODUCT LIFE-CYCLE STRATEGIES After launching a new product, management is aware that it will have a life cycle, although its exact shape and length cannot be known in advance. A typical product life cycle (PLC) is the course that a products sales and profits take over its lifetime (see p. 297 in the textbook). The product life cycle has five distinct stages: 1. Product development begins when the company finds and develops a new-product

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idea. During product development, sales are zero and investment costs mount. 2. Introduction is a period of slow sales growth as the product is introduced in the market. Profits are nonexistent in this stage because of the heavy expenses of product introduction. 3. Growth is a period of rapid market acceptance and increasing profits. 4. Maturity is a period of slowdown in sales growth because the product has achieved acceptance by most potential buyers. Profits level off or decline because of increased marketing outlays to defend the product against competition. 5. Decline is the period when sales dwindle and profits drop. Although not all products follow all five stages of the PLC, the concept can describe a product class (gasoline-powered automobiles), a product form (SUVs), or a brand (the Ford Escape). Product classes have the longest life cycles. Product forms have the standard PLC shape. However, a specific brands PLC can change quickly because of changing competitive attacks and responses. The PLC can be applied to styles, fashions, and fads. A style is a basic and distinctive mode of expression. A fashion is a currently accepted or popular style in a given field. Fads are temporary periods of unusually high sales driven by consumer enthusiasm and immediate product or brand popularity. When used carefully, the PLC concept can help in developing good marketing strategies for the different stages of a product. Nevertheless, using the PLC concept to forecast product performance or develop marketing strategies presents some problems. In practice, for example, it is difficult to forecast the sales level at each PLC stage, the length of each stage, and the shape of the PLC curve. The moral of the product life cycle is that companies must innovate continually or else they risk extinction. 5.1 Introduction Stage The introduction stage starts when the new product is launched. In this stage, profits are negative or low, due to low sales and high expenses for distribution and promotion. If the new product satisfies the market, it will enter the growth stage. This is where sales begin to climb quickly. New competitors will enter the market. They will introduce new product features, and the market will expand. The increase in competitors leads to an increase in the number of distribution outlets. Prices remain stable. Profits increase during the growth stage, as promotion costs are spread over a large volume and as unit manufacturing costs decline. The maturity stage is characterized by slowing product growth. This stage lasts longer than the previous stages, and it poses strong challenges to marketing management. Because most products are in the maturity stage, most marketing management deals with the mature product. The slowdown in sales growth results in many producers with many products to sell. Competitors begin marking down prices, increasing their advertising and sales promotions, and upping their product-development budgets to find better versions of the product. These steps lead to a drop in profit. During this stage, product managers should consider modifying the market, product, and marketing mix. In modifying the market, the company tries to increase the consumption of the current product. In modifying the product, the company tries changing characteristics such as quality, features, style, or packaging to attract new users and to inspire more

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usage. In modifying the marketing mix, the company tries to improve sales by changing one or more marketing mix elements. The sales of most product forms and brands eventually dip. This is the decline stage. Sales decline for many reasons, such as technological advances, shifts in consumer tastes, and increased competition. As sales and profits decline, some firms withdraw from the market. Those remaining prune their offerings and pay attention to their aging products. The first task is to identify those products in the decline stage by regularly reviewing sales, market shares, costs, and profit trends. Then management must decide whether to maintain, harvest, or drop each of the declining products. 6.0 ADDITIONAL PRODUCT AND SERVICE CONSIDERATIONS We will wrap up our discussion of products and services with two additional considerations: social responsibility in product decisions and international product and services marketing. 6.1 Product Decisions and Social Responsibility Marketers should consider public policy issues and regulations regarding acquiring or dropping products, patent protection, product quality and safety, and product warranties. Regarding new products, the government may prevent companies from adding products through acquisitions if the effect threatens to lessen competition. Companies dropping products must observe their legal obligations to suppliers, dealers, and customers who have a stake in the dropped product. Companies must also obey U.S. patent laws when developing new products. Manufacturers must comply with specific laws regarding product quality and safety. For example, the Consumer Product Safety Act of 1972 established the Consumer Product Safety Commission, which has the authority to ban or seize potentially harmful products and set severe penalties for violation of the law. If a product with a defective design injures consumers, they can sue manufacturers or dealers. A recent survey of manufacturing companies found that product liability was the second-largest litigation concern, behind only labor and employment matters. Litigation from these issues has resulted in huge increases in product liability insurance premiums, causing big problems in some industries. Congress passed the Magnuson-Moss Warranty Act in 1975. The act requires that full warranties meet certain minimum standards, including repair within a reasonable time and without charge or a replacement or full refund if the product does not work after a reasonable number of attempts at repair. Otherwise, the company must make it clear that it is offering only a limited warranty. 6.2 International Product and Services Marketing International product and service marketers face special challenges. First, they must figure out what products and services to introduce and in which countries. Then, they must decide how much to standardize or adapt their products and services for world markets. Packaging also presents new challenges for international marketers. Although product and package standardization can produce benefits, companies must usually adapt

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their offerings to the unique needs of specific international markets. Service marketers also face special challenges. Some service industries, such as commercial banking, have a long history of international operations. Professional and business service industries have also globalized. The international growth of these companies followed the globalization of the client companies they serve. Retailers are among the latest service businesses to go global. As their home markets are becoming saturated, American retailers are expanding into faster-growing markets abroad. The trend toward growth of global service companies will continue, especially in banking, airlines, telecommunications, and professional services. Student Exercises 1. Key Term: New Product Development

At Google, innovation is more than a processits part of the companys DNA. When engineers at Google create a prototype, the Googly thing to do is launch it on Google Labs. Check out Google Labs at (www.googlelabs.com). What is the role of this website in Googles freewheeling new-product development process? 2. Key Term: Idea Generation

New-product development starts with idea generationthe systematic search for new product ideas. To harness customer input into new-product development, 3M has opened nearly two dozen customer innovation centers throughout the world. How do these centers help 3M to bring together culture and technology, as well as customers and engineers, to make new products and services? 3. Key Term: Crowdsourcing

The practice of crowdsourcing throws the innovation doors wide open, inviting broad communities of peoplecustomers, employees, independent scientists and researchers, and the public at largeinto the new-product development process. Dells IdeaStorm site (www.ideastorm.com) asks consumers or anyone else for insights on how to improve the companys products. How does this website contribute to Dells new-product development efforts? 4. Key Term: Test Marketing

Test marketing is the stage of new-product development in which the product and its proposed marketing program are tested in realistic market settings. However, test marketing can be costly and time consuming. Therefore, companies are seeking out alternative ways to test their ideas for products and promotions. The SymphonyIRI Group (www.symphonyiri.com) helps clients transform insights into impact at every level of their organization across sales, marketing, merchandising, category and brand management, and shopper marketing to achieve high performance and growth. What kinds of test-marketing services does The SymphonyIRI Group provide? 5. Key Term: Product Life Cycle

The product life cycle (PLC) represents the course of a products sales and profits over its lifetime. It involves five distinct stages: product development, introduction, growth,

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maturity, and decline. Browse the Internet to locate a product that represents the product development stage. Do the same for the remaining four stages. 6. Key Term: Fashion

A fashion is a currently accepted or popular style in a given field. The more formal business attire of the 1980s and 1990s has given way to the business casual look of the 2000s. However, there is some controversy over just what business casual attire is supposed to look like. Search the Internet for several sites that offer advice about appropriate workplace clothing to learn about the business casual style. Were you surprised by what you discovered? Why or why not? 7. Key Term: Decline Stage

The last stage of the product life cycle is the decline stage. Products experiencing sales decline and profit decay occupy this unenviable stage. Check out the home audio components offered at Pioneer Electronics (www.pioneerelectronics.com). Do you see any products there that are in the decline stage? 8. Key Term: Fads

Fads are temporary periods of unusually high sales driven by consumer enthusiasm and immediate product or brand popularity. A fad may be a part of an otherwise normal PLC of a brand or product, or the fad may comprise the entire life cycle of a brand or product. Browse the Internet to locate a couple of current fads. Why do you think they are fads? 9. Key Term: Introduction Stage

Several companies have developed viable 3D technology for the home theater environment, but the reality of seeing 3D TV in the average household is probably years away. In your opinion, what will need to happen in order for 3D TV to move into the growth stage of the PLC? 10. Key Term: International Product Service and Marketing

Packaging presents challenges for international marketers. For example, names, labels, and colors may not translate easily from one country to another. Your textbook cites examples of colors and names of brands that did not translate well from the marketplace in the United States into an international setting (see p. 305). Search the Internet for some other examples of colors or names of brands that got lost in translation. Marketing ADventure Exercises 1. Ad Interpretation Challenge: Idea Generation Ad: Information TechnologyGoogle

New-product development begins with idea generationthe systematic search for newproduct ideas. For companies, new products are a key source of growth. Even in a down economy, companies must innovate, as new products provide new ways to connect with customers as they adapt their buying to changing economic times. Read the opening vignette about Google on pp. 282283 in your textbook. How does Google create an environment that encourages every employee to take responsibility for innovation?

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2.

Ad Interpretation Challenge: Idea Generation Ad: CrowdsourcingInnoCentive

The practice of crowdsourcing invites broad communities of people (customers, employees, independent scientists and researchers, and the public at large) to participate in the process of developing new products. InnoCentive (www.innocentive.com) is recognized as a pioneer in open-innovation and crowd sourcing. Review the products and solutions posted on its website. How can these products and services help companies succeed in the idea-generation process? 3. Ad Interpretation Challenge: Product Development Ad: Office ProductsHewlett Packard (HP)

Customers are often directly involved in product testing. For example, Hewlett Packard signs up consumers to evaluate prototype imaging and printing products in their homes and offices. Visit the HP Product Test site at (www.hpproducttest.com). What is the Beta Test Program? What is the Delta Test Program? How can consumers participate in product-testing programs supported by HP? 4. Ad Interpretation Challenge: Customer-Centered New Product Development Ad: LEGO GroupReal Marketing 9.1

According to the Real Marketing 9.1 feature on pp. 295296 in your textbook, LEGO plastic bricks have been fixtures in homes around the world for more than 60 years. However, only six years ago, the Danish-based LEGO Group (TLG) was near bankruptcy. The problemthe classic toy company had fallen out of touch with its customers, so its products had fallen out of touch with the times. In 2004, the company set out to rebuild its aging product line, brick by brick. Identify the essential elements of that rebuilding plan. How is LEGO performing in todays challenging economy? 5. Ad Interpretation Challenge: Commercialization Ad: Student Choice

If the company chooses to go ahead after the test marketing stage and launch the new product into the market, it is entering the commercialization phasethe final stage of the new-product development process. Browse the Internet to locate an advertisement for a product that is entering the commercialization phase. 6. Ad Interpretation Challenge: New-Product Development in Turbulent Times Ad: Consumer ElectronicsApple

During tough economic times, management may be tempted to reduce spending on newproduct development. However, such thinking is usually shortsighted. Good times or bad, a company must continue to innovate and develop new products if it wants to grow and prosper. How has Apples performance during the recent tough economy made it more competitive and positioned it for the future? 7. Ad Interpretation Challenge: The Product Life Cycle Ad: CondimentsTABASCO

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Not all products follow the five stages of the PLC. In fact, it seems like a well-managed brand could last forever. For example, TABASCO sauces marketing slogan is over 140 years old and yet still able to totally whup your butt! Other venerable brands include Coca Cola, Budweiser, Guinness, American Express, Wells Fargo, Kikkoman, and Gillette. Visit the websites of several brands noted in this exercise, and review their histories. In your opinion, why have they been able to stand the test of time? 8. Ad Interpretation Challenge: The Product Life Cycle Ad: Virgin: Constant Reinvention of the BrandReal Marketing 9.2

According to the Real Marketing 9.2 feature in your textbook (see pp. 300301), innovation and brand identity are key driving factors behind Virgin. What do you think of Virgin Galactic? 9. Ad Interpretation Challenge: Maturity Stage Ad: Greeting CardsAmerican Greetings

At some point, a products sales growth will slow down, and the product will enter the maturity stage of the PLC. In modifying the market, the company tries to boost sales by finding new users and new market segments for its brands. Visit American Greetings at (www.americangreetings.com). Based on what you see there, what is American Greetings doing to find new users and reach new market segments? 10. Ad Interpretation Challenge: Social Responsibility Ad: Student Choice

Marketers must carefully consider public policy issues and regulations regarding acquiring or dropping products, patent protection, product quality and safety, and product warranties. A product recall is a request to return to the maker a batch or an entire production run of a product, usually due to the discovery of safety issues. The recall is an effort to limit liability for corporate negligence and to improve or avoid damage to the corporations image. Search the Internet to discover information about a recent or pending product recall. What is the product? Why is it being recalled?

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