MODULE 3 NEW PRODUCT DEVELOPMENT

18.1 SIGNIFICANCE OF NEW PRODUCTS

New product development is a major component of the firms product
policy. It is not enough if the existing product lines are appraised
properly, products are positioned effectively & brand decisions taken
wisely. For higher levels of growth, a firm has to look beyond its existing
products.

Meeting Changes in Consumer Demand

It is to be expected that there will be change in food habits, comforts &
convenience of life, social customs & habits, expectations &
requirements.
Any business has to be vigilant about these changes taking place in its
environment. People always seek better things better products &
services, more convenience I products, more fashion & value for money.
A business firm has to respond to these dynamic requirements & these
responses take the shape of new products/services.

Making New Profits

New products become necessary from the profit angle too. Products that
are already established often have their limitation in enhancing the
profit level of the firm. It thus becomes essential for business firms to
bring in new products to replace old, declining & losing products. New
products become part of the growth requirements of the firm & in
many cases, new profits come only through new products.

Combating Environmental Threats

Threats emanate from different aspects of the environments such as
changes in the economic, social & political conditions, and technology &
supply related conditions. In addition, there is the ever-present
competition acting as another sources of threats.
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18.2 CLASSIFICATION OF NEW PRODUCTS
New products can be broadly classified into:
a) New products arising out of technological innovations
b) New products arising out of marketing-oriented modifications

The Walkman Story

A new product idea may emerge through many routes such as:
Companys R&D
Companys market research
External research organizations
Companys employees/suggestion schemes
Customers/Dealers
As a natural happening (one gets the idea during a casual
conversation with a colleague)
The Walkman idea belongs to the last category. How did the product
idea occur & how was it developed? Morita himself tells the story in his
book, Made in Japan. His friend used to walk into the room, carrying
his heavy stereo record player & a pair of headphones. He used to say,
I like music very much. But this equipment is too heavy to carry but still,
I take it, as I want my music with me. And thus was born SONY
WALKMAN

Ibukas point in telling this story is simple

I do not believe that any amount of market research could have told us
that the Sony Walkman would be successful; yet, this small item literally
changed the music-listening habits of millions of people all around the
world. Often such a product idea strikes us as a NATURAL
HAPPENING. Once the idea is there, we have to refine our own thinking
on it & its use & create the product. We must also create market for it.
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MODULE 3 NEW PRODUCT DEVELOPMENT

18.3 STAGES IN NEW PRODUCTS DEVELOPMENT
There are basically 8 stages in new- product development process
Idea generation
Concept development & testing
Business analysis
Test marketing
Stage
01

02

03

04

05

06

07

08

Start
Coordinate,
Stimulate &
Search for ideas
inside & outside
Identify
Co., factors
Their weights
Develop
alternative
product concepts

Propose
1. Price
2. Distribution
3. Promotion
Propose
1. Mkt analysis
2. Cost analysis
Conduct
Factory tests
Cons Pref tests
Branding
Packaging
Go into ltd
prodn, prepare
advtg plans
Go into full
production &
distribution

Evaluate
Is the idea worth
considering

* Idea screening
* Marketing strategy development
* Product development
* Commercialization
Action

Conclude
Yes
No

Does the idea

agree with co.,
obj, strategy &
resources?
Can we find a
good concept for
the product
attracting cons
attention
Can we find a
cost-effective,
affordable marktg
strategy?
Will this product
meet our profit
goal?
Have we
developed product
that is technically
& commercially
sound?
Have product
sales met our
expectations?
Are product sales
meeting our
expectations?

Yes
No
Yes

No
Yes
No
Yes
No
Yes
No
Yes
No
Yes
No

Idea
generation
Drop
Idea
screening
Drop
Concept
developing &
testing
Drop
Marketing
strategy
development
Drop
Business
analysis
Drop
Product
development
Drop
Test
marketing
Drop
Commercializ
ation
Drop

MODULE 3 NEW PRODUCT DEVELOPMENT

18.4 NEW PRODUCTS DEVELOPMENT
Extent of Newness of the Product
A totally new product (new to the world)
A new product to a particular society
A new product to the particular company
A new product to the particular company, in the particular market
segment
A low value product for the consumer
A high value product for the consumer
A low priority product for the consumer
A high priority product for the consumer
A luxury product
A convenience product
A product that can meet a currently felt need
A product that will serve a created desire

Business/Market Analysis

A fairly reliable estimate of demand for the proposed product

Seasonal patterns in consumption, if any
Other market features affecting demand
Price elasticity of demand
Competition; major competitors, their market share, the dominant
market segments held by them, etc.,
Volume-Cost-Profit analysis at different feasible levels
Type of marketing channels required, type of channels available,
comparative costs/advantages of the available types
The marketing organization required for marketing the product;
and what would it cost.

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18.5 NEW PRODUCTS DEVELOPMENT
Business/Market Analysis
This stage is of special importance in the new product development
process, because several vital decisions regarding the project are taken
based on the analysis done at this stage. This stage will decide whether
from the financial & marketing point of view, the project is worth
proceeding with. Investment analysis & profitability analysis of the
project under different assumptions are made at this stage. The
projects overall impact on the companys financial position with &
without the new products are estimated & compared.

Estimating Demand for New Products

Firms usually take up estimating the demand for the new product as a
part of business analysis/market analysis. The following 2 methods can
be tried to estimate demand of new products:

Substitution/Displacement Method:
A new product generally displaces some old products or old use pattern.
When nylon came to India, it was a totally new product. Nylon
displaced rayon in 2 ways in textiles, nylon filament yarn (NFY)
displaced rayon filament yarn & in tire cords, nylon tire cord (NTC)
displaced rayon tire cord. The estimated demand for the existing
product can serve as the maximum limit for the demand for the new
product.

End-Use Method:
Products that have an altogether new end use do come to the market
once in a while. The only way to assess the demand for such products is
to define the end use of the new product & to locate the potential
customers for it. The aggregate of potential customers in each use
category is taken as the potential demand in that category.

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18.6 PRICING STRATEGY FOR NEW PRODUCTS

Difficulties firms face in new product pricing

There are 2 broad methods of pricing demand-based & competitionbased. Neither of them suits a new product. Demand-based pricing is
out of question for such products, as adequate data is not available in
respect of these products. Competition-based pricing is also out of
question, because the product is a pioneer.

Skimming Pricing
In skimming pricing, the new product is priced high & the cream of the
market is skimmed by concentrating on those segments that are not
price-sensitive. Such prices will fetch the firm substantial initial income,
which it can plough in for further market development & promotion.
Through this method, the firm also recovers a substantial portion of its
development costs. Later on, the firm may bring down the prices, when
it enters mass markets, which are more price-sensitive. Skimming prices
cannot be employed if the product cannot command the patronage of an
affluent, non price-sensitive, market segment.

Penetration Pricing
When the new product is likely to be highly price-sensitive & when
there is no elite market for it, penetration pricing will be the option. The
intention in this strategy is to penetrate a broad market through low
prices. The income is generated by sales spread over large markets; the
large volume facilitates substantial economies in unit cost of production
& marketing; and the cycle can continue. The strategy helps to establish
the product in the market.

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18.7 FIRMS REQUIREMENTS IN PURSUING NEW PRODUCTS

The firms requirements in going for the new products can be

one of the following:
To be real innovator & to earn the rewards associated with the
innovation
To exploit a market need that is coming to the fore
To expand the product mix to ensure steady growth over the
long run
There are companies, which have a thirst for innovation.
Usually, they are also very ambitious in the matter of rewards.
They are prepared to shoulder the risks associated with
product innovations, as they know that without undertaking
such risks, they cannot gain big rewards. New product
development is 2nd nature to such companies & they are
constantly at this game.
The 2nd category of companies goes in for a new product, when
they have spotted a felt need for it in the market.
In the 3rd category, the compulsion for going in for a new
product comes out of the companys desire to keep expanding
its product mix. The company does not want to limit itself with
the existing products/product lines. Such a company will
nurture a new product idea that fits in with the basic
requirement of product mix expansion. Such companies are
generally more conservative in their approach to new product
development relative to the other 2 categories. Their policy is
one of limited risk. They will take up only those product
ideas that, in their estimate, are sure to fetch commercial
success.
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