8 New Product Development

Sudhanshu Joshi

Learning Objectives:

The Learning objectives of the module are to address the following questions:

1. Understanding how a new product is developed.

2. Understanding various concepts related to new product.

3. Understanding different stages of a product life cycle.

Definition

Strategic sourcing: The development and management of supplier relationships to acquire goods and services in a way that aids in achieving the immediate needs of a business.

Bullwhip effect: The variability in demand is magnified as we move from the customer to the producer in the supply chain.

Functional products Staples that people buy in a wide range of retail outlets, such as grocery stores and gas stations

Innovative products: Products such as fashionable clothes and personal computers that typically have a life cycle of just a few months

Outsourcing Moving some of a firm’s internal activities and decision responsibility to outside providers.

Logistics Management functions that support the complete cycle of material flow: from the purchase and internal control of production materials; to the planning and control of work-in- process; to the purchasing, shipping, and distribution of the finished product.

Inventory turnover and weeks of supply Measures of supply chain efficiency that are mathematically the inverse of one another.

Cost of goods sold The annual cost for a company to produce the goods or services provided to customers.

Average aggregate inventory value The total value of all items held in inventory for the firm, valued at cost.

Weeks of supply A measure of how many weeks’ worth of inventory is in the system at a particular point in time.

Mass customization The ability of a company to deliver highly customized products and services to different customers around the world.

Process postponement Delay of the process step that differentiates a product to as late in the supply chain as possible.

Functional products include the staples that people buy in a wide range of retail outlets, such as grocery stores and gas stations. Because such products satisfy basic needs, which do not change much over time, they have stable, predictable demand and long life cycles. But their stability invites competition, which often leads to low profit margins. Specific criteria suggested by Fisher for identifying functional products include the following: product life cycle of more than two years, contribution margin of 5 to 20 percent, only 10 to 20 product variations, an average forecast error at time of production of only 10 percent, and a lead time for make-to-order products of from six months to one year.To avoid low margins, many companies introduce innovations in fashion or technology to give customers an additional reason to buy their products. Fashionable clothes and personal computers are good examples. Although innovation can enable a company to achieve higher profit margins, the very newness of the innovative products makes demand for them unpredictable. These innovative products typically have a life cycle of just a few months. Imitators quickly erode the competitive advantage that innovative products enjoy, and companies are forced to introduce a steady stream of newer innovations. The short life cycles and the great variety typical of these products further increase unpredictability.

Demand Characteristics
FUNCTIONAL	INNOVATIVE
Low demand uncertainty	High demand uncertainty
More predictable demand	Difficult to forecast
Stable demand	Variable demand
Long product life	Short selling season
Low inventory cost	High inventory cost
Low profit margin	High profit margin
Low product variety	High product variety
Higher volume	Low volume
Low stock out cost	High stock out cost
Low obsolescence	High obsolescence

Supply Characteristics
STABLE	EVOLVING
Less breakdowns	Vulnerable to breakdowns
Stable and higher yields	Variable and lower yields
Less quality problems	Potential quality problems
More supply sources	Limited supply sources
Reliable suppliers	Unreliable suppliers
Less process changes	More process changes
Less capacity constraints	Potential capacity constrained
Easier to change over	Difficult to change over
Flexible	Inflexible
Dependable lead times	Variable lead time

Hau Lee’s Uncertainty Framework—Examples and Types of Supply Chain Needed

1. Introduction: What is New Product Development?

New product development is the complete process of introducing a new product to the market for consumption and feedback from the end user of the business chain through the systematic procedure and parameter. The new product may be consumable product or service. New products are goods and services that differ in their characteristics from previously produced goods and services by the firm.

New product development is the process of bringing a new product to the market as per the requirement of the customers. New product development may be done to compete with a product or may be done to improve an existing product.

1.1. Why New Products?

Business organizations develop new products due to following reasons:

(I) A business organization can’t survive in current competitive environment with their routine products because the changing environment changes the customers’ demands. In order to survive business firms need to introduce new products or modify the existing products as per the needs and wants of customers. The new products bring to the market by business firms must satisfy the customer needs and wants otherwise it is not beneficial for the firms.

(II) Business organization introduced new products to the market in order to enhance the net profit of the organization because new products are unique and there are high demands for new products. The new products have high demands in the market because they are developed as per the requirement of the customers.

(III) Another reason for the development of new product is that changing environment creates new demand and needs.

1.2. New Product Development Strategy:

New product development strategy includes how business organizations can develop or introduced new product to the market. There are mainly three methods which are adopted by the firms for new product development which are as follows:

(I) Merger

(II) Acquisition

(II) New Product Development

Merger:

Merger simply means the fusion of two or more companies voluntarily to form a new company. Merger happened when two or more companies combines into one new company. In India merger is known as amalgamation. In merger, the merging companies are called amalgamating company and the new company is called amalgamated. By this way, the amalgamated company introduced the products of amalgamating company.

Types of Merger:

There are mainly three types of merger as under: Vertical Merger;

Horizontal Merger; and Conglomerate Merger.

Vertical Merger:

Vertical merger is a kind of merger happened between two companies producing different kinds of products. For example, if a car manufacture company merges with a tire company then it is a kind of vertical merger.

Horizontal Merger:

Horizontal merger is a kind of merger happened between two companies producing similar kinds of products.

Conglomerate Merger:

A conglomerate merger is a merger between firms that are involved in totally unrelated business activities.

Acquisition:

It is another way to introduce something new to the market. Acquisition simply means acquiring a whole company or buys a patient or license to bring new products to the market. In other words, when one entity purchases the business of another entity then it is known as acquisition.

An acquisition may be an act of acquiring effective control by one company over assets or management of another company without any combination of companies. Companies may remain independent, separate but there may be change in control of companies.

2. New Product Development:

Under this way of product development firms develop new product and introduced it to the market by their own research efforts. The products came under this category are new products, modified products or new brands developed by the firms.

2.1. Reasons for Failure of a New Product:

Often new products introduced by the firms to the market do not successful. There are many reasons behind this. Failure of a product is painful because firms does hard work for launching a new product to the market. But it is a common phenomenon around the globe that if the product can’t satisfy customer needs and does not fulfill the organization objectives then it can’t be survive in the market. We can divide failure in two types namely, outright failure and partial failure.

Outright Failure:

When failure of a product results in close down the venture then it will be known as outright failure. Losing money is an outright failure, which might be due to negative market process. Outright failure occurs when there is no demand for the newly launched product in the market. Another major reason behind outright failure of a product is that miscalculation of unit cost and distribution cost. As a result the product does not contribute to the fixed and variable cost.

Partial Failure:

When a newly launched product is accepted by the market, but it can’t fulfill its financial targets then it is known as partial failure. A partial failure leaves room for partial failure. The main reason behind partial failure may be miscalculation of cost. The manager tends to find out the root cause of the problem and try to resolve it as soon as possible.

The main reasons behind the failure of a new product are as under:

Launching an imitative product which is not so different from the existing products. An imitative product can’t compete and survive in the market because the existing product have its own customers and they believe on it from long times.
Another major reason for the failure of a new product is its low quality. If the quality of a product is not sufficient as per the requirements of the customers then it can’t be survive in the market.
Target customers are too small that do not meet the sales volume of the company.
Another important reason behind the failure of a new product is the company does not have market access and it is lack of sufficient resources.
Poor timing is also responsible for the failure of a new product. If the product is launched too early before the market is ready or launched too late when the peak season has already passed then it is not possible for the newly launched product to compete and survive in the market.
Marketing strategy should be proper for the success of the new product. Weak marketing strategy will result in a failure of new product because this kind of strategy can’t consider the competitive environment.
Poor advertising is also a reason for the failure of a new product. Due to poor advertising target customers are not aware about the existence and benefit of the product.
Sometimes newly launched products can’t get success in the market due to some mangers’ personal agendas or interest. Some managers try to launch the new product for a major career breakthrough, some try to launch new products to differentiate themselves in the eyes of their senior managers.

3. Types of New Product:

A new product can be of many types. It may be an improvement over an existing product or completely new product. Following are the some types of a new product:

Innovative Product: It means generation of a new idea. This kind of product is completely different from an existing product.
New Product Lines: It means a company add some new products in his existing product lines. For example, mobile manufacturing company Samsung may launch a new mobile phone in their galaxy series. Such newly added products are updated version of the previous one. This is mainly done by companies to strengthen their existing product line.
Improved Products: Under this category, companies tend to make some improvement in their existing products as per their own research and customer feedbacks.
Repositioned Products: Under this an existing product of a company tends to target a new market.
Cost Reduction: Under this companies reduced the cost of their products but specifications remain unchanged. This is basically done by companies to enhance the sale of their obsolete products.

4. Why Companies Develop New Products?

There are several reasons for the development of a new product. The main reasons behind the development of a new product are as under:

(I) To create stars and cash cows for the future.

(II) To replace declining products.

(III) To take advantage of new technology.

(IV) To defeat rivals and strengthen their position in the market.

(V) To maintain or increase market share.

5. Process of New Product Development:

New product development process is a process of developing, testing and considering the viability of new products in the market in order to ensure the growth or survival of the organization. New product development process involves following steps:

(I) Idea Generation

(II) Idea Screening

(III) Concept Development and testing

(IV) Market Strategy Development

(V) Business Analysis

(VI) Test Marketing

(VII) Commercialization

5.1. Idea Generation:

The first step in the new product development process is idea generation. Idea generation simply refers to a systematic and continuous search for new product development opportunities. Here, organizations tend to find out various sources and methods which will be capable to support their ideas. It involves delineating sources of new ideas and methods for generating them. Under this step, business organizations doing various analyses which are as follows:

(I) Dimensional Analysis:

Dimensional analysis involves all physical characteristics of a product. In other words, dimensional analysis provides a list of physical characteristics of a product. Dimensional analysis help organization to find out the answers of some questions such as: “Why is the product this way?”, “How could the product be changed?” or “What would happen if one or more of the characteristics were removed?”

(II) Problem Analysis:

Under problem analysis organization tends to find out the problems faced by consumers while using a particular existing product or service so that they can evolve a new product for the benefit of the consumers.

(III) Benefit Structure Analysis:

In benefit structure analysis organizations find out the list of benefits which a consumer wants in a particular product. In benefit structure analysis, organizations utilize a questionnaire and present this questionnaire in front of the customers.

(IV) Scenario Analysis:

In scenario analysis, companies tend to know about the opportunities available in the market for their new product or service. Companies want to know about current market trend through scenario analyses.

5.2. Idea Screening:

Idea screening is the second step in new product development process. After the identification of potential ideas, it is must for the firm to screen them. In idea screening, firm weeded out poor, unsound, unsuitable and unattractive ideas. The firm has considered only feasible ideas and those who have potential for sustainability and growth.

Under idea screening companies find out the answers of following questions:

(a) Will the product be beneficial for the customer in the target market?

(b) What is the current and expected future competition for the product idea?

(d) Is it technically feasible for the firm to manufacture such product?

(e) Will the product be profitable for the firm when it is manufactured and delivered to the customer at the target price?

5.3. Concept Testing:

Under concept testing the product is presented in front of consumers to know their intentions about the product at this early stage of development. Concept testing help companies to know whether any change is required in their product or not. Concept testing is very helpful to avoid costly mistakes. Concept testing is a quick and inexpensive way of measuring consumer enthusiasm. It asks potential consumers to react on a product or service.

5.4. Market Strategy Development:

The next step for the new product development process is market strategy development. Under this step, firms tend to decide about the market size, structure, product positioning, sales, market share and profit goals of the product for first few years.

In market strategy development, firms also decide about planned price, distribution strategy, and marketing budget for the first few years.

5.5. Business & Financial Analysis:

Business and financial analysis played a vital role in new product development process. It involves various financial analyses such as cost projections, investment analysis and profitability analysis. Under cost analysis, firms find out total cost incurred in new product development process. In investment analysis, companies wants to know about how much funds they can invest in this new product development process. It depends upon firm’s capability. To know the profitability companies do cost-benefit analysis. Under financial analysis, firms also tend to find out the ways from which firms obtain funds. A firm can obtain funds from several ways such as equity funds, debt funds or both. Equity fund involves the owner’s money whereas debt fund does not involve owner’s money. Example of debt fund involve loan from banks. It depends upon firms that how they obtain funds for the successful completion of their operations.

5.6. Test Marketing:

The next step for the new product development process is test marketing. Test marketing involves introducing a product in the market for sale in one or more selected area and observing its feasibility and performance in the market. Through test marketing, firms are able to know about the behaviour of actual consumer. Firms are able to know the reaction and response of consumers.

5.7. Commercialization:

Commercialization is the last and final step of new product development process. After testing is completed, the firm is ready to introduce the product to its full target market. This is commercialization and corresponds to the introductory stage of the product life cycle. Commercialization involves implementing a total marketing plan and full production.

6. Product Life Cycle:

Every product has its own life and it goes through a cycle. Product life cycle is the cycle through which every product goes through from introduction to withdrawal or eventual demise. Different products have different life cycles and it depends upon the characteristics of the product. Following figure shown product life cycle for most products:

Figure 1: Stages of Product Life Cycle

Under product life cycle we are trying to find out answers of some questions such as when it was introduced; when it was getting rapid acceptance; when it was on the peak of its position; when it started falling from the peak; and when it disappeared. Product passes through certain stages during its life span.

No product is capable to satisfy needs and wants of consumers for an unlimited period of time. The sales and profits of the product are differing over time. The life of product can be determined by its capacity to meet market expectations. The existence of a product depends upon its capability to satisfy its customer requirements.

Product life cycle help us to know the relationship between sales volume and profits. Product life cycle can be defined as the study of relationship between sales volume and profits in relation to time through entire span of the products life.

According to Philip Kotler, “The product life cycle is an attempt to recognize distinct stages in sales history of the product”.

6.1. Stages of Product Life Cycle:

Product life cycle comprises of four stages namely, introduction, growth, maturity, and declining stage. Each stage of product life cycle has its own characteristics and these characteristics can be characterized in terms of sales volume, amount of profits, level of promotional efforts and expenses, and degree of competition. Firms need to made unique marketing strategy for each stage of product life cycle.

Introduction Stage:

Introduction stage starts when a newly developed product launched to the market and it is available first time for consumers in the market. Consumers are not aware about the product, or they may not have general opinion and experience about the product.

In this stage, heavy marketing activity and product promotion takes place. The product is put into limited outlets in a few channels for distribution. Sales take off slowly in this stage. The need is to create awareness, not profits.

In the very initial stage, there is loss or negligible profit. During this period, the direct competition is very low. Company has produced the product in limited quantity because he faced selling problems in this stage. Price is normally high to recover or offset the cost of development, production, and marketing with minimum sales. However, the price factor depends upon company business strategy. Under this stage sales of the product rise gradually.

Characteristics of Introduction Stage:

The introduction stage of product life cycle has following characteristics:

(I) In introduction stage a lot of money is required for selling and promotional activities to increase awareness of customers about the product.

(II) Due to high development, production, and marketing costs the price of the product in this initial stage is kept high. However, it depends upon the business strategy of the firm.

(III) The technical and production problems has to be tackled by the marketing and operational experts.

(IV) At this very initial stage the sale of the product is very low and it increases at a lower rate.

(V) During the introduction stage of the product, company suffers from losses or it has negligible profit. In other words, it is a situation of no profit, no loss.

(VI) The level of competition is very low under this stage.

Growth Stage:

This is the stage of rapid market acceptance. The product gets positive response from market because customers have to be aware about the product. This stage is marked by a rapid climb in sales. Sales rise at the increasing rate. Under this stage, seller shifts his promotional attempts from “try-my-brand” to “buy-my-brand”.

Company tries to develop effective distribution network so that no problems faced by the customers. Due to rise in profits, numbers of competitors are high. As some buyers are price- sensitive, to attract such kind of buyers of the product price may be reduced at a right time to.

Company continues its marketing efforts, its selling and promotional efforts to educate and convince the market and meet competition.

Characteristics of Growth Stage:

The main characteristics of growth stage are as under:

(I) As a result of consumer acceptance of the products sales increase rapidly under this stage.

(II) Due to high sales company earn high level of profits.

(III) Due to attractive profits many competitors have to be evolved and enter into the market.

(IV) The level of competition is very high because many competitors are present in the market.

(V) To attract more consumers companies tend to reduce the product price.

(VI) Company develops and widened their distribution network.

(VII) To remove the identified defects in the product company made necessary primary changes in the product.

(VIII) Company enters the new segments and new channels are selected.

Maturity Stage:

This stage is marked with slow down of sales growth. The sales of the product continue to rise but at decreasing rate. Under this stage, many competitors have entered into the market and existing products face high level of competition. In this stage, the sales curve of the firm is pushed downward. During this stage, for certain period of time, sales remain stable. This level is called the saturation stage. Profits of the firm decline gradually. Normally, this stage lasts longer and marketers face formidable challenges.

Under this stage, sales grow at slowing rates and finally stabilize. In this stage, products get differentiated, price wars and sales promotion become common and a few weaker players exit from the market due to non-survival.

The maturity stage may be divided into three phases namely, growth maturity; stable maturity and decline maturity. During growth maturity, sales growth rate is high. In stable maturity phase, sales of the firm remain stable. Stable maturity phase is also known as saturation stage. During decline maturity phase, sales of the firm start to decline.

Under growth stage marginal producers are forced to drop out the products. To sustain in the market, firms modify their products and change their marketing strategy.

Characteristics of Maturity Stage:

The main characteristics of maturity stage are as under:

(I) Under maturity stage the sale of the product increase at decreasing rate.

(II) Profits of the firm start to be declined.

(III) Due to declining profit marginal competitors leave the market.

(IV) Under this stage, firms given more emphasis to customer retention.

(V) To sustain in competitive market, product, market and marketing mix modifications are undertaken in this stage.

Decline Stage:

This is the last stage of product life cycle. Under this stage, sales of the product start declining. Profits also start erasing. There is a minimum profit or even a little loss. Under this stage, firms reduce their advertising and selling expenses in order to earn some profits. The declining stage is faced by only those products who survived in maturity stage.

In declining stage, sales of the product have to be dropped, as consumers may have changed, the product is no longer relevant or useful. During this stage, price wars continue, several products are withdrawn and cost control becomes the way out for most products.

As new products enter to the market with advanced technology and many new specifications, most products have to be obsolete. Customers don’t consider such obsolete products because everyone wants to get updated version of a product. So sales of the product start declining in this stage. New products start their own life cycle and replace old ones. A number of competitors withdraw from the market. Those who remain in the market prefer to drop smaller segments, make minor changes in products, and continue selling the products in profitable segments and channels.

However, under this stage, management continues with the same product with expectation that sales improve when economy improves; marketing strategy is revised expecting that competitors will leave the market; or product is improved to attract new market segments.

It may be costly and risky for the firm to continue with the same products until and unless a strong reason exists for the same. Otherwise, later on it is difficult for the firm to manage selling and promotional efforts. If the product can’t survive and sustain in the highly competitive environment then it incur substantial loss to the firm. It is very difficult for the firm to recover such losses. Before dropping the product completely, marketer must check every possibility. If there is any possibility for the survival of the product in the market then firms will try to exist in the market with same product. The firms may make some changes in their product for survival.

Characteristics of Decline Stage:

Following are the main characteristics of declining stage of a product:

(I) During this stage, sales of the product decline rapidly.

(II) Profits fall more rapidly than sales in this stage.

(III) Firms made modifications in their product for survival.

(IV) Gradually, the company prefers to shift resources to new products.

(V) Due to loss or decline in sales of the product most of sellers withdraw from the market.

(VI) Promotional expenses are reduced to realize a little profit.

6.2. Significance of Product Life Cycle:

Product life cycle analysis plays a vital role for the survival of the product of a firm. If a company done PLC analysis properly, then it can know easily about the health of the product in relation to the market it serves. PLC analysis also helps companies to know about the current market trends. After knowing the current market trends, firms may made changes in their marketing strategy and also made changes in their products as per the requirements of the consumers. It will help firms to survive more efficiently and effectively in the target market.

Suggested Readings:

a) Immonen and Saaksvouri (2003): Product Life-Cycle Management. Springer-Verlag Berlin and Heidelberg GmbH &Co.

b) Cooper (2011): Winning at New Products: Creating Value Through Innovation. Basic Books.c)Barclay and Dann(2010):New Product Development. Routledge

d) Srivastava (2007): Product Management and New Product Development. Excel Books

e) Arreola-Risa and Keys (2013): Designing Supply Chains for New Product Development (Supply and Operations Management).Business Expert Press

f) Tillman and Cassone (2012): Strategic Planning and New Product Development (FT Press Operations Management). FT Press