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CHAPTER 5

CHAPTER 5. NEW PRODUCT DEVELOPMENT, MANAGEMENT AND STRATEGY. Product Lines Defined. Proprietary or Catalog Products: Standard product offerings inventoried for anticipation of sales orders. Custom-Build Products: Made for different variations according the specifications of customers.

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CHAPTER 5

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  1. CHAPTER 5 NEW PRODUCT DEVELOPMENT, MANAGEMENT AND STRATEGY

  2. Product Lines Defined • Proprietary or Catalog Products: • Standard product offerings inventoried for anticipation of sales orders. • Custom-Build Products: • Made for different variations according the specifications of customers. • Custom-Designed Products: • One-of-a-kind unit made for a small group of users. • Industrial Services: • Maintenance, repair or warranty.

  3. Various Business Product Strategies • Establishing product/service policies • Setting product service objectives • Searching out new products/services • Introducing new products/services • Modifying existing products/services • Dropping out old products/services • Packaging the products • Providing technical assistance/support

  4. Consumer Vs Business Product Strategies • Product is important and low failure rate • Derived demand and less research • Buyer and user are not the same • Specifications are very important • Longer life cycle • Product support is very important • Packaging is less important • Unimportant aesthetic characteristics

  5. Importance of Product Planning • Increased Competition: • Increased global and domestic competition. • Derived Demand: • understanding consumer needs and wants. • Increased Purchasing Sophistication: • Vendor analysis, value analysis and computer simulations. • Labor Saving Requirements: • Product planning to save labor cost

  6. Types of New-Product Approaches • Technology push • Once the perceived value of technology is great, technology push usually result. When the new product is developed, marketing function becomes important • Market pull • It is the result of market research and understanding the needs of users and development a new product to satisfy the needs. It caries the least business risk, because there is a chance that product will be sold.

  7. Product Development and Strategy in Business Marketing • It is engineering responsibility. • Marketing and sales personnel are frequently called on new product. • It is the lifeblood of the industry; therefore, firms should spent time and effort to developing new product. • However, it is a risky endeavor for every industrial firm.

  8. Phases of New Product Development Idea and concept generation Screening and evaluation Business analysis Product development Product testing Product commercialization and introduction

  9. Marketing Activities at Each Phase • Idea and concept generation: • Involves the search for product ideas and concepts that meet company objectives. • Screening and evaluation: • Involves analysis to determine which ideas submitted are pertinent and merit a more detailed study of potential feasibility and market acceptance. • Business analysis: • Return-on-investment criteria are examined along with competition and the potential for market entry. • Product development: • Involves taking the product from an idea generated during a brainstorming session to a state of readiness for product and market testing. • Product testing: • Involves conducting commercial experiments necessary to verify earlier business judgments. • Product commercialization and introduction: • Includes launching the new product through full-scale production and sales and committing the company's reputation and resources to the product's success.

  10. Alternative Approach to Product Development • Initial Screening • go or no go decision • Preliminary market assessment • quick and dirty situation analysis • Preliminary technical assessment • technical evaluation of new product idea • Detailed market study • marketing research, focus group interviews

  11. Alternative Approaches to Product Development (cont.) • Preliminary business analysis • net present value, profit expectations • Product development • Alpha test • testing in house • Beta test • testing the product in customer’s business • Test market • selling the product in test cities

  12. Alternative Approaches to Product Development (cont.) • Trial production • limited production to prove production facilities • Final business plan • financial analysis before commercialization • Production ramp up • Full scale production • Market launch • implementation comprehensive marketing plan

  13. New Product Commercialization: Common Mistakes • When the development risks are high and the opportunity cost are low, it is not particularly advantageous to accelerate product development. • When the development risk is low and opportunity costs are high, it is absolutely important to speed up the process.

  14. New Product Commercialization (cont.) • The most challenging situation is that when opportunity costs and development risks are both high. • Breakthrough inventions: • It is an idea that is so different that it can not be compared to any existing practice or perception. • Incremental innovations: • This is continuation of existing method or practice.

  15. New Product Commercialization (cont.) • Mistake No.1: • Lack of sensitivity to the differences in the management tasks required of incremental Vs. breakthrough projects. • Mistake No.2: • Tendency to assume that breakthrough projects need financial support from top management and incremental need only backpacking. • Mistake No.3: • Managers already handle a portfolio of products through existing manufacturing/sales system, it makes sense to adopt the same for the new product. However, new customers have different buying habits; therefore, using existing organizational systems often means completely missing the boat on the real customers’ real needs • Mistake No.4: • Supplier misperception lead to faulty product positioning.

  16. Organization of the New Product Effort • Product manager: • Individuals responsible for four P’s marketing mix decisions for specific product line as it travels through life cycle; responsibility often extends to new product development. • New product committee: • Part-time interdisciplinary management group reviews new product proposals; advantages outweigh disadvantages because committee is most common form of organizational structure for managing new products. • New product department: • Specific department generates and evaluates new product ideas, directs and coordinates development work, and implements field testing and pre-commercialization of new product; allows for maximum effort in new product development, but at expense of major overhead costs. • New product venture team: • Task force representing various departments responsible for new product development and implementation; normally dissolved once new product is established in market.

  17. Product Manager/Marketing Manager Role Old View: Organize, coordinate, and control. New View: Calculated chaos and controlled disorder Communicate—Communicate—Communicate: Make things happen. • Questions: • What companies purchase products from these producers? • What would a Product Manager do to facilitate these transactions and relationships?

  18. Product Life Cycle Concept • Introduction: • Create awareness • Growth: • Favorable image and create more buyers. Higher sales. • Maturity: • Stable sales and declining unit costs of promotion • Decline: • Declining sales and profit

  19. ProductLife Cycle IntroductionGrowthMaturityDecline As a strategy planning tool, a “PLC” diagram is a visual representation of a tendency (many non-business systems tend to same shape, such as to show income and height). On one level, it is a reminder to planner of what is coming—if an inflection point is reached, you should know what is coming (even though you only have actual life cycle to that point). In business, PLC is often driven by experience curve, economies of scale, competitive attraction to market opportunities, rate of diffusion factors, and eventual market saturation. Planners must adjust for actual impact of these factors on a particular product. (continued)

  20. IntroductionGrowthMaturityDecline ProductLifeCycle On another level, marketers continuously monitor and adjust their strategy and tactics as product’s cycle progresses. As a reference, they can refer to standard mix strategies for each PLC stage (usually represented in a table directly under PLC diagram on most texts). Marketer’s objective is to adjust strategy to changing life cycle situation to maximize the results. As maturity approaches, marketer often decides to attempt a PLC extension by (1) finding ways to increase current market’s usage, (2) finding totally new uses, (3) finding new target segments, (4) developing new distribution, or (5) perhaps a major product improvement and repositioning. (continued)

  21. Product Life Cycle Actual PLC curves can be any shape—from product that doesn’t sell at all, to fad that grows fast but has short life, to seasonal product, etc. Company depends on its marketers to understand what factors determine success and to make appropriate strategic decisions. It is often tempting for new students to want to learn PLC superficially, but in real world many people depend on in-depth understanding.

  22. Experience Curve Int. Growth Mat. Dec. cost production

  23. Experience Curve Concept

  24. Success of Industrial Products • Experience in effective product planning • Introduction of superior products • High level of marketing proficiency • Superior technological capabilities • Well defined target market • Coordination between marketing, production and technological personnel • Adequate financial resources

  25. Failure of Industrial Products • Absence of sound marketing orientation and competitive strength • Lack of offering significant benefits over competitors’ products • Inadequate and misdirected marketing efforts • Technical difficulties • Higher prices

  26. Determinants of the Product Mixin Business Market • Technology: • Successful firms are also leader of introduction of new technology. • It requires continuous contact with customers to inquire needs/wants. • Competition: • The challenge is the continuous changes of product mix of competitors. • Barriers to entry may prevent this challenge. • Changes in Levels of Business Activity: • Business cycles and seasonal variations may be very effective in business market; therefore, business-to-business firms add new products to their product lines to meet the seasonal demand. • Operating capacity: • Under capacity in sales and marketing may suggest business-to-business firms to improve their product mix. • Market Factors: • Changing in product mix of business-to-business marketers could present an opportunity to sell additional products.

  27. Stages in Adoption Process • Awareness: • Buyer learns of new product or service, but lacks information. • Interest: • Buyer seeks out or requests additional information. • Evaluation: • Buyer (or member of buying team) considers/evaluates usefulness of product/service; consideration might be given to value-analysis project or make-buy situation. • Trial: • Buyer adopts product or service on limited basis. • Adoption: • If trial purchase worked, then buyer decides to make regular use of product/service.

  28. Factors InfluencingRate of Adoption-Diffusion • Diffusion: Spread of new product, innovation, or service throughout an industry over time. • Diffusion speed varies among industries—fast in electronics, slow in domestic steel. • As the marketer you must know, evaluate impact of, monitor, and where possible affect factors that influence adoption/diffusion rate. • Technical complexity/uncertainty of the new product will slow down the diffusion process.

  29. Product Portfolio Strategies • Boston Consulting Group Matrix (BCG) • Question mark • Star • Cash cow • Dog

  30. BCGSBUPortfolioBusinessStrategy High Business strength, Growth rate, Cash use Low High Low Industry attractiveness, Market share, Cash generation (continued)

  31. BCG Business SBU Portfolio Strategy High Use cash to make into star Defend position Business strength, Growth rate, Cash use Low Nurture to feed cash to? Fix or abandon High Low Industry attractiveness, Market share, Cash generation (continued)

  32. BCG Business SBU Portfolio Strategy (as might appear in your strategic planning documents) High Growth rate Cash use Low Computers Printers Modems Telephones High Low Market share Cash generation Note: Size can indicate amount of sales. (continued)

  33. GE Strategic Planning Grid High Medium Low High Business strength axis Self-defined as a function of: size, growth, share, profitability, image, position, people, and other factors of business strength or weakness Medium Low High Medium Low Industry attractiveness axis Self-defined as a function of: size, market growth, strength of competitors, industry profitability, technical strength, and positive acting market environmental factors. (continued)

  34. Product Deletion Strategies • Harvesting: • It is a strategy that to cut the cost to improve the cash flow. • Reduce maintenance, research and advertising costs. • Eliminate small order customers. • Line Simplifications: • Trims the product lines to a manageable level. • Divestment: • Reverse acquisition. • Allows the firm to have balance product portfolio. • Balancing with high-growth businesses with low-growth ones.

  35. Important Characteristics of Business Services • Intangibility: • Freight forwarding, consulting, repair, etc. can seldom be tried out/tested in advance of purchase; instead, buyers must view advertising copy, listen to sales presentation, or consult current users to gain insight into expected performance. • Heterogeneity: • A service is an experience and thus cannot be duplicated; difficult to standardize and thus output quality may vary. • Perishability and fluctuating demand: • Services cannot be stored and markets fluctuate by day, week, or season; idle service capacity is business that is lost forever—no inventory buffer.

  36. Important Characteristics of Business Services (cont.) • Simultaneity: • Production and consumption of services are inseparable; this typically puts marketer in very close contact with customer, requiring them to be highly professional.

  37. Business Service Marketing: Challenges and Opportunities • Service Marketing Vs. Product Marketing: • Business products should follow long development process. • Business products should be packaged and distributed. • Business services are developed, distributed and offered at the same time. • Product alteration is difficult for business product, but it is very easy for business services. • Positioning Strategy: • Image of business services is in the mind of users. • Competitive strategies of business services are implemented within the target market areas. • Bundling of Services: • Selling maintenance/service contract with product.

  38. Business Service Marketing (cont.) • Service Strategy and Marketing Mix: • Product: • Similar to products, improvements of services are required. • It requires to recruit, train and manage the service employees. • Price: • It is related with the achievement motive of service provider. • Pricing decision for business services are affected by the demand, costs, and competitive pressure. • Place: • It should be convenient and available to users. • It must be simple and shorter than business products. • Promotion: • It is inseparable from product; therefore, business services use similar promotional tactics

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