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New Product Planning, Strategy, and Development Contents. Introduction Innovation Strategy Opportunity Identification Design Process Testing and Improving New Products Correlates of Success and Reasons for Failure. Opportunity Identification.
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New Product Planning, Strategy, and DevelopmentContents • Introduction • Innovation Strategy • Opportunity Identification • Design Process • Testing and Improving New Products • Correlates of Success and Reasons for Failure
Opportunity Identification Chapter 4: Market Definition and Entry Strategy Part 1 • Step 1: Identification of markets that offer the best opportunities for the organization • Step 2: Detailed definition of these markets by determining • the boundaries of each market and • the relationship between the market and the product line • Step 3: Selection of markets for new products and product line expansion, with the best prospects and organizational match Chapter 4: Market Definition and Entry Strategy Part 2 • Focus on the Bass Model
Revisiting Growth Potential : The Bass Model • The rate at which a product diffuses into a market is a measure of its growth potential • A market for a product may be thought of as consisting of two groups of adopters • Innovators • Imitators • The rate of innovation diffusion will be governed by the relative size of these two groups and their respective propensity to innovate or imitate • The Bass Model uses the sales data from the first few years of a product category launch to create the estimated pattern of sales for the product category during its entire lifecycle
Actual versus Fitted Actual and Fitted Adoption of VCR's 1980-1989 12000 10000 8000 Actual Adoption 6000 Fitted Adoption 4000 Adoption in Thousands 2000 0 80 81 82 83 84 85 86 87 88 89 Year
Actual versus Fitted Data using the Bass Model • Note how similar the shapes of the actual and fitted adoption curves are to the familiar shape of the product life cycle (PLC) • The adoption curves exhibit all the stages of the PLC • Introduction • Growth • Maturity • Decline • Thus the Bass Model possesses sufficient descriptive accuracy and is also consistent with the theoretical concept of PLC • With limited data and by making realistic assumptions, the Bass Model can be used by product managers to arrive at not only the market potential for a product but also the estimated pattern of sales for each year in the product’s life cycle
Revisiting Growth Potential: Market Growth Models Sure, let’s dive right in and look at some equations
The Bass Model Equation S t= P*(M- Yt-1) + Q*(Yt-1/M)*(M- Yt-1) Where S (t) = Sales in time period ‘t’. P = Coefficient of innovation Q = Coefficient of imitation M = Market Potential Yt-1 = Cumulative Sales up to time period ‘t-1’.
The Bass Model: The components of the equation S t= P (M- Yt-1) + Q (Yt-1/M) (M- Yt-1) M- Yt-1 = Remaining market potential at the beginning of time period ‘t’ Yt-1/M = Ratio of cumulative sales at the beginning of time period ‘t’ to the total market potential P(M- Yt-1) = Sales obtained in a given period(t) from the “innovators” group Q(Yt-1/M) (M- Yt-1)= Sales obtained in a given period(t) from the “imitators’ group S (t) = Total Sales from both groups in time period ‘t’.
The Bass Model Equation: An intuitive explanation S t= P(M- Yt-1) + Q(Yt-1/M)(M- Yt-1) Sales from innovators in any period given by P(M- Yt-1) is a function of the remaining market potential M- Yt-1. P is simply a constant fraction. Sales from imitators in any period Q(Yt-1/M)(M- Yt-1) is also a function of the remaining market potential M- Yt-1. But in addition, sales from imitators is also a result of the pressure exerted by the total number of people who have bought the product so far (Yt-1) in relation to the total market potential (M). In other words, sales from imitators is a function of Yt-1/M. Hence the sales from imitators is a function of the combination of the remaining potential M- Yt-1 and the ratio Yt-1/M. This combination is represented by the product (Yt-1/M)(M- Yt-1). Q is simply a constant fraction. Hence the total sales S t is the combination of these two elements
The Bass Model: Different forms of the same equation With a little bit of algebraic manipulation the equation S t= P(M- Yt-1) + Q(Yt-1/M)(M- Yt-1) can be re-written as S t = PM + (Q-P) Yt-1 – Q/M Y2t-1 =A + B Yt-1 + C Y2t-1 Where A = PM, B= (Q-P) and C= -Q/M Mathematically, when all potential adopters have bought the product, S t = 0 and Yt-1 =M Substituting in the equation S(t) = PM + (Q-P) Yt-1 – Q/M Y2t-1 0=A + B M + C M2 This is a quadratic equation in M, and can be solved for M
The Bass Model (contd.) We know a quadratic equation in the form ax2 + bx + c = 0 is solved by the following formula: Hence, in our equation So if we are provided with the A, B, and C values in the equation A + B Yt-1 + C Y2t-1, we can estimate the market potential M and also determine the Coefficients P and Q. We will look at an illustration of this application later.
The Bass Model (contd.) With the help of basic calculus two other important formulae can be derived: • The time period when sales will reach peak levels T* = (1/(P+Q) )* In(Q/P) (Note: ln is short for natural log) • The magnitude of peak sales in the time period T* S(T*) = M(P+Q)2/4Q Knowledge of these two bits of information would be very useful in capacity planning
Market Growth Models (contd.) Other implications from the equation S t = PM + (Q-P) Yt-1 – Q/M Y2t-1 • If Q > P, sales curve will rise and fall • If Q < P, sales curve will fall continuously
New Product Diffusion- How the Times Are Changing Adoption rates across categories* * Marketing Engineering, 2nd edition, Lilien & Rangaswamy
Bass Model Applications • In real life, the Bass Model has been adapted to many complex situations • In the next few slides, we will look at some simple problem solving exercises that illustrate the possible applications of the Bass Model • Please also refer to the Tutorials 3 and 4 available under Week 3
Problem # 1 For a particular product, the coefficient of innovation P (for the Bass model) is 0.05 and the coefficient of imitation Q is 0.2. The total number of potential buyers is 100, 000. a. Determine the time when sales will reach its peak. b. Calculate the magnitude of peak sales
Problem # 1 ( contd.) • Coeff of innovation P = 0.05 • Coeff of imitation Q = 0.2 • Time to peak sales T* = 1/(P+Q) In (Q/P) • Peak sales magnitude S(T*) = M(P+Q)2/4Q • T* = • S(T*) =
Problem # 2 Suppose that the Bass model is fitted to empirical data, resulting in the following expression: St = 410 + 0.39 Yt-1 - 10-6 Y2t-1 From this equation, determine the total number of potential adopters M
Problem # 2 (contd.) St = 410 + 0.39 Yt-1 - 10-6 Y2t-1 St = PM + (Q-P) Yt-1 – Q/M Y2t-1 A=PM = 410 ------ 1 B=Q-P =0.39 ------ 2 C=-Q/M = -10-6 ------ 3 Mathematically, when all potential adopters have bought the product, S t = 0 and Yt-1 =M Solving this quadratic equation by using we obtain the value of Potential Adopters M = 391,048