New Product Development: Definition, Process

new product developmentGetting the product right is the single most important activity of marketing. If the product is not what the market wants, no amount of price adjustment, dependable delivery, or brilliant promotion will encourage consumers to buy it – or at least, not more than once, and very few companies produce products which are ‘once-in-a-lifetime’ buys.

On the other hand, if the product produced does satisfy the consumer, the purchase is likely to be repeated. The purchaser may buy other products offered by the same company and recommend its products to other consumers.

Management’s decisions about the products to be offered among the most important of those affecting a company’s future. Product decisions are more basic than decisions about other marketing variables.

After segmenting the market, a particular company, choosing its target customer groups, identifying their needs, and determining its desired market positioning, is ready to develop and launch new products desired by its customers. In the new product development process, the marketing department plays a vital role.

The marketing department should actively participate with other departments in each stage of the new product development process rather than leave it to the Research and Development department.

Developing a new product begins with thoroughly evaluating the marketplace to determine consumer needs and wants. Based on that evaluation, the marketing executive starts planning strategies that will best fit those needs and yield a reasonable profit.

Te learn about new product development, and we need to know;

  • What is the new product?
  • Challenges in New-Product Development.
  • Establishing An Organization For New Product Development.
  • New Product Development Process.

What is a New Product?

New products are “new” in varying degrees. They may be minor or major modifications of a firm’s existing products.

They may be new to a particular firm but not new to the market. If new to the firm, they may be closely related, loosely related, or totally unrelated to its existing products. Or a product may be new to the market, something not previously available in any form.

If a product is both new to the market, so that there is nothing by way of guidance to be found in the experience of others, and also unrelated to a firm’s existing products, so that there is little carry-over of experience from these, then the risks of product innovation are great.

New products, therefore, for our purposes will include original products, improved products, modified products, and new brands that the firm develops through its own R & D efforts. We shall also be concerned with whether consumers see them as “new.”

Booz, Allen & Hamilton identified six types of new products related to their newness to the company and the marketplace. They are:

  • New-to-the-World Products: New-to-the-world products are those products that create an entirely new market.
  • New-Product Lines: If a company can enter an established market for the first time with a product, it is called a new product line.
  • Additions to Existing Product Lines: New products that supplement a company’s established product lines are called additions to existing product lines.
  • Improvements in / Revisions to Existing Products: New products that provide improved performance or greater perceived value and replace existing products are referred to as improvements in/revisions to existing products.
  • Repositioning: Repositioning is modifying the existing products/brands in some way to widen their appeals or direct appeals to other market segments(s).
  • Cost Reductions: New products that provide similar performance at a lower cost are termed a cost reduction.

A company usually pursues a mix of these new products. It is found that only 10% of all new products are truly innovative or new to the world because they involve the greatest cost and risk since they are new to the marketplace and the company.

Challenges in New-Product Development

Challenges in New-Product Development

Considering the extreme competition in contemporary business, companies are exposed to greater risks than fail to develop new products.

Changing needs and tastes of consumers, new technologies, shorter product life cycles, and increased competition at home and abroad have made existing products vulnerable. Side-by-side new-product development can be very risky.

It was found in a study that the new-product failure rate was 40% for consumer goods, 20% for industrial goods, and 18% for service products.

Several reasons are responsible for this high rate of failure.

They may be as follows:

  • If a high-level executive pushes a favorite idea through disregarding negative research findings of the marketing department.
  • If there is an overestimation of the market size of a good product idea.
  • If the actual product is not designed appropriately.
  • If it is overpriced, not positioned correctly, or advertised ineffectively.
  • If development costs go beyond the expected costs.
  • If competition is found stronger than anticipated.

New product development may be affected by several other factors in addition to the factors mentioned above;

  1. Faster Development Time
  2. Shortage of Important New-Product Ideas in Certain Areas
  3. The costliness of New-Product-Development Process

Faster Development Time

With the fear that competitors may work the same new idea, many companies compress development time using computer-aided design (CAD) and manufacturing techniques, early concept tests, and advanced marketing planning, which may not suit the needs and tastes of the customers.

Shortage of Important New-Product Ideas in Certain Areas

Some of the basic products such as steel, detergents, etc. have few opportunities for improvements.

The costliness of New-Product-Development Process

After generating many new-product ideas, a company finds just one or a few worthy of development. It has to spend a substantial amount of money on R&D, manufacturing, marketing, and other areas.

Shorter Product Life Cycles

In this age of imitation, a new product is immediately copied by the competing companies, making the product’s life cycles really short. At times, a company cannot even realize the cost of development of the product.

Fragmented Markets

Markets are getting fragmented day by day due to keen competition, which forces a company to target its product to a smaller segment not worthy of making a profit.

Social and Governmental Constraints

Due to consumer safety, ecological compatibility, government restrictions, and regulation, new product development in certain areas have become more difficult.

The challenges mentioned above may be faced effectively, taking into account the following two aspects: first, the company must establish an effective organization for handling the new product development.

Second, it must employ the possible best tools and concepts in the stages of the new-product-development process.

Establishing an Organization For New Product Development

The development of a new product, whether consumer or industrial goods or services, can be a highly involved process. It is seldom just a matter of dreaming up a new idea and rushing it to the marketplace – the risks of loss are far too great.

If a company has an organized new product development effort, it has more chances of success. Therefore, new product development can be successful if a company establishes an effective organization to take care of the new-product development process.

This organization should begin with the company’s top management since it is ultimately accountable for the new product’s success. It should specify the company’s business domain and the categories of products where it should concentrate.

The next important area of top management’s decision is how much to budget for new product development.

Here management faces a real challenge since normal investment criteria for budgeting cannot be applied here because R & D outcomes are uncertain.

There could be several way outs, such as encouraging and financing as many projects as possible, setting R & D budget by applying a conventional percentage of sales figures, or spending keeping pace with the competitors.

On the other hand, some companies decide the number of new products they need and estimate how much money they require to invest for R & D of this new product development.

Establishing an effective organizational structure is a key factor in new- product development work. How the company is organized for new product development depends on several factors. They are:

  • The extent to which it relies on new products for profits and growth;
  • The extent of its financial resources available for research and development and the new product introduction;
  • Its research and new product expertise; and
  • The stability and market positions of its existing product lines.

The company can organize for this effort in various ways. The most common methods are described in the following sections.

Product Managers

Many companies give their product manager the responsibility for developing new product ideas.

In addition to all the other duties this job entails, the product manager can be responsible for a wide range of activities. But, some companies have been very successful with this type of organization.

Several advantages are there of using product managers for new product development. An important one is the monetary savings from not employing an additional manager or creating another organizational unit.

Also, product managers are frequently more attuned to customer needs and want to deal with them daily while selling existing products.

Moreover, product managers have a good appreciation of the difficulties and costs of making a product successful.

Besides these advantages, there are some drawbacks. Since product managers are normally extremely busy with their existing products, they hardly concentrate on new product ideas.

As a result, new product development tends to be lag both in terms of time and quality. It is not also unlikely that they lack the required skills and knowledge of new product development.

New Product Managers

New product ideas’ responsibility may be entrusted with the new product managers who report to the group- product managers. This is a more professional and practical approach though fraught with several weaknesses.

For example, they may tend to think about product modifications and line extensions, limiting the number of new ideas generated.

New Product Departments

Because of the shortcomings of organizing new product development around product managers, some marketing executives prefer to delegate this function to a separate department.

Larger organizations establish new product departments, so more consistent attention can be directed to research and development. The size of this department usually ranges from one to five people.

Having no other responsibilities, a new product department can direct all its activities to develop promising innovations. Besides, the proper levels and varieties of expertise can improve the department’s output quality.

The disadvantages of a new product department center basically on its cost and authority. One, organizing a separate department for new product development can be very expensive.

Though successful new products can yield vast profits, research and development costs can be substantial too. The second problem is that new product departments frequently are held accountable for developing innovations but not marketing them.

The new product department often does not have the experience or expertise to appreciate the difficulties in making even a great innovation a market success.

New Product Committees

To avoid some of the problems associated with product managers and new product departments, companies may organize new product committees.

They are usually comprised of four to nine people representing marketing, finance, production, engineering, and other departments, along with top-level executives.

In some cases, committee membership is a full-time activity for a designated period of time; in others, it is only a part-time activity and day-to-day duties.

This is a high- level management committee which reviews the new product proposals and approves those. New product committees bring together high levels of expertise, and if operated on a part-time basis, the costs are not prohibitive.

More so, committees tend to bind together all facets of a company’s efforts by a commonality of purpose.

Such committees’ limitations include the lack of full-time commitment by the members, lack of personal responsibility since committee decisions relieve individual accountability, and their slowness and difficulty reaching decisions.

New Product Venture Team

A more contemporary type of organizational unit used for new product development is the venture team. This type of group is formed with personnel from various operating departments, and it is responsible for developing a specific product. In some respects, This is similar to the new product committee because it comprises experts from different fields.

However, the difference is that a venture team is brought together for a specific project or product innovation. The purpose of a venture team is more narrowly defined.

This approach’s main advantages are that the needed skills are made available for the task at hand and that the members devote full time to the project. The disadvantages are interruptions to normal operations by taking team members away from their other jobs and the members’ lack of experience working as a cohesive unit.

To be effective, product development requires closer teamwork among design, manufacturing, and marketing from the very beginning. The marketing department must follow and advise on the idea throughout its development, i.e., marketing should be in the foreground.

New Product Development Process – How to Manage New Product Development?

New Product Development Process

Developing a new product is a real challenge for any firm. If the target consumers do not well accept the product, investment goes into ashes. The new product development process involves eight sequential stages.

Companies face challenges in each of the stages. The marketing manager should, therefore, proceed very carefully along the new product development process.

The development of a product, in essence, is the process of fitting the proposed product to the requirements and opportunities of the market. Although organizational structures companies may use for new product development vary, their processes are somewhat alike.

The new product development process involves eight stages, each of which has major marketing challenges.

Stages of new product development are;

  1. idea generation,
  2. idea screening,
  3. concept development and testing,
  4. marketing strategy development,
  5. business analysis,
  6. product development,
  7. market testing, and
  8. commercialization.

Steps Involved in the New Product Development Process and Their Planning and Evaluation Methods

Stages in the new product development processIllustrative evaluation and planning methods
Idea GenerationConsumer research (e.g., preference mapping), focus group interviews.
Idea ScreeningLists of criteria, scoring methods, ranking methods.
Concept Development and TestingConverting ideas into meaningful and consumer terms, product positioning, decide on a limited number of concepts, estimate their costs, designs, and retail prices, and then obtain potential consumer reaction.
Marketing Strategy DevelopmentDescription of behavior, size, and structure of the target market; product positioning, first few years’ sales, market share and profit targets, product’s planned price, distribution strategy, and marketing budget for the first year.
Business AnalysisEstimating total sales, estimating first-time sales, estimating replacement sales, estimating repeat sales, estimating the cost, and profits.
Product DevelopmentPositioning, package design, name, advertising, pricing, etc.
Market TestingUse tests, simulated shopping tests, test marketing.
CommercializationTracking of market performance, sales, and cost analyses

1. Idea Generation

The first step in developing new products is idea generation. Usually, the marketing executive will create or obtain a pool of ideas that can be examined for possible commercialization.

But, it is to mention here that this pool is not always easy to develop. There could, many potential sources of new product ideas.

One of the most valuable is the company’s customers. A marketing executive can actively solicit suggestions, formally study consumer needs through research, or simply observe their behavior. The other source of new product ideas is the company’s salespeople.

Salespeople have some appreciation of the company’s capabilities and customer’s needs. Another source is the other departments of the company (research, production). Starting from top executives down to the lowest-paid employees, new products’ ideas frequently come from the inside.

Sources for new product ideas can also come from competing firms, company’s scientists, engineers, designers, inventors, trade associations, trade and professional publications, commercial development companies, patent attorneys, university and commercial laboratories, industrial consultants, advertising agencies, marketing research firms, idea people and many others.

Idea Generation Techniques

Following techniques can be used by individuals and groups to generate new ideas:

Attribute Listing Technique

Under this technique, major attributes of a product are first listed, and then efforts are taken to modify attribute (s) to give the product a new shape. We mean an improved product.

Forced Relationships

In this technique, the number of objects is first listed. Each of the objects is considered about every other object to create a new product having multiple-use, for example, a torchlight, a clock, a radio, and a rechargeable light all in one.

Morphological Analysis

Under this method, structural dimensions of a problem are identified, and relationships among different dimensions are examined to find ideal combinations of a product, for example, a videophone.

Need / Problem Identification

This technique considers the problems faced by consumers using particular product complaints made by them with regards to a particular product. The product can be modified, or a completely new product may be developed that fits consumers’ needs.

Brainstorming

This technique is based on the idea “the more the marrier.” Here, eight to ten people discuss a problem to generate as many ideas as possible and pick the best one from among them.

Following guidelines should be followed as identified by Osborn to make the conference effective:

  • Criticism to be ruled out: Avoid negative comments on ideas until the time comes.
  • Freewheeling is welcomed: Encourage wilder ideas to pick the best one.
  • Quantity is encouraged: The concept of “the more, the merrier ” is pursued.
  • Combining and improving ideas is encouragedParticipantsts should coordinate to combine ideas to get synergistic results in the brainstorming sessions.

2. Idea Screening

In this step, the marketing executive will eliminate all those ideas that do not appear to hold reasonable promise. Through this, the executive can reduce the cost of further studying ideas that may never reach commercialization. Moreover, the process can speed up for ideas having merit.

Idea screening should be based on a well-developed program to determine if the ideas fit with company objectives and resources. Ideas should be measured against nine criteria to identify their relative weight.

They are;

  • compatibility with objectives,
  • compatibility with company image,
  • compatibility with other lines,
  • compatibility with manufacturing processes,
  • compatibility with cost limits,
  • identified target market,
  • marketable through existing channels,
  • degree differs from the competition, and
  • legally protectable.

The relative weight should be measured on a three-point scale showing good (1.0), fair (0.5), and poor (.0). The following table can be used as an example of measuring relative weights of alternative ideas:

Showing the New Product Ideas Rating Scale

CRITERIARelative importanceRating
Good Fair Poor (1.0) (0.5) (.0)
Relative weight
Column 2 x Column 3
Compatibility with objectives
Compatibility with company image
Compatibility with other lines
Compatibility with manufacturing processes
Compatibility with cost limits
Identified target market
Marketable through existing channels
Degree differs from the competition.
Legally protectable
1.00Score

After the rating of ideas is done, the marketing executive will narrow down the possibilities to a much more manageable number. It is found that the screening process eliminates about 75 to 80 percent of the pool of ideas. The pool is very carefully formulated. This process will not result in such a high mortality rate. In reality, one in seven ideas may eventually become a commercial product.

3. Concept Development And Testing

Ideas considered attractive must be converted into testable product concepts.

If the product idea is converted into meaningful consumer terms, it can be considered a product concept. The reason for concept development is that consumers buy product concepts, not product ideas.

For example, an automobile manufacturer gets the idea of producing a solar-power automobile. Product ideas are converted into a product concept, and a particular idea may be converted into many concepts.

In this case, one of the concepts could be an electric automobile which can operate up to 100 miles without recharging and seats five passengers; the second concept could be an electric lorry which can operate up to 200 miles without recharging and goods carrying capacity of 10 tons and so on.

The next step is concept testing. Out of the original product ideas, only about 20 percent will survive the preliminary screening.

The other 80 percent will be eliminated because they did not fit the company’s objectives, production, financial, or marketing criteria. In the concept development phase, the survived ideas were turned into a specific product concept. The testing phase will be tested with an appropriate target consumer group, presenting the concepts physically or symbolically.

To do this, the marketing executive must decide on a limited number of concepts, estimate their costs, designs, and retail prices, and then obtain potential consumer reaction.

Respondents here are presented with a detail of each of the concept to be tested and are requested to answer the following questions:

  1. Are the benefits clear to you and believable?
  2. Do you see this product as solving a problem or filling a need for you?
  3. Do other products currently meet this need and satisfy you?
  4. Is the price reasonable to the value?
  5. Would you (definitely, probably, probably not, definitely not) buy the product?
  6. Who would use this product, and how often would it be used?

The above questions are asked to measure the concept’s communicability, believability, need level, gap level, perceived value, purchase intent, user targets, and purchase frequency.

At this stage, the marketer summarizes the respondents’ responses to see whether the target consumers will largely favor the converted concept into a physical product.

Such research will provide the marketing executive with some reasonable data to decide whether or not to proceed. Research can also provide some ideas for improving or otherwise modifying the product concept before further development.

4. Marketing Strategy Development

As soon as the concept testing is done, the product manager, to introduce the product in the market, will develop a preliminary marketing strategy plan that may be further modified depending on the necessity.

There are three parts of such a strategic plan, each of which describes separate aspects.

For example, the first part is concerned with the description of behavior, size, the structure of the target market, product positioning planned, and the first few years’ sales, market share, and profit targets.

The product’s planned price, distribution strategy, and marketing budget for the first year are described in the second part of the strategy. In contrast, the long-run sales, profit goals, and marketing mix strategy over time are described in the third part of the marketing strategy plan.

5. Business Analysis

After the product concept and marketing strategy are developed, the management’s attractiveness is evaluated by the management to see whether the company’s objectives will be attained considering the cost involved, sales to be made, and profit generated from these sales.

The product development stage starts if management gets a positive answer to the above question.

The business analysis consists of (a) estimating total sales (including estimation of first-time sales, estimation of replacement sales, and estimation of repeat sale), and (b) estimating cost and profits. Let us have a look at them briefly in the following sections;

Estimating Total Sales

Management must know whether the proposed product’s estimated total sales will warrant a satisfactory profit to decide product development.

By summing up the estimated first-time sales, estimated replacement sales, and estimated repeat sales, a company arrives at an estimated total sales figure. Since product life-cycles sales vary according to the type of product, sales estimation methods also vary.

product life cycle sales for three types of products

In the case of time purchased product (funeral plot, for example), the company experiences rising sales until it reaches its peak. Ultimately, declining sales reach zero as the number of customers exhaust. The sales will not go down to zero if new customers start buying the product.

There is another category of products called infrequently purchased products that customers buy occasionally.

Examples include television, washing machine, etc. Customers may buy them next time if products become obsolete, out of order, outdated, or even perform not up to the mark. The second and subsequent buying is called replacement purchase.

A company producing such items should separate first-time purchase and replacement purchase (see the figure of 6.1b).

Yet, there is another category of products that we frequently purchase, such as toothpaste.

In this category, the number of first-time buyers increases initially, reaching a peak and gradually declining as most people already buy the product. If the product can provide reasonable satisfaction to the first-time buyers, they are likely to buy it again (repeat purchases).

Estimating Costs and Profits

The next step in business analysis is the estimation of costs and profits.

When sales forecasts are prepared, management wants to see the costs that may involve making the estimated sales and the profits generated from such sales.

By preparing a statement showing a couple of years’ costs and revenues generated by the proposed product, management decides whether the product is worth developing. Such a statement is facilitated by different estimates prepared by finance, marketing, manufacturing, and research and development departments.

To evaluate the merit of a new product proposal, companies use different financial measures such as break-even analysis to estimate how many units it should sell to reach a position where costs and revenues are the same, i.e., no profit, no loss situation.

Later, companies go for estimating profit through risk analysis.

6. Product Development

At this stage, a prototype will be developed for each of the relatively few product concepts that survive business analysis. They are expensive but essential for marketing executives to completely define the product concept’s final characteristics and features, ensuring that the idea can be translated into a product.

Here any engineering or general production problems will be uncovered and examined. The concept will be eliminated if such problems cannot be resolved.

After the prototype is created, it can be tested for quality, durability, consistency, and other function related criteria. Additionally, it can be consumer tested on a small group to determine how they will use it, how well they like it, and any further changes they consider useful.

7. Market Testing

The marketing executive cannot be sure how consumers will react to the product once it is in the marketplace, even if the preliminary work is done. Therefore, it is advised that the product may be tested in a limited number of areas, for a short period of time, with a relatively large marketing budget.

It involves the sale of a proposed new product under conditions as near normal as possible in a test market that is as representative as possible of the target market. Some evidence can then be obtained as to how well the product will perform when launched.

If the product can be easily copied by competitors or a copy of a product already on the market, the marketing executive may bypass this step. The need for market testing of new products stems from the inherent limitations of concept testing.

Concept testing is artificial in varying degrees as far as market conditions are concerned. Concept testing usually involves only some, and not all, aspects of the new product.

However, it is to be remembered that market testing is not a foolproof method for evaluating a product. The basic problem of sampling error is an important one. Cost limitations usually prevent the use of a truly representative sample of the total market.

Usually, only one or a few cities are chosen for test marketing. Also, the cost of arranging for the gathering of maximum information in the test market is high. Expensive store audits and consumer surveys may be necessary to do this.

The marketing expenditures tend to be large to get more speedy consumer usage. Competitors often alter their normal marketing strategies to confuse the test market results and give themselves additional time to prepare their new product strategies.

Because of cost and other reasons, the time devoted to testing marketing is usually limited.

It is questionable whether sales in a short time period are fully representative of longer-term sales experience.

The difference between the initial sales and repeat sales is particularly critical. Initial sales may indicate a high customer interest in a new product. Still, only repeat sales indicate the satisfaction of customer satisfaction on which long­term success must be built.

8. Commercialization

When a product reaches this stage in the development process, it is completed. The marketer reaches this final decision based on market testing results, and the decision is launching the product.

Some decisions must be taken before the product is launched in the marketplace, and they are;

  • when to launch,
  • where to launch,
  • who should be the target markets,
  • what should be the introductory market strategy relating to distribution, promotion, and pricing.

Commercialization plans for full-scale manufacturing and marketing must be refined and settled, and the project’s budgets must be prepared. In the early part of the commercialization phase, the marketing manager analyzes the results of test marketing to determine what marketing mix changes are needed before the product is introduced.

The results of test marketing may tell the marketers, for example, to change one or more of the product’s physical attributes, to modify the distribution plans to include more retail outlets, to alter promotional efforts, or to change the product’s price.

An organization gears up for large-scale production during the commercialization phase. This activity may require sizable capital expenditures for plant and equipment, and the firm also may need to hire additional personnel.

During this phase, marketers often spend enormous sums of money for such promotional efforts as advertising, personal selling, sales promotion, and publicity. These expenses, coupled with capital expenditures, can make the commercialization phase extremely costly.

If the customers accept the product rapidly, commercialization becomes significantly easier if marketers can make them aware of its benefits and motivate them. Their chances of success in the marketplace increase significantly.

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