CHAPTER 6PRODUCT MANAGEMENT

NEW PRODUCT DEVELOPMENT PROCEDURE ‐ Idea Generation Idea Screening Concept Development and Testing Product Development and Test Marketing Commercialization

PRODUCT LIFE CYCLE: CHARACTERISTICS AND STRATEGY Introduction Growth Maturity Decline

ANSOFF GROWTH MATRIX Market Penetration Market Development Product Development Diversification

1. NEW PRODUCT DEVELOPMENT PROCEDURE‐

Developing and introducing new products is often expensive and risky, but so is the failure to introduce new products. A business will normally go through five stages of new product development in order to minimize the risk of product failure. Marketers are involved in new product development (NPD) primarily because of their knowledge of the marketplace, that is, customers, competitors

and the environment.

I. Idea GenerationNew product development should be pro active, a well planned and managed process. A company will‐ ‐ generally seek ideas from sources such as its R&D department — after all they are set up primarily to create ideas and products. Customers are obviously a logical source provided the company has given them an avenue to communicate. Product ideas can easily come from competitors — and even patents can be cleverly circumvented. Focus groups can be conducted even with the general employees. To generation of ideas internally, a company may use various incentives or rewards, or an exercise known as brainstorming.

II. Idea ScreeningThe screening process determines which ideas have the greatest potential and match the company's objectives. This is a crucial stage as two types of costly errors can be made.

a) Go–error - a poor idea is allowed to be developed and commercialized.(High cost of product development and market introduction)-1985 introduction of a new Coke

b) Drop–error - Drops an otherwise good idea. (The potential return from the idea is foregone)

III. Concept Development and TestingThe generally crude (Basic) idea has to become more refined. The idea is re written as ‐ concepts, i.e., ideas that are more defined, detailed and specific; and are expressed from the customer (target market) perspective. Testing of concepts can involve focus groups. Business Analysis. Before the approved concept proceeds further, an analysis of its potential in the marketplace must be conducted. This will involve projecting of production costs, demand, profitability, resource requirements, and risk return analysis.‐

IV. Product Development and Test MarketingThe company must first determine whether it is technically able to manufacture the product according to plan and at costs low enough to result in a reasonable price.

Product Development: The concept is then converted into a physical prototype or working model that should reveal the tangible and intangible attributes associated with the proposed product.

Test Marketing: The ultimate test is not whether it works, but whether it will sell. How will consumers, resellers and even competitors react to the new product? The most vigorous consumer testing is the test marketing where the product is introduced into real market conditions and situations. It allows the marketing mix — branding, packaging, distribution, pricing, promotion to be tested. Advantages: It minimizes the risk of a nation wide product failure. ‐ It allows the test product to perform in a real market situation to obtain a measure of its sales and

marketing performance. The business can fine‐tune the marketing mix (4Ps) Repeat–purchase rate can be monitored provided the test period is long enough. For many

products, the success depends not on the number of first-time buyers, but long term repeat‐ purchases.

Disadvantages:1. It exposes the company's intentions (its new product and marketing strategies) to its competitors. 2. Competitors may try to sabotage (Interfere) the test marketing by “out marketing” the product through price discounts, sharp increases in promotions

3. Test marketing can take years to set up and conduct. And it can be very costly due to the high costs involved in producing a limited quantity of the product, i.e., diseconomies of scale.

Alternatives to test marketing. Simulated or fast tracked market testing usually involves subjecting a‐ panel of consumers to actual use of the product in real situations, for example, at home. The company can quickly monitor the reaction of these users. The company can learn more if these users are also given competitors’ products to use and compare.

V. CommercializationCommercialization is the full scale manufacturing and marketing of the new product, usually in a‐ much larger geographical market or nationally. The product enters the first stage of its product life cycle.

2. PRODUCT LIFE CYCLE:

Characteristics & StrategyAfter launching the new product, the business has to acknowledge the fact that the sales will exhibit a certain trend over a period of time. This sales trend reflects the various stages of the product’s life cycle. (Introduction, growth, Maturity and decline)

I. Introduction

Characteristics. Slow sales because of the lack of interest or knowledge of mainstream customers. Profits are negative because of the high costs of product development with its introduction. Sales are limited to a category of buyers known as innovators, who tend to be younger, affluent

and more venturesome. Many will be opinion‐leaders — respected individuals sought by mainstream consumers for advice, opinions and trends

There will be little or no competition at this stage. That’s because the pioneers would have taken considerable steps (Patents on the invention, Copyrights or trade secrets)

Marketing strategies. Product’s quality is basic because it’s based on new technology, and the range is very limited. To some, it may still be more an extended trial or test marketing stage even though the product

has been “officially” launched. The product’s attributes are restricted to core features only, with added features included later.

Retailers are usually skeptical (Uncertain) about the relatively unproven product, resulting in limited distribution.

The promotion at this stage includes extensive promotion by the pioneer or early entrants to‐ stimulate primary demand (the demand for the product, rather than a particular brand) by creating awareness and interest

A high price is necessary for economic reasons — to recoup high research & development, production and marketing costs.

II. Growth

Characteristics. Rapid rise in sales because of strong acceptance by early mainstream consumers. Profits should also peak at this stage due to increased sales and reduction in unit cost —

economies of scale. Sustained growth suggests that the product is widely accepted and has gone “mainstream”.

Otherwise, the product is deemed a failure and will exit the market. Some may remain, reducing to a niche product, by targeting a tiny minority.

Competitors' entry is encouraged by the increased market acceptance, and competing brands start to flood the market.

Many would have accessed the technology or even obtained the rights from the pioneers through licensing arrangements.

Marketing strategies. Product improvement and product range expansion are necessary to combat the proliferation

and diversity of competing brands. Also, the mainstream (Ordinary) market is extremely heterogeneous with very mixed types or

segments of buyers. A wider product range caters to the needs of different segments of the market.

Early stages of the life cycle, there’s still scope for advancing technology leading to improved quality — the product’s core attributes, like performance and reliability, become simply better.

Functional improvement adds functions and features to the product — sometimes nothing. The early version mobile phone started to incorporate memory functions, vibration alert, games and a navigation menu at this stage. These may not lead to improved quality.

Distribution should be intensive, with a sharp increase in the number of retail outlets. Competing brands have to jostle for the limited display space offered by these outlets in order to improve their market presence.

The price is reduced to meet competition, and to attract the early mainstream buyers. Lower prices are also possible because of economies of scale

III. Maturity

Characteristics. Sales slow and start to plateau as the market saturates (Satisfied) — everyone who wants one,

already has one. Profits will decline and then stabilize because of downward price pressure. Intense competition as competitors compete in a market that is no longer growing. The product appeals to the mass market — anyone and everyone. Buyers' knowledge of the product now reaches an all time high.‐

Marketing strategies. The objective of each competitor is to maintain or defend its market share. Usually, the higher

the market share, the better the chances for long term survival. ‐ Prices continue to fall even further to compete; and attract the late mainstream customers. Low prices can still be profitable if economies of scale can bring unit cost down. Continuous product improvement is necessary to refresh buyers’ interest Style or cosmetic improvement — is really running out of technology.

IV. Decline

Characteristics. Sales may be caused by environmental factors such as changing social trends. Sales of sewing

machines have declined as more women have turned to the paid jobs. The product may become obsolete, i.e., no longer used to meet a given need because of

changing technology. Computer has replaced the typewriter for document creation

Marketing strategies. Maintaining, or continuing with, the product remains a viable (Practical) alternative for some

companies in the hope that others (competitors) will exit from the market Also, the international product life cycle will ensure that there is still a strong demand in third‐

world countries for products long considered obsolete elsewhere.

3. ANSOFF GROWTH MATRIX

In addition to the product life cycle, the Ansoff growth matrix is a simple, yet useful, strategic model for the development and management of the Product over time. In the pursuit of growth, a business can continue with its existing

target markets or move into new target markets. It can also carry on with its current range of products or develop new ones.

Market Penetration (විනිවිද යාම)This is essentially an unchanged marketing strategy, but with increased effort on each of the marketing mix elements (4Ps) to sell more of the existing products to the existing target markets. This strategy is the least risky because it is business as usual but a bit more.‐ ‐

Increased usage by current customers. Here the business will try to increase the use of its products (more usage), usually by increased promotion or price discounting. Visa’s reward program encourages the increased use of its credit cards.

Increased quantity used or purchased on each occasion. By bulk packaging its products, a business can increase the amount bought on each occasion. Fast‐ ‐food restaurants offer combo meals to encourage a larger purchase on each visit. Betts shoe stores‐ frequently have a “buy one pair and get another at 50%” deal.

Market DevelopmentThis involves marketing the existing range of products to a new target market. This is a low‐risk option because there is no investment in new products — just finding new markets. Exporting to foreign markets is also market development.

Product DevelopmentThis strategy pertains to the marketing of a new range of products to existing customers. This is a moderate‐risk strategy because it involves investment in new, sometimes unproven, products. But the business has the advantage of dealing with its current customers. Cross selling is an example of product development — where existing customers are sold other products from the same company. Moreover, customers with several products from the same company tend to be more loyal because of the hassle involved in changing companies. The practice is common in finance, banking and insurance businesses. The cost of acquiring a new business from an existing customer is much lower. A customer who has a Visa account, saving account, mortgage and a personal loan with the same bank is unlikely to switch banks.

Diversification This is the most risky strategy because the company may be venturing into quite unknown

territory. Potential return is high. Ex: Johnson’s & Johnson’s is one of the most diversified health care companies in the world —baby care, pharmaceutical, nutrition, personal care, contact lenses, medical devices and diagnostics. It started 100 years ago making ready to use surgical dressings. ‐ ‐

Although the motivation is largely financial, diversification can often lack synergy, i.e., sharing of resources like R&D, marketing competence, management skills, logistics, etc. History is dotted with failed diversification moves. Think “Dunlop” and tyres quickly come to mind first — followed by footwear, sporting goods. But Pacific Dunlop Company had a history venturing into underwear and socks, bicycles (Repco), automobile batteries. All these came to a halt in the 1990s. The Pacific Dunlop company is no more.