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Principles of Marketing

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Principles of Marketing ­ MGT301
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Lesson ­ 21
Lesson overview and learning objectives:
In last Lesson we discussed the concept regarding some individual decisions about the product like
product attributes, labeling and packaging. Today we will continue the same topic and will discuss
the process of new product development again as well.
o PRODUCT
o NEW PRODUCT DEVELOPMENT PROCESS
A. Product Line Strategies
We have looked at product strategy decisions such as branding, packaging, labeling, and support
services for individual products and services. But product strategy also calls for building a product
line. A product line is a group of products that are closely related because they function in a similar
manner, are sold to the same customer groups, are marketed through the same types of outlets, or
fall within given price ranges. For example, Nike produces several lines of athletic shoes and
Motorola produces several lines of telecommunications products. In developing product line
strategies, marketers face a
number of tough decisions.
The  major  product  line
P ro d u c tt L iin e E x tte n s iio n s
P ro d u c L n e E x e n s o n s
decision involves product
line length--the number of
items in the product line.
Stretching
Filling
Conttractng a
ractiing a
The line is too short if the
Con
PrroductLine
P oduct Line
Adding new
Adding sizes or
manager can increase profits
items to line
styles
Drroppng ittems
D oppiing iems
by adding items; the line is
too long if the manager can
Dow nw ard
increase profits by dropping
items. Company objectives
Upw ard
and  resources  influence
product line length. Product
Tw o-w ay
lines tend to lengthen over
time. The sales force and
distributors may pressure the
product manager for a more complete line to satisfy their customers. Or, the manager may want to
add items to the product line to create growth in sales and profits. However, as the manager adds
items, several costs rise: design and engineering costs, inventory costs, manufacturing changeover
costs, transportation costs, and promotional costs to introduce new items. Eventually top
management calls a halt to the mushrooming product line. Unnecessary or unprofitable items will
be pruned from the line in a major effort to increase overall profitability. This pattern of
uncontrolled product line growth followed by heavy pruning is typical and may repeat itself many
times.
The company must manage its product lines carefully. It can systematically increase the length of
its product line in two ways: by stretching its line and by filling its line. Product line stretching
stretches its line downward, upward, or both ways.
Many companies initially locate at the upper end of the market and later stretch their lines
downward. A company may stretch downward to plug a market hole that otherwise would attract a
new competitor or to respond to a competitor's attack on the upper end. Or it may add low-end
products because it finds faster growth taking place in the low-end segments.
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Principles of Marketing ­ MGT301
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B. New-product development
Given the rapid changes in consumer tastes, technology, and competition, companies must
develop a steady stream of new products and services. A firm can obtain new products in two
ways. One is through acquisition--by buying a whole company, a patent, or a license to produce
someone else's product. The other is through new-product development in the company's own
research and development department. By new products we mean original products, product
improvements, product modifications, and new brands that the firm develops through its own
research and development efforts. In this chapter, we concentrate on new-product development.
New products continue to fail at a disturbing rate. One source estimates that new consumer
packaged goods (consisting mostly of line extensions) fail at a rate of 80 percent. Moreover, failure
rates for new industrial products
may be as high as 30 percent.3Why
Marketing
Business
do so many new products fail?
Strategy
Analysis
There  are  several  reasons.
Although an idea may be good, the
Concept
market  size  may  have  been
Product
Development
Development  overestimated. Perhaps the actual
and Testing
product was not designed as well
as it should have been. Or maybe
it was incorrectly positioned in the
Test
Idea
market,  priced  too  high,  or
Marketing
Screening
advertised poorly. A high-level
executive might push a favorite
idea  despite  poor  marketing
Idea
research findings. Sometimes the
Commercialization
Generation
costs of product development are
higher  than  expected,  and
sometimes competitors fight back harder than expected.
Because so many new products fail, companies are anxious to learn how to improve their odds of
new-product success. One way is to identify successful new products and find out what they have
in common. Another is to study new-product failures to see what lessons can be learned. Various
studies suggest that new-product success depends on developing a unique superior product, one
with higher quality, new features, and higher value in use. Another key success factor is a well-
defined product concept prior to development, in which the company carefully defines and
assesses the target market, the product requirements, and the benefits before proceeding. Other
success factors have also been suggested--senior management commitment, relentless innovation,
and a smoothly functioning new-product development process. In all, to create successful new
products, a company must understand its consumers, markets, and competitors and develop
products that deliver superior value to customers.
So companies face a problem--they must develop new products, but the odds weigh heavily
against success. The solution lies in strong new-product planning and in setting up a systematic
new-product development process for finding and growing new products. Figure shows the eight
major steps in this process.
a) Idea generation
New-product development starts with idea generation--the systematic search for new-product
ideas. A company typically has to generate many ideas in order to find a few good ones. Major
sources of new-product ideas include internal sources, customers, competitors, distributors and
suppliers, and others. Using internal sources, the company can find new ideas through formal
research and development. It can pick the brains of its executives, scientists, engineers,
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manufacturing, and salespeople. Some companies have developed successful "entrepreneurial"
programs that encourage employees to think up and develop new-product ideas. Good new-
product ideas also come from watching and listening to customers. The company can analyze
customer questions and complaints to find new products that better solve consumer problems.
The company can conduct surveys or focus groups to learn about consumer needs and wants. Or
company engineers or salespeople can meet with and work alongside customers to get suggestions
and ideas. Finally, consumers often create new products and uses on their own, and companies can
benefit by finding these products and putting them on the market. Customers can also be a good
source of ideas for new product uses that can expand the market for and extend the life of current
products. Competitors are another good source of new-product ideas. Companies watch
competitors' ads and other communications to get clues about their new products. They buy
competing new products, take them apart to see how they work, analyze their sales, and decide
whether they should bring out a new product of their own. Finally, distributors and suppliers
contribute many good new-product ideas. Resellers are close to the market and can pass along
information about consumer problems and new-product possibilities. Suppliers can tell the
company about new concepts, techniques, and materials that can be used to develop new products.
Other idea sources include trade magazines, shows, and seminars; government agencies; new-
product consultants; advertising agencies; marketing research firms; university and commercial
laboratories; and inventors.
The search for new-product ideas should be systematic rather than haphazard. Otherwise, few new
ideas will surface and many good ideas will sputter in and die. Top management can avoid these
problems by installing an idea management system that directs the flow of new ideas to a central point
where they can be collected, reviewed, and evaluated. In setting up such a system, the company can
do any or all of the following:
 Appoint a respected senior person to be the company's idea manager.
 Create a multidisciplinary idea management committee consisting of people from R&D,
engineering, purchasing, operations, finance, and sales and marketing to meet regularly and
evaluate proposed new-product and service ideas.
 Set up a toll-free number for anyone who wants to send a new idea to the idea manager.
 Encourage all company stakeholders--employees, suppliers, distributors, dealers-- to send
their ideas to the idea manager.
 Set up formal recognition programs to reward those who contribute the best new ideas.
The idea manager approach yields two favorable outcomes. First, it helps create an innovation-
oriented company culture. It shows that top management supports, encourages, and rewards
innovation. Second, it will yield a larger number of ideas among which will be found some
especially good ones. As the system matures, ideas will flow more freely. No longer will good ideas
wither for the lack of a sounding board or a senior product advocate
b) Idea Screening
The purpose of idea generation is to create a large number of ideas. The purpose of the succeeding
stages is to reduce that number. The first idea-reducing stage is idea screening, which helps spot
good ideas and drop poor ones as soon as possible. Product development costs rise greatly in later
stages, so the company wants to go ahead only with the product ideas that will turn into profitable
products. As one marketing executive suggests, "Three executives sitting in a room can get 40
good ideas ricocheting off the wall in minutes. The challenge is getting a steady stream of good
ideas out of the labs and creativity campfires, through marketing and manufacturing, and all the
way to consumers."
Many companies require their executives to write up new-product ideas on a standard form that
can be reviewed by a new-product committee. The write-up describes the product, the target
market, and the competition. It makes some rough estimates of market size, product price,
development time and costs, manufacturing costs, and rate of return. The committee then
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evaluates the idea against a set of general criteria such as these: Is the product truly useful to
consumers and society? Is it good for our particular company? Does it mesh well with the
company's objectives and strategies? Do we have the people, skills, and resources to make it
succeed? Does it deliver more value to customers than do competing products? Is it easy to
advertise and distribute? Many companies have well-designed systems for rating and screening
new-product ideas.
c) Concept Development and Testing
An attractive idea must be developed into a product concept. It is important to distinguish
between a product idea, a product concept, and a product image. A product idea is an idea for a
possible product that the company can see itself offering to the market. A product concept is a
detailed version of the idea stated in meaningful consumer terms. A product image is the way
consumers perceive an actual or potential product.
Concept testing calls for testing new-product concepts with groups of target consumers. The
concepts may be presented to consumers symbolically or physically For some concept tests, a
word or picture description might be sufficient. However, a more concrete and physical
presentation of the concept will increase the reliability of the concept test. Today, some marketers
are finding innovative ways to make product concepts more real to consumer subjects. For
example, some are using virtual reality to test product concepts. Virtual reality programs use
computers and sensory devices (such as gloves or goggles) to simulate reality.
d) Marketing strategy Development
The next step is marketing strategy development, designing an initial marketing strategy for
introducing this car to the market.
The marketing strategy statement consists of three parts. The first part describes the target market; the
planned product positioning; and the sales, market share, and profit goals for the first few years.
The second part of the marketing strategy statement outlines the product's planned price,
distribution, and marketing budget for the first year. The third part of the marketing strategy
statement describes the planned long-run sales, profit goals, and marketing mix strategy:
e)
Business Analysis
Once management has decided on its product concept and marketing strategy, it can evaluate the
business attractiveness of the proposal. Business analysis involves a review of the sales, costs, and
profit projections for a new product to find out whether they satisfy the company's objectives. If
they do, the product can move to the product development stage.
To estimate sales, the company might look at the sales history of similar products and conduct
surveys of market opinion. It can then estimate minimum and maximum sales to assess the range
of risk. After preparing the sales forecast, management can estimate the expected costs and profits
for the product, including marketing, R&D, operations, accounting, and finance costs. The
company then uses the sales and costs figures to analyze the new product's financial attractiveness.
f)
Product Development
So far, for many new-product concepts, the product may have existed only as a word description, a
drawing, or perhaps a crude mock-up. If the product concept passes the business test, it moves
into product development. Here, R&D or engineering develops the product concept into a
physical product. The product development step, however, now calls for a large jump in
investment. It will show whether the product idea can be turned into a workable product.
The R&D department will develop and test one or more physical versions of the product concept.
R&D hopes to design a prototype that will satisfy and excite consumers and that can be produced
quickly and at budgeted costs. Developing a successful prototype can take days, weeks, months, or
even years. Often, products undergo rigorous functional tests to make sure that they perform
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safely and effectively. The prototype must have the required functional features and also convey
the intended psychological characteristics.
g)
Test Marketing
If the product passes functional and consumer tests, the next step is test marketing, the stages at
which the product and marketing program are introduced into more realistic market settings. Test
marketing gives the marketer experience with marketing the product before going to the great
expense of full introduction. It lets the company test the product and its entire marketing
program--positioning strategy, advertising, distribution, pricing, branding and packaging, and
budget levels.
The amount of test marketing needed varies with each new product. Test marketing costs can be
enormous, and it takes time that may allow competitors to gain advantages. When the costs of
developing and introducing the product are low, or when management is already confident about
the new product, the company may do little or no test marketing. Companies often do not test-
market simple line extensions or copies of successful competitor products.
h) Commercialization
Test marketing gives management the information needed to make a final decision about whether
to launch the new product. If the company goes ahead with commercialization--introducing the
new product into the market--it will face high costs. The company will have to build or rent a
manufacturing facility. The company launching a new product must first decide on introduction
timing Next, the company must decide where to launch the new product--in a single location, a
region, the national market, or the international market. Few companies have the confidence,
capital, and capacity to launch new products into full national or international distribution. They
will develop a planned market rollout over time. In particular, small companies may enter attractive
cities or regions one at a time. Larger companies, however, may quickly introduce new models into
several regions or into the full national market.
Speeding Up New-Product Development
Many companies organize their new-product development process into the orderly sequence of
steps starting with idea generation and ending with commercialization. Under this sequential
product development approach, one company department works individually to complete its stage
of the process before passing the new product along to the next department and stage. This
orderly, step-by-step process can help bring control to complex and risky projects. But it also can
be dangerously slow. In fast-changing, highly competitive markets, such slow-but-sure product
development can result in product failures, lost sales and profits, and crumbling market positions.
"Speed to market" and reducing new-product development cycle time have become pressing
concerns to companies in all industries.
In order to get their new products to market more quickly, many companies are adopting a faster,
team-oriented approach called simultaneous (or team-based) product development. Under this
approach, company departments work closely together, overlapping the steps in the product
development process to save time and increase effectiveness. Instead of passing the new product
from department to department, the company assembles a team of people from various
departments that stay with the new product from start to finish. Such teams usually include people
from the marketing, finance, design, manufacturing, and legal departments, and even supplier and
customer companies.
Top management gives the product development team general strategic direction but no clear-cut
product idea or work plan. It challenges the team with stiff and seemingly contradictory goals--
"turn out carefully planned and superior new products, but do it quickly"--and then gives the team
whatever freedom and resources it needs to meet the challenge. In the sequential process, a
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bottleneck at one phase can seriously slow the entire project. In the simultaneous approach, if one
functional area hits snags, it works to resolve them while the team moves on.
KEY TERMS
New-product development: The development of original products, product improvements,
product modifications, and new brands through the firm's own R&D efforts.
Idea generation: The systematic search for new-product ideas.
Idea screening: screening new-product ideas in order to spot good ideas and drop poor ones as
soon as possible.
Product concept: A detailed version of the new-product idea stated in meaningful consumer
terms.
Concept testing: Testing new-product concepts with a group of target consumers to find out if
the concepts have strong consumer appeal.
Business analysis: A review of the sales, costs, and profit projections for a new product to find
out whether these factors satisfy the company's objectives.
Product development: A strategy for company growth by offering modified or new products to
current market segments. Developing the product concept into a physical product in order to
ensure that the product idea can be turned into a workable product.
Commercialization: Introducing a new product into the market.
Test marketing: The stage of new-product development in which the product and marketing
program are tested in more realistic market settings.
Sequential
S a le s a n d
P r o fits ($ )
product
development
A
S a le s
new-product
development
approach in which
P r o fits
one
company
department works
to  complete  its
T im e
stage of the process
In tr o d u c tio n
P ro d u c t
G ro w th
M a tu r ity
D e c lin e
before passing the
D e v e lo p m e n t
S ta g e
new product along
to
the
next
S a le s a n d P r o fits O v e r
th e P r o d u c t's L ife F r o m
department
and
In c e p tio n to D e m is e
stage.
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Table of Contents:
  1. PRINCIPLES OF MARKETING:Introduction of Marketing, How is Marketing Done?
  2. ROAD MAP:UNDERSTANDING MARKETING AND MARKETING PROCESS
  3. MARKETING FUNCTIONS:CUSTOMER RELATIONSHIP MANAGEMENT
  4. MARKETING IN HISTORICAL PERSPECTIVE AND EVOLUTION OF MARKETING:End of the Mass Market
  5. MARKETING CHALLENGES IN THE 21st CENTURY:Connections with Customers
  6. STRATEGIC PLANNING AND MARKETING PROCESS:Setting Company Objectives and Goals
  7. PORTFOLIO ANALYSIS:MARKETING PROCESS,Marketing Strategy Planning Process
  8. MARKETING PROCESS:Analyzing marketing opportunities, Contents of Marketing Plan
  9. MARKETING ENVIRONMENT:The Companyís Microenvironment, Customers
  10. MARKETING MACRO ENVIRONMENT:Demographic Environment, Cultural Environment
  11. ANALYZING MARKETING OPPORTUNITIES AND DEVELOPING STRATEGIES:MIS, Marketing Research
  12. THE MARKETING RESEARCH PROCESS:Developing the Research Plan, Research Approaches
  13. THE MARKETING RESEARCH PROCESS (Continued):CONSUMER MARKET
  14. CONSUMER BUYING BEHAVIOR:Model of consumer behavior, Cultural Factors
  15. CONSUMER BUYING BEHAVIOR (CONTINUED):Personal Factors, Psychological Factors
  16. BUSINESS MARKETS AND BUYING BEHAVIOR:Market structure and demand
  17. MARKET SEGMENTATION:Steps in Target Marketing, Mass Marketing
  18. MARKET SEGMENTATION (CONTINUED):Market Targeting, How Many Differences to Promote
  19. Product:Marketing Mix, Levels of Product and Services, Consumer Products
  20. PRODUCT:Individual product decisions, Product Attributes, Branding
  21. PRODUCT:NEW PRODUCT DEVELOPMENT PROCESS, Idea generation, Test Marketing
  22. NEW PRODUCT DEVELOPMENT:PRODUCT LIFE- CYCLE STAGES AND STRATEGIES
  23. KEY TERMS:New-product development, Idea generation, Product development
  24. Price the 2nd P of Marketing Mix:Marketing Objectives, Costs, The Market and Demand
  25. PRICE THE 2ND P OF MARKETING MIX:General Pricing Approaches, Fixed Cost
  26. PRICE THE 2ND P OF MARKETING MIX:Discount and Allowance Pricing, Segmented Pricing
  27. PRICE THE 2ND P OF MARKETING MIX:Price Changes, Initiating Price Increases
  28. PLACE- THE 3RD P OF MARKETING MIX:Marketing Channel, Channel Behavior
  29. LOGISTIC MANAGEMENT:Push Versus Pull Strategy, Goals of the Logistics System
  30. RETAILING AND WHOLESALING:Customer Service, Product Line, Discount Stores
  31. KEY TERMS:Distribution channel, Franchise organization, Distribution center
  32. PROMOTION THE 4TH P OF MARKETING MIX:Integrated Marketing Communications
  33. ADVERTISING:The Five Mís of Advertising, Advertising decisions
  34. ADVERTISING:SALES PROMOTION, Evaluating Advertising, Sales Promotion
  35. PERSONAL SELLING:The Role of the Sales Force, Builds Relationships
  36. SALES FORCE MANAGEMENT:Managing the Sales Force, Compensating Salespeople
  37. SALES FORCE MANAGEMENT:DIRECT MARKETING, Forms of Direct Marketing
  38. DIRECT MARKETING:PUBLIC RELATIONS, Major Public Relations Decisions
  39. KEY TERMS:Public relations, Advertising, Catalog Marketing
  40. CREATING COMPETITIVE ADVANTAGE:Competitor Analysis, Competitive Strategies
  41. GLOBAL MARKETING:International Trade System, Economic Environment
  42. E-MARKETING:Internet Marketing, Electronic Commerce, Basic-Forms
  43. MARKETING AND SOCIETY:Social Criticisms of Marketing, Marketing Ethics
  44. MARKETING:BCG MATRIX, CONSUMER BEHAVIOR, PRODUCT AND SERVICES
  45. A NEW PRODUCT DEVELOPMENT:PRICING STRATEGIES, GLOBAL MARKET PLACE