New Product Development and Product Life-cycle Strategies

Chapter 8 New Product Development and Product Life-Cycle Strategies

CHAPTER 8

NEW PRODUCT DEVELOPMENT AND PRODUCT LIFE-CYCLE STRATEGIES

PREVIEWING THE CONCEPTS – CHAPTER OBJECTIVES

1. Explain how companies find and develop new-product ideas.

2. List and define the steps in the new product development process and the major considerations in managing this process.

3. Describe the stages of the product life cycle and how marketing strategies change during a product’s life cycle.

4. Discuss two additional product issues: socially responsible product decisions and international product and services marketing.

JUST THE BASICS

CHAPTER OVERVIEW

In this chapter, we’ll look into two product topics:

1. Developing new products

2. Managing products through their life cycles.

New-product development is risky, and many new products fail.

The first part of this chapter lays out a process for finding and growing successful new products.

In the second part of the chapter, we see that every product passes through several life-cycle stages and that each stage poses new challenges requiring different marketing strategies and tactics.

Finally, we look at two additional considerations: social responsibility in product decisions and international product and services marketing.

ANNOTATED CHAPTER NOTES/OUTLINE

FIRST STOP

Samsung: Enriching Customer’s Lives through New Product Innovation

Samsung, the world’s largest consumer electronics manufacturer, produces “gotta-have” electronics in just about every product category.

A little over 20 years ago, Samsung made the decision to go from being a ‘copy-cat’ brand to being a premier brand and innovation leader.

Copyright © 2015 Pearson Education, Inc.8-1

Part 3 Designing a Customer-Driven Strategy and Mix

Samsung set out to create “lifestyle works of art.” Every new product had to pass the “Wow!” test: If it didn’t get a “Wow!” reaction during market testing, it was sent back to the design studio.

Beyond TVs and mobile devices, Samsung is applying its new product Wow! to categories ranging from household appliances to digital imaging to notebook PCs.

Through a dedication to customer-focused new product innovation, Samsung has become a world-leading innovator of stylish, high-performing premium products.

INTRODUCTION

Every product seems to go through a life cycle.

This product life cycle presents two major challenges:

1. Because all products eventually decline, a firm must be good at developing new products to replace aging ones (the challenge of new-product development).

2. The firm must be good at adapting its marketing strategies in the face of changing tastes, technologies, and competition as products pass through life-cycle stages (the challenge of product life-cycle strategies).

NEW-PRODUCT DEVELOPMENT STRATEGY

Use Key Term New Product Development here.Use Critical Thinking Exercise 8-6 here.

A firm can obtain new products in two ways.

1. Acquisition—by buying a whole company, a patent, or a license to produce someone else’s product.

2. New-product development efforts.

Use Chapter Objective 1 here.

THE NEW-PRODUCT DEVELOPMENT PROCESSFigure 8.1 shows the eight major steps in the new-product development process.

Use Figure 8.1 here.Use Chapter Objective 2 here.



1. Idea Generation

Use Key Term Idea Generation here.

Idea generation is the systematic search for new-product ideas.

Internal Idea Sources

Using internal sources, the company can find new ideas through formal research and development. Or it can pick the brains of employees—from executives to salespeople to scientists, engineers, and manufacturing staff.

External Idea Sources

Companies can also obtain good new-product ideas from any of a number of external sources, such as distributors and suppliers or even competitors.

Perhaps the most important source of new-product ideas is customers themselves.

Crowdsourcing

Many companies are now developing crowdsourcing new-product idea programs. Crowdsourcing invites broad communities of people into the new-product innovation process.

Use Key Term Crowdsourcing here.Use Marketing at Work 8.1 here.Use Discussion Question 8-1 here.

2. Idea Screening

Use Key Term Idea Screening here.

The first idea-reducing stage is idea screening, which helps spot good ideas and drop poor ones as soon as possible.

3. Concept Development and Testing

Use Key Terms Product Concept and Concept Testing here.Use Table 8.1 here.

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 Development

In concept development, several descriptions of the product are generated to find out how attractive each concept is to customers. From these concepts, the best one is chosen.

Concept Testing

Concept testing calls for testing new-product concepts with groups of target consumers. (Table 8.1)

Marketing Strategy Development

4. Marketing strategy development involves designing an initial marketing strategy for a new product based on the product concept.

Use Key Term Marketing Strategy Development here.Use Discussion Question 8-2 here.

The marketing strategy statement consists of three parts.

1. A description of the target market; the planned value proposition; and the sales, market share, and profit goals for the first few years

2. An outline of the product’s planned price, distribution, and marketing budget for the first year

3. A description of the planned long-run sales, profit goals, and marketing mix strategy

5. Business Analysis

Use Key Term Business Analysis here.

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.

6. Product Development

Use Key Term Product Development here.


Chapter 8 New Product Development and Product Life-Cycle StrategiesIn product development, R&D or engineering develops the product concept into a physical product.

The product development step calls for a large jump in investment.

7. Test Marketing

Use Key Term Test Marketing here.Use Discussion Question 8-3 here.

Test marketing is the stage at which the product and marketing program are introduced into realistic market settings.

8. Commercialization

Use Key Term Commercialization here.

Commercialization involves introducing the new product into the market.

Decisions must be made about introduction timing as well as where to launch the new product.

Use Critical Thinking Exercise 8-7 here.Use Online, Mobile, and Social Media Marketing here.

MANAGING NEW-PRODUCT DEVELOPMENT

Customer-Centered New-Product Development

Use Key Term Customer-Centered New-Product Development here.

New-product development must be customer centered.

Customer-centered new-product development focuses on finding new ways to solve customer problems and create more customer-satisfying experiences.

Team-Based New-Product Development

Under the 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 order to get their new products to market more quickly, many companies use a team-based new-product development approach.

Use Key Term Team-Based New-Product Development here.

Under this approach, company departments work closely together in cross-functional teams, 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.

Systematic New-Product Development

An innovation management system can be used to collect, review, evaluate, and manage new-product ideas.

The innovation management system approach yields two favorable outcomes.

1. It helps create an innovation-oriented company culture. 2. It will yield a larger number of new-product ideas, among which will be found some

especially good ones.

New-Product Development in Turbulent Times

In difficult times, innovation more often helps than hurts in making the company more competitive and positioning it better for the future.

Use Linking the Concepts here.

PRODUCT LIFE-CYCLE STRATEGIES

Figure 8.2 shows a typical product life cycle (PLC), the course that a product’s sales and profits take over its lifetime.

Use Key Term Product Life Cycle (PLC) here.Use Figure 8.2 here.

Use Chapter Objective 3 here.

The product life cycle has five distinct stages:

1. Product development begins when the company finds and develops a new-product idea.


Chapter 8 New Product Development and Product Life-Cycle StrategiesDuring product development, sales are zero, and the company’s investment costs mount.

2. Introduction is a period of slow sales growth as the product is introduced in the market. Profits are nonexistent in this stage because of the heavy expenses of product introduction.

3. Growth is a period of rapid market acceptance and increasing profits.

4. Maturity is a period of slowdown in sales growth because the product has achieved acceptance by most potential buyers. Profits level off or decline because of increased marketing outlays to defend the product against competition.

5. Decline is the period when sales fall off and profits drop.

The PLC concept can describe a product class (gasoline-powered automobiles), a product form (SUVs), or a brand (the Ford Escape).

Product classes have the longest life cycles.

Product forms have the standard PLC shape.

Product brand PLC can change quickly because of changing competitive attacks and responses.

The PLC can be applied to styles, fashions, and fads (Figure 8.3).

• A style is a basic and distinctive mode of expression. • A fashion is a currently accepted or popular style in a given field. • Fads are temporary periods of unusually high sales driven by consumer enthusiasm and

immediate product or brand popularity.

Use Key Terms Style, Fashion, and Fad here.Use Figure 8.3 here.

Use Discussion Question 8-4 here.Use Marketing at Work 8.2 here.

Strategies for each of the other life-cycle stages:

Introduction Stage

Use Key Term Introduction Stage here.

The introduction stage starts when the new product is first launched.

In this stage, profits are negative or low, promotion spending is relatively high, and only basic versions of the product are produced.

A company, especially the market pioneer, must choose a launch strategy that is consistent with


Part 3 Designing a Customer-Driven Strategy and Mixthe intended product positioning.

Growth Stage

Use Key Term Growth Stage here.

The growth stage is where sales begin to climb quickly.

New competitors will enter the market. They will introduce new product features, and the market will expand.

The increase in competitors leads to an increase in the number of distribution outlets. Prices remain stable.

Profits increase during the growth stage.

Maturity Stage

Use Key Term Maturity Stage here.

The maturity stage is characterized by slowing product growth.

The slowdown in sales growth results in many producers with many products to sell.

Competitors begin marking down prices, increasing their advertising and sales promotions, and upping their product-development budgets to find better versions of the product.

These steps lead to a drop in profit.

Product managers should consider modifying the market, product, and marketing mix.

In modifying the market, the company tries to increase the consumption of the current product.

In modifying the product, the company tries changing characteristics such as quality, features, style, or packaging to attract new users and to inspire more usage.

In modifying the marketing mix, the company tries changing one or more marketing mix elements.

Use Discussion Question 8-5 here.Use Marketing at Work 8.2 here.



Decline Stage

Use Key Term Decline Stage here.Use Table 8.2 here.

The sales of most product forms and brands eventually dip. This is the decline stage.

Management may decide to maintain its brand without change in the hope that competitors will leave the industry.

Management may decide to harvest the product, which means reducing various costs (plant and equipment, maintenance, R&D, advertising, sales force) and hoping that sales hold up

Management may decide to drop the product from the line. (Table 8.2)

Use Marketing by the Numbers here.

ADDITIONAL PRODUCT AND SERVICE CONSIDERATIONS

Product Decisions and Social Responsibility

Marketers should consider public policy issues and regulations regarding acquiring or dropping products, patent protection, product quality and safety, and product warranties.

Regarding new products, the government may prevent companies from adding products through acquisitions if the effect threatens to lessen competition.

Manufacturers must comply with specific laws regarding product quality and safety.

The litigation phenomenon has resulted in huge increases in product liability insurance premiums, causing big problems in some industries.

Some companies are now appointing product stewards, whose job is to protect consumers from harm and the company from liability by proactively ferreting out potential product problems.

Use Chapter Objective 4 here.Use Marketing Ethics here.

International Product and Services Marketing

International product and service marketers face special challenges.


Part 3 Designing a Customer-Driven Strategy and Mix• They must figure out what products and services to introduce and in which countries. • They must decide how much to standardize or adapt their products and services for world

markets. • Packaging presents new challenges for international marketers.

The trend toward growth of global service companies will continue, especially in banking, airlines, telecommunications, and professional services.

END OF CHAPTER MATERIAL

Discussion and Critical Thinking

Discussion Questions

8-1 Define crowdsourcing and describe an example not already presented in the chapter. (AACSB: Written and oral communication; Reflective thinking)

Answer:

Crowdsourcing throws the innovation doors wide open, inviting broad communities of people—customers, employees, independent scientists and researchers, and even the public at large—into the new-product innovation process. Crowdsourcing can produce a flood of innovative ideas. For a list and descriptions of crowdsourcing projects visit http://en.wikipedia.org/wiki/List_of_crowdsourcing_projects.

8-2 What activities are performed in the marketing strategy development step of the new product development process? What is required in a good marketing strategy statement (AACSB: Written and oral communication; Reflective thinking)

Answer:

Marketing strategy development involves designing an initial marketing strategy for introducing the product to the market. The marketing strategy statement consists of three parts. The first part describes the target market; the planned value proposition; and the sales, market share, and profit goals for the first few years.

8-3 What is test marketing? Explain why companies may or may not test market products, and discuss alternatives to full test markets. (AACSB: Written and oral communication)

Answer:

Test marketing is the stage at which the product and its proposed marketing program are


http://en.wikipedia.org/wiki/List_of_crowdsourcing_projects

Chapter 8 New Product Development and Product Life-Cycle Strategiesintroduced into realistic market settings. Test marketing gives the marketer experience with marketing a product before going to the great expense of full introduction. It lets the company test the product and its entire marketing program—targeting and 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 high, 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. However, a company may do a lot of test marketing when introducing a new product requires a big investment, when the risks are high, or when management is not sure of the product or its marketing program.

As an alternative to extensive and costly standard test markets, companies can use controlled test markets or simulated test markets. In controlled test markets, such as SymphonyIRI’s BehaviorScan, new products and tactics are tested among controlled panels of shoppers and stores. By combining information on each test consumer’s purchases with consumer demographic and TV viewing information, BehaviorScan can provide store-by-store, week-by-week reports on the sales of tested products and the impact of in-store and in-home marketing efforts. Using simulated test markets, researchers measure consumer responses to new products and marketing tactics in laboratory stores or simulated online shopping environments. Both controlled test markets and simulated test markets reduce the costs of test marketing and speed up the process.

8-4 Compare and contrast styles, fashions, and fads. (AACSB: Written and oral communication)

Answer:

A style is a basic and distinctive mode of expression. For example, styles appear in homes (colonial, ranch, transitional), clothing (formal, casual), and art (realist, surrealist, abstract). Once a style is invented, it may last for generations, passing in and out of vogue. A style has a cycle showing several periods of renewed interest.

A fashion is a currently accepted or popular style in a given field. For example, the more formal “business attire” look of corporate dress of the 1980s and 1990s gave way to the “business casual” look of the 2000s and 2010s. Fashions tend to grow slowly, remain popular for a while, and then decline slowly.

Fads are temporary periods of unusually high sales driven by consumer enthusiasm and immediate product or brand popularity. A fad may be part of an otherwise normal life cycle, as in the case of recent surges in the sales of poker chips and accessories. Or the fad may comprise a brand’s or product’s entire life cycle. Pet Rocks are a classic example.


Part 3 Designing a Customer-Driven Strategy and Mix8-5 Discuss how a company can maintain success for products in the mature stage of the

product life cycle and give examples not already described in the chapter. (AACSB: Written and oral communication)

Answer:

A company should consider modifying the market, product offering, and marketing mix. In modifying the market, the company tries to increase consumption by finding new users and new market segments for its brands. The company may also look for ways to increase usage among present customers. The company might also try modifying the product—changing characteristics such as quality, features, style, packaging, or technology platforms to retain current users or attract new ones. Finally, the company can try modifying the marketing mix—improving sales by changing one or more marketing mix elements. The company can offer new or improved services to buyers. It can cut prices to attract new users and competitors’ customers. It can launch a better advertising campaign or use aggressive sales promotions—trade deals, cents-off, premiums, and contests. In addition to pricing and promotion, the company can also move into new marketing channels to help serve new users.

Critical Thinking Exercises

8-6 Visit the Product Development and Management Association’s Web site (www.pdma.org) to learn about this organization. Click on “OCI Award” in the “About PDMA” dropdown menu. Describe this award and the criteria used when granting it, and discuss one company that has received the OCI Award. (AACSB: Written and oral communication; Information technology)

Answer:

This organization advocates best practices in product development and provides several resources for members. The OCI stands for Outstanding Corporate Innovator, and there are four basic requirements for receiving this award:

1. A sustained record of successful new product launches over a five-year period2. New product success that leads to significant company growth3. The company has a defined new product development process.4. An innovative culture within the organization

Companies receiving this award each year are highlighted on the site. Recent recipients include Xerox Corporation, Bank of America, Nextel, Air Force Laboratory, and Harley-Davidson. Students can click on each organization to learn why it was granted this distinction. Instructors might want to assign students specific companies so a variety of award winning companies can be discussed in class.


http://www.pdma.org/


8-7 Find an example of a company that launched a new consumer product within the last five years. Develop a presentation showing how the company implemented the 4 P’s in launching the product and report on the product’s success since the launch. (AACSB: Written and oral communication; Reflective thinking)

Answer:

Students’ examples will vary. Searching “New Products” brings several results students can select for this activity. For example USA Today had a photo gallery at http://mediagallery.usatoday.com/Hot+products+and+marketing+trends+for+2012/G3190?loc=interstitialskip showing 10 hot products and marketing trends for 2012 and an article on products to watch for in 2013 (see www.usatoday.com/story/money/business/2012/12/30/2013-new-product-trends/1767425/).

P&G launched a new product in early 2012, selecting the Academy Awards as the broadcast vehicle because of the timing and audience fit for the product. The launch was not without problems, however. First it was delayed due to manufacturing problems, which opened the window for competitors such as Arm & Hammer to offer their own single-use detergent packets. Due to increasing commodities prices, P&G had to raise the price of the new product in the face of economic conditions that have consumers trading down to store brands. Then P&G had to modify the packaging and change advertising after hundreds of calls to poison control due to children eating the product because they thought it was candy.

Minicases and Applications

Online, Mobile, and Social Media Marketing: Reading Rainbow

You may have grown up watching LaVar Burton on PBS’s Reading Rainbow show. He hosted the children’s educational show for 26 years and now is taking it mobile. Burton purchased the rights to the show and launched a Reading Rainbow mobile app. The app is free to try, but a $9.99 per month or $29.99 per six-month subscription allows kids unlimited access to the library and adventures on themed islands such as the Animal Kingdom and others from the iconic television show, as well as new adventure field trips. Audio and video storytelling brings books to life for children, and interactive elements encourage curiosity and learning. Adventures incorporate segments from the TV show and brand new video. Up to five children in a household can customize their own reading adventures, and reading lists are suggested based on their abilities and interests. The parent dashboard lets parents monitor their child’s reading progress. LaVar Burton personally starts each day with a “Good morning, y’all” tweet followed by 15 to 20 more tweets each day to his followers. The service is always expanding, offering new adventures that are often based on user feedback through social media.


http://www.usatoday.com/story/money/business/2012/12/30/2013-new-product-trends/1767425/

http://mediagallery.usatoday.com/Hot+products+and+marketing+trends+for+2012/G3190?loc=interstitialskip

http://mediagallery.usatoday.com/Hot+products+and+marketing+trends+for+2012/G3190?loc=interstitialskip

Part 3 Designing a Customer-Driven Strategy and Mix8-8 In what stage of the product life cycle is the Reading Rainbow television program? Has

the mobile app changed that? Explain (AACSB: Written and oral communication; Reflective thinking)

Answer:

The Reading Rainbow program aired on PBS from 1983 to 2006 and episodes can still be watched on the Internet (see www.tv.com/shows/reading-rainbow). Therefore, it is in the mature stage of the product life cycle. However, it could be argued that the app has put it back into the growth stage of the product life cycle.

8-9 Discuss other existing products that have created new life for the product by embracing Internet, mobile, or social media platforms. Suggest an app for another tangible product or service that does not currently use online, mobile, or social media, along with ways to encourage customer engagement and social sharing. (AACSB: Written and oral communication; Information technology; Reflective thinking)

Answer:

Students’ answers will vary. Some examples include game apps, such as Words with Friends (from the Scrabble board game) or Clue (from the Clue board game). The Fan Fiction Web site, where users create stories based on existing books (such as Harry Potter), is now a mobile app. Other new apps could be similar to the Reading Rainbow app, where users are involved in the program, such as a murder mystery show. For example, Murder She Wrote was a popular mystery show that could be reinvented into a “who done it” app.

Marketing Ethics: Orphan Drugs

For years, rare diseases—those affecting fewer than 200,000 patients—were unattractive markets for pharmaceutical companies. That changed in 1983 when Congress created the “orphan drug” designation. The U.S. Food and Drug Administration now offers incentives such as faster approval, tax incentives, and longer patent protections to companies developing drugs for rare diseases, and patient groups raise millions of dollars to aid in their development. Now, more than 200 orphan drugs a year enter development, and about a third of them gain FDA approval. But these drugs are expensive to users. For example, Isis Pharmaceutical’s cholesterol drug for a rare condition costs $235,000 to $295,000 per year. NPS Pharmaceuticals has a drug for a rare bowel condition, Gattex, that costs patients $295,000 per year. In Europe, Sanofi’s enzyme-replacement therapy drug, Mynozyme, costs €700,000 (over $900,000) per year. These high prices fetched more than $1 billion in annual sales for a third of orphan drug makers, and the category has more than $50 billion in worldwide sales that grow more than 20 percent a year. According to the U.S. National Institutes of Health, there are almost 7,000 rare diseases affecting 30 million Americans, making this an attractive market segment for pharmaceutical companies who have seen many of their blockbuster drugs go off-patent and are looking for new


http://www.tv.com/shows/reading-rainbow

Chapter 8 New Product Development and Product Life-Cycle Strategiesrevenue streams. But who pays for these expensive orphan drugs? Right now, private health plans and governments foot the bill.

8-10 Discuss the ethical issues surrounding orphan drugs. Should pharmaceutical companies be allowed to charge such high prices for these drugs? (AACSB: Written and oral communication; Ethical understanding and reasoning)

Answer:

Students’ answer will vary. This is a difficult issue, though, because many of these treatments prove lifesaving. On one side of the issue is the fact that since the market for these drugs is so small, companies have to charge high prices to recoup development costs and gain an adequate return on their investment. However, with sales of more than $1 billion a year, it could be argued that companies are getting much more than development costs and an adequate ROI in return. For example, NPS’s bowel drug cost $250 million to develop, a far cry from $1 billion or more it normally costs to bring a more mainstream drug to market. Costs are lower because clinical trials require fewer patients and take less time due to the orphan drug designation. See Jonathan D. Rockoff, “The Big Business of Orphan Drugs,” The Wall Street Journal, (January 31, 2013), B1, B2.

8-11 Discuss the impact of austerity measures in Europe and the implementation of health-care reform in the United States on the future of orphan drugs. (AACSB: Written and oral communication; Reflective thinking)

Answer:

Students’ answers will vary. The European Union is concerned about orphan drug prices, with countries such as the Netherlands and Ireland demanding and getting cuts in prices. The United Kingdom rejected the expanded use of an orphan drug used to treat blood disorders. For more information, see “Orphan Drug Prices under Siege in Austerity-Minded Europe” (www.bloomberg.com/news/2013-04-07/orphan-drug-prices-under-siege-in-austerity-minded-europe.html).

The implementation of healthcare reform in the United States is still in its early stages at this time, but more information regarding orphan drugs may come to light when students address this issue. As of 2013, because these diseases are so rare, insurance companies may only need to pay for one patient’s treatment, spreading the costs among all of its customers.

Marketing by the Numbers: Kei Cars


http://www.bloomberg.com/news/2013-04-07/orphan-drug-prices-under-siege-in-austerity-minded-europe.html

http://www.bloomberg.com/news/2013-04-07/orphan-drug-prices-under-siege-in-austerity-minded-europe.html

Part 3 Designing a Customer-Driven Strategy and MixThe U.S. government fuel-economy regulations require carmakers to achieve a fleet average of 54.5 miles per gallon by 2025. Smaller vehicles can help car companies meet those standards. Tiny vehicles in Japan, known as kei cars (from “kei-jidosha” or “light automobile”), achieve 55 mpg ratings. Kei cars are not new in Japan. They began as a tax and insurance break to stimulate the Japanese economy after World War II. However, the typical kei buyer in Japan is close to 50 years old, causing concern for Japanese automakers focusing only on the Japanese market. The U.S. regulations provide an opportunity for these automobiles in America. However, profit margins are almost as tiny as the cars themselves, causing carmakers to wonder if they can make an adequate profit when exporting to the United States. Of the big-three Japanese carmakers—Honda, Toyota, and Nissan—Honda is the only one making kei cars. It is considering bringing its new Honda NBox to the United States. Its closest competitor would be Daimler’s Smart car, which made a profit of $108.3 million on sales of $10.7 billion in the United States last year. Smart cars sell for around $13,000 but seat only two people. In comparison, Honda’s NBox holds four people and would be priced at $16,000, making it an alternative for small-car-minded families. To answer the following questions, refer to Appendix 3, Marketing by the Numbers.

8-12 What is the profit margin for the Smart car? (AACSB: Written and oral communication; Analytical thinking)

Answer:Profits

Profit Margin = ————— = $108.3 million/$10.7 billion = 0.01 or 1% Sales

8-13 If the unit variable cost for each NBox is $14,000 and Honda has fixed costs totaling $20 million for this car, how many NBox cars must Honda sell to break even? How many must it sell to realize a profit margin similar to that of the Smart car? (AACSB: Written and oral communication; Analytical thinking)

Answer: Fixed cost

Breakeven volume = ———————— Price – Variable Cost

So,

$20,000,000Breakeven volume = ——————— = 10,000 cars $16,000 – $14,000

The profit margin found for the Smart car was 1%. To determine the unit volume necessary to achieve this goal, we incorporate the profit goal into the unit contribution as an additional variable cost. Look at it this way: If 1% of each sale must go toward profits, that leaves only 99% of the selling price to cover fixed costs. Thus, the equation becomes:



fixed cost fixed cost Unit volume = ——————————— or ——————————

price variable cost (0.01 price) (0.99 price) variable cost

So,

$20,000,000 Unit volume = ————————— = 10,869.56 cars

(0.99 $16,000) $14,000

Therefore, to realize a 1% profit margin, Honda would have to sell 10,870 cars.

Video Case Teaching Notes

Video Case Chapter 8 – Subaru Running time

Intro: 1:14Problem: 2:24Solution: 3:12Total: 6:52

Video Summary

When a company has a winning product, it has it made. Or does it? Subaru is a winning company (one of the few automotive companies to sustain growth and profits in hard economic times) with various winning products, including the Impreza, Legacy, Forester, and Outback. But what happens when any one product starts to decline in popularity?

This video demonstrates how Subaru constantly engages in new-product development as part of its efforts to manage the product life cycle for each of its models. Subaru is focused on both developing the next version of each existing model and developing possible new models to boost its product portfolio.

Questions and Answers

8-14 How would you describe the product life cycle in relation to one Subaru product?Students could pick any of the products illustrated in this video. Here is one example based on the Outback: Introduction – the introduction of SUVs really dates back to the pre-war era with the first Chevrolet Suburban (1936). This was followed throughout the decades with early Jeeps, International Scouts, and Ford Broncos. Growth – as David Sullivan explained, the supply and demand of SUVs was increasing rapidly in the early 1990s. While Subaru had marketed four-wheel drive sedans and


Part 3 Designing a Customer-Driven Strategy and Mixwagons for years, it didn’t have anything that really qualified as an SUV. So, it lifted its Legacy sedan and wagon, beefed up the suspension, put meatier tires on it, and the Outback was born. Many consider the introduction of the Outback in 1995 as the introduction of an entirely new product category, crossover SUVs or CUVs.Maturity – Today’s Outback is in the maturity phase as a fourth-generation vehicle. It is important to note that the entire category of CUVs is mature (SUVs have been in decline for a number of years now). When a company’s most popular product starts to taper off, it must move forward with new products. Subaru has recognized this. They are not a company that is totally rooted in SUVs. When customers began abandoning SUVs, companies like Ford and Chevrolet were in big trouble. Subaru has a unique relationship between its CUVs and non-CUVs. As the demand for the CUV version fluctuates, the demand for its non-CUV counterpart picks up the slack (Outback and Legacy are largely the same vehicle). Subaru has also developed itself in the market of high-performance sedans (WRX) and full-sized CUVs (Tribeca). Decline – None of Subaru’s vehicle models seem to be in a true decline phase. This is what they hope to prevent. But they are preparing for such by creating other models.

8-15 How do shifting consumer trends affect Subaru’s products? The shifting trend towards SUVs and CUVs is a case-in-point. The Outback was born from a necessity for Subaru to have a product that could compete with other manufacturers producing vehicles catering to this growing trend. As the trend increased and CUVs took on a life of their own, Subaru was well poised with a leading product. As larger, truck-based SUVs started to decline, Outback (and its sibling the Forester) met consumer desires for a beefy all-wheel drive vehicle that was more car-like and more fuel-efficient.

8-16 How does Subaru remain customer-oriented in its new product efforts? Research. The firm collects data from customer letters and phone calls and conducts research through means like ethnographic studies. Subaru has gone in to people’s homes to observe how they live and what needs they have in their vehicles. From this, the firm has identified various new product features such as more comfort and convenience features and more rear-seat legroom.

Teaching Ideas

This video begins with an introductory segment, followed by a problem segment, and ends with a solution segment. The intention here is to provide flexibility and multiple options for using the video. The following are some of the ways that instructors may utilize these three video segments.

1. Introduction only - Instructors may choose to use the introduction segment alone as a means of highlighting the company. As a stand-alone video, the introduction segment supplements material in many of the chapters of the text. The introduction segment for


Chapter 8 New Product Development and Product Life-Cycle Strategiesthis Subaru video not only illustrates that Subaru is a company with many different products, but that it is engaged in trying to meet consumer needs with new products as trends shift.

2. Problem challenge - The instructor may show the problem segment, either with or without the introduction segment, and with or without the solution segment. This may be done in the interest of time. It may also be done strategically. An ideal way to challenge students is to require them to develop possible solutions to the presented problem before they have seen the solution segment. The instructor then has the option of whether or not to show the solution segment. This segment illustrates the challenges that emerge when top products hit maturity.

3. Solution only – This may be done to illustrate a specific concept in the chapter. Rather than taking the time to perform a problem/solution exercise, the solution segment may be shown to demonstrate how a company overcame a specific problem. New products do not necessarily mean “completely new” concepts. Modifications and updates are new products. This segment shows how Subaru is very focused on both.

Company Case Teaching Notes

Cases appropriate for this chapter include: Case 8, Google: New Product Innovation at the Speed of Light (Synopsis, Discussion

Questions, and Teaching Notes below) Case 2, Dyson: Solving Customer Problems in Ways They Never Imagined (see IM

Chapter 2 for instructor material) Case 6, Dove: Building Customer Relationships Everywhere, One Gender at a Time (see

IM Chapter 6 for instructor material)

Google: New Product Innovation at the Speed of Light

Synopsis

Google is most people’s “go to” search engine, capturing 84 percent of all online searches. But more important, Google is one of the world’s most innovative companies, constantly developing an almost endless flow of wildly imaginative new technologies and services. Google not only innovates, it does it fast, implementing major new services in less time than it takes competitors to refine and approve an initial idea. Google’s innovation pace would boggle the minds of product developers at most other companies. But fast innovation is part of Google’s DNA. Google has no two-year plans for developing new products, only four- to five-month strategic windows. Google makes ideas available to users at Googlelabs.com, and then develops them through an iterative process that involves users. The thing that keeps Google employees passionate about innovation is the deeply held belief that their work can change the world. Google is different, and that difference can be felt in the spirit of the company and its innovation.


Part 3 Designing a Customer-Driven Strategy and MixTeaching Objectives

The teaching objectives for this case are to:

1. Evaluate the evolution of a new-product expert. 2. Understand the different approaches to new product development. 3. Apply the product life cycle to Google’s products.4. Determine whether Google is likely to retain its innovative dominance.

Discussion Questions

1. Based on information in this chapter, identify major similarities and differences between the new-product development process at Google versus that found at most other companies. This case in some respects represents the antithesis of traditional new product development. The chapter outlines the new-product development process as per the eight steps identified in Figure 8.1. However, the case points out that this process can take years in most companies. For Google’s fast-changing world, that is far too long. That’s why Google green-lights ideas quickly, even if they stand a big chance of failing. They cut out many if not most of the phases of the new-product development process and release products that most would still consider to be full of flaws. Then, Google lets users toy with the products and iron out the bugs. At that point, it is pretty apparent whether or not the product is one that has the potential to be a Google winner. Google has one big benefit that makes this process work. Its cost of development is far lower than it is for most because all Google products are digital and already have a location for instant distribution. If something fails, they haven’t lost much and they move on.

2. Is Google’s product-development process customer centered? Team based? Systematic? The case uses words like “wild” and “chaotic” to describe the innovation process at Google. It would seem that few companies could survive built on a system like this. But somehow, it doesn’t just work at Google. It thrives. So, it can hardly be said that Google’s process is systematic. Rather, it has elements of customer-centered and team-based new-product development. The case talks about the “Solve For X” conference – an invitation-only conference for 50 of the smartest people in the world. The focus is on solving some of the world’s biggest problems. The focus is also on thinking outside the box as “radical” was the key word at the conference. As the text points out, customer-centered new-product development “focuses on finding new ways to solve customer problems.”

Team-base new-product development is an alternative to the sequential, linear progression through the eight steps. For this approach, teams from different areas and departments tackle different aspects of the process, skipping, jumping, and overlapping


Chapter 8 New Product Development and Product Life-Cycle Strategiesphases. Google employs “20,000 of the world’s smartest people,” then goes even further by heading outside the company for ideas and the development of such.

3. Considering the product life cycle, what challenges does Google face in managing its product portfolio? Google needs to make sure that it always has new products at virtually every phase of the product life cycle. Some (like Google Search) have already had a long life and will likely continue to have such in the future. But others come and go quickly based on rapid and dynamic changes in the marketplace. Google has got to maintain a certain number of mature products in order to keep people coming in to its ecosystem. And because products will always be phasing out, there must be a substantial set of products rising up through the introduction and growth phases. One of the biggest challenges in managing this ever-fluctuating mass is that Google can’t be sure how long a product’s life will be. Also, it relies on such a big portfolio of products that are interrelated. To some extent different Google products play off of and feed each other. So as different products are introduced, grow, succeed, and fade away, the very nature of that progression alters the dynamics of Google’s overall portfolio.

4. Is there a limit to how big Google’s product portfolio can grow? Explain. There must be a limit. But Google has not likely come close to identifying what that limit is. As you visit the Google home page, look at the tabs across the top of the page. There are nine or ten at any given time. Click on “more” and you’ll find dozens. Given this structure, there are only so many active products that Google can have at any one time. If it adds pages and pages worth of products, most will get little attention as we humans have a pretty limited scope.

However, if Google were to create products that integrate into other aspects of the Internet world, functioning seamlessly and transparently as we engage in every day activities, the sky is the limit. Google’s search bar that is imbedded onto just about every Web site is the perfect example. No one needs to go looking for it. It’s just there. Google needs to not only find ways to get its existing products to be more integrated, it needs to use this perspective to invent new products that have not yet been thought of.

5. Will Google be successful in markets where it does not dominate, such as social networks and app/entertainment stores? Why or why not? Google has certainly proven that the answer to this is “yes”. Mapquest was once the biggie. Now, Google Maps dominates. Google Video? No problem, just buy the market leader YouTube. Even its search engine is an example of this as it was far from the first search engine developed. But the case also points out that Google doesn’t necessarily need to dominate every category. As with Google +, it only needed to reach a certain level of success in order to feed the data that Google was looking for into its developmental brain.

Teaching Suggestions


Part 3 Designing a Customer-Driven Strategy and MixStart by chronicling the seemingly endless portfolio of highly innovative Google products and services—past, present, and future. Using the discussion questions below, link to the following sites to expose students to the mind-blowing scope of Google’s innovations. Quickly scan and discuss the list of Google products at en.wikipedia.org/wiki/List_of_Google_products. The list just keeps going and going. You can supplement this with a brief video clip that highlights various Google products (www.metacafe.com/watch/3479365/mdmn_group_google_latest_products_september_2009/). Once you’ve draw out the almost overwhelming list of Google innovations, discuss the Google innovation process. Keep in mind that the purpose of the discussion isn’t to discuss every Google product. Rather, it’s to show the scope of Google’s innovations and the process behind their development.

GREAT IDEAS

Barriers to Effective Learning

1. Understanding the systematic nature of the new-product development process will cause problems for some students. They will have some difficulty understanding why a process is needed at all, and they will also not realize how development costs rise at each and every stage. Finally, the amount of analysis that goes into the screening phases might be a surprise to them. To overcome these barriers, come up with a new product idea in class and review how you might develop it into a viable product.

2. The commercialization phase of the new-product development process could also be somewhat difficult for the students to comprehend. They may not be aware that not all products are launched nationally or globally when first introduced. Some examples of products that are available only regionally—food and drink products frequently are regional—may help them to understand the logistics of launching a new product.

3. The phases of the product life cycle, and the fact that it can apply to product classes, forms, and brands, can cause some difficulty. Discussing brands that are in each stage helps tremendously, as does discussing products that have successfully moved back from decline into maturity or growth (e.g., Arm & Hammer baking soda).

4. The differences among fads, fashions, and styles can be explained through asking the students to discuss clothing in those terms. Because these items are routinely discussed in terms of fashions and styles, students can easily internalize the differences in meaning of these terms.

Student Projects

1. Go to Samsung’s (the makers of the Galaxy line of smartphones) website (www.samsung.com) and read about one of their newest offerings, the S4. Imagine if you had been assigned the job of developing questions for the concept test of this


http://www.metacafe.com/watch/3479365/mdmn_group_google_latest_products_september_2009/

http://en.wikipedia.org/wiki/List_of_Google_products

Chapter 8 New Product Development and Product Life-Cycle Strategiesproduct. Develop a series of five questions that you would have included.

2. Why is test marketing so important for marketers? Why is not more often used?3. Find two products that you believe are in the introduction stage of the product life cycle.

Justify your beliefs.4. What is the difference between fads, styles, and fashions?5. In what ways do the growth and maturity stages of the product life cycle differ?

Small Group Assignment

Form students into groups of three to five. Each group should read the opening vignette to the chapter about Samsung. Each group should then answer the following questions:

1. How has Samsung used innovation to become so successful?2. Samsung says that the customer is the core of its innovation movement. What does this

mean and how has Samsung operationalized this belief?3. What is “Product Wow!”?

Each group should share its findings with the class.

Individual Assignment

Read the opening vignette to the chapter. Think about the answers to the following questions:

1. Take a look at some of the new products Google has introduced to the market recently (e.g., Google Hangouts, Google Glass, etc.). Which of these do you consider long-term “winners?” Why?

2. What does the following statement mean to you: “Innovation is the responsibility of every Google employee”?

3. Who is Google’s primary competitor? Why?

Share your findings with the class.

Think-Pair-Share

Consider the following questions, formulate answers, pair with the student on your right, share your thoughts with one another, and respond to questions from the instructor.

1. How do companies find new products?2. Define the stages of the new-product development process.3. What stage of the PLC do you believe currently holds Google’s Web browser (Chrome)?

Why?4. How are competitors a source of new-product ideas?5. What are the advantages of team-based new-product development?



Classroom Exercise/Homework Assignment

Research the bottled water market. Check out the websites for Evian (www.evian.com/en_us), Aqua Pacific (www.aquapacific.com), Mountain Valley Spring Water (www.mountainvalleyspring.com), and Perrier (www.usa.perrier.com). What stage of the PLC would you say bottled water occupies? How is each of these companies attempting to maintain or grow sales of their products?

Classroom Management Strategies

This is a relatively short chapter, so you have the luxury of really being able to focus on each section. Still, there is a lot of material to discuss, so effective use of time is important. The majority of class time should be spent on the new-product development section, with slightly less than half being devoted to product life-cycle strategies.

1. An introductory 5 minutes should be spent on the discussion of Apple’s development as an example of why companies need to continually offer new products and services.

2. Another 5 minutes should be spent discussing the reasons why a systematic new-product development process is important, rather than developing products in a haphazard manner. Tie this discussion back to earlier in the term when you talked about marketing strategies, mission statements, and goals and objectives for the company as a whole.

3. Spend about 35 minutes going through the eight stages of the new-product development process. At each phase, using examples from your own and the students’ experience will help tremendously. Having a guest speaker from a company that has developed and launched several products is a unique way of driving home the importance of a systematic process.

4. Finally, spend 15 minutes discussing the PLC and the marketing strategies that can accompany each stage. Going online and looking at Web sites for various kinds of products at each of the different stages could make this more interesting for the students, while also providing a more detailed introduction to the meaning of a product life cycle.


http://www.usa.perrier.com/

http://www.mountainvalleyspring.com/

http://www.aquapacific.com/

http://www.evian.com/en_us


PROFESSORS ON THE GO

Developing New Products and Managing the Product Life Cycle

Key ConceptsThe steps in the new-product development strategy

Under what conditions would you consider not test marketing a product? You are a new-product manager and have been asked to design an idea-screening

process for your company. Prepare a five-step process for screening consumer convenience good ideas.

Take a product that has failed. Analyze why this happened. What suggestions could you offer that might have prevented the failure?

What are the different types of test markets?

Key ConceptsProduct life-cycle strategies

What is a fad? Take a fad product and show how it could be maintained on the market past its fad stage. Describe your strategies for doing so. How could the Internet be used to aid your strategy?

Collect and describe ten advertisements that show products in different phases of a product life cycle. What did you use to determine which stage the products were in?

What is the difference between a style, fashion, and fad? What are the different strategies for modifying a product in the maturity stage? What are the strategies for dealing with products in the decline stage?


New Product Development and Product Life-cycle Strategies

Documents

Transcript of New Product Development and Product Life-cycle Strategies