New Product ManagementPGDBM/IT/HR/IB

Rajat Gera

What Is a New Product?• New-to-the-World Products

– Polaroid camera, Sony Walkman, word-processing software

• New Category Entries– Hewlett-Packard PCs, Hallmark gift items, Tata

Passenger cars (Indica)

• Additions to Product Lines– line extensions or flankers

• Product Improvements– Wagon-R, Windows 98, plain-paper fax

• Repositionings • Cost Reductions

Product Newness

What Is a Successful New Product?

90

40

10

0102030405060708090

Sometimes Quotedin Press

Research Reports Sometimes Claimed

Percent of Products that Fail

Although you may hear much higher percentages, careful studies supported by research evidence suggest that about40% of new products fail -- somewhat higher for consumerproducts, somewhat lower for business-to-business products.

The Conflicting Masters of New Products Management

• Three inputs to the new products process: the right quality product, at the right time, and at the right cost.

• These conflict with each other but may have synergies too.

• Issue: how to optimize these relationships in a new product situation.

Quality

Time Cost

Value

New Product Development Imperatives-1

Breakthrough Platform Maintenance

A Bubble Diagram at a Hewlett-Packard Division

The Basic New Product Process

Phase 1: Opportunity Identification/Selection

Phase 2: Concept Generation

Phase 3: Concept/Project Evaluation

Phase 4: Development

Phase 5: Launch

The Impact of Simultaneous Operations on the Product Development Process

Phase 1: Opportunity Identification/Selection

Active and passive generation of new product opportunities as

• spinouts of the ongoing business operation. • New product suggestions, • changes in marketing plan, • resource changes, • and new needs/wants in the marketplace.

Research, evaluate, validate, and rank them (as opportunities, not specific product concepts). Give major ones a preliminary strategic statement to guide further work on it.

Activities that Feed Strategic Planning for New Products

• Ongoing marketing planning (e.g., need to meet new aggressive competitor)

• Ongoing corporate planning (e.g., senior management shifts technical resources from basic research to applied product development)

• Special opportunity analysis (e.g., a firm has been overlooking a skill in manufacturing process engineering)

Sources of Identified Opportunities

• An underutilized resource (a manufacturing process, an operation, a strong franchise)

• A new resource (discovery of a new material with many potential uses)

• An external mandate (stagnant market combined with competitive threat)

• An internal mandate (new products used to close long-term sales gap, senior management desires)

Phase 2: Concept Generation

Select a high potential/urgency opportunity, and begin customer involvement. Collect available new product concepts that fit the opportunity and generate new ones as well.

Phase 3: Concept/Project Evaluation

Evaluate new product concepts (as they begin to come in) on technical, marketing, and financial criteria. Rank them and select the best two or three. Request project proposal authorization when have product definition, team, budget, skeleton of development plan, and final PIC.

Stages of Concept/Project Evaluation

• Screening (pretechnical evaluation)

• Concept testing

• Full screen

• Project evaluation (begin preparing product protocol)

The first stages of the new products process are sometimes called the fuzzy front end because the product concept isstill fuzzy. By the end of the project, most of the fuzz shouldbe removed.

Phase 4: Development

(Technical Tasks) Specify the full development process, and its deliverables. Undertake to design prototypes, test and validate prototypes against protocol, design and validate production process for the best prototype, slowly scale up production as necessary for product and market testing.

(Marketing Tasks) Prepare strategy, tactics, and launch details for marketing plan, prepare proposed business plan and get approval for it, stipulate product augmentation (service, packaging, branding, etc.) and prepare for it.

Phase 5: Launch

Commercialize the plans and prototypes from development phase, begin distribution and sale of the new product (maybe on a limited basis) and manage the launch program to achieve the goals and objectives set in the PIC (as modified in the final business plan).

The Life Cycle of a Concept

Rate of Use of NPD Steps among PDMA Members

Concept searching 90%

Concept screening 76%

Concept testing 80%

Business analysis 89%

Product development (technical) 99%

Use testing/market testing 87%

Opportunity Identification and Selection

Strategic Planning for New Products

Opportunity Identification and Selection

Opportunity Identification: Finding Greenfield Markets

• Find another location or venue. Once McDonald’s had taken up the best locations for traditional fast-food restaurants, it continued its U.S. expansion by placing stores inside Wal-Marts, in sports arenas, and elsewhere. Starbucks Coffee complemented coffee-shop sales by selling its coffee beans and ice creams in supermarkets.

• Leverage your firm’s strengths in a new activity center. Nike has recently moved into golf and hockey, and Honeywell is looking into casino opportunities.

• Identify a fast-growing need, and adapt your products to that need. Hewlett-Packard followed the need for “total information solutions” that led it to develop computing and communications products for the World Cup and other sporting events.

• Find a “new to you” industry: P&G in pharmaceuticals, GE in broadcasting (NBC), Disney in cruises, Rubbermaid in gardening products – either through alliance, acquisition, or internal development.

Source: Allan J. Magrath, “Envisioning Greenfield Markets,” Across the Board, May 1998, pp. 26-30.

Why Does a Firm Need a New Products Strategy?

• To chart the group’s/team’s direction– What technologies?/what markets?

• To set the group’s goals and objectives– Why does it exist?

• To tell the group how it will play the game– What are the rules?/constraints?– Any other key information to consider?

Corporate Strengths

New products in this firm will:

• Use our fine furniture designers (Herman Miller)

• Gain value by being bottled in our bottling system (Coca-Cola)

• Utilize innovative design (Braun)

• Be for babies and only babies (Gerber)

• Be for all sports, not just shoes (Nike)

• Be for all people in computers (IBM)

• Proliferate our product lines (Rubbermaid)

• Be almost impossible to create (Polaroid)

• Use only internal R&D (Bausch & Lomb)

• Not threaten P&G (Colgate)

Product Platform PlanningMany firms find that it is not efficient to develop a

single product.

Platform: product families that share similarities in design, development, or production process.

• Car industry: $3 billion price tag on a new car platform is spread out over several models.

• Sony: four platforms for Walkman launched 160 product variations.

• Boeing: passenger, cargo, short- and long-haul planes made from same platform.

• Black & Decker: uses a single electric motor for dozens of consumer power tools.

Other Platforms-Brand, Category, SBU, Trade Channel

What is the Product Innovation Charter (PIC)?

• It is the new product team’s strategy.

• It is for Products (not processes).

• It is for Innovation (think of the definition of new product).

• It is a Charter (a document specifying the conditions under which a firm will operate).

The Contents of a Product Innovation Charter

Background Key ideas from the situation analysis; special forces such as managerial dicta; reasons for preparing a new PIC at this time.

Guidelines Any "rules of the road," requirements imposed by the situation or by upper management. Innovativeness, order of market entry, time/quality/cost, miscellaneous.

Goals-Objectives What the project will accomplish, either short-term as objectives or longer-term as goals. Evaluation measurements.

Focus At least one clear technology dimension and one clear market dimension. They match and have good potential.

A Sample PIC for a Chemical Product

Focus: The XYZ Company is committed to a program of innovation in specialty chemicals, as used in the automobile and other metal finishing businesses, to the extent that we will become the market share leader in that market and will achieve at least 35 percent ROI from that program on a three-year payout basis. We seek recognition as the most technically competent company in metal finishing.

Goals-Objectives: These goals will be achieved by building on our current R&D skills and by embellishing them as necessary so as to produce new items that are demonstrably superior technically, in-house, and have only emergency reliance on outside sources. The company is willing to invest funds, as necessary, to achieve these technical breakthroughs.

Guidelines: Care will be taken to establish patent-protected positions in these new developments and to increase the safety of customer and company personnel.

PIC Special Guidelines

• Degree of Innovativeness

– First-to-market

– Adaptive product

– Imitation (emulation)

• Timing

– First

– Quick second

– Slow

– Late

• Miscellaneous

– Avoidance of competition with certain firms

– Recognition of weaknesses

– Patentability

– Product Integrity

Dimensions for Assessing Strategic Fit

• Strategic goals (defending current base of products versus extending the base).

• Project types (fundamental research, process improvements, or maintenance projects).

• Short-term versus long-term projects.• High-risk versus low-risk projects.• Market familiarity (existing markets, extensions of current

ones, or totally new ones).• Technology familiarity (existing platforms, extensions of

current ones, or totally new ones).• Ease of development.• Geographical markets (North America, Europe, Asia).

Strategic Buckets Model for One SBU in Exxon Chemical

Low Market Newness High Market Newness

Low Product Newness Improvements to Existing Products(35%)

Additions to Existing Product Lines(20%)

Medium Product Newness Cost Reductions(20%)

New Product Lines(15%)

High Product Newness Repositioning(6%)

New-to-the-World Products(4%)

Source: Adapted from Robert G. Cooper, Scott J. Edgett, and Elko J. Kleinschmidt. Portfolio Managementfor New Products, McMaster University, Hamilton, Ontario, Canada, 1997, p. 63.

Concept Generation

Required Inputs to the Creation Process

• Form (the physical thing created, or, for a service, the set of steps by which the service will be created)

• Technology (the source by which the form is to be attained)

• Benefit/Need (benefit to the customer for which the customer sees a need or desire)

Technology permits us to develop a form that provides the benefit.

Some Patterns in Concept Generation

Customer need firm develops technology produces form

Firm develops technology finds match to need in a customer segment produces form (Newton message Pad)

Firm envisions form develops technology to product form tests with customer to see what benefits are delivered

Note: the innovation process can start with any of the three inputs.

What is a Product Concept?

• A product concept is a verbal or prototype statement of what is going to be changed and how the customer stands to gain or lose.

• Rule: You need at least two of the three inputs to have a feasible new product concept, and all three to have a new product.

New Product Concepts and the New Product

Need Form

Technology New Product

“C”=Concepts

CC

C

The Soft Bubble Gum Example

• Benefit: “Consumers want a bubble gum that doesn’t take five minutes to soften up.”

• Form: “We should make a softer, more flexible bubble gum.”

• Technology: “There’s a new chemical mixing process that prevents drying out of food and keeps it moist.”

Why would each of these taken individually not be a product concept?

What a Concept Is and Is Not

“Learning needs of computer users can be met by using online systems to let them see training videos on the leading software packages.” (good concept; need and technology clear)

“A new way to solve the in-home training/educational needs of PC users.” (need only; actually more like a wish)

“Let’s develop a new line of instructional videos.” (technology only, lacking market need and form)

Methods for Generating Product Concepts

Two Broad Categories of Methods:• Gathering Ready-Made Product Concepts• Using a Managed Process Run by the New

Products Team

Best Sources of Ready-Made New Product Concepts

• New Products Employees– Technical: R&D, engineering, design– Marketing and manufacturing

• End Users– Lead Users

• Resellers, Suppliers, Vendors• Competitors• The Invention Industry (investors, etc.)• Miscellaneous (continued)

Problem-Based Concept Generation

Problem Analysis: General Procedure

1. Determine product or activity category for study.

2. Identify heavy users.

3. Gather set of problems associated with product category.– Avoid “omniscient proximity” -- rate

importance of benefits and levels of satisfaction.

4. Sort and rank the problems according to severity or importance.

The Bothersomeness Technique

List of pet owners' problems: AProblem Occurs

Frequently

BProblem is

Bothersome

A x B

Need constant feeding 98% 21% .21Get fleas 78 53 .41Shed hairs 70 46 .32Make noise 66 25 .17Have unwanted babies 44 48 .21

Problem Analysis: Sources and Methodologies

• Experts

• Published Sources

• Contacts with Your Business Customers or Consumers– Interviewing– Focus groups– Observation of product in use– Role playing/Product Function analysis

Scenario Analysis

• “Extending” vs. “leaping”

• Using seed trends for an “extend“ scenario

• Techniques: – Follow “trend people”/”trend areas”– “Hot products”– Prediction of technological changeover– Cross-impact analysis

Relevance Tree Form of Dynamic Leap Scenario

Wild Card Events and Their Consequences

• No-Carbon Policy: Global warming may cause governments to put high taxes on fossil fuels, shifting demand to alternative sources of energy. This changes the allocation of R&D investment toward alternative energy, possibly causes new “energy-rich” nations to emerge, and ultimately may lead to a cleaner environment for everyone.

• Altruism Outbreak: This is the “random acts of kindness” movement – solve social problems rather than leaving it up to the government. Schools and other institutions will revive due to community actions, and perhaps inner cities would be revitalized.

• Cold Fusion: If a developing country perfects free energy, it becomes prosperous overnight. It gains further advantages by becoming an energy exporter.

Solving the Problem• Group Creativity Methods/Brainstorming• Principles of Brainstorming:

– Deferral of Judgment– Quantity Breeds Quality

• Rules for a Brainstorming Session:– No criticism allowed.– Freewheeling -- the wilder the better.– Nothing should slow the session down.– Combination and improvement of ideas.

Analytical Attribute Analysis

What are Analytical Attribute Techniques?

• Basic idea: products are made up of attributes -- a future product change must involve one or more of these attributes.

• Three types of attributes: features, functions, benefits.

• Theoretical sequence: feature permits a function which provides a benefit.

Gap Analysis

• Determinant gap map (produced from managerial input/judgment on products)

• AR perceptual gap map (based on attribute ratings by customers)

• OS perceptual map (based on overall similarities ratings by customers)

A Determinant Gap Map

Rate each brand you are familiar with on each of the following: Disagree Agree

1. Attractive design 1..2..3..4..5 2. Stylish 1..2..3..4..5 3. Comfortable to wear 1..2..3..4..5 4. Fashionable 1..2..3..4..5 5. I feel good when I wear it 1..2..3..4..5 6. Is ideal for swimming 1..2..3..4..57. Looks like a designer label 1..2..3..4..58. Easy to swim in 1..2..3..4..59. In style 1..2..3..4..5 10. Great appearance 1..2..3..4..5 11. Comfortable to swim in 1..2..3..4..5 12. This is a desirable label 1..2..3..4..5 13. Gives me the look I like 1..2..3..4..5 14. I like the colors it comes in 1..2..3..4..5 15. Is functional for swimming 1..2..3..4..5

Obtaining Customer Perceptions

1

1.5

2

2.5

3

3.5

4

4.5

5

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Snake Plot of Perceptions (Three Brands)

Aqualine

Islands

Sunflare

Attributes

Ratings

Aqualine

Islands

Splash

Molokai

Sunflare

Gap 1

Gap 2

Fashion

Co

mfo

rt

The AR Perceptual Map

-2 2

-2

2

Failures of Gap Analysis

• Input comes from questions on how brands differ (nuances ignored)

• Brands considered as sets of attributes; totalities, interrelationships overlooked; also creations requiring a conceptual leap

• Analysis and mapping may be history by the time data are gathered and analyzed

• Acceptance of findings by persons turned off by mathematical calculations?

Trade-Off (Conjoint) Analysis

• Put the determinant attributes together in combinations or sets.

• Respondents rank these sets in order of preference.

• Conjoint analysis finds the optimal levels of each attribute.

Thickness Spiciness Color ActualRanking*

Ranking asEstimatedby Model

Regular Mild Red 4 4Regular Mild Green 3 3Regular Medium-Hot Red 10 10Regular Medium-Hot Green 6 8Regular Extra-Hot Red 15 16Regular Extra-Hot Green 16 15Thick Mild Red 2 2Thick Mild Green 1 1Thick Medium-Hot Red 8 6Thick Medium-Hot Green 5 5Thick Extra-Hot Red 13 13Thick Extra-Hot Green 11 11Extra-Thick Mild Red 7 7Extra-Thick Mild Green 9 9Extra-Thick Medium-Hot Red 14 14Extra-Thick Medium-Hot Green 12 12Extra-Thick Extra-Hot Red 17 18Extra-Thick Extra-Hot Green 18 17

* 1 = most preferred, 18 = least preferred.

Conjoint Analysis Input: Salsa Example

Regular Thick Ex-Thick

UT

ILIT

Y

2

1

0

-1

-2

Mild Medium-Hot Ex-Hot Red Green

Thickness Spiciness Color

0.161 0.913 -1.074 1.667 0.105 -1.774 -0.161 0.161

Conjoint Analysis: Graphical Output

Conjoint Analysis:Relative Importance of Attributes

0 20 40 60 80 100 %

Spiciness

Thickness

Color

59.8%

34.6%

5.6%

Some Qualitative Attribute Analysis Techniques

• Dimensional Analysis

• Checklists

• Relationships Analysis– There are many others.

A Dimensional Attribute List

• Weight• Rust resistance• Length• Color• Water resistance• Materials• Style• Durability• Shock resistance• Heat tolerance

• Explosiveness• Flammability• Aroma• Translucence• Buoyancy• Hangability• Rechargeability• Flexibility• Malleability• Compressibility

An Idea Stimulator Checklistfor Industrial Products

• Can we change the physical/chemical properties of the material?

• Are each of the functions really necessary?• Can we construct a new model of this?• Can we change the form of power to make it work better?• Can standard components be substituted?• What if the order of the process were changed?• How might it be made more compact?• What if it were heat-treated/hardened/cured/plated?• Who else could use this operation or its output?• Has every step been computerized as much as possible?

Relationships Analysis

• Force combinations of dimensions (features, functions, and benefits) together.

• Techniques:– Two-dimensional matrix– Multidimensional (morphological) matrix

• Two-dimensional example: person/animal insured and event insured against.

• Household cleaning products example used six dimensions:– Instrument used, ingredients used, objects cleaned, type

of container, substances removed, texture or form of cleaner

Other Methods:Lateral Search Techniques

• Free association

• Creative stimuli words

• Studying “big winners”

• Use of the ridiculous

• Forced relationships

• Analogy

Concept/Project Evaluation

The Evaluation System

Cumulative Expenditures Curve% ofexpenditures

Time Launch

Many high-techproducts

Many consumerproducts

Risk/Payoff Matrix at Each Evaluation

• Cells AA and BB are “correct” decisions.• Cells BA and AB are errors, but they have different

cost and probability dimensions.

Decision AStop the Project Now

BContinue to Next Evaluation

A. Product would fail ifmarketed AA BA

B. Product would succeed ifmarketed AB BB

Planning the Evaluation System: Four Concepts

• Rolling Evaluation (tentative nature of new products process)-Risk management via acceptance or mitigation)

• Potholes

• People

• Surrogates

Rolling Evaluation (or, "Everything is Tentative")

• Project is assessed continuously (rather than a single Go/No Go decision)

• Financial analysis also needs to be built up continuously• Not enough data early on for complex financial analyses• Run risk of killing off too many good ideas early• Marketing begins early in the process• Key: new product participants avoid "good/bad"

mindsets, avoid premature closure

Potholes

Know what the really damaging problems are for your firm and focus on them when evaluating concepts.

Example: Campbell Soup focuses on:

• 1. Manufacturing Cost

• 2. Taste

People

• Proposal may be hard to stop once there is buy-in on the concept.

• Need tough demanding hurdles, especially late in new products process.

• Personal risk associated with new product development.

• Need system that protects developers and offers reassurance (if warranted).

Surrogates

• Surrogate questions give clues to the real answer.

Real Question Surrogate Question

Will they prefer it? Did they keep the prototype product we gave them

after the concept test?

Will cost be competitive? Does it match our manufacturing skills?

Will competition leap in? What did they do last time?

Will it sell? Did it do well in field testing?

An A-T-A-R Model of Innovation Diffusion

Profits = Units Sold x Profit Per Unit

Units Sold = Number of buying units

x % aware of product

x % who would try product if they can get it

x % to whom product is available

x % of triers who become repeat purchasers

x Number of units repeaters buy in a year

Profit Per Unit = Revenue per unit - cost per unit

The A-T-A-R Model: Definitions

• Buying Unit: Purchase point (person or department/buying center).

• Aware: Has heard about the new product with some characteristic that differentiates it.

• Available: If the buyer wants to try the product, the effort to find it will be successful (expressed as a percentage).

• Trial: Usually means a purchase or consumption of the product.

• Repeat: The product is bought at least once more, or (for durables) recommended to others.

A-T-A-R Model Application

10 million Number of owners of Walkman-like CD players

x 40% Percent awareness after one year

x 20% Percent of "aware" owners who will try product

x 70% Percent availability at electronics retailers

x 20% Percent of triers who will buy a second unit

x $50 Price per unit minus trade margins and discounts ($100) minus unit cost at the intended volume($50)= $5,600,000 Profits

Getting the Estimates for A-T-A-R Model

xx: Best source for that item.

x: Some knowledge gained.

Item MarketResearch

Concept Test Product UseTest

ComponentTesting

Market Test

Market Units XX X X XAwareness X X X XTrial XX X XAvailability X XXRepeat XX XConsumption X X X XXPrice/Unit X X X X XXCost/Unit X XX

Concept Testing

Many Ideas Are Eliminated Before Concept Testing

• PIC eliminates most new product ideas even before they are developed into concepts.

• Ideas of the following types are excluded:– Ideas requiring technologies the firm does not have.– Ideas to be sold to customers about whom the firm

has no close knowledge.– Ideas that offer too much (or too little)

innovativeness.– Ideas wrong on other dimensions: not low cost, too

close to certain competitors, etc.

Suggested Questions for the Initial Reaction

• Market Worth: what is the attractiveness of the new product to the targeted customer population?

• Firm Worth: Is the new product project viewed positively by management? Does this new product project enhance the firm’s competencies?

• Competitive Insulation: Can the product’s advantage be maintained against competitive retaliation?

What Is a Product Concept Statement?

• A statement about anticipated product features (form or technology) that will yield selected benefits relative to other products or problem solutions already available.

• Example: “A new electric razor whose screen is so thin it can cut closer than any other electric razor on the market.”

Purposes of Concept Testing

• To identify very poor concepts so that they can be eliminated.

• To estimate (at least crudely) the sales or trial rate the product would enjoy (buying intentions, early projection of market share).

• To help develop the idea (e.g. make tradeoffs among attributes).

Procedure for a Concept Test

• Prepare concept statement

• Clarify specific purposes

• Decide format(s)

• Select commercialization

• Determine price(s)

• Select respondent type(s)

• Select response situation

• Define the interview

• Conduct trial interviews

• Interview, tabulate, analyze

Mail Concept Test -- Verbal DescriptionHere is a tasty, sparkling beverage that quenches thirst, refreshes, and

makes the mouth tingle with a delightful flavor blend of orange, mint, and lime.

It helps adults (and kids too) control weight by reducing the craving for sweets and between-meal snacks. And, best of all, it contains absolutely no calories.

Comes in 12-ounce cans or bottles and costs 60 cents each.

1. How different, if at all, do you think this diet soft drink would be from other available products now on the market that might be compared with it?

Very different ( ) ( ) ( ) ( ) Not at all different

2. Assuming you tried the product described above and liked it, about how often do you think you would buy it?

More than once a week ( ) ( ) ( ) ( ) ( ) ( ) Would never buy it

Purposes of the Full Screen• To decide whether technical resources should be

devoted to the project.– Feasibility of technical accomplishment -- can we do it?– Feasibility of commercial accomplishment -- do we want

to do it?

• To help manage the process.– Recycle and rework concepts– Rank order good concepts– Track appraisals of failed concepts

• To encourage cross-functional communication.

Screening Alternatives

• Judgment/Managerial Opinion

• Concept Test followed by Sales Forecast

(if only issue is whether consumers will like it)

• Scoring Models

A Simple Scoring ModelValues

Factors: 4 Points 3 Points 2 Points 1 PointDegree of FunNumber of PeopleAffordabilityCapability

MuchOver 5EasilyVery

Some4 to 5ProbablyGood

Little2 to 3MaybeSome

NoneUnder 2NoLittle

Student's Scores: Skiing Boating HikingFun 4 3 4People 4 4 2Affordability 2 4 4Capability 1 4 3 Totals 11 15 13

Answer: Go boating.

Source of Scoring Factor Models

A Scoring Model for Full ScreenNote: this model only shows a few sample screening factors.

Factor Score (1-5) Weight Weighted Score

Technical Accomplishment:

Technical task difficulty

Research skills required

Rate of technological change

Design superiority assurance

Manufacturing equipment...

Commercial Accomplishment:

Market volatility

Probable market share

Sales force requirements

Competition to be faced

Degree of unmet need...

The Scorers

• Scoring Team: Major Functions (marketing, technical, operations, finance)

New Products Managers

Staff Specialists (IT, distribution, procurement, PR, HR)

• Problems with Scorers: May be always optimistic/pessimistic

May be "moody" (alternately optimistic and pessimistic)

May always score neutral

May be less reliable or accurate

May be easily swayed by the group

May be erratic

Alternatives to the Full Screen

• Profile Sheet

• Empirical Model

• Expert Systems

• Analytic Hierarchy Process

A Profile Sheet

Empirical Screening Model

(This example is based on Project NewProd database.)

Eight Significant Factors

• Product superiority• Overall firm/resource compatibility• Market need, growth, and size• Economic advantage of product to end user• Technological resource compatibility• Product scope (mass vs. narrow specialty)• Market competitiveness (-)• Newness to the firm (-)

Why Financial Analysis for New Products is Difficult

• Target users don’t know.

• If they know they might not tell us.

• Poor execution of market research.

• Market dynamics.• Uncertainties about

marketing support.

• Biased internal attitudes.

• Poor accounting.• Rushing products to

market.• Basing forecasts on

history.• Technology

revolutions.

Handling Problems in Financial Analysis

• Improve your existing new products process.• Use the life cycle concept of financial analysis.• Reduce dependence on poor forecasts.

– Forecast what you know.– Approve situations, not numbers (recall Campbell

Soup example)– Commit to low-cost development and marketing.– Be prepared to handle the risks.– Don’t use one standard format for financial analysis.– Improve current financial forecasting methods.

The Life Cycle of Assessment

Calculating New Product’s Required Rate of Return

Risk

% ReturnReqd. Rateof Return

Cost ofCapital

Avg. Riskof Firm

Risk on Proposed Product

Hurdle Rates on Returns and Other Measures

Hurdle RateProduct Strategic Role or Purpose Sales Return on

InvestmentMarket Share

IncreaseA Combat competitive entry $3,000,000 10% 0 PointsB Establish foothold in new

market$2,000,000 17% 15 Points

C Capitalize on existingmarkets

$1,000,000 12% 1 Point

Explanation: the hurdles should reflect a product’s purpose,or assignment. Example: we might accept a very lowshare increase for an item that simply capitalized on ourexisting market position.