IM43001 Product Development (With Project) 2-0-3 4

Basic Concepts, Alternative Product Strategies, Steps in new product development, Technology forecasting, Sales forecasting, Product design, Life Testing, Quality and Reliability considerations, Manufacturing and maintenance, Defining product market structure, Consumer perception and product positioning.

Project: Design, Development, and Entrepreneurship of a new product right from the stage of idea generation

Books on Product Development1. Product Development and design for manufacturing

- John W. Priest, Jose M. Sanchez2. Engg. & Product Development Management

- Stephen C. Armstrong 3. Product Design and Manufacturing

- A.K. Chitale and R.C. Gupta4. Essentials of New Product Management

- Glen L. Urban, John R. Hauser, Nikhilesh Dholakia5. Problems of Product Design and Development

- C. Hearn Buck6. Hand book of New Product Development

- Peter Hilton 7. Product design and development

- Ulrich, K T and S D Eppinger

Some Success History• In 1910 dominant mode of urban transportation in Europe was street car railway-

fast, reliable, cheaper• Henry Ford designed a personal car- slightly higher cost, more flexible – great

success-automotive industry was born• Michelin, French tire maker – radial tires- with tough quality standard, aggressive

marketing campaign- great success• When US started producing radial tires, Michelin reduced the price, and

diversified to heavy duty ($ 2 bn) applications• Communications: AT&T was leader. 1980 MCI Communications introduced low

cost long distance call services, immediately captured 4% Market (in 3 months)• Medical Diagnosis: General Electric-USG has almost replaced usage of harmful

X-rays• $ 5 bn Shampoo market:

– 1970s-Johnson&Sons-Agree Crème Rinse to “stop greasiness” – Gillette-For Oily Hair Only shampoo- (12-24 age group), For oil replenishment, hair

loss, styling-Mint oil shampoo (19-49 age group)– 1980s, Gillette-Silkience-self adjusting shampoo

Product Development •Industrial Product •Consumer Product •Why PD ?

–Make More Profits–Effective Competition in dynamic market–Needs and desires of consumers are not static–Technology changes–Success of any product is only temporary

•This depends on Finding, screening, producing, testing, packing & marketing

new products

Why to go for PD ?

1. Excess Capacity of production system2. Scientific Advances 3. Consumers want change 4. Business needs have changed - cost cutting

- new material, process, machines 5. World competition, Travel, Growth of global

communication6. Dynamic market

Assignment 1. Discuss about 2 new products which you have seen in

the last 5years. Write one paragraph on each product and its substitute. How is the new product better than the one used previously ?

2. What is the possible next product development in each of the above cases?

3. What are the technological changes/developments in the last 5 years?

4. Find out 2 consumer products that were developed on technological ground in the last 5 years.

5. What were the substitutes for these products before?Date of submission:August 09 (1&2),August 23(3-5)Late submission will not be accepted.

How do a product succeed?

Winning features• superior• cheaper • distinctive• marketing strategy

This requires innovative ideas

Product Life Cycle

• Introduction • growth• maturity • decline

Product Life Cycle

No. of products

time

Profits falls

Redesign superior products

New product

Product Life Cycle

1. Competition 2. Technological changes 3. Market shifts 4. Innovation by competitors

If new products are not developed sales & profit decline Innovation Risky but Important

Make products obsolete

Some Failure Cases• Ford motor company – Edsel – lost 100M$• GM – abandoned Wankel Rotary engine- 100M$

invested• Bowmar – calculators – • DuPont –corfam substitute for leather-400M$• General Mills – Bugles, Daisies, Butterflies-M$• Gillette – Happy face – M$• Osborne – first portable PC – went bankrupt 1983• IBM – stopped PC Jr.-heavy losses

There is also risk !

• 20-25% of Industrial products fail• 30-35% of consumer products failExpenditure • R & D• Engg. & Tech. - before products introduction • Marketing - some time products are not actually introduced •1 out of 7 only materialize • 46 % of resources on new PD are allocated to failed products in the market

Initiating Factors for PD1. Financial Goals - Profit/earning per share to increase with NPD Old Products : cost increase earnings stabilized/declined opening of market & competition saturated demand Example : land phones 2. Sales Growth - NP Developed to maintain/increase S.G. - SG reduces per-unit costs 3. Competitive Position Market share changes (even 1%) are critical US auto manufactures

had spend b$ on R & D to compete regain with Japanese auto companies

Initiating Factors for PD

4. Product Life Cycle :

5. Technology :- Rapid change of Technology

- High rewards for NPD with high-tech 6. Invention : Example : Polaroid instant camera A new invention of scientific principle NPD

Initiating Factors for PD….7. Regulation Government regulation/deregulation NPD Example:Auto (LPG/NG) from Petrol/Diesel to protect Environment8. Material cost and Availability

Change of Products must be revised/dropped 9. Demographic & Life style changes ITC Tobacco to Foods PEPSI soft drinks to diet decaffeinated cola & Pepsi foods Nuclear family Small washers/drivers, ovens, ready to eat

foods, small family products Health consciousness jogging & work out equipment,

low cholesterol high fiber foods

Initiating Factors for PD….

10. Customer Requests :

11. Supplier initiatives :- Supplier can also force innovation - An industry producing refills can motivate a pen

industry for better design - A packaging industry can motivate a soft

drink/food industry to develop a new product

Nature of Initiating Forces

Internal forces : Financial goals, sales growth External : Competition, life cycle, technology,

invention, regulation, material costsOpportunities : Demographic changes, request supplier initiatives• Proactive approach and (not Reactive approach) gives advantage to an industry• Potential rewards of NPD should be high • Risks of NPD should be Acceptable level

Proactive Strategy: More Crucial in Future1. The cost of capital will be high 2. Competition will be tough and global in scope3. Organizations will be searching into areas outside current

operations 4. Industrial nations will be increasingly aggressive in

supporting high-technology, growth-oriented businesses5. Markets will become increasingly mature and saturated 6. Consumer lifestyles will continue to change 7. Buyers will become more sophisticated 8. Technological change will be rapid 9. Product life cycles will shorten 10. Environmental pressures from government, consumers,

and labor will increase, and 11. Shortages of resources and fluctuating prices of critical

raw- materials will make cost control very difficult

Product Strategy and Innovation Process Products are added to the product portfolios of firms in

a variety of waysStrategies to add new products/adjust existing products

- Innovative and imitative- offensive and defensive - entrepreneurial and bureaucratic- internal development and external acquisition

Turbulent and risky environment for decision Risk and uncertainty Rewards : profits, market dominance, customer loyalty,

invulnerability to external forces

Corporate, Market and Product Strategies

Corporate Strategy : - overall direction-giving framework for an organization- In a competitive world, C.S. should confer on the firm a unique differential advantage - careful analysis of products and markets- diversification- appropriate market

Range of Strategic Responses To make intelligent strategic responses, we must know our capabilities and the environment in which we operate

Corporate, Market and Product StrategiesSetting Strategic Goals:Start with an audit of companies capabilities and its environment.

- What are our strengths/weaknesses? - What are our competitors’ strengths/weaknesses? - What are our present products and Life cycles?- R.M. availability, cost- What technological changes are expected? - What Government regulations affecting us? - What consumption change can we exploit?- Fix our business goals after analyzing these- Quantify the goals to monitor progress- Gap analysis to put additional effort to achieve goals

Setting Strategic Goals….• A large private firm:

10% growth in earning/share, 20% increase in sales, at least 5% market share and Rs. 100 crore revenue/year for launching a NP

• A small, high tech entrepreneur:50% sales growth achieved through products with less than Rs 100 million sales per year and less than 1% of the market

• A public mass transfer service:Reverse the decline in ridership over 5 years and reduce the deficit by 5% per year

Alternative Product Strategies Reactive or Proactive ?Reactive : Wait until the competitors introduce a product copy it

if it is successfulProactive : First to introduce a NP and exploit the opportunities Each one is appropriate under certain condition

Reactive Proactive (taking initiative) Defensive- against a NP R&D by competitor Marketing - find consumer needs -get time for Entrepreneurial- a person-entrepreneur development has an idea- make this happen Imitative Acquisition- purchase other firms with Second but better products new to the acquiring firm Responsive- reacting & market to customers requests

Reactive vs Proactive Strategies

To select any strategy we must understand the situations:

1. Growth opportunities 2. Probable protection for innovation3. The scale of the market 4. The strength of the competition 5. The organization’s position

Growth OpportunitiesThere are 4 possibilities

Existing Products New Products

1 Increase market share, sales & production, better distribution NW. Reactive strategy in best. PD only when competition is expected. Defensive strategy

2,3,4 Proactive strategy- innovation, R&D, marketing are more suitable

1. Market Penetration

3. Product Development

2. Market Development

4. Diversification

Existing Markets

New Markets

Protection for Innovation

- Patenting to get ROI on PD- Enduring market share to the pioneering brand- Mc Donald’s, Surf, Philips, about 60% M. Share

Be Proactive

- If the innovative/first product can be easily copied, protection is difficult Better be Reactive

Scale of Market

Market size & Margin are important

Large Markets: Mass production, distribution, marketing dominance, good returns

- be proactive Small Markets: Better be reactive

- produce what the customers wantExample: Process machinery, boilers,

engines tailor the design/customer made

The strength of the competition• Competitive environment reactive strategy is

sometimes feasible• Time To Copy: is short, no patent protection, better

imitate• A small firm: vulnerable to competitive

reaction so better be reactive, no innovation

• A big firm: proactive to protect its level and image - no imitation - innovation to keep leadership Example: GE in home appliances

The organization’s position

Position in Vertical system - In a distribution chain (S.C) one firm may be

proactive while others reactive to support it- Also depends on relative positioning/power

Synthesis and Recommendations - All organization do not have to innovate new products - Reactive strategy may be best for some organizations

Reactive Strategies: Organizational Characteristics

1. Require concentration on existing products or makes

2. Can achieve little protection for innovation3. Are in markets too small to recover

developmental costs 4. Are in danger of being overwhelmed by

competitive imitation5. Are in distribution chains dominated by

another innovator

Proactive Strategies: Organizational Characteristics

1. Overall policy of growth 2. Willingness to enter new products and markets 3. Capability of achieving patent or market

penetration 4. Ability to enter high-volume or high-margin

markets 5. Resources and time necessary to develop new

products 6. Competition unable to rapidly enter with a

second-but- better strategy7. Reasonable power in the distribution channel

Marketing Vs R&DA proactive strategy must integrate • R&D: US Fed. Govt. $50bn

Private Industry $60bn• Marketing: Survey, Research - Customer based innovations- about 80% of successful products are developed based on customer demands - R&D alone is not worth - Marketing inputs are must for the success- Effective communication should be established among

specialists in sales, marketing, production, R&D to see that opportunities are not overlooked

R&D Expenditures for New-Product Development in Various Industries

Industry Companies in sample Percentage of Total Expenses

Electrical Equipment

28 79%

Chemicals & pharmaceuticals

34 82

Instruments 16 88

Machinery & computers

19 68

Aircraft 6 84

Food 7 96

Product Innovations Resulting from Market Needs and Technological OpportunitiesType of innovation (Sample size) Market or

Product Needs Technical Opportunities

British firms (137) 73% 27%

Winner’s industrial research award (108)

69 31

Weapon systems (710) 61 39

British innovators (84) 66 34Computers, railways, housing (439) 78 22

Materials (10) 90 10

Instruments (32) 75 25

Other (303) 77 23

Commercial Outcome for Chemical Laboratories

Source of Idea Increase in Sales Caused by Innovation

None Small Medium Large

Projects Laboratory 66% 17% 17% 0%

Marketing 58 14% 14 14

Customer 33 33 13 20

The Proactive Innovation Process• Control of risks• Encouragement of creativity Management must develop a proactive strategy for this

7 Steps for Proactive ….1. Opportunity Identification 2. Design 3. Prototype production, evaluation 4. Mass Production 5. Testing 6. Introduction 7. Life Cycle Management

Opportunity IdentificationR&D indicate technological opportunities

integration with market demandPut effort to find market: growing, profitable, vulnerable

find opportunities to match strength and weakness of our organization tap our technological potential creative ideas to be generated

integrate creative Engg., R&D, marketingIdeas concepts products marketable products

DesignIdeas: Evaluate & refine ideas to create products with

physical and psychological attributes indicating high probability of success in the market

Develop- marketing strategy - R&D specifications

- Engineering development: process, material - Iterative cycles of evaluation and refinement.

Concept-prototype-pilot production-sales support

Testing & MarketingTesting - product testing for Q, R, P - Package, transportation - marketing, advertisement, testing Test marketing - best known step in PD - scaled-down version of a national introduction - prevent national failure - not simply to see success/failure of a product - customer response, company’s production/distribution system

improvement in advertising, promotion, pricing distribution, product performance

- input for national level launching, strategy for profit- maximizing

Testing & Marketing……

Test Marketing is 1. expensive 2. delay national introduction3. tip off competitor to a high-potential idea

Pretest Market Models1. to conduct pre-test studies2. simulation for market study3. improve test marketing4. identify major needs for improvements5. prevent costly pilot test programs

Testing & Marketing……Introduction Successful test introduction nationallyQuick national introduction depends competitors ability,

Distribution, Availability of funds Production Rate, Easiness in imitation

Otherwise market-by-market introduction Test Market

- need not indicate success in national introduction - change of consumer tastes - unanticipated competitor response- troublesome channels of distributions- national economic or social crisis- New regulations

Product Life Cycle Management- Much money is spent on PD & marketing- Returns on investment must be good- price, advertising, sales effort, and promotion

strategies require updating to improve profit & length of L.C.- New competitors may enter defensive strategy?

Should we change direction & magnitude ?1. Price 2. Advertising budget 3. Product position 4. Characteristics5. Distribution

Product Life Cycle Management

After mature phase:

1. Repositioning 2. Manage decline3. Tap remaining profit potential 4. Redesigns & revitalization of product L.C

New Product Development ProcessOPPORTUNITY IDENTIFICATION

Market Definition; Idea Generation

DESIGNPerceptual Mapping; Product Positioning

Concept Forecasting; Product Engineering; and Marketing Mix

TESTINGAdvertising and Product Testing; Pretest Market Forecasting;

Test Marketing

INTRODUCTIONLaunch Planning; Tracking the Launch

LIFE CYCLE MANAGEMENT Market Response Analysis; Competitive Defense;

Innovation at Maturity; Product Portfolio Management

Go

Go

No

Go

No

No

Harvest/Terminate

No

Go

NPD – Plan versus RealityOur Process as we say we

should do itOur process as it has

happenedIdea Generation Exultation

Screening and Refinement Disenchantment

Test Marketing Confusion

National Search for the Guilty

Punishment of the innocent

Distinction for the Uninvolved

Market FailuresWhy products fails ? How to avoid failures ?• Market too small:

Insufficient demand for this type of product• Poor match of company to product

Company capabilities do not match product requirements• Not new/not different

A poor idea that really offers nothing new• No real benefit

Product does not offer better performance• Poor positioning/misunderstanding of consumer needs.

Perceived attributes of product are not unique or superior• Inadequate support from channel

Product fails to generate expected channel support

Market Failures….• Forecasting error: under/over estimation • Competitive response: quick/effective copying • Changes in consumer’s tastes

Substantial shift in consumer preference before product is successful

• Changes in environmental constraints Drastic change in key environmental factor

• Insufficient ROI : poor profit margins and high costs• Organizational problems conflicts, poor management

policies:Intra-organizational conflicts and poor management practices

Safeguards against Market Failures

1. Market is defined and rough potential estimated in the opportunity identification and concept test phase

2. Opportunities are matched to company’s capabilities and strategic plans before development is begun

3. Creative and systematic idea generation. Also, early consumer check to see how idea is perceived

4. In the design stage, perceived benefits of concepts as well as benefits from actual products use are tested

5. Use of perceptual mapping and preference analysis to create well-positioned products

6. Assessment of trade response in pretest-market phase

Safeguards against Market Failures…7. Use of systematic methods in design, pretest, and test phase to

forecast consumer acceptance8. Good design and strong positioning to preempt competition.

Quick diagnosis of , and response to, competitive moves 9. Frequent monitoring of consumer's perceptions and

preferences, during development and after introduction 10. Incorporation of environmental factors in opportunity analysis

and design phases. Adaptive control11. Careful selection of markets, forecasting of sales and costs,

and market-response analysis to maximize profits12. Multifunctional approach to new product development to

facilitate intra-organizational communication. Recommendations for a sound formal and informal organizational design

Cost, time, risk of NPDCost : Limited resources Management budget : How much each phase cost

High cost : Testing & Introduction Conclusion : 1. Early phase is less risky

2. Eliminate failures early before they lead to higher investment

Opportunity Identification Design Testing TOTAL DEVELOPMENT

Consumer products (lakhs) Industrial products 100 - 500 200 - 1500 1000 - 6000

50 - 200 500 -5000 300 -3000

1300 - 8000 850 -8200

Introduction TOTAL INVESTMENT

5000 -20000 1000-10000

6300-28000 1850-18200

Time Too long a development process loss of opportunity Too short a development process may ignore key issues failures. Difficult to estimate in advance Depends on creative breakthroughs and getting product and market strategy at start

Opportunity identificationMonths

4 - 8

Design 2 -15Testing - Pretest - Test market

2 -05 6 -12

Introduction TOTAL TIME

2 - 616-46

Time….If R&D is substantial, add at least 12-24 months 2 ½ years is reasonable 18 months is very fast schedule 5 years Industrial product

Major Break through : Many years Xerox 15 years Penicillin 15 years TV 55 years

RiskProbability of successful design : Pd (50 %)

Pr of successful test market, given design = PTM (45 %)

Pr of Market success, given successful TM = PM (70 %)

Over all success = Pd · PTM · PM = 16 % (consumer product)

= 27 % (for industrial product)Risk starts from very beginning of PD.Careful management is essentialOne is every 6 products only succeed