New Product Development and Strategy
New Product Development and Strategy
Unpublished manuscript January 2007
Does a new product succeed or fail because of its positioning, its price, its promotion, its availability or its timing? Or is it because of its strong or weak competition, the economic situation or even the weather or a health scare? Entrepreneurial Success comes back to the product – the venture is the vehicle.
Introduction
New product development is one of the most important aspects of a new enterprise start up and is the activity that will most influence and guide the direction of the firm throughout its life. The process of new product development and the success of the product in the market will primarily determine how well the company will sustain itself and be the key to developing any competitive advantage of the firm over others. The new product development function has been neglected in entrepreneurship literature, yet it is an extremely important key to success in the new venture and an extremely difficult process considering new entrepreneurs may not as yet developed the all round expertise, experience and resources of large companies. Another area of neglect in new product development and entrepreneurship literature is the actual formulation, design, packaging and manufacturing process development of a new product, which is the link between technology and the market in any new venture creation.
One of the keys to successful new product and process development is the design and production of a new product with the minimal resources possible without sacrificing any quality of the finished and marketable article. For the entrepreneur, this process must be undertaken in a heuristic manner (discussed later), rather than through any strict disciplinary approaches, advocated and practiced by large companies. This is one of the ways a new venture can gain competitive advantage over larger companies, if the product and process can be designed and built for a fraction of the cost that more established enterprises can achieve. Thus product development is one of the most important processes of new venture creation. New product development is a discipline where the technical aspects are learned as you go along the process, as most of these aspects are not in any text books, but come from people’s lives and experiences. This is a reality of new product development that even MNCs have to face. New product development is both a manifestation and extension of strategy in terms of what the company puts into the marketplace, steering the direction of the enterprise and at the same time, an influence upon strategy or a restraint upon strategy because founder and/or team capabilities limit the set of options available to the new venture in terms of what can be done in the marketplace in terms of product.
The new product development process is so close to the concepts of idea, opportunity and decision to start up a new enterprise, as well as where you will go in the marketplace – you cannot by definition have a start up without beginning the new product development process.
One can observe in the marketplace that some new companies almost seem immediately to make a high impact on the market. Others enter the marketplace and seem to go nowhere, while others grow gradually over a long period of time. The difference in these companies comes back to the initial new product development process, where some are able to quickly develop a new product and make profits despite of high costs and design flaws through generating high revenues. Others do the same but fail to generate profits and revenues to sustain their venture, while yet others can internally sustain themselves while their idea manifested into a product slowly develops recognition, distribution and sales in the marketplace, where revenues eventually flow over the breakeven point to generate profits to sustain the venture. New product success depends on many factors which will influence the destiny of the new venture. In later venture life the decisions about future investment of profits and the strategic soundness of those decisions will determine long term sustainability of the firm. New product development is one of the most important aspects of long term sustainability.
In the early life of the new venture the conventional rules of management and strategy are discarded in a scramble to develop a product and get it quickly into the marketplace to generate enough sales to survive. This is a very haphazard time where best practices and production efficiencies are almost irrelevant in the minds of any founder, particularly in the SME. The jump is made with primarily intuition backing the strategy and it is the faith in this strategy that keeps the founder and the firm going forward. This adds great risk and pressure of which statistics of new product failures lend support. This chapter will look into the issues involved in new product development and the strategies underlying the process to assist the new venture creator develop some form of roadmap across this critical period in the new venture and following periods of growth and development of the enterprise.
New Product Development in the Malaysian Perspective
There are many estimates and statistics presented by various authors about new product failure rates in the marketplace. Robert Calvin in his book Entrepreneurial Management claims that 80% of new products fail after being launched[i]. Observing new product launches here in Malaysia tends to confirm this, even those launched by MNCs. Failures take slightly longer to acknowledge in Malaysia due to the distribution driven approach to the market in the consumer products arena, where products are pushed to consumers from the shelves to customers through the heavy use of in-store promotions and promoters. This figure of 80% would be accurate in the cosmetic sector, slightly less in the household product sector and even less in the agriculture sector, as competing products tend to have similar functions and benefits to what is already in the market and market fragmentation and distribution gaps influence sales very heavily. In Malaysia, the perceived risk of launching radical new products tends to stifle innovation, where many companies tend to prefer being product followers, allowing others to innovate to reduce risk.
This mental encapsulation prevents companies coming out and differentiating themselves from the competition and expanding their position in the market as a trend setter, where they resign themselves to being trend followers. This attitude and perception makes the Malaysian market less innovative than perhaps some other countries in the region, which has to change if Malaysia is going to take its rightful position in the global market as an innovative country. This situation if skilfully studied can potentially lead to numerous new product opportunities for a new venture. If differentiation can be developed and accepted by consumers, then there is plenty of room for new ventures in this country. Likewise, due to the emphasis by companies on being followers, there is plenty of opportunity to develop new brands, which can be protected by creating a source of competitive advantage that has barriers developed to prevent competitors emulating the product quickly. This is of course very easy to say, but with the right perspectives, it is possible to exploit the strategy of product differentiation and enhance a position in the market through the correct use of branding. This originates in the new product development process.
New product development is approached differently by firms. In Malaysia, larger firms tend to either develop a very bureaucratic and formal procedure or act upon the whim of the managing director, or more so combine the above, which leads to a less than effective process. In a discipline which is talking about the need for faster new product development processes[ii], Malaysian companies still lag behind, which opens up even more opportunities for SMEs.
SMEs in Malaysia, at least those in consumer products lack potential exit strategies or contingencies for failed products that SMEs in many Western countries have available to them; that of a channel of discontinued stock (i.e., $2 or ₤1 shops), where failed products can be disposed of at a heavy discount. The cost of new product failure in Malaysia is writing off inventory completely, along with the development costs, customer ill-feeling and almost certain closure with a deep sense of failure. Secondly, if the product is successful, it will most likely lead to copying by competitors, some of which will be much larger firms with greater resources, brand image, salesforce, larger promotional budgets and greater distribution capability. The advantage that being the innovator has and incumbency in the marketplace is lost due to a wide gap in market power (based on distribution ability) between small and large companies. These are central issues that the new venture founder must consider before start up.
While looking at the Malaysian perspective, one other issue provides the SME or the new venture with an opportunity. As many commentators see globalism as one of the largest influences on markets in this new century, especially with MNCs developing and launching products for the ‘Malaysian’ market based on extensions of international brands with slight modifications, more reflective upon that MNC’s history in the Malaysian market rather than modifications made to suit the Malaysian market, the Malaysian market remains very complex and heterogeneous, often very difficult to understand. Malaysia is one of a number of few countries with a significant makeup of a number of racial groups. The complexity does not stop there, as within each racial group there is great diversity. The Malays are far from a homogeneous consumer group, with different influences upon their histories[iii], thus providing them with different orientations and consumer tastes. The Chinese are also diverse, some coming to Malaysia long ago, adopting Malay customs (the Babas), while others migrated from various regions in China to Malaysia and primarily maintain their Chinese culture[iv]. Some live partly integrated into the ‘Malaysian’ culture, while another group rarely mix from school through their working careers with other ethnic groups. Some are English educated, while others are Chinese educated, thus the Chinese cannot be seen as one coherent group[v] or market.. There is also a vast difference between urban markets and rural markets[vi] where consumer tastes and preferences vary significantly. Even with the rapid development of the new middle class in Malaysia, it still remains divided along ethnic lines[vii], thus developing into two distinct markets in many product areas, ethnically segregated shops, banking, entertainment, pop music, food, fashion, reading materials, etc. This is reinforced by the segregation in education and careers of the various ethnic groups[viii].
Thus Malaysia within the context described above can be seen as a number of sub-markets within the Malaysian market as a whole. This runs contrary to the concept of the cosmopolitan man and agrees with Crawford’s observation that there is little market homogeneity, even within a nation[ix]. Even with the increasing number of foreign competitors launching into the Malaysian market, local SMEs still have great opportunities if they are able to understand the various consumer needs and wants of each ethnic group and find these niches to be large enough to sustain a new business. The downside of this issue however is that targeting specific ethnic niches may not provide a market large enough to develop any economies of scale and the firm will not be able to grow past a certain point.
The Role of Product Development in the Enterprise
As mentioned in the introduction, new product development is the manifestation of the idea to exploit the chosen opportunity. It is the centre of all strategies and the vehicle that will get the enterprise going in the market. New product development is the chosen basis of growth for companies like Siemens, Nokia, Sony, Apple and Glaxo of which they have completely relied upon as a strategy. These companies are what they are today because of new product development. The place of new product development in the web of company strategies and operations is shown in figure 6.1.
Figure 6.1. The Relationship of New Product Development to the Enterprise
Whether an enterprise is a home based industry, a manufacturing operation or a service business, the new product development process is paramount to developing the overall direction of the company. In most cases, it will be the only source of revenue for the venture and total means of survival, as new product development will set the whole future scenario for the enterprise. If the new product fails to reflect a need in the marketplace, it is most likely to fail, beginning heavy consequences to the enterprise. If the new product is not differentiated from competitors’ products, this will lead to tough competition and price cutting, which will erode potential enterprise revenues and make it very difficult for the new enterprise to survive in an industry of stronger and larger firms. Conversely, if the product is highly differentiated from competitors’ products in the marketplace, the new venture will have to take enormous efforts to establish it in the marketplace, requiring a lot of time and resources to do so.
Growth to a sustainable size and direction are two of the early primary objectives of the new enterprise. These early on override profitability, organisation and efficiency in the early part of new enterprise development. Gibb and Scott developed a strategic small business model which shows the factors which influence growth of the enterprise[i]. This model provides a framework for SME development that incorporates most of the strategic issues involved in the ‘top down’ corporate planning models of Ansoff, Porter and Steiner, from a micro perspective. The model has been developed on the assumption that growth is extremely important to the SME to reach minimum economies of scale, growth is synonymous with success and growth is regarded as economically desirable because SMEs are regarded as the basis of future large firms and generators of employment[ii]. Gibb and Scott’s model assists the enterprise determine how to change, accounting for the dynamic environment the new enterprise must face in developing its strategic direction, with consideration of its internal capabilities.
Gibb and Scott’s model is broken down into five components. The performance base represents a profile of the existing business which can be broken down into sub-components like market trends, which would include product and marketing mix and competition, production trends, which would include measures of utilisation, efficiency and quality, etc. and financial and management trends, which would include issues like net worth, liquidity and gearing. This would be very similar to the position audit in the conventional strategic planning process as is espoused by writers like Steiner.
The base potential for development is the overall strength of the business and its capabilities. This would include many parameters that would influence the firm to change and grow, such as the firms liquidity, technology, physical assets, human resources, accumulated experience of markets, customers, product development, financial and networking, the personal objectives of the founder and influence of family and peers, his or her personal capacities, visions and attitudes and the ideas base of the new venture or existing enterprise for the development of existing and future products, entry into what markets and ambitions for growth. This would equate to the resource audit in conventional strategic planning.
The key internal and external influences on development is very similar to the strengths, weaknesses, opportunities and threats (SWOT) analysis found in most strategic planning text books. The Gibb and Scott model is shown in figure 6.2. below;
Figure 6.2. A Model of Growth Through Product/Market Development
Gibb and Scott (1985)
The above model was developed on the basis of researching how 16 SMEs approached the issue of product/market development, from where the following assumptions of how SMEs undertake this activity were derived;
Planning takes place around a specific project or number of small projects,
Strategic planning in any formal way is unlikely to exist, but through the development of a specific project a certain degree of strategic awareness will develop, without it the firm will run into blind alleys,
The absence of formal plans may not reflect on the capability of the SME,
The product/market development is highly dynamic characterised by a great deal of learning during the process by the founder/owner manager of the SME – they will usually take the approach of coming up against problems and solving them,
The development process will not necessarily reflect itself in traditional indicators like increased revenue and employment,
Lack of growth in the SME may not necessarily reflect a lack of ideas for development, growth is heavily dependent upon the founder/owner manager having time and resources available, which is an important factor in taking a proactive approach to development,
External information is more likely to be acquired by the founder/owner manager through friends and networks rather than from secondary data and information and how dependable this information is will depend upon the quality and variety of the network, and
Strengths and weaknesses of the base will be an important factor in the eventual success of the new development.
The Gibb and Scott model allows SMEs to fully take account of administrative and institutional blocks and hindrances, such as ‘red tape’ and bureaucracy and incentives and other assistance available. Internal factors such as capabilities and resources can be matched against constraints and opportunities in the external environment to determine a way forward for the enterprise. The model more accurately reflects the development of an SME where the influence and attitudes of the founder/owner manager are strongly reflected in the process.
Fundamentally the new product development process is very similar between large, very large, SMEs and even micro-enterprises. There is very little difference in the information required to undertake the process and the steps that need to be taken. In the new venture however the new product development process is haphazard, flexible and almost completely informal, while still achieving the same end result as much larger companies. Although many academics and practitioners advocate a formal new product development process, there is little evidence to suggest that any formal process is more effective than the way a new venture/entrepreneur undertakes new product development. In fact many corporate organisations are looking for ways to make their organisations more entrepreneurial.
The Development of New Products
Companies have a number of options to grow. A company can expand its geographical area, i.e., launch its products in new markets, acquire new businesses and their products, or develop their own new products. Without new product development, the option of geographical expansion is limited because in today’s international markets, companies usually face either the same competitors or different competitors with similar products. Even a company with a product based on a new breakthrough technology cannot maintain its competitive advantage forever and must continue to develop or acquire new products in order to keep in front of its competitors who will eventually catch up with them.
Products have a limited life and new products must be created to replace those near the end of their lifecycle. Markets and technologies are changing quickly even in the most stable markets, which is leading to shorter product lifecycles. If one observes the market brands have long lives but the products under the brand umbrella are continually changed and updated almost in a seasonally fashion. Thus companies which don’t continue to introduce new products run the risk of becoming irrelevant to the marketplace. Markets and industries are changing so rapidly that 40% of the Fortune 500 companies that existed in 1975 do not exist today[i].
New product development is an important aspect of the competitive environment. If existing companies don’t launch new products, it is most likely their competitors will gain advantage in the marketplace, which will eventually erode the company’s position in the marketplace and later effect revenues, profitability and survival. New products are a strategy that companies use to introduce enhancements into the market so they can claim benefits over their competitors. Today on average, new products (those introduced into the market within the last 5 years) represent 33% of a company’s sales[ii]. In some markets, mobile phones, televisions, white goods, automobiles, etc., this figure is 100%.
While new product development is one of the most important aspects of competitive strategy, it is also one of the riskiest. New product failure rates have risen from 45.6% in 1961 to over 80% today[iii]. Cooper’s definition of the new product development process underlies it’s strategic importance to a firm as …”a defined product strategy for the business goals and objectives clearly communicated to all, there are clearly defined users of strategy focuses to give direction of the business total new product effort, i.e., where you want to go. The basic new product effort has a long term thrust and focus,”[iv]. Trott’s definition “the actual development of new products is the process of transforming business opportunities into tangible products”[v] links new product development to the process of exploiting opportunities in the entrepreneurial process.
Finally, companies in the same industries, with similar products, have basically the same strategy choices and generic themes to pursue win similar groups of customers, thus product development is one of the major ways a firm can differentiate itself from the its competitors.
Types of New Products
Amongst the large number of products coming out onto the market each year, it is sometimes very difficult to distinguish what is really a new product. One could not claim that a new chilli sauce or sambal balacan launched into the market to be a new product unless there is some form of differentiation from what already exists in the market. Even if there was some differentiation, this must be recognised by consumers. What is important according to Rogers and Shoemaker is that the product is perceived to be new by consumers[vi], i.e., the product is perceivably different, relative to what is already on the market. The overwhelming majority of products launched onto the market are usually variations of existing products, with changes in either the brand, level of service, technology, features, packaging, price, or quality dimensions, or a combination of them. Only about 10% of new products introduced are both new to the company and the market – an item not sold by that company before or an item not sold in the market before[vii]. Thus there are many ways of classifying new products, given the many forms they can take.
New to the world products are the first of their kind in the market. They are usually something invented or enhanced by a significant change or advance in technology, such as a new discovery or different method utilising modified processes, materials or methods in producing a product. These products would revolutionise the market segment or even create a new market, which may require significant consumer learning to become familiar with the new product. Examples of this would be the new micro-chip processors, Intel has just announced, which will make computers more energy efficient, light weight and smaller[viii], the progression from land line based telephones to mobile phones and now hand phones, the progression from typewriters to electric typewriters to word processors and personal computers, the change from wood, to gas to electric and microwave cooking and the Sony walkman and Ipods. New to the world products make up only a small proportion of new products and they are perceived as the riskiest types of new products to launch as manufacturers have to deal with consumers inexperience with the new concepts and incompatibilities with their prior consuming experiences, which act as barriers to consumer adoption[ix].
New Product Lines (New to the Firm) are not new to the market but new to the firm launching them into the market. This is where a company would enter a market for the first time, where success and profitability will depend upon the timing they entered the market, i.e., as a pioneer, early follower, early or late majority or as a late follower. The later the company enters the market, the less will be the concept risk taking, but the greater will be the competitive risk. Intellectual property value decreases as more firms enter the market with similar competitive products, leaving little room for product differentiation. Figure 6.3. below pictorially shows the situation in-terms of competition, potential profitability and IP value in relation to the time a firm enters a new market for that company.
Figure 6.3. Competition, potential profitability and IP value in relation to the time a firm enters a new market for that company
Additions to Existing Product Lines are products that extend a range marketed by a firm. The product is different from existing products either in function or consumer application or as a variant of an existing product, such as a different pack size, flavour or fragrance, etc. Companies usually introduce additions to existing product lines to enhance their position in the market they are competing in, consolidate their position, to fill a perceived gap where consumers aren’t served well or to react to competitors.
Improvements and Changes to Existing Products are undertaken to improve quality or make the product more convenient to use by the consumer. This is often a continuous process by companies, but when the product has been overhauled substantially, companies may undertake a relaunch or promotional campaign to inform consumers about the change. Sometimes products are phased out with a replacement product to maintain their competitive position in the market. This happens continually in the mobile phone market, sometimes a number of times each year.
Product Repositioning are products that are retargeted at new consumer groups or a larger proportion of consumers sharing the same wants. For example, a detergent may be repositioned in a new pack size to attract new consumers, or aspirin was repositioned as a remedy for blood clots and prevention of strokes and heart attacks from an analgesic, which was under attack for health reasons and heavy competition from paracetamol based product.
About 10% of new products launched are new to the world products, which increases to around 18% in moderate to high tech industries. New product lines are about 26% of new products, but much higher at 37.6% in moderate to high tech industries. Additions to product lines are around 26%, but dropping to 18% in high tech industries. Product changes and improvements are around 26% of new products, 19.8% in moderate to high tech industries and product repositionings are 7%, but almost non existent in moderate to high tech industries[i]. Thus, the majority of new products are developments and variations based on existing products.
Products can be either goods or services. The primary goal of a product is to fulfil a service that enhances human experience[ii], which both goods and services can do. Both have tangible components for example, a facsimile machine is a good providing a service, cars must be serviced after purchase, a haircut provides something tangible, a written insurance policy is something tangible, providing assistance in time of need, people will buy a cup of coffee at the Coffee Bean, even though they could purchase a cup of coffee much cheaper at a kedai kopi along the side of the road and a university education produces something tangible. Looking another way, just because something can be stored in a warehouse as inventory doesn’t mean that it doesn’t need a distribution system[iii], such as insurance industry.
Entrepreneurial New Product Development
No standard set of procedures or processes exist in new product development. There are department stage, activity stage, cross functional, decision stage (stage-gate) and process models espoused in the literature. Different industries take different orientations towards new product development, where for example pharmaceutical companies will be dominated by scientific, technological and regulatory issues, while food companies are dominated by consumer research that leads to minor product changes. Yet some industries still take a craftsman approach in the joinery, furniture, décor and kitchen refurbishing industries. Even the moderately high tech fragrance business creates products through more an artistic approach, rather than a scientific approach, which has as much to do with psychology, consumer tastes, blending just as an artist on canvass would do as it does with chemistry[iv].
In reality, new product development has as much to do with making assumptions, short cutting the logic process through the use of heuristics, which are little rules of thumb that firms with experience in the industry have grown to believe in[v], such as ‘30% of people who hear about a new brand will try it’. Hunches, gut feeling and intuition are heavily relied upon to progress products, contrary to what most of the literature about new product development advocates.
Successful new product development comes from experience and with it, the individual discipline and maturity to know when they are biased in their thinking of potential success or failure of a product. Industry knowledge is very important, but it must be used objectively without emotional baggage, i.e., ‘we have a long history in that market and it is ours’, or ‘we have always been successful with new products in this market’, etc. These are cognitive biases that can lead to failure, that some would call market arrogance. As MNCs employ more graduate executives to fulfil managerial roles in companies without climbing the corporate ladder so as to speak, the insider industry advantage is getting less and less. Marketing executives without grass root industry experience, passion for the industry and a tangible ‘feel of it’, relying primarily on data for decisions, potentially lay open some opportunity for the entrepreneur who has passion, diligence and sound intuition. The ‘new’ executives, often surrounded with market research and advertising consultants with the power to sign check books, so often get things wrong and wonder why a champaka fragrance – as beautiful as it is, is not accepted by consumers who associate the fragrance with grave yards and jasmine is rejected by 80% of the consumers. The facts are, agreed by the majority of all literature in new product development is that;
· Less than 5% of new products launched on the market are successful,
· Out of 100 new ideas, less than 2 become a commercial reality,
· Most companies are followers in the market and not innovators,
· Very few really novel innovations are ever launched commercially, and
· Most new products are actually only incremental steps in enhancement of products, rather than something completely new.
Although new product development is one of the most important strategies for sustainability of a company, too many companies turn away from innovation and cut costs and expenses as a reaction to declining performance, without looking into the root causes, which may be product life-cycle based or competitive based, which require a new product development solution. Usually a panic response further stifling innovation of the company. The new product development option is often seen as a more difficult alternative, as under pressure, the following problems arise;
Finding the right opportunities and appropriate innovation necessary to develop them,
Reducing development times without reducing quality and innovation,
Building and maintaining brand equity through a strong product,
Integrating market, design engineering and production processes to produce, and products that are considered useful and desirable by consumers.
The above is the trap for those who do not view new product development as a continuous process, even if it is an implicit and background process, within the company and the minds of those who manage it.
The entrepreneur, especially after start up and turning into an SME can be trapped by the scenario above, lending support to Drucker’s postulation that entrepreneurship is only a stage in the development of a firm and the entrepreneurial state can be grown out of[vi]. This is compounded by the small firm’s lack of resources, time, technology and expertise to research new ideas and innovations to develop the business[vii]. SMEs are even more limited in their strategic options because of their inability to influence the environment and marketplace, due to their size like larger companies[viii]. Cupelled with lack of knowledge[ix], the entrepreneur requires specific strategies and processes to take account of these weaknesses and navigate its birth and growth in a very focused way, that adapt to rather than change the environment and marketplace.
Strategy is the action a company takes to achieve one or more of its goals and the strategic management process is the way in which managers develop these strategies[x]. New product development as discussed in the introduction is the manifestation of strategy and will dictate how the company interacts with its environment and how successful and sustainable the company will be in the future. Due to size and age of a start-up or SME, the development process will differ greatly from large firms and will take place ‘bottom up’ or by the founder him or herself[xi] and primarily involve the skilful utilisation of assets, skills and resources, to take advantage of their best competences in developing new products and entering the marketplace. Thus the entrepreneur or SME will have a set of competences that are relatively unique to him or her[xii], which will provide the basis of future action. This is the nexus of creativity, innovation and selected strategy, discussed in chapter 2 that the entrepreneur uses to create a market niche or position with some form of competitive advantage, utilising what he or she has in terms of ideas, competences and resources. How these factors are integrated together will determine the entrepreneur’s capability and performance in the marketplace. To achieve this, the most important resource is skill and knowledge possessed by the entrepreneur. To a great degree this skill can only be learned through experience and difficult to imitate from other firms[xiii]. This is not different from large firms which learn as they go in the new product development process, as each product/market is unique, how to exploit opportunities and neutralise threats. Though intangible, this is a core aspect of competitive advantage, unmeasurable in any conventional sense, but written about heavily by Peter Senge and Chris Argyris, outlined previously in chapter 1.
Following the above arguments and problems firms face in new product development, the most important aspects of entrepreneurial new product development is a continual strategic awareness of the environment by the entrepreneur and his or her capabilities in innovation, production and management to see through the selected opportunity into an operational reality. From the point of view of a start-up or small firm, these activities do not require the ‘specialist skills’ advocated in many strategic planning[xiv] and new product development processes. There is little evidence to suggest that these processes create more success than the way a new entrepreneur does things.
Figure 6.4. Entrepreneurial New Product Development, Competencies and Competitive Advantage
Figure 6.4 above shows the importance of personal competencies in the entrepreneurial process, where product development is the key to developing the strategy to realise opportunities. Performance and growth depends upon a number of factors, which are governed by the core competencies of the entrepreneur or organisation[i]. This would suggest that success and growth has a lot to do with these competencies and investment in the development of these competencies is important in establishing, maintaining or increasing the lead over competitors, as it is competencies that enable one to exploit opportunities. Competencies influence the ability to develop ideas and screen them for opportunities and select the ones that can be best realised. Competencies also influence the ability to develop competitive advantage, which ultimately differentiates the product and venture from others in the market. Selection of the correct solution to identified opportunities, the ability to understand and create some form of competitive advantage and the ability to manage or organise the enterprise efforts are the factors that influence performance. Through competencies local companies are able to fight international companies entering the market[ii] due to their better knowledge of the local situation.
Creativity, Innovation and Strategic Thinking in the New Product Development Process
The initial process of contemplating the development of a new product is perhaps the most important aspect of the whole process. It is here where new ideas are spotted, evaluated as to their opportunity potential, the technology and competencies required considered, various strategy scenarios mentally extrapolated out to evaluate their effect and benefit to the enterprise, so that the best strategy solution can be realised. This is the most fluid and unstructured part of the process where all these possibilities are sorted and evaluated in a way that does not resemble real and tangible work[iii]. The quality of information used (market data, knowledge of customers, technology costs, etc) has great bearing on the outcome and final result of the product development process.
This is a creative process (explained previously in chapter 3) to seek some type of innovation to warrant the effort to launch a new product onto the market that will have some competitive advantage over potential competition, whether it be through lower costs, utilisation of better knowledge of the marketplace, better relationships and ability to utilise a channel of distribution, a better ability to organize the delivery of product or service or operation in the market, which will lead to product differentiation from those competitors to provide some market advantage. Innovation is thus the source of new products, strategy and competitive advantage of which Drucker postulates there are seven primary sources[iv], outlined in table 6.1. below;
Table 6.1. Drucker’s Sources of Innovation
Drucker further postulates that the seven sources of innovation can be manifested into four types of product/strategy development as summarised[i] in table 6.2. below;
Table 6.2. Drucker’s Four Types of Innovation for Product/Strategy Development
Product and strategy innovation is the means by which markets develop. Schumpeter termed this process creative destruction, where the market evolves through a process of new products being launched by firms which supersede those already in the marketplace[i]. Outdated products will disappear and overtime the market will be represented by a range of completely new products. This can be very easily seen in the automobile and mobile phone industries very quickly. This happens in all markets, which can be seen in Figure 6.5. showing the product evolution of the laundry detergent.
Figure 6.5. The Evolution of the Laundry Detergent
Product evolution occurs primarily through incremental product benefit improvements by firms launching products into the market to gain advantage over competitors. This is mostly predictable following changing consumer tastes and lifestyles. Most new products come out of this process and firms introduce these products in other international markets, thus intensifying competition across the globe. Then from time to time a firm develops a new innovation based either upon a new technology or by picking up some technology from one area and transferring it to their target market to create a completely new form of product in that market. In the evolution of the laundry detergent the development of the liquid laundry detergent in the late 1970’s is an example of later and the switch from soaps to synthetic surfactants is an example of a completely new technology influencing the form of the product. The key factors influencing the process of product evolution in a market segment can be best illustrated by the SET diagram developed by Cagan and Vogel[i].
Figure 6.6. The Product Opportunity Gap
The rapidly rising levels of affluence in Malaysian consumers, along with most of the rest of the world, the opening up of the ASEAN economies to open foreign competition and exponential improvements in technology are rapidly decreasing the life cycle of products in the market place. Malaysian consumer tastes are very different from a decade ago and over the next decade will undergo further change as consumers respond to health, leisure and lifestyle issues. Coupled with the improvements in products that technology, it will no longer be able to be assumed that product lifecycles will last more than five years as products will quickly be superseded with new models, versions and complete new designs based on newer technologies. Advances in ICT and biotechnology will bring many new products and even allow for the development of whole new industries, as we have seen with the development of ipods, mobile phones, new medicines based on biotechnology and the like
Innovation will also affect the ways products and services are presented to consumers by making products more accessible and more convenient to use like the development of prepaid mobile phone services where accounts can be topped up at provision stores, convenience stores and petrol kiosks. Re-organising how existing businesses are run has brought low cost air travel to the region through Air Asia.
Products and services will be also greatly affected by Government regulation. Carbon credits will force the development of green engines and the increased use of bio-fuels in the transport industry. Materials used in the manufacture of products will be more heavily scrutinized like cosmetics forcing in some cases the reformulation and even complete rethinking of products and their redevelopment. Occupational health and safety issues will force more consideration about safety issues. Technology development will also create new materials that will perform better and be more cost effective than existing ones. All the above scenarios are factors for product evolution, which will be driven through innovation. The trends towards shorter product lifecycles over the last 50 years[i] is shown in figure 6.7. below;
Rapid technology development, the ability of strong firms to exercise some degree of control over the channels of distribution and increasing internationalization of the market is creating greater market concentration. This can be clearly seen in the Malaysian retail sector where chains like Giant, Carrefour and Tesco are quickly increasing their market share over more traditional retail outlets. The effect of market concentration on manufacturers and suppliers is to reduce their numbers and force some product rationalization where products cater for the large consumer groups. Increasing market concentration defines the market into more rigidity and initially creates focus on the major market segments.
At some stage market concentration will reach a point where smaller market segments are failed to be satisfied by the smaller number of firms operating in the market. If these unsatisfied market segments are large enough, opportunities develop for smaller firms to move in and exploit these segments. The market will eventually see a renaissance of smaller firms offering niche products to unsatisfied consumers sometimes through alternative channels of distribution. An example of this is the growing number of herbal products and cosmetics marketed through direct marketing channels.
New opportunities occur when a market becomes concentrated, as further growth in sales by larger firms doesn’t correlate with increased profits as the cost to service small segments is high. Smaller firms are able to achieve better profits without direct competition in these unmet segments by focusing on the most profitable customer niches and keeping costs low. Companies who are able to scale down the size and capital costs of routine technology used in the industry, may be able to develop new sources of competitive advantage[i]. Figure 6.8. shows diagrammatically the relationship between market concentration and level of opportunities in a market.
Invention Verses Innovation
Many people relate new product development to invention. However invention only makes up a small part of new products and less than 2% of all patents are actually commercialized. Inventors are usually good at developing ideas into concepts and tangible items, but not all inventions satisfy consumer wants and needs. It is particularly difficult for an inventor to successfully develop a product in the market by themselves because of the tremendous resources needed to develop the market to make consumers aware and educate them about the new product. Many inventions, although novel, fail to solve any real consumer needs, or fail to satisfy them effectively and thus fail to gain much interest from consumers.
An invention will remain a conceptual idea without innovation. It is only really a starting point in the innovation process which is concerned about turning the idea into a practical and commercial application. Inventions involve creativity, which is only part of the whole product development process as explained by Myers and Marquis[i] ….”Innovation is not a single action but a total process of interrelated sub processes. It is not just the conception of a new idea, nor the invention of a new device, nor the development of a new market. The process is all these things acting in an integrated fashion”.
Some innovations are radical and lead to great changes in the lives we lead as did the products[ii] listed in table 6.3. to our society. But many inventions have come by accident[iii] and it took innovation to determine potential commercial applications. These examples show that the majority of these innovations are developed by organizations rather than individuals due to the need of large resources and technical knowledge. Technical and product innovation often leads to other forms of innovation such as organizational change to effectively implement the firm’s strategies based on new products developed into the market place, as can be seen in the communications and air transport industries.
Table 6.3. Breakthrough Innovations That Changed Our Lives
Table 6.4. Accidents That Innovation Turned Into Successful Products
Product Life Cycles
As mentioned throughout this chapter, products have a life cycle. The product lifecycle of products is a reason why companies must continue to develop new products to replace those in the market place that have come to the end of their useful life. It is extremely difficult to develop strategy according to the product lifecycle because identifying its various stages is complex[i]. Strategy can be both a cause and effect of each stage and thus it is difficult to forecast sales for each stage in the cycle. However, understanding a products position in the cycle and the factors that can influence stage, consumer tastes, technology and competition can greatly assist in strategy development.
Products take a predictable sales and profit path over a limited lifetime, which five stages are clearly defines[ii], as shown in figure 6.9.
1. The product development stage where an idea is evaluated and developed into a commercial product. This is where time is spent on developing the product without any sales revenue at all with increasing costs as time goes on. For an entrepreneur, especially during start up this can be a very straining upon personal resources, especially if full time is being devoted to the project without any other source of income.
2. The introduction stage is where the product is first introduced into the market. Usually this period takes time, especially during a new enterprise start up as gaining access to distribution channels is also a learning experience with much trial and error being undertaken with potential buyers. Established companies with strong relationships with customers may be able to gain much quicker distribution. However once distribution is established there is a period where the product moves very slowly and sales growth is slow while potential customers evaluate the product for potential purchase and use. The length of this period depends upon many factors, for example how brand conscious consumers are if the product is similar to others, etc. Table 6.4. Below shows the expected slow sales growth time for various types of new products. Profits will be negative or very low during this period because of the high costs of introduction and necessary promotion required. In the introduction stage a percentage of sales cannot be used through fund accrual, and thus must be part of the initial investment. Many products fail due to firms not reserving funds for this purpose. In most Malaysian cases, especially through retail channels, the firm will have to finance the movement of stock into the channel for a long period of time, 30-180 days.
Table 6.4. Expected Sales Growth Time Scenarios for New Products
The introduction stage is the time when focus must be put into persuading consumers to switch brands or in the case of a new to the world product or a significant innovation from existing products invest in educational promotional activities. Pioneering products although have the first to the market advantage as an incumbent product are very susceptible to followers who gain some advantage through learning from the pioneer’s mistakes, especially if they can exercise stronger influence over the channels of distribution. The pioneer to maintain market leadership must develop a comprehensive defensive marketing strategy (pricing & promotion, etc) to fend off challenges[i] from future competitors.
1. The growth stage will be entered into if consumers accept the new product and continue to repurchase it on a regular basis. If this becomes the case then sales will begin to rapidly rise from faster shelf off-take and gaining new distribution points from conservative channel outlets that held of on initial purchase and support of the new product. New competitors will be likely to enter the market and existing competitors likely to retaliate through discounting and more vigorous merchandising at store level to maintain their market-share.
As the Malaysian retail sector is a supplier driven market relying on continuous in-store activity (promotion & merchandising) the new product must be continually promoted during the growth stage. On an initial low sales base up to 40% of gross sales are needed for in-store (below the line) activities. The potential strain this can cause on funding should be underestimated as these costs will be deducted from invoice revenue. However as sales increase and promotional costs can be allocated across a larger revenue, the percentage required on in-store funding will lower to somewhere between 10-20%. The funding effect on a firm during the growth stage of a product is shown in the example in Table 6.5.
Table 6.5. Effect on Sales Growth on a Firm’s Funding During the growth Stage of a Consumer Product.
On the manufacturing side, increasing sales volumes allow the firm to purchase larger quantities of raw materials and packaging and negotiate lower prices leading to higher manufacturing margins and profits. The time/experience gained also allows fine tuning of the manufacturing process to make savings through increases in efficiency through process and labour experience. It is not unusual for direct manufacturing costs to come down 30% during this period. Likewise the time/experience factor allows improvement of product quality where the usual unexpected manufacturing and packaging compatibility problems are ironed out.
The primary objective of the firm during the growth stage is to maintain steady sales growth until the cost of increasing sales is higher than the extra profit gained. Shelf off-take velocity, distribution and competition are the three major factors that the firm needs to consider during the later period of the growth stage. Shelf off-take velocity is influenced by advertising and in-store promotion and is usually manipulated and maximized through coordinated promotional campaigns with corresponding in-store activities, utilizing purchased shelf space from stores, participation in gondola or block promotions along the aisles and providing discounts at strategic seasonal times, i.e., food items leading up to major festivals. Gaining extra distribution points in the existing channel and looking for distribution points outside the existing channel increases marginal sales of the product, i.e., moving to the hotel trade to gain extra customers. Competitor activity will influence sales growth according to the effort and activity they undertake in the market-place to counter the new product and promote their product. Competitors can be countered to some extend by adding new product benefits and variants to gain further competitive advantage over the competition, hence the importance of holding back on some potential product benefits that could have been incorporated into the original product, for some future time when those features can be utilized for market leverage over competitors when needed. This is a common strategy used by firms in the telecommunications, electronic, automobile and other consumer good industries. Figure 6.10. shows the relationship between sales, profits, shelf velocity, extra distribution and competition during the growth stage.
2. The maturity stage is where sales slow down and plateau. Products usually enter this stage when there are a number of competing products in the market. During this period, competitors will use promotion and discounting to maintain sales levels and target erosion of competitors’ sales to gain market-share. Competitors will also launch new product variants with added features and benefits to switch consumer loyalty towards their brands. During the maturity stage, where competition is at it’s peak, profitability will begin to decline as extra promotion is needed and firms begin discounting and lowering prices. In markets where the channels of distribution are concentrated, i.e., international retailers, some of the smaller brands will be dropped from product ranges and even a category rationalization can take place, leaving only a small number of brands.
Firms need to employ strategies to maintain their market-share and sales level, which mentioned above will erode profitability. Competitors will attempt to vary and segment the market with new products with added features and benefits and seek new customers through developing new market segments, i.e., development of a special bleach for washing, rather than general purpose. Failure to do this would normally result in loss of market-share in an competitive environment and relegation to marginality and almost total forced withdrawal from the market.
3. Eventually the product falls into the decline stage where sales begin to go do almost steadily. This can be a very gradual process in stable technology markets like food and household products or be extremely rapid in technology based products like media and communications. The speed of the decline stage is usually governed by the velocity that consumers change their preferences away from the product towards another. In food and household products this is normally gradual, as is with insecticides, or rapid when VCRs where replaced with VCDs and later DVDs in the home media industry, with the arrival of new technologies.
When the cost of managing the product in the market becomes high in comparison with the returns or the marginal utility of focusing on a new product with higher potential returns is better, most medium and large companies with large product portfolios will usually drop the product off. Smaller companies tend to hold onto a product until low sales make the product uneconomic to further produce the product.
Sometimes when all brands have been withdrawn from the market, a small company can hold on to a minimum level of sales for a number of years without needing to support the product with promotion and discounts. The shoes polish market would be a good example of this situation.
The product lifecycle can be used as a tool to understand how products develop, maintain their position and decline in markets. However it can only provide a conceptual understanding or guide, rather than a specific basis to develop marketing strategies[ii], as it is in reality very difficult to actually determine what part of the cycle a product is actually at and which strategies should be utilized accordingly.
The product lifecycle can be used to examine product categories, which include classes of products like petroleum and automobiles, product forms, which would define the type of products, i.e., in the case of automobiles, sedans, vans and four wheel drives and brands, which are a specific or group of products marketed by a specific firm or group of firms.
Different product categories will exhibit different life cycles. For example, petroleum products have an extremely long product life cycle because alternative technology and feed-stocks from renewable resources have not challenged the product category to date, even with all the publicity and debate about renewable resource alternatives. This can be compared to the life cycle of a brand of air freshener which is very short. However the product form it competes in will have a longer cycle than the individual brands marketed within the form, i.e., a liquid, aerosol or gel type or household room, cupboard or automobile air freshener. Figure 6.10. below Shows the difference in lifecycles between product categories, forms and brands in the recording media industry.
Figure 6.10.
Looking at products within the product lifecycle framework can help distinguish between styles, fashions and fads. A style is a specific form of expression of a product, i.e., in the automobile example, a sedan or fastback. A Fashion is something that is accepted at a particular time such as mag wheels or spoilers on cars. Fads are fashions that enter the market suddenly, become very popular, peak quickly and become unpopular, because they do not fulfill a strong need or satisfy it well[iii], i.e., mens’ carry bags as a fashion accessory in the early 1980s. Styles can last many years and carry a specific consumer segment following, while a fashion will become popular for a period of time and slowly fad towards another. Fads will attract a small proportion of consumers for a short period of time. Figure 6.11. shows the different lifecycle curves for styles, fashions and fads.
Figure 6.11.
Technology and New Product Development
Intellectual Property
Intellectual property can be defined as a legal entitlement which sometimes attaches to the expressed form of an idea, or to some other intangible subject matter. This legal entitlement generally enables its holder to exercise exclusive rights of use in relation to the subject matter of the IP. The term intellectual property reflects the idea that this subject matter is the product of the mind or the intellect, and that IP rights may be protected at law in the same way as any other form of property.[iv] One of the keys to intellectual property is the concept of novelty which is something that has not been publicly disclosed in any form, anywhere in the world The basic forms of intellectual property of listed in the table below:
Table 6.x. Basic Forms of Intellectual Property
Intellectual property must be defined widely to include trade secrets and commercially confidential information, which can also be called proprietary technology. Patents as a form of intellectual property rights have issues related to their scope of protection, are sometimes hard to justify in terms of costs due to the small market the novelty will serve, are expensive to gain registration and take a long period of time before they are accepted through process and review procedures[i]. Jaffe and Van Wijk state that in many jurisdictions patent enforcement is very difficult due to slow court systems, bias against foreign plaintiffs, lack of technical competence and a general inability to enforce judgements[ii]. A survey undertaken by Lessor found that companies tended not to patent their innovations in many cases, due to the fear that waiting would allow other companies to copy and counterfeit the product first in developing countries that had markets too small to justify the cost of registering a patent[iii]. Grubb argues that in biotechnology, patents as a form of intellectual property rights do not serve the same purpose as in the electronics industry, where patents are used as ‘bargaining chips’ in cross licensing agreements and patent pooling as there are common product standards imposed by necessity and regulation[iv].
There are other alternative forms of intellectual property protection used by companies that maintain trade secrecy and advantage over competitors. Trade secrets can be guarded and protected within an organisation by maintaining employment contracts with secrecy agreements that can be enforced through contractual remedies. These include specifically tailored production processes, mode and control of reactions and formulations used in the production of products by a company. Under legal license agreements, this technology, although unpatented can be protected as proprietary knowledge under contract law. The rapid changing nature of technology and continual improvement upon processes and product, is itself a mode of protection, as long as the company maintains pro-active R&D in process and product development. Patents applications can often become redundant before the application is even reviewed by the patent office in an environment of continual technology change.
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Notes and References
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