New-Product Development and Product Life-Cycle Strategies

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CHAPTER 6

• New-Product Development and Product Life-Cycle
  Strategies
• Objective finding and developing new products
  and managing them successfully over their life
  cycle.

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New-Product Development Strategy

• Because of the rapid changes in consumer tastes,
  technology, and competition, companies must
  develop new products and services. A firm can
  obtain new products in two ways
• acquisition (1) buying a whole company, (2) a
  patent, or (3) a license.
• new-product development (1) developing original
  products, (2) product improvements, (3) product
  modification, or (4) new brands.

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New products

• Can be obtained via acquisition or development.
• Suffer from high failure rates.
• To create succesful new products, the company
  must
• Undestand its customers, markets and competitiors
• Develop products that deliver superior value to
  customers.

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Causes of new product failures

• Overestimation of market size
• Product design problems
• Product incorrectly positioned, priced or
  advertised
• Costs of product development
• Competitive actions

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New-product Development Process

• In order to find and develop successful
  products, the marketers must go through the
  following stages

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Idea Generation

• New product development starts with idea
  generation - the systematic search for
  new-product ideas.
• Major sources of new-product ideas include (1)
  internal sources - research development
  department, executives, salespeople (2)
  customers (3) competitors (4) distributors and
  suppliers (5) others - trade magazines,
  seminars, government agencies, new-product
  consultants, marketing research firms,
  universities, inventors.

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Idea Screening

• Idea screening reduces the number of new ideas by
  screening new-product ideas in order to identify
  good ideas and drop poor ones as soon as
  possible.
• In idea screening, market size, product price,
  development time and costs, production costs,
  rate of return and type of customers are put into
  consideration.

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Concept Development and Testing

• An attractive idea must be developed into
  alternative detailed product concepts.
• Concept Development is a detailed version of the
  new-product idea stated in meaningful consumer
  terms. Several concepts can be developed for a
  product idea e.g. the idea of developing an
  electric car may be created in the following
  product concepts - (1) an inexpensive family car
  (2) a medium cost sporty car for young people
  (3) an inexpensive

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• car for conscious people who look for basic
  transportation, low fuel cost, and low pollution.
  The marketer must test these alternatives.
• Concept Testing involves testing new-product
  concepts with target consumers before turning the
  new ideas into actual new products. The concepts
  may be presented to consumers symbolically or
  physically. After being exposed to the concept,
  consumers may be asked to tell their opinions.
  The answers will help the company decide which
  concept has the strongest appeal.

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Marketing Strategy Development

• After all the concepts are tested, the company
  must develop the initial marketing strategy to
  introduce the best concept to the market.
• At this stage, the marketing strategy consists of
  three parts
• Part one describes the (1) target market, (2)
  the planned product positioning, and (3) the
  sales, market share and profit goals for the
  first year.
• Part two outlines the products planned (1)
  price, (2) distribution, and (3) marketing budget
  for the first year.
• Part three describes the planned long-run (1)
  sales, (2) profit goals, and (3) marketing mix
  strategy.

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Business Analysis

• Once the product concept and the marketing
  strategy is decided, the marketer should evaluate
  the business attractiveness of the proposal.
• Business analysis involves the projections for
  the sales (by looking at the sales history of
  similar products and getting the market opinion),
  costs (by looking at the forecasted sales
  figures), and profit for the new product to find
  out whether they satisfy the companys
  objectives. If they do, the product can move to
  the product-development stage.

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Product Development

• Here, the product concept is developed into a
  physical product (prototype) to understand
  whether the product idea can be turned into a
  workable product.
• Prototypes are tested under laboratory and field
  conditions to make sure that the product performs
  safely and effectively.

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Test Marketing

• After the prototype is tested under the
  laboratory and field conditions, the next stage
  is testing the product under more realistic
  market settings.
• Test marketing allows the company to test the
  product and its marketing program (e.g.
  positioning strategy, advertising, pricing,
  distribution, branding, packaging, budget) before
  going into the full introduction.
• When introducing a new product requires a big
  investment, or when management is not sure of the
  product or marketing program, the companies do a
  lot of test marketing.

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Commercialization

• Commercialization is the introduction of a new
  product into the market.
• At this stage, the company may need to spend
  between 10 million and 100 million for
  advertising and sales promotion in the first
  year.
• Here, the company should decide when and where
  the product will be introduced.

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Product Life-Cycle Strategies

• After launching a new product, management wants
  it to enjoy a long and happy life, although it
  does not expect the product to sell forever.
• The product life cycle (PLC) is the course that a
  products sales and profits take over its
  lifetime. It has five stages
• 1. Product development begins when the company
  develops a new-product idea. During product
  development, sales are zero and the companys
  investment costs mount.

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• 2. Introduction is a period of slow sales growth
  as the product enters in the market. Profits are
  nonexistent in this stage because of the heavy
  expenses of product introduction.
• 3. Growth is a period of rapid market acceptance
  and increasing profits.
• 4. Maturity is a period of slowdown in sales
  growth because the product has achieved
  acceptance by most potential buyers. Profits
  level off or decline because of increased
  marketing outlays to defend the product against
  competition.
• 5. Decline is the period when sales fall off and
  profits drop.

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Product Life-Cycle
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• The PLC concept is used by the marketers to
  forecast product performance or to develop
  marketing strategies.
• But all products do not follow the PLC in the
  same way. Some products are introduced and die
  quickly others stay in the maturity stage for a
  long time. Some enter the decline stage and are
  then cycled back into the growth stage through
  strong promotion or repositioning.
• The major drawbacks of this cycle is that it is
  difficult (1) to identify which stage of the PLC
  the product is in, (2) to determine the factors
  that affect the products movement through the
  stages, to forecast the (3) sales level at each
  PLC stage, (4) the length of each stage, (5) the
  shape of the PLC curve.

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• The product life cycle concept can be applied to
  a
• Product class (soft drinks)
• Product form (diet colas)
• Brand (Pepsi)

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Introduction Stage

• The introduction stage starts when the new
  product is first launched.
• Here, sales growth is slow, profits are negative
  or low, because of low sales and high
  distribution and promotion expenses.
• Promotion spending is high to inform consumers of
  the new product and get them to try it.
• The company and its competitors produce the basic
  versions of the product because the market is not
  ready for the different versions of the product
  yet.

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• The introduction stage strategies are
• Rapid-skimming strategy (high price/high
  promotion) here the company targets the cream
  of the buyers (buyers with high income) so the
  price of the new product or service is set high.
  When the company wants to attract these people
  rapidly (quickly), it heavily promotes the
  product.
• Slow-skimming strategy (high price/low
  promotion) the difference between slow- and
  rapid-skimming is in the amount spent on
  promotion. Here less money is spent on
  promotion.
• Rapid-penetration (low price/high promotion) the
  price level is the key difference between
  penetration and skimming strategies. Whe the
  market is price sensitive, penetration is a
  better strategy. In penetration, prices are set
  low to capture as many buyers as possible. When
  most of the potential buyers

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• are unaware of the product, they use heavy
  promotion. Here the risk is attracting heavy
  competition because a lot of companies may like
  to copy.
• Slow-penetration strategy (low price/low
  promotion) here the new product or service is
  introduced at a low price with a low level of
  promotion. Again, the potential market is large
  and price sensitive but aware of the new service
  or product that is why, the level of promotion is
  low.

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In summary

• Marketing objective Create product awareness and
  trial
• Sales Low sales
• Costs High cost per customer
• Profits Negative
• Customers Innovators
• Competitors Few
• Strategies
• Product Offer a basic product
• Price Skimming or penetration
• Place Build selective distribution
• Promotion Build product awareness among early
  adopters and dealers with advertising, use heavy
  sames promotion to entice trial

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Growth Stage

• If the new product satisfies the market, it will
  enter a growth stage, in which sales climb
  quickly.
• Early adopters buy the product.
• New competitors enter the market when they are
  attracted by the opportunities for profit. They
  introduce new product features so the market
  expands.
• Sales increase, prices remain the same or fall
  slightly, promotional spending stays the same or
  increase slightly.

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• Profits increase as promotion costs are spread
  over a large volume (sales) and as unit
  production costs fall.
• The growth stage strategies are
• improving product quality and adding new product
  features and models
• entering into the new market segments
• entering into the new distribution channels
• shifting some advertising from building product
  awareness to building product conviction and
  purchase
• lowering prices at the right time to attract more
  buyers
• in order to sustain its rapid growth and meet
  competition.

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• By spending a lot of money on product
  improvement, promotion, and distribution, the
  company can gain a dominant position in the
  market but, as a result of this, it gives up
  maximum current profit and hopes to make it in
  the next stage.

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In summary

• Marketing objective Maximize market share
• Sales Rapidly raising sales
• Profits Rising profits
• Customers Early adopters
• Competitors Growing number
• Strategies
• Product Offer product extentions, service and
  warranty
• Price Depends on the strategy chosen at the
  intorduction stage
• Place Build intensive distribution
• Promotion Build awareness and interest in the
  mass market with advertisements, Reduce sales
  promotions to take advantage of ehavy customer
  demand

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Maturity Stage

• At some point, a products sales growth will slow
  down, and the product will enter a maturity stage
  which lasts longer than the previous stages.
• Here, competition is greater because of the
  overcapacity. They drop their prices, increase
  advertising and sales promotions, and increase
  their RD budgets to find better products. As a
  result, profits decrease, weaker competitors
  leave the market and only the well-established
  competitors remain.

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• The product managers should consider modifying
  their market, product and marketing mix rather
  than defending their product. The maturity stage
  strategies are
• In modifying the market, the company looks for
  new users and market segments e.g. Johnson
  Johnson Baby Shampoo is marketed to adults
  looks for ways to increase usage among present
  customers e.g. Sut icin Sut icirin campaign of
  Mis Sut. Or the company may want to reposition
  the brand to appeal to a larger or faster-growing
  segment.
• Or the company may try modifying the product
  by changing its products features, quality or
  style to attract new users e.g. Sony adds new
  styles and features to its Walkman and Discman
  lines, Algida adds new flavors and ingredients to
  its current products, Burger King introduces its
  new Fish Burgers or car

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• manufacturers restyle their cars to attract
  buyers who want a new look.
• Or the company can try modifying the marketing
  mix by changing one or more marketing mix
  elements to improve sales. They can cut prices to
  attract new users and competitors customers.
  They can launch a better advertising campaign or
  use heavy sales promotions. The company can also
  move into larger market channels - mass
  merchandisers. Or the company can offer new or
  improved services to buyers.

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In summary

• Marketing objective Maximize profit while
  defending market share
• Sales Peak sales
• Costs Low cost per customer
• Profits High profits
• Customers Middle majority
• Competitors Stable number begining to decline
• Strategies
• Product Diversify brand and models
• Price Price to match or beat competitors
• Place Build more intensive distribution
• Promotion Stress brand differences and benefits
  with advertising. Sales promotions are increased
  to encourage brand switching.

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Decline Stage

• Most product forms and brands sales decline.
• Here, the sales may become zero suddenly or may
  drop to a low level where they continue for may
  years.
• As sales and profits decline, firms withdraw from
  the market.
• The remaining companies prune their product
  offerings, drop smaller segments or channels, cut
  the promotion budget or reduce their prices
  further.

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• Here, the company should decide whether to
  maintain, harvest, or drop its product in the
  decline stage.
• Management may decide to maintain its brand
  without changing it in the hope that the
  competitors would leave the market. Or management
  may decide to reposition the brand in the hope of
  moving it back into the growth stage of the
  product life cycle.
• Management may decide to harvest the product by
  reducing costs (equipment, advertising, sales
  force) hoping that sales will remain.
• Or the management may decide to drop the product
  from the line by selling it to another firm or
  simply liquidate it at salvage value.

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In summary

• Marketing objective Reduce expenditure and milk
  the brand
• Sales Declining sales
• Costs Low cost per customer
• Profits Declining profits
• Customers Laggards
• Competitors Declining number
• Strategies
• Product Phase out weak items
• Price Cut price
• Place Go selective phase out unprofitable
  outlets
• Promotion Reduce advertisements to level needed
  to retain hard-core loyals. Reduce sales
  promotions to minimal level.