Product Innovation

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Product Innovation Opportunity Identification
Idea Generation, and Design Dr. Yushan
Zhao College of Business and Economics UW-Whitewat
er Spring 2006
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New Product Development Process
Evaluate at each stage to determine whether to
proceed. Key is to manage risk of introducing
a failure or not introducing a success.
Opportunity Identification
Go/No Go
Design
Go/No Go
Testing
Go/No Go
Introduction
Go/No Go
Life-cycle Management
Proactive vs. Reactive
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Expected Costs
Cost of individual phase
Expected costs
Rate of Complete Success at the Beginning of that
Phase
Table 3.7 (page 65)
Costs for Phase Likelihood of Success in Phase Expected Costs Proportion of Total Expected cost
Phase 1 700 50 5,400 15
Phase 2 4,100 57 15,800 44
Phase 3 2,600 70 5,700 16
Phase 4 5,900 65 9,000 25
Total 13,300 13 35,900 100
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Expected Time
Time of individual phase
Expected Time
Rate of Complete Success at the Beginning of that
Phase
Table 3.7 (page 65)
Time for Phase Likelihood of Success in Phase Expected Time
Phase 1 5 months 50 39 Months
Phase 2 6 57 23
Phase 3 12 70 26
Phase 4 4 65 6
Total 27 13 94
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High-Tech Market

1. Assessing market opportunity in high-tech markets
2. Selected strategies Growth, first mover

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Strategic Planning for High-tech Products
Market Opportunity Assessment
New Product and Technology Strategies
Aggregate Project Plan
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Assessing Market Opportunity

• Product-market characteristics
• Market size/growth potential
• Unmet customer needs
• Entry barriers
• Competitive attractiveness
• Profit potential
• Risk
• Organizations capabilities and position

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Size/Growth Potential in High-Tech Markets

• Heavy reliance on
• Expert opinion
• Analogous product sales history
• Diffusion estimates
• Customer measurement in NPD process

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Speeding Innovation Diffusion

• Significant advantage over existing products
• Compatible with existing values, and past
  experiences
• Easy to understand
• Easy product trial
• Benefits from using product highly visible and
  easily communicated to others

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Bass Diffusion Model

• Forecasts market size and growth characteristics
  for first time product purchases in a new product
  category.
• Assumes innovators who adopt new products without
  influence from others, and imitators who rely on
  word-of-mouth from earlier adopters of the
  product.

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Bass Model

• First developed in 1969 by Frank Bass.
• Predicts future product class sales for good
• s(t) pm q-pY(t-1) (q/m) Y(t-1)2
• s(t) sales in period t
• p initial probability of adoption (about 0.04)
• m total numbers of potential buyers
• q a diffusion rate (about 0.3)
• Y(t-1) total number of purchases by last period

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Using p and q from Analogous Product Sales History

Formula St pM
q-p Yt-1 ( q/M ) Yt-12 Fit and solve for p
and q St ß0 ß1 Yt-1 ß2 Yt-12
Examples p q BW TV 0.028 0.25 Color
TV 0.002 0.66 VCR 0.025 0.60 Home PC 0.12 0.28
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Forecast HDTV Using Color TV Growth
Characteristics
New Product High Definition Television

Innovation Imitation parameter
parameter 2000 2000
(p) (q) Forecast Actual HDTV
Using -gt 0.002 0.66 550K
630K Total Potential (M) 100
million households
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HDTV Forecast using Bass Model
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Customer Measurement in NPD Testing

• Test environments
• Concept test descriptions, graphics, prototypes
• Simulated shopping
• Test markets
• Measure preferences for product alternatives,
  purchase intentions, after-use satisfaction,
  trial and repeat purchase rates

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Issues in Customer Measurement of Opportunity

• Is the target market(s) well represented in the
  sample?
• Can customers give you accurate responses? Do
  they lack understanding of the new product and
  its benefit.
• Does the test environment/procedure approximate
  purchases/purchase process well?
• How well are competitors moves incorporated?

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Entry Barriers

• Experience curve/economies of scale
• Brand image
• Cognitive advantage
• Customer switching costs
• Proprietary technology/knowledge
• Legal protections
• Other (e.g. pricing, shelf space, production
  capacity, investment requirements)

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Competitor Analysis in High Tech Markets

• Potential competitors may be as important as
  existing competitors (technology-enabled)
• Capabilities (skills and knowledge) are critical
• Strategic intent of competitor must be
  assessed. What are they likely to do? They
  could, but would they?

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Market Attractiveness Matrix
? Good O Fair ? Poor
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Growth Strategies
Existing Products New Products
Product Development Strategy
Existing Markets New Markets
Market Penetration Strategy
Market Development Strategy
Diversification Strategy
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Technology Influence on Growth Strategies
Existing Products New Products
Technology opportunities lead to new products
Existing Markets New Markets
And often lead to new market opportunities
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Examples
Existing Products New Products
IBM/business computer -gt Line of bus. computers
Epson/printers -gt Color ink-jet
printers Microsoft/PC software -gt Word
processing SW Palm/PDA -gt Color-enhanced
PDA
Existing Markets New Markets
- Personal computers - Digital photography - Home
entertainment - Voice communications
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Growth Strategic Questions
Existing Products New Products
Is market saturated? Can you take share from
competition? Do you have superior marketing
skills?
Unmet needs in existing market? Product line
holes? Do you have superior RD skills?
Existing Markets New Markets
Leverage skills/position into new markets? Able
to do battle with new competitors? Rate of
diffusion of innovations? (new to cust.)
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Growth Strategy Wisdom

• Avoid incumbent inertia (complacency,
  conservatism and conceit)
• Beware of cannibalization phobia
• New markets can be shaped
• Early market entrants (first movers or fast
  followers) can have enduring advantages

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First Mover vs. Fast Follower
First Mover Fast Follower Scale
economies Significant Not significant or
acquirable Firms competency Innovation Promoti
on, Production Imitation
costs High Low Protection mechanisms High Lo
w Preemption of scarce resources Likely Not
likely Preferences can be shaped early Yes No
and endure Customer switching costs High Not
prohibitive Learning from first
mover Difficult Easy
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Idea Generation Exercise

• Please take a few minutes to think problems you
  have in your life or work such as shopping,
  dining, phone, grooming, pet management,
  transportation, car maintenance, etc. Then,
  generate at least three new product ideas to
  solve the problems.
• Teams are required to present ideas generated to
  class.

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Idea Generation
Methods of Idea Generation
Source of Ideas
Direct search Innovation Exploratory user
study Facilitate lead users Creative
methods National policy Alliance acquisition
Technology Market/user solution Production/service
Competition/other firms Channels of
distribution Suppliers Managers/employees
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Idea Generation Empathic Methods

• Empathic methods are methods which provide an
• understanding user needs through empathy with
  the user world rather than from user articulation
  of needs.
• Methods
• - Observation of users behaviors
• - Ethnographic exploration - NPD designers
  immersed users environment

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Empathic Method

• Critical observation
• Capture the data
• Reflection and analysis
• Brainstorm solutions
• Develop prototypes of possible solutions
• Source Leonard and Rayport (1997)

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Empathic Information

• Triggers of use what prompts usage
• Unarticulated user needs
• Interactions with the users environment
• Customization of products
• Intangible product attributes
• Source Leonard and Rayport (1997)

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Day-in-the-Life Experiences

• Learn from doing what they do in everyday and
  extraordinary situations
• Use your own and your competitors products
• Acquire training and background similar to your
  customers

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Lead Users
1. Lead users have needs ahead of the general
marketplace. They face needs that will be general
in a marketplace - but face them months or years
ahead of the bulk of the marketplace. (and) 2.
Lead users expect to benefit significantly from
a solution to those needs.
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Lead Users

• Lead users can be any of the following
• 1. Lead users in the target application.
• Lead users in analogous markets.
• Lead users of important related attributes of
  products (e.g. technology experts)

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Lead-User Process

• Project Preparation and Planning
• achieve top management support and form
  cross-functional team
• background research on product category
• Identify Trends and Customer Needs
• identify markets and core needs
• identify leading-edge expertise
• Explore Lead User Needs and Solutions
• identify lead users interview and screen
• generate concepts in lead user workshops
• test concepts with typical users
• Refine Concept Solution
• finalize solution and create strategic plan

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Lead User Examples
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Lead User Examples (cont.)
?
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Identify Lead Users
Gatorade White-out fluid Laser Printer Sofa Mounta
in bikes Surf boards Your Businesses
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Lead User Communities

• if you want something done right, do it
  yourself
• Sticky information is difficult to transfer to
  manufacturers
• Needs are changing, and innovation evolves over
  time
• Lead users willing to reveal innovations freely
• Source von Hippel

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Lead Users Advantages and Disadvantages
Advantage Lead users able to articulate
future needs and possibly solutions for the
general market. Disadvantages 1) Lead users
can be difficult to identify. 2) Lead users
may not cooperate.
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Idea Generation Matrix
Form Function Customer Benefits Computer Records
Office Record concerts Fax Entertain Businessme
n show movies VCR documents Traveler Show how to
cook Telephone Teach House wives show
techniques TV Train Gardener transmit Printer R
eceive Carpenter Projector Musician Copier K
ids Camera Students Handicam
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Idea Evaluation
T x C x P
I
D
I index of attractiveness T probability of
successful technological development C
probability of commercial success given that it
is technically successful P profit if
successful C cost of development
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NEWPROD Scoring Model

• Developed by Dr. Robert Cooper
• Database of projects from 100 Canadian industrial
  firms (2500 new product projects)
• Found 8 factors which were significantly related
  to product success
• Weights for the factors were estimated using
  regression analysis
• Managers rate projects on each factor, and the
  project score is derived from these rating and
  factor weights.

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NEWPROD Example

• Factor Project Project Score
• Factors Weight Score x Weight
• Product superiority/differentiation 1.744 1.19 2.
  08
• Overall product/firm/resource compatibility 1.138
  -.16 -.18
• Market need, growth, and size 0.801 .88 0.70
• Economic advantage of product to end user 0.722
  -.49 -.35
• Technological resource compatibility 0.342 -.19
  -.07
• Product scope 0.225 0.90 0.20
• Market competitiveness -.301 -1.82 0.55
• Newness to the firm -.354 -.24 0.09
• 3.02
• Relative importance of factors can be judged by
  comparing their scores.
• Score of this project can be compared with
  alternative projects for funding.
• Score of this project can be compared with past
  successful projects.