Sales Forecasting and Financial Analysis

11-1

Forecasting the Demand For Satellite Radio

In 2000: forecast for 2007 was 36 million subscribers. In 2001: forecast revised to 16 million. By end of 2006: actual number of subscribers = 11 million.

Source: Sarah McBride, Until Recently Full Of Promise, Satellite Radio Runs Into Static, Wall Street Journal, August 15, 2006, pp. A1-A9.
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Forecasters Are Often Right

In 1967 they said we would have: Artificial organs in humans by 1982. Human organ transplants by 1987. Credit cards almost eliminating currency by 1986. Automation throughout industry including some managerial decision making by 1987. Landing on moon by 1970. Three of four Americans living in cities or towns by 1986. Expenditures for recreation and entertainment doubled by 1986.
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Forecasters Can Be Very Wrong

They also said we would have: Permanent base on moon by 1987. Manned planetary landings by 1980. Most urbanites living in high-rises by 1986. Private cars barred from city cores by 1986. Primitive life forms created in laboratory by 1989. Full color 3D TV globally available.
Source: a 1967 forecast by The Futurist journal. Note: about two-thirds of the forecasts were correct!
11-4

Forecasting Satellite Radio Sales Using Purchase Intentions

In 2000, 213 million vehicles in U.S. 95% availability, 40% awareness. Market potential = 213 million x 95% x 40% = 81 million. Assume half can afford satellite radio = 40.5 million. Percentage that will be among the first to try the new technology = 16%. Forecast for first year = 40.5 million x 16% = 6.4 million. Projected yearly growth rate = 10%. Assuming this growth rate, by end of 2006, expected total sales = about 10 million. Note: not too far from the attained number = 11 million!
11-5

Diffusion of Innovation

Bass Model Forecast of Product Diffusion

11-7

Bass diffusion of Innovation

The Bass model is quantitative innovation diffusion model The model is designed to predict future sales of a product or product category based on historical product sales levels The values that feed the model are based on assessing similar products s(t) = pm + [q-p] Y(t) (q/m) [y(t)]2
Refer to pg 261

Regression Analysis
Regression analysis is a statistical tool for the investigation of relationships between variables Simple linear regression assesses the relationship between 2 variables E.g. Higher Education Salaries Rainfall and Plant Nursery Sales Regression implies dependency of one variable on the other

Time Series Analysis

A time series is a collection of observations of well-defined data items obtained through repeated measurements over time E.g. Monthly sales over a year

Why Financial Analysis for New Products is Difficult

Target users dont know. If they know they might not tell us. Poor execution of market research. Market dynamics. Uncertainties about marketing support. Biased internal attitudes. Poor accounting. Rushing products to market. Basing forecasts on history. Technology revolutions.
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NPV
Discounted cash flows are used to take into consideration the Time Value of Money This is based on the premise that due to risk, a dollar today is more valuable than a dollar a year from now The discounted cash flows are aggregated and compared to the initial outlay of the project and an assessment re: the viability of the project is made

A Marketing-R&D Conversation
MKTG: Were going to be needing a solar-powered version of our standard garage door opener, soon. R&D: How reliable should it be? Should it be controllable from inside the house? Should we use new electronics technology? Should it be separate from the collector system already installed? MKTG: Well, youre the technical people, make some recommendations. R&D: In other words, you dont know what you want. MKTG: Cripes, do we have to tell you everything? What do you do for a living? How should we know where the collectors should be located? R&D: If we go electronic, youll say its too expensive. If we go electric, youll say were living in the 1930s. Wherever we put the collectors you will say we are wrong. If we guess, you second-guess. MKTG: OK. Put the collectors on the garage roof. R&D: That probably cant be done.
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The Product Protocol

aka
Protocol preparation Product definition Deliverables

A signed (or unsigned) agreement between parties involved in the product development process
Marketing Technical Operations Finance etc.

Role of the Product Protocol

The product protocol must state what each department will deliver The requirements of each department to fulfill requirements must also be included While not all deliverables will be known at this point, the critical deliverables must be covered Cycle times must also be included The protocol must be broken down into specific and measurable targets Refer to Paragraph 2 pg 287

Purposes of Protocol
To determine what marketing and R&D groups need to do their work. Think concept life cycle: this is more than a simple concept statement, yet less than we will have when the first prototype is available. Try to identify the key deliverables at this point. To communicate essential to all players and integrate their actions, directing outcomes consistent with the full screen and financials. To set boundaries on development process or cycle time. To permit the development process to be managed (i.e., what needs to be done, when, why, how, by whom, whether).

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Why Have A Protocol?

Also known as product requirements, product definition, deliverables, etc. Doesnt it seem obvious and simple? Actually is one of the top success factors distinguishing winning from losing projects. Maybe because it involves more than technical aspects.

12-17

Contents of a Product Protocol

Target market Product positioning Product attributes (benefits) Competitive comparison Augmentation dimensions Timing Marketing requirements Financial requirements Production requirements Regulatory requirements Corporate strategy requirements Potholes

Refer to pg 289

Voice of the Customer

Understanding the customer need is an essential part of the product protocol Using focus groups or interviews, the customers voice can be solicited Avoid getting customer wish lists rather than needs (Discuss the importance of structuring questions & probing)

Quality Function Deployment (QFD)

The QFD is designed to bridge the marketing & technical gap in designing the product QFD is a process developed by the Japanese automobile industry that allows VOC to become a driver of all steps in the NPD process

Protocol Within the New Products Process

End User Market Contact New Product Group R&D Contact Engineers

Unmet Needs And Problems

Inventory of Needs

Statement of Needs to Benefits to How to Deliver the Be Fulfilled by Product Deliver Requested Benefits

PROTOCOL

Benefit to Feature Conversion (Specs)

Finished Product

Prototype Confirmed

Evaluate Prototype; Further Development

R&D Delivers Features Delivered; Prototype Lab Assesses Performance

End User Market Contact New Product Group R&D Contact Engineers
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QFD and Its House of Quality

12-22

Benefits in QFD Example

Compatibility Print quality Ease of use Productivity

12-23

Technologies in QFD Example

Postscript compatible Resolution Edge sharpness Duplex printing Hours training required Speed (text) Speed (graphics)
12-24

Tradeoffs in QFD Example

Improving resolution slows down text printing and really slows down graphics printing. Increasing edge sharpness slows down both text and graphics printing. Duplex printing speeds up text and graphics printing. Postscript compatibility improves resolution and edge sharpness.
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Moving to Later Stages of QFD

House of Quality:
Customer Attributes
Converted to:

Engineering Characteristics

Parts Deployment:
Engineering Characteristics
Converted to:

Parts Characteristics

Process Planning:
Parts Characteristics
Converted to:

Process Operations

Production Planning:
Process Operations Production Requirements
Converted to: Source: Adapted from John R. Hauser and Don Clausing, The House of Quality, Harvard Business Review, May-June, 1988.

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QFD Realities
Substantial cost and time commitment. Only mixed results in some applications. Requires top management support and commitment. Must be viewed internally as an investment. Requires good functional integration. May work better if the team members have a successful track record of working together before.
12-27

Improving QFD Efficiency

Concentrate on only some of the Engineering Characteristics: the most critical, or the ones where improvements are easy to accomplish. Organize the Engineering Characteristics into groups, and designate responsibility to functional areas. Do cost-benefit analysis on each Engineering Characteristic to determine which provide the greatest benefit relative to cost of improvement.
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Chapter 13
Design

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What Is Design?
Has been defined as the synthesis of technology and human needs into manufacturable products. Design introduces a bold new way of competing. Designdriven innovations do not come from the market; they create new markets. They dont push new technologies, they push new meanings. (Design expert Roberto Verganti) In practice, design can mean many things, ranging from styling to ergonomics to setting final product specifications. Design has been successfully used in a variety of ways to help achieve new product objectives. One thing it is not: prettying up a product that is about to manufactured!
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Contributions of Design to the New Products Process

Design for Speed to Market Design for Ease of Manufacture Design for Differentiation Design to Meet Customer Needs Design to Build or Support Corporate Identity Design for the Environment

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Principles of Universal Design

Equitable Use
The design is useful to people with varied abilities.

Flexibility in Use
The design accommodates a wide variety of preferences.

Simple and Intuitive to Use

The design is easy for anyone to understand.

Perceptible Information
The design communicates the required information to the user.

Tolerance for Error

The design minimizes adverse consequences of inappropriate use.

Low Physical Effort

The design can be used efficiently by anyone with minimal fatigue.

Size and Space for Approach and Use

The product is easy to reach, manipulate, and use.
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Product Architecture
The process by which a customer need is developed into a product design. Solid architecture improves speed to market, and reduces the cost of changing the product once it is in production. Product components are combined into chunks, functional elements are assigned to the chunks, and the chunks are interrelated with each other.
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Product Architecture Illustration

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Product Architecture and Product Platforms

Product architecture development is related to establishing a product platform. If chunks or modules can be replaced easily within the product architecture, derivative products can be made from the same basic platform as technology, market tastes, or manufacturing skills change. Examples: 200 versions of the Sony Walkman from four platforms.

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Prototype Development
Comprehensive Prototype: complete, fullyfunctioning, full-size product ready to be examined by customers. Focused Prototype: not fully functioning or developed, but designed to examine a limited number of performance attributes or features.
Examples: a crude, working prototype of an electric bicycle; a foam or wood bicycle to determine customers reactions to the proposed shape and form.

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Improving the Interfaces in the Design Process

Co-location Digital co-location Global teams Produceability engineer Upstream partnering with vendors

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Computer-Aided Design (CAD)

Greatly accelerates the design step and allows assessment of multiple possible designs without building expensive prototypes. Design for Manufacturability (DFM): search for ways to minimize manufacturing costs. Design for Assembly (DFA): search for ways to ease assembly and manufacture. Rational for DFM: A seemingly trivial detail in design phase might have huge manufacturing cost consequences later on!
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Newer Developments in CAD

Stereolithography (rapid prototyping) Mechanical computer-aided engineering (MCAE)

13-39

Chapter 15
Product Use Testing

15-40

What is Product Use Testing?

Product use under normal operating conditions. Some terms:
Alpha testing: done in-house. Beta testing: done at the customer site.

Typical goals of beta testing: to determine if the product works and is free of bugs.

15-41

The Role of Marketing During Development

Marketing is involved from the beginning of the new products process. Advises the new product team on how the product development fits in with firms marketing capabilities and market needs. Early involvement of marketing increases products chances for success. Think of marketings task as more information coordination than information gathering.
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Marketing Ramp-Up
The I think weve got it phase. Once this point is reached, the teams attitude toward the project changes. Marketings role increases as marketing people rev up their operations. Plan field sales and service availability. Begin work on packaging and branding. Begin work with advertising agency reps. etc. Marketing ramps up for the product launch.

15-43

Arguments Against Product Use Testing

A fortune has already been spent on the product. Market research says the product is a winner. Competitor is working on a similar product. May suggest lack of faith in product. Customers have to learn how to use the product. Competitor may steal our idea and beat us to the market.

15-44

One Argument For Product Use Testing: Dry Idea Deodorant

Process was anything but linear. Gillette discovered flaws in product design through in-house alpha testing and beta testing with users. Gillette got some surprises in terms of benefits sought back to the drawing board near end of process! (Luckily, quick fix was available.)

15-45

Arguments For Product Use Testing

Better to build off a technology base that provides some insulation from competitive copying than to worry about such copying. Customer needs are complex sets use testing would have identified problems with GTE Airfone Delivering a total quality product avoiding "horror stories" of poor product quality before product is marketed.

15-46

Knowledge Gained From Product Use Testing

Pre-use sense reactions. Early use experiences ("Does it work?"). Alpha Tests
Initial tests for bugs usually conducted internally

Beta Tests
Short term tests with select customers

Gamma Tests
Third level of thorough testing before final launch

Diagnostic information.
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Common Pitfalls of Beta Testing

Beta test site firm has no internal capacity to test the performance of the product at the required level and lacks the funding to hire an outside firm to do the test. Developer puts in a wishy-washy performance requirement like "user-friendly" which is meaningless without a measurable specification. Testing is done too late in the new products process, which almost ensures that development time will be extended and production delays will occur. Doing testing in increments throughout the process can avoid this pitfall. Developers attempt to beta-test their own products. By definition they are too close to the product to critically test it and find problems. Developers ignore early negative results, hoping that the product will improve by itself during the new products process. All beta test results, whether positive or negative, need to be honestly evaluated.
15-48

Gamma Testing
Beta testing may not meet all the product developers requirements. Does the new product meet customers needs? Is it cost-effective for them? Gamma testing involves thorough use and evaluation of the new product by the end user. Its an ideal product use test but in many cases firms go with beta testing. Cost and time considerations Keeping ahead of competitors

15-49

Some Key Testing Dimensions

User groups to contact (lab personnel, experts, employees, stakeholders). Mode of contact (mail vs. personal, individual vs. group, point of use vs. central location). Identity disclosure (avoid halo-image effects). Degree of use explanation (no comment, some, full explanation). Degree of control over use (supervised vs. unsupervised) Singularity (monadic usually less sensitive than paired or triangular comparison).
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More Key Testing Dimensions

Duration of use (single use vs. extended periods). Source of product (batch, pilot plant, final production). Product form (single product vs. variants). Mode of recording reaction (like/dislike, preference, descriptive information). Source of norms (past experience, market research firms). Research service (internal vs. outside personnel).

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Data Formats: Like/Dislike

15-52

Data Formats: Preference and Descriptive

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PART FIVE
LAUNCH

16-54

Launch

16-55

Common Myths About Marketing Planning for New Products

Marketing people make the decisions that constitute a marketing plan. The technical work is complete when the new item hits the shipping dock. Marketing people take over. The marketers task is to persuade the end user to use the new product. The more sales potential there is in a market segment, the better that segment is as a target candidate. The pioneer wins control of a new market. As with Broadway shows, opening night is the culmination of everything we have been working for.
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Chapter 16
Strategic Launch Planning

16-57

Strategic Givens
Corporate, some team decisions made earlier. Often found in the PIC Guidelines.
A specified gross margin: affects funding. Speed-to-market: affects promotional outlays and schedules. Commitment to a given channel: affects distribution plan. Advertising policy: affects promotion decisions. Pricing policy: affects decision to use penetration or skimming pricing (slide down demand curve).

16-58

Revision of PIC Goals

Customer Acceptance Goals
Use Satisfaction Sales Market Share

Product Level Performance Goals

Cost Time to Market Performance Quality

Financial Performance Goals

Cash-to-cash (Time to break even) Margins IRR, ROI

Other
Competitive Effect Image Change Morale Change

16-59

Strategic Platform Decisions

Permanence Aggressiveness Type of Demand Sought Competitive Advantage Product Line Replacement Competitive Relationship Scope of Market Entry Image
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Permanence
Strategic options:
Permanent, stand-alone. Permanent, but as a bridge to other items e.g., platform strategy. Temporary: Given firms tendency to develop streams of products, more and more new products are actually only temporary (examples: cereals or snacks tied to recent childrens movies or TV shows).
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Type of Demand Sought

Primary demand: for new-to-the-world product Replacement demand: for a product improvement or upgrade (new computer chip, new compact car) Selective demand: for an entry into an established market.

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Product Line Replacement Strategies

Butt-on product replacement Low-season switch High-season switch The existing one is simply dropped when the new one is announced. Example: Ford's marketing of Mondeo and dropping of Sierra. Same as butt-on, but arranging the switch at a low point between seasons. Tour companies use this switch when they develop their new catalogs. Same as butt-on, but arranging the new item at the top of a season. Example: Polaroid used this strategy often, putting new replacement items out during the Christmas season. Another version of butt-on, but arranged by a sequence of market segments. Mercedes introduced its C series country by country. Keeping the earlier product along side the new, but with decreased support. Example: The 386 chip stayed along side the 486, until the Pentium was introduced. Putting the new item in a different channel or diverting the existing product into another channel. Example: Old electronic products often end up in discounter channels.

Roll-in, roll-out Downgrading

Splitting channels

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Scope of Market Entry

This is not test marketing. This is launch. All forces in place and working.
Roll out slowly checking product, trade and service capabilities, manufacturing fulfillment, promotion communication, etc. Roll out moderately, but go to full market as soon as volume success seems assured. Roll out rapidly full commitment to total market, restricted only by capacity.
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Some Other Strategic Platform Decisions

Aggressiveness (aggressive versus cautious attitude at entry) Type of demand sought (primary versus selective) Competitive advantage sought (differentiation, price leadership, or both) Competitive relationship (aim at a competitor, avoid a competitor) Image (create a new image, tweak an existing image, use the already-existing image)
16-65

The Target Market Decision

Alternative ways to segment a market
End-use Geographic Demographic, Behavioral Psychographic Benefit segmentation

Micromarketing and mass customization Diffusion of Innovation

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Factors Affecting Diffusion of Innovation

Derived from classic Rogers model of diffusion Relative Advantage (Googles rapid acceptance by computer users) Compatibility (digital cameras are designed to be used much as film cameras) Complexity (Apple Newtons handwriting recognition was found to be hard to use) Divisibility (try a new GPS system at low cost as an addon with a rental car) Communicability (long-term benefits of a decaypreventing toothpaste are impossible to discern at time of purchase)
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Another View of Diffusion: Crossing the Chasm

Two adopter groups: Visionaries (innovators and early adopters) Pragmatists (all later categories) The two groups differ in their expectations of the new products. Pragmatists do not use visionaries as their opinion leaders. Visionaries might snap up a cool new cell phone while pragmatists may just be looking for something that works well and is not too expensive.

16-68

Crossing the Chasm

A value proposition may attract the visionaries but may never get acceptance in the mass market To cross the chasm, the firm needs to develop a value proposition that works for pragmatists and to develop a launch strategy that is designed to reach pragmatists.
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Product Positioning
Who Why How To whom are we marketing? Why should they buy it? How do we best make the claim?

16-70

Product Positioning
Alternatives
Attribute
Features (What it is) Functions (How it works) Benefits (How the user gains)

Surrogates (Refer to Figure 16.5 pg 410)

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To Whom Are We Marketing?

Users vs. non-users (primary vs. selective demand) Target market criteria (demographic, geographic, psychographic, benefit segmentation) Everybody no narrowing down (mass customization, Post-It notes) The real issue here is commitment by all new product participants and by management

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Why Should They Buy It?

Formatted in three ways: Solves major problem current products do not. Better meet needs and preferences. Lower price than current items.

16-73

Product Positioning Options

Position to an Attribute Feature: A dog food that has as much protein as ten pounds of sirloin. Function: A shampoo that coats your hair with a thin layer of protein. Benefit: A new toothpaste saves you money (direct) and improves your sex life (follow-on) Dranos classic tagline was Thicker, stronger, faster (a feature, a function, a benefit). Miller Lites is Tastes great, less filling (two benefits).

Position on a Surrogate Nonpareil: Jaguar cars, Perrier water. Parentage: A Chanel perfume, a Disney movie, a Ralph Lauren designer suit. Manufacture: Budweiser (beechwood aging), Audi (renowned engineering). Target: Airlines designed for the business traveler, Vector tires for use on wet roads. Rank: Hertz, Blue Cross/Blue Shield, and others who claim to be No. 1. Endorsement: Doctor recommendation, celebrity spokesperson. Experience: Stress long use by satisfied customers (Nuprin, Yellow Pages). Competitor: USPS Express Mail and some Kia autos are just like competitors but cheaper. Predecessor: You liked Hersheys Kisses so you will also like Hugs.

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Branding Decisions
What is the brands role or purpose? Are you planning a line of products? Do you expect a long-term position in the market? How good is your budget? Physical/sensory qualities of brand considered? Message clear and relevant? Insulting or irritating to anyone?
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Categories of Brand Names

Famous Names (Coca-Cola, Disney): protected by Federal Trademark Dilution Act preventing others from using similar names. (Ex.: Victors Little Secret) Fanciful Names (Bluetooth, Kodak, Ameriprise): Distinctive neologisms; easy to protect but the firm must create a meaning for the word. Arbitrary Names (Apple, Virgin, http://www.Monster.com): Real words but unrelated to the nature of the product; again, easy to protect. Suggestive Names (Coinstar, Quadra Tred tires): Require a little imagination , but can communicate a product benefits. May be harder to protect under trademark laws. Descriptive Names (Lean Cuisine, Hot Jobs): Harder to protect; may go first onto the Supplemental Register and after five years can get advanced legal protection (this happened to Rollerblades). Generic Names (Thermos, Aspirin, Cellophane): The name becomes synonymous with the product category and the original trademark holder loses exclusive rights to the name.

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Trademarks and Registration

Trademark: A word, symbol, logo, word string, sound signature that identifies a product. Examples: BMW Z3 or Z4 Roadster, the GE script lettering, Apple Inc.s multicolored apple, Nikes Just Do It, the three-note NBC chimes or the Intel Inside sound. Generally, trademark refers to legal aspects while brand refers to marketing strategy. Technically, services have service marks, and businesses have trade names (not trademarks). If a trademark is registered, the firm can keep the trademark forever even if another firm can show prior use. Trademarks should not be immoral or misleading. Trademarks should not be too descriptive of a product type (Light cigarettes). Should not be confusingly similar to other trademarks (consider Apple Inc. vs. Apple Corps, McSleep vs. McDonalds).
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Questions and Guidelines in Brand Name Selection

Refer to Fig 16.8 pg 415

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Some Brand Names That Didnt Work

Refer to Fig 16.9 pg 417

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How Brand Equity Provides Value

High Brand Loyalty
Reduced marketing costs

High Brand Awareness

Easier to make brand associations Increased liking and familiarity

High Perceived Quality

Supports quality positioning

More/Better Brand Associations

Creates positive image

Other Brand Assets

Patents or trademarks

Increased trade leverage

Supports higher-price strategy

Helps customer process information

Strong channel relationships

Provides value to customer:

Assists in customer information processing Increases confidence in purchase Increases satisfaction in product use

Provides value to firm:

Increases effectiveness of marketing programs Increases customer loyalty and trade leverage Facilitates brand extensions Is a source of competitive advantage
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Building Brand Equity

Getting awareness of the brand and the meaning. Making brand associations even the factory location in Saturns case. Building perceived quality Loyalty in repurchase locking them in Getting reseller support

16-81

Brand Equity and Branding Strategies

Umbrella branding strategy Kelloggs uses corporate name as part of all cereal brands. Kraft uses Planters, Di Giorno, Maxwell House as well as Kraft in its brand names. Individual branding strategy No P&G cleaning products carry the P&G name (Tide, Bold, Mr. Clean, etc.). Clorox does not use the Clorox name on many of its cleaning products (409, SOS) and does not use it at all on non-cleaning products (Hidden Valley, KC Masterpiece).
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Other Options in Branding Strategy

ConAgra Foods used individual branding for years on its products (Orville Redenbacher, Reddi-Wip, Healthy Choice, Peter Pan) but now uses a unifying logo (smiling plate with spoon) and slogan (Food You Love).

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Global Branding and Positioning

Standardization: Gillette uses the same brand name and positioning worldwide (The Best A Man Can Get). Adaptation of Positioning: Canon sells the same camera worldwide but uses the So Advanced, Its Simple positioning in North America. Adaptation of Brands: General Mills cereals are marketed in Europe through a joint venture with Nestle and are sold under the Nestle corporate name there.
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Packaging
The role of packaging: containment, protection, safety, display, and information/persuasion. Packaging can assist the user, permit reusability, meet environmental needs, carry warnings, meet legal requirements, aid in disposability. Packaging as a competitive tool: recognizability, convenience, customer attraction, etc.
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