Chapter 3

1.

Describe the importance of new product development to a

firms success or failure.

2.

Describe the new product development process, the

product life cycle, and different strategies and tradeoffs in
product innovation.

3.

Learn different concepts in new product development.

4.

Learn important new product development analysis

techniques.

Developing a new pharmaceutical drug costs between $800

million and $2 billion, and the process often takes more
than 10 years.

A pharmaceutical company may test up to 30,000 different

drug formulations before one can be approved for use and
successfully introduced into the market.

Development of a new drug is a long, difficult, expensive,

and high-risk undertaking for a pharmaceutical company.

New product

a good, a service, or a good/service that was

previously not available to customers

New product development

the overall process of strategy, organization,

concept generation, product and marketing plan

creation and evaluation, and commercialization of
a new product (good or service)

DISCUSSION STARTER

Do companies need new products?

A typical supermarket introduces more than 5,000 new

products to its customer base every year. As many as 80%
are unsuccessful.

WHY?

Poor market research

Problems or defects
Inferior designs
Poor timing of their introduction
Poor communication to potential customers
Competitors
Ineffective operations, such as supply chain or inventory policy

The development and

introduction of new
products can make the
difference between a
companys success and its
failure to survive.

Source: Image Source/Corbis

 Firms innovate and develop new products for unique

opportunities for competitive advantages.

Example: The iPod, iPhone, iTunes, iPad has been

instrumental in the survival and emergence of a stronger

and more competitive Apple Inc., resulting in market share
gain and higher profitability.

 New products introduced in the marketplace provide

additional first mover advantages to the company.

By developing new products, a company can quickly capture

a big share of the market before competitive products are

introduced.

For Example: Toyotas successful introduction of the Prius

hybrid car prior to its competitors development of such a car

has allowed the company to establish a dominant position in
the emerging market segment of fuel-efficient and
environmentally friendly automobiles.

 During the early stages, a new product faces less

competition than a product in a mature market; therefore, its

profitability tends to be higher.

As the market becomes saturated with several competitive

products, prices start falling, and profit margins decrease.

The developments of innovative and creative new products

is a very powerful source of goodwill and creates a positive
corporate image.

Brand equity measures used in marketing show that firms

with more successful new product development efforts
command higher respect from customers and profitability.

brand equity: the monetary or relative value of a brand

perceived in the marketplace by its customers.

 Having a systematic process for new product

development in place can introduce new products

quickly after a competitors product is launched.

Sonys Playstation, Microsofts X-Box, and

Nintendos Wii compete fiercely in the video game

industry. Each company tries to quickly introduce
new products to compete with others.

Toyota and Honda are roughly three times better

than GM and Ford in terms of time to develop new

products. They were able to introduce new
products quickly as consumer tastes and
preferences changed and competitors launched
new products (e.g., minivans and trucks).

 The product development

effort is often closely linked

with process development.

New products provide the

opportunity for enhanced

sales as the demand for
older products decreases
over time.

Source: Image Source/Corbis

NPD Process

A disciplined and definite set of tasks and steps

that describe the normal means by which a

company repetitively converts embryonic ideas
into salable products or service

The generation of innovative ideas is very difficult.

The NPD process involves multiple and sometimes

overlapping steps.

The NPD process requires participation and input from

multifunctional teams.

 These tradeoffs (figure 3.5) become still more

complicated when we consider the dynamic environment

created by multiple firms that are developing similar
products. The costs involved in these tradeoffs can be
significant.

Example: It has been estimated that delaying the

introduction of a new $15,000 car could cost an

automobile firm as much as $1.5 million per day in lost
profits.

 Introduction Stage
Growth Stage
Maturity Stage
Decline Stage

For some products, the four stages of the life cycle

might be over within a few weeks of the products
initial launch, whereas for other product categories,
the life cycle could last for several years.
The characteristics of a product, its demand,
competitive pressures, and costs change as it goes
through its life cycle. Therefore, different operating
decisions become important during different stages.

 The product is still being fine-tuned and its design is undergoing

revisions based on evolving customer feedback and evolving

preferences.

Typically sales is low during this phase; therefore the company

incurs a net loss on the product.

During this period, most processes are not standardized fully

and are still being adjusted.

The Demand has to be created, and potential customers have

to be encouraged to try the new product.

 The product design begins to stabilize during the growth

stage

Unit costs of production start decreasing because

production processes have become standardized and

because of economies of scale.

Sale of products starts increasing rapidly, and the firm

starts generating additional profits

The firm needs additional capital and production

resources to cope with the higher demand.

Competitive pressures within the marketplace start

increasing because several companies start offering

competing products.

 The production and service delivery processes are

standardized

Unit costs of production become lower

Sales volume reaches its maximum potential
Increased competition often leading to lower prices for

the consumer

Competing firms try to differentiate their product

offerings from others so that increase their market share

at the expense of competitors.

 During this stage, the product sales start decreasing

The firm starts preparing for the end of this product
Price of product falls because there are many competitors

therefore firms start divesting resources to other

emerging products.

 Introduction3D TVs
GrowthBlueray discs/DVR
Maturity DVD
Decline Video cassette

DISCUSSION STARTER

What new products/services have changed the way we

live?

 Because most products that companies introduce go

through the four life cycle stages just described, a

worthwhile strategy for firms is to continuously innovate
so that they always have products at different stages in
their sales and growth. This approach ensures that the
firm can use its production resources and capacity
effectively, as shown in the Figure 3.7.

Time-based competition: a broad-based competitive strategy

that emphasizes time as the major factor for achieving and
maintaining a sustainable competitive advantage

The objective is to significantly compress the time required to

propose, develop, produce, market and deliver products. In other
words firms need to develop the ability to minimize the time
required to develop new products or make rapid design changes.

As product life cycles in many industries are getting shorter, the

need for faster product development is increasing. Therefore,
time-based competition has become the rule rather than the
exception.

 Industry clock speed: a measure of the speed of innovation

within an industry- industries evolve at different rates, or clock

speeds.

High-clock-speed industries- Electronics- see multiple generations

of products within short time periods, perhaps even within 12

months.

Low-clock-speed industries- Chemical industry (e.g., steel) a

generation of products may last as long as five or even ten years.

The faster the industry clock speed, a company must constantly

innovate to maintain its leadership position within the market
place.

Radical Innovation: a new product, generally containing

new technologies, that significantly changes behaviors and
consumption patterns in the marketplace

For example: With the development of the Internet, many

consumers are shopping for a variety of products online
(hotel booking, airline tickets), rather than visiting a store
(travel agent).

 Disruptive Innovation: a new product that is initially

introduced at a lower quality level along some

established criteria but a much superior quality level
along a new dimension

For example: Mobile phones provide higher mobility than

traditional landline phones, but initially they had lower
voice quality. Over time, disruptive new products slowly
increase their quality along the traditional dimension as
well.

 Blue ocean strategy: a strategy that suggests that

companies should innovate not to compete with products

from other companies, but to try to make the competitive
products irrelevant

A red ocean refers to a saturated market in which there is

fierce competition, as it is already crowded with people

(companies) providing the same type of services or
producing the same kind of goods.

CAD: the use of computers to interactively design products

and prepare engineering documentation

The speed and ease with which sophisticated designs can

be manipulated, analyzed and modified with CAD makes
the review of numerous options possible before final
commitments are made.

 Virtual reality: a visual form of communication in which

images substitute for the real thing but still allow the user to
respond interactively

Virtual reality is being used to develop 3D layouts of

everything from restaurants to amusement parks. Changes

in a car, restaurant, or ride are made much less expensively
at this stage than they can be later.

 There is increased awareness of the environmental impact of

human progress.

Increased pressure on new product developers to consider the

environmental impact of any innovation.

Also, essential for companies to make customers aware that

environmentally friendly new product designs may cost slightly

more, at least in the short run.

Examples: Prius, Plates and Cups made of Recycled Paper

instead of Styrofoam.

 Green production: techniques that include reducing wastes

and emissions during production and assessing the total

impact of a good or service on the environment, taking into
account every activity associated with the production and
supply of that good or service

Environmentally friendly new product design means more

than just the features of the goods produced or the service

delivered.

 Design for disassembly: designing products so that

they are easy to take apart once theyre discarded. This

approach allows the usable parts of the product to be
recycled and only the unusable parts to be discarded.

Example: Computer ink-jet printer cartridges are now

designed so that they can be refilled, thus eliminating the

need for discarding a used cartridges shell.

Modular design: products designed as independent

subproducts that are attached to create a final product

Example: Dell uses the concept of modular design to keep a

minimum inventory of raw materials and components but still
rapidly satisfy the needs of its large number of customers. Dell
assembles the finished products (computers), but the individual
modules used (microprocessor, hard disk, DVD-ROM, display
panels) are finished products from its suppliers.

The practice of concurrent engineering (CE) implies that

product design and production process development occur
concurrently in an integrated fashion, using a crossfunctional team, rather than having them performed
sequentially by separate functions.

Intended to facilitate the development team in considering

all elements of the product life cycle from conception
through disposal allows to identify design problems early
in the development process and also come up with more
effective designs.

 Example: Bose Corporation goes even one step further

by actually allowing the employees of its suppliers to

have offices at Bose facilities and participate in its
product development efforts.

Such collaboration allows Bose engineers to identify

design problems early in the development process and

also come up with more effective design ideas.

Product platforms: a commonly used technique for

developing a variety of products based on common
structures or basic architectures

Designing new products that can be used as a platform

offers many benefits to the company by providing
economies of scale, reduces the development cycle of
subsequent products.

Example: Tylenol- first appeared as a regular strength drug.

Now we have variety of Tylenol products colds, sinus, flu,
infants, children, extra-strength, allergies.

The process of discovering the technological principles of a

new product through the analysis of is structure, function
and operation. It often involves taking the new product
apart and analyzing its components and functionalities in
detail, usually to try to make a new device or program that
does the same thing without copying anything from the
original.

Can the apparent similarities between fiercely competing

products such as the Honda Accord and Ford Taurus be
explained by the use of reverse engineering by one of the
competitors?

Companies use a number of tools and techniques to undertake

their new product development efforts effectively.
The four tools are:

Customer Choice Analysis

Product Reliability Analysis

Product-Complexity Index

Quality Function Deployment

Customer choice analysis: an experimental approach to

identify the relative importance of various product features
for customer choices cost, service quality, food quality,
speed of service, location, amenities, price etc.

Data is collected from a representative sample of

customers, constructing choice experiments- econometric
models based on responses are used to identify key
patterns in the survey responses, providing a relative
weight for each market driver and for interactions among
drivers.

These econometric models are used to calculate the

willingness to pay and desirability for new product
features
Willingness to pay: the amount a customer is willing to

pay for a new product configuration

Desirability: the relative attractiveness of a new product

offering

An approach for assessing the overall integrity of a product

based on the configuration of its components. PRA is a detailed
science that is built heavily on probability, statistics and
uncertainty theories. Product design is analyzed to identify the
potential failure points and possible solutions.

Redundancy: the use of backup components and systems to

enhance the reliability of a product- if one part fails, there is an
alternative success path, such as a back-up system.
Redundancy significantly increases system reliability, however,
redundancy is difficult and expensive and therefore limited to
critical parts of the system.
Example: Having an extra engine on an airplane

Robust design: a design approach that ensures that small

variations in the production process do not adversely affect the
quality of the product

 The product-complexity index (PCI) is the critical parameter that a

firm needs in order to estimate the design levels and prices for a
new product

PCI = (maximum price/cost) * difficulty scale

Difficulty Scale = Development time (years) / Sales Lifetime

(years)

This index is used to assess the relative ease or difficulty in

developing a product.

Homework: Solve Excel Example

Quality Function Deployment (QFD) has been

recognized as an effective method for integrated
product and process development.
QFD is a structured approach for systematically
integrating customer requirements into every aspect
of product development from planning to the
production floor.
Table 3.3 shows an overview of the QFD process.
The premise is that cooperation and communication
among marketing, manufacturing, engineering, and
R&D lead to a greater new product success.

The first QFD matrix, called the House of Quality links the
voice of the customer to the product design attributes
(voice of the engineer).

 Customer needs determined jointly by marketing, sales,

engineering staff members

Product Attributes are ranked as desired by customers-

prioritized needs of the customers

Translate customer requirements into relevant

engineering design attributes

Competitive evaluation of the product manufactured by

different brands/companies

5 = best, 1= least

 In our example (electrical transformer product), High

Trans Inc. is better than its competitors on almost all

customer-based attributes.