Week 1 Discussion

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CHAPTER ONE

The Strategic Elements of Product Development

Setting

Mention new products and people think about technology—iPods, iPhones, YouTube, virtual realities, fiber optics, and the like. But most new products are far simpler—low-carb colas, new movies, new singing stars, fast foods, and new flavors of frozen yogurt. New products run the gamut from the cutting edge of technology to the latest version of the ballpoint pen. New products can be tangible goods or services. New products can be destined for the consumer market, the business-to-business market, or both.

You have chosen to study how new products are developed and managed, so it would be nice to say they come from an orderly process, managed by experienced persons well versed in product innovation. Some do, but some don’t. Years ago, Art Fry became famous for an idea that became Post-it notes, when his hymnal page- marking slips kept falling out. He had a rough time persuading others at 3M that the idea was worth marketing, even though it soon became the second largest volume supply item in the office supply industry! Or consider James Dyson, an industrial designer by training who was dissatisfied with the performance of commercially available vacuum cleaners and set out to create a better one. After five years and about 5,000 prototypes, he created the Dual Cyclone bagless vacuum cleaner. Over the next eight years, he was unable to interest vacuum cleaner manufacturers or venture capitalists in the new product, frequently hearing that since he was a designer, he couldn’t possibly know anything about manufacturing or marketing! In 1985 and on the verge of bankruptcy, Dyson found an interested Japanese investor, and by 1993 he had set up Dyson Appliances in the United Kingdom (his home country). Since that time, Dyson Appliances has sold over $2 billion worth of vacuums worldwide.1

So you may be confused by the uncertainty you meet in this book. If so, welcome to the land of creative exploration. The activity we study in this book is sometimes called product innovation management; some call it product planning, and some (from a very biased perspective) call it research & development (R&D) or marketing. In this book, we use the most descriptive term we have—new products management—and we adopt the viewpoint of the marketing manager; that is, we are primarily concerned about the specific role for marketing in the overall task.

The Importance of New Products

New products are big business. Over a hundred billion dollars are spent yearly on the technical development phase alone. Untold thousands of new products are marketed every year, perhaps millions if we call each new Web site a new product. Hundreds of thousands of people make their living producing and marketing new products. Many managers realize that radical innovation is critical to future growth and even the survival of the

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firm. Here, we are defining radical innovation as innovation that displaces or makes obsolete current products and/or creates totally new product categories.2 The Industrial Research Institute identified “accelerating innovation” and “business growth through innovation” as the top challenges faced by technology leaders, and well-known business writer Gary Hamel has described the creation of radical innovation as “the most important business issue of our time.”3

The reason firms invest this much in new products is that they hold the answer to most firms’ biggest problems. Competitors do the most damage when (1) there is so little product differentiation that price-cutting takes everyone’s margins away or (2) when they have a desirable new item that we don’t. The fact is: A successful new product does more good for a firm than anything else. The very reason for a firm’s existence is the value its operations provide to others, and for which they pay. And in a competitive world this means that what we offer—be it a physical good or a service—must be better than what someone else offers, at least part of the time. This is true in all organizations, including hospitals, churches, colleges, and even political parties. Look at the winners in those arenas and ask yourself which ones are popular and growing.

Another reason for studying about new products is that the new products process is exceedingly difficult. Hundreds of individuals are involved in the creation of a single product, but all are from separate departments (sales, engineering, manufacturing, and so on) where they may have their own agendas. When a product flops miserably, it often generates huge publicity, much to the chagrin of the producers: think of New Coke, Premier smokeless cigarettes, the movies Gigli and Catwoman, or countless others. Perhaps, as a result, we think failure rates are higher than they really are. New products do fail, of course, but at around a 40 percent rate, not the 90 percent rate you often hear, and this percentage holds for both goods and services. The best product- developing firms can improve their odds further: They require only about four ideas to generate one winning product, as compared to over nine ideas for other firms. This is probably because the best firms are better at screening out bad ideas earlier.4 And after many years of research, we know many of the most important reasons why products fail. The firm doesn’t understand the customer, or underfunds the required research and development, or doesn’t do the required homework before beginning development (sometimes called the ready— fire—aim approach), or doesn’t pay enough attention to quality, or lacks senior management support, or chases a moving target (we will see moving-target issues such as unstable specifications and scope creep in Chapter 3).5

The goal at most firms is not necessarily to reduce failure rates to zero. Having too low a failure rate might mean that the firm is playing it too safe with close-to-home innovations, while missing out on the (risky) breakthroughs. The definition of “too low” probably depends on the industry and on how inherently risky product development is. The goal here is to minimize the dollar losses on the failures (don’t bankrupt the company!) and to learn from them. Regardless of the actual failure rate you encounter, the amount at stake and the risk of failure are high in new product development.

Success rates have remained remarkably consistent over the years. The Comparative Performance Assessment Study (CPAS) is periodically conducted by the Product Development & Management Association (PDMA), most recently in 2012.6 In these studies, for every 100 ideas, a little under 70 make it through the initial screen; fewer than 50 pass concept evaluation and testing and are moved to the development phase; a little more than 30 make it through development; about 30 make it through testing; about 25 of them are commercialized; and about 15 are considered to be successes (about 60 percent of those that were commercialized). Interestingly, the percent success rate does not vary too much from one category to the next. The percent success rate ranges from 51 percent (frequently purchased consumer goods) to 65 percent (health care). If one splits the CPAS sample into two groups, the “Best” (the top-performing 25 percent of firms) and the “Rest,” a slightly different pattern emerges: In 2012, the Best firms attained a success rate of

FIGURE 1.1 The Best Firms Achieve Superior NPD Results

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• • • • •

•

over 80 percent, while the Rest’s success rate was much lower at about 50 percent. The Best, therefore, have greater success with new product development!7

Figure 1.1 shows that the Best firms not only have a higher percentage rate of successes, but also derive almost twice as many sales and profits from new products (defined as five years old or younger) than do the Rest. Best firms are also more efficient in developing successful products: they require about 4.5 ideas to generate one success, while the Rest require almost three times as many ideas per success. In addition, the development cost per successful project for Best firms is roughly half the cost per successful project for the Rest.8

The 2012 CPAS study also reveals that the Best companies at product development manage their new products process differently than do the Rest. In sum, the Best companies are better at implementing many of the new products process concepts and principles that we discuss in upcoming chapters of this book. Relative to the Rest, the Best:

Are more likely to use market research tools like creativity sessions (which we explore in Chapter 5), trade- off analyses (Chapter 7), concept tests (Chapter 9), voice of the customer (Chapter 12), alpha and beta testing (Chapter 15), and test markets (Chapter 18). Are more likely to have global market and operations strategies (Chapters 3 and 14). Rely more on portfolio analysis for product selection (Chapter 3). Tend to use social media and online communities more for information gathering (Chapter 5). Employ formal processes for selecting which concepts to develop (Chapter 10). Are more effective in using team support tools and team incentives (Chapter 14).9

In sum, the concepts of new products management as presented throughout this book are used extensively, and well, by the top innovating companies, who achieve superior results from their new products!

Globalization and New Product Development

Like all aspects of modern business, product development has become more challenging due to increased globalization. To a greater extent than ever before, firms are seeing new product development as a global process in order to take advantage of worldwide opportunities and increase their efficiency and effectiveness of innovation. According to a 2007 study by consultants Booz & Company, the top global firms in terms of R&D spending deployed about 55 percent of their R&D spending in foreign countries. Among the 80 top U.S. R&D firms, $80.1 billion out of $146 billion was spent overseas, and similar percentages were found for top European and Japanese R&D firms.10 The Booz & Company study also showed that the firms with higher percentages of R&D spending deployed elsewhere did better than average on many important performance measures, such as return on investment and total shareholder return.

This study found that firms have multiple reasons for increasing their global R&D efforts. In many foreign countries, R&D engineers are lower paid than in the United States, Western Europe, or Japan—but the salary gap is narrowing, especially for the most skilled engineers and scientists. Now, many firms look overseas not just to access a cheaper labor force, but to access the talent residing in these markets and the ideas generated by these skilled personnel. Huge markets such as India and China are obvious sources of talented engineers, and there is some evidence of specialization: India boasts strengths in automotive engineering, China in electronics.

Another reason for increased global R&D is the increasing globalization of the innovating firms themselves. For example, as automakers seek to penetrate new markets such as China or India, it makes sense to conduct more of their design work in or near these markets than back in the home office located in Michigan or Bavaria. In addition, firms are under increased pressure to reduce product development times, or may be competing in increasingly turbulent market environments. These factors lead firms to leverage all the global resources they have at their disposal for product development.11

Many multinational firms seek to leverage their product development skills across their subsidiaries and gain competitive advantage by setting up global new product teams.12 A large firm may have R&D skills in its German subsidiary, its manufacturing in Asia, and its suppliers somewhere else again. A firm’s global presence, however, is no guarantee that it will automatically know how to efficiently manage its global operations. Effectively coordinating and marshaling the efforts across multiple countries to develop and to launch successful new products is a major challenge. There are many decisions to make that impact global product development effectiveness: how much autonomy should the subsidiaries have, how should they be rewarded, what work conditions should be imposed such that teamwork within and between subsidiaries is encouraged, and so forth. There is also the possibility of outsourcing some of

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the required new product capabilities, for example, through strategic alliances with global partners. Similarly, the global network of suppliers and distributors needs to be managed and coordinated so as to improve global product development as well as global launch. Selecting the best organizational structure for the global product team is more difficult than if only one culture is involved, as differences among team individuals as well as linguistic barriers and national culture differences must be taken into account. At the time of launch, even more decisions arise: Should a product be positioned the same way throughout the world, or should positioning, branding, or packaging decisions be localized? Many firms react to these challenges with well-defined, formal processes, while others leave the new products process relatively unstructured and adaptable to product or environmental considerations.

The best research available on this topic finds that firms with a global innovation culture have the most effective global new product programs.13 Having a global innovation culture means that a firm is open to global markets, mindful of differences in customer needs and preferences, and respectful of different national cultural and business environments. Firms with such a corporate culture are able to recognize the specialized skills, resources, and ideas they possess in different subsidiaries around the world. In fact, at these firms, all operations and strategies (not just new product development) are defined in terms of the realities of the international market. A firm with a global innovation culture is better at integrating its global knowledge, can better manage the R&D tasks associated with the new products process, and has an advantage in implementing global launches.14 All of these factors contribute to improved global new product performance. Throughout this book, you will see examples of firms that practice innovation on a global basis, which includes managing virtual and highly diverse global product

FIGURE 1.2 Product Development as a Global Process

development teams—no easy task! Figure 1.2 provides several samples of firms that take the global aspect of product development very seriously.

Global new product teams are a way of life now for many firms, and we will see more about the challenges facing such teams in Chapter 14. There, we will focus on the issues facing the global new product development team, and how firms overcome these hurdles to take advantage of product knowledge residing in many corners of the world. We touch on some of the issues regarding global positioning and branding decisions in Chapter 16.

How Product Development Is Different

It is likely that this course is located in your university’s business school, within the marketing department. Or it might be part of your engineering training, or part of a specialized program in technology innovation management. In any case, this is a good time to note an underlying principle of product development: It’s all about teamwork. The new products team ideally is cross-functional, comprising personnel from marketing, R&D, engineering, manufacturing, production, design, and other functional areas as well. Unlike other courses you may be taking,

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we spend much time in this text on how you interact with people from other fields of study: discussing how team members work together, how they can improve communication, what they need to achieve when working together, and so on. So, whatever your background, and whatever course of study you are pursuing, remember that in product development you will spend a lot of your time coordinating and working closely with people from other functional areas. Above all else, product development is a joint effort.

All members of a new products team make an important contribution to product development, so we must be aware of, and try to avoid, narrow functional viewpoints. Marketers have to learn to work with scientists, engineers, lawyers, production managers, and so on. We may come from marketing, and we will often return there when the project is finished, but, for now, we are all new products people, working with all functions, being biased to no one. A marketing type may not appreciate the thoroughness of a research scientist. And that scientist may not appreciate the marketer’s enthusiasm, which sometimes leads to what the scientist thinks are rash and unwarranted conclusions. Now is a good time to begin thinking like a general manager.

This course of study calls for a strong creative contribution. Not only do we create new product concepts; in many firms, that’s easy. The tough part is how best to develop and market them—devising a concept-testing method that works, screening a totally new idea the firm has never faced, figuring out how to integrate engineers into a trade show booth effectively, how to position a product that creates its own new category, how to produce it on present equipment, how to name it in a way that communicates and is not confusing, and so on. No answers are found in the back of this book. We never will know whether any one decision was right, just whether the total package of decisions worked out.

Being creative means we travel on unmarked roads. Most of our decisions are made on grossly inadequate facts. Not that we don’t know what facts we need or how to get good estimates of them—we usually do. But there’s never enough time or money. Worst of all, what seems to be a fact in January may not be a fact come June, when we actually introduce the new item. As a result, we often do things that make others nervous. For example, we use heuristics—rules of thumb that firms have found work for them: “On items such as this, about 30 percent of the people who hear of a new brand, try it,” or “When the product engineer from R&D disagrees with the process engineer from manufacturing, it’s better to go with manufacturing.” Heuristics sometimes leave us holding an empty bag; but without them, projects just won’t move forward fast enough. Another technique is to use simple intuition: hunch, or gut feel. This explains why most managers want new products people to have spent time in ongoing operations before moving on to new products work.

This suggests another key difference between this course and many of your others. This course is about the activities of people working under intense pressure, making tough decisions under impossible conditions. Consider a now-classic example: a group of about 15 people sent by IBM from Armonk to Boca Raton during the dawn of the personal computer era, 1980. They were given one year to create and market a new product, which eventually became known as the IBM PC. Literally billions of dollars were at stake—the difference between becoming a major player in a new market or missing the boat completely. Virtually every day, someone on that team had to make a decision that could close the show. When studying how strategy guides teams throughout a project, or how firms telescope their market testing into simultaneous regional rollouts, remember that pressure.

You may also be taking a course that deals with innovation in manufacturing or operations, and you may wonder how process innovation differs from product

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FIGURE 1.3 Not All New Products Are Planned

innovation. The term process innovation usually applies to functions, especially the manufacturing or distribution process, and every new product benefits from this type of innovation. The term product innovation applies to the total operation by which a new product is created and marketed, and it includes innovation in all of the functional processes.

The last difference worth noting here is in application. Sometimes the new product process is accidental, or serendipitous (see Figure 1.3). But remember the old adage that chance favors the prepared mind. At least two dozen scientists had observed mold killing their bacteria colonies before Alexander Fleming pursued the phenomenon into the discovery of penicillin. More recently, Pfizer researchers noticed that several of the men in a test study of a new angina medication reported that it was ineffective at treating their angina, but it did have an unexpected alternative effect on the body. Soon, Pfizer was marketing Viagra, one of their top products in recent years and showing enough market growth potential to have attracted several competitors.15 So, we must practice. You cannot learn how to develop a new product concept by reading about attribute analysis or gap analysis. You must do them. The same goes for product use testing, positioning, contingency planning, and many more. There are opportunities at the end of every chapter to think about the chapter’s material in a market setting.

What Is a New Product, and What Leads to Success?

The term new product can mean different things to different people. Figure 1.4 shows that new products can include new-to-the-world (sometimes called really new) products, as well as minor repositionings and cost reductions. The list in Figure 1.4 may include things you would exclude. For example, can we have a new item just by repositioning an old one (telling customers it is something else)? Arm & Hammer did, several times, by coming up with a new refrigerator deodorant, a new carpet freshener, a new drain deodorant, and more, all in the same package of baking soda, even with the same brand name. These may be considered just new uses, but the firm still went through a process of discovery and development. And a new use (particularly in industrial firms) may occur in a completely separate division. DuPont, for example, uses basic fibers in many different ways, from technical to consumer. Financial firms use their common databases for different markets. Similarly, brand names have long been used as platforms for launching line extensions. The Dove soap name, for example, has been extended to almost two dozen box soaps and almost as many liquid body washes.16

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FIGURE 1.4 What Is a New Product?

All the categories in Figure 1.4 are considered new products, but it is plain to see that the risks and uncertainties differ, and the categories need to be managed differently. Generally, if a product is new to the world or new to the firm (the first two categories), the risks and uncertainties faced by the firm are higher, as are the associated costs of development and launch. It cost Gillette far more, for example, to launch its newest shaving system (the Fusion) than to do upgrades to the earlier Mach 3 system (such as developing the women’s version, named Venus, which used the same blade technology). A greater commitment of human and financial resources is often required to bring the most innovative new products to market successfully.

Note also that not all the new product categories in Figure 1.4 are necessarily innovations. Line extensions, like the Dove soap bars mentioned above, or new flavors of Oreo cookies, may have resulted from the company’s desire to increase display space and shelf space. As Bob Golden of Technomic, a food industry consultancy, notes, “Many of these companies [that launch line extensions] are cannibalizing existing brands in order to stimulate the [product] category.” Line extension shouldn’t be confused with “true” innovation—and management must recognize that true innovation that provides enhanced value to customers is where their long-term competitive advantage may lie.17

New-to-the-world products revolutionize existing product categories or define wholly new ones. They are the most likely to require consumer learning and/ or incorporate a very new technology. Desktop computers with word processing software defined a new product category that made electric and manual typewriters virtually obsolete, and consumer learning was required by those who type for a living. Hewlett-Packard LaserJet printers did much the same thing in the printer category. The launch of CDs required major differences at the retail level in terms of store layout and distribution of related components (such as CD players). Other familiar examples, such as hybrid cars, the iPod, and even the Swatch watch, illustrate the use of new technologies in new-to-the-world products. Manufacturers had to overcome perceived risks, perceived incompatibility with prior experience, or other barriers to customer adoption (more on this subject in Chapter 16).

Of course, launching new-to-the-world products means risk—and the encouragement to take on the risk must permeate the whole firm and must start at the highest levels of management. At highly innovative firms like Intel and Gillette (the latter now a division of Procter & Gamble), top management may even abandon the use of quarterly earnings estimates in order to keep the business units focused on innovation and other long-term strategic goals.18

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The new product line category in Figure 1.4 raises the issue of the imitation product, a strictly “me-too.” If a firm introduces a brand of light beer that is new to them but is identical to those already on the market, is it a new product? Yes, it is new to the firm, and it requires the new products process. Canon was not the first laser printer manufacturer, Coca-Cola was not the first orange-juice bottler, and P&G was not the first competitor in the coffee business. These were new products to these firms, however, managerially speaking, and they are managed as such by the companies.

Figure 1.4 shows that many new products can be considered additions to existing product lines or improvements and revisions to existing products. Many of these line extensions round out or add to existing product lines extremely well: Tide Liquid detergent, Bud Light, Special K snack bars or shakes. Nevertheless, studies suggest that the most innovative new product categories account for many more product successes. In one study, the two most innovative categories accounted for about 30 percent of new product launches, but about 60 percent of the most successful products. (Percentages, of course, will vary by industry: High-tech industries will produce proportionately more highly innovative new products.) In fact, a U shape between innovativeness and success was found: The most innovative new product categories and the least innovative categories (the repositionings and cost reductions) outperformed the middle categories in terms of meeting financial criteria, returns on investment, and resulting market shares!19 This is because new products in the “middle ground” are not new enough to really excite new customers, yet different enough from existing products that there are fewer synergies. The results suggest that many firms need to reconsider the importance and potential contribution of innovative new products when making project selection decisions. In Chapter 3 we shall look at building a strategic portfolio of products that strives for balance among the innovation categories.

We have already seen that, even among the best firms, there are some product failures, and this entire book is devoted to developing new successful products, so there can be no easy answer to the question “What leads to new product success?” Nevertheless, several studies over the years on this question have yielded a consistent answer: The number one reason for success is a unique superior product. Additionally, common causes of failure include “no need for the product” and “there was a need but the new product did not meet that need.” In other words, it was not unique and superior.20 It did not offer the user sufficient value added relative to the costs of purchasing and use. Value added is a key concept to keep in mind as you travel the new product highway.

Does This Field of Activity Have a Unique Vocabulary?

Yes, it does, for two reasons. One, it is an expanding field, taking on new tasks and performing them in new ways. Second, it is a melting pot field, bringing in the language of scientists, lawyers, marketing people, accountants, production people, corporate strategists, and many more. Because many of these people talk about the same event but using different terms, communication problems abound.

For example, there is sometimes confusion over the terms invention and innovation. To managers invention refers to the dimension of uniqueness—the form, formulation, function of something. It is usually patentable. Innovation refers to the overall process whereby an invention is transformed into a commercial product that can be sold profitably. The invention may take but a few moments. We have far more inventions than we do innovations. Similarly, the average person might think that a product idea, a product concept, a product prototype, and maybe even a product are all about the same thing. As you will see in the pages of this book, we have specific, distinct definitions for each of these terms, and they are not interchangeable.

The problem becomes much worse from a global perspective. Take, for example, the term design. In North American new product work, design means essentially industrial design or engineering (premanufacturing) design; in Europe, however, design means the entire technical creation function from initial specs to the shipping dock. To some design people, the term means the entire product innovation function.

When in doubt, a complete glossary of new product terms is published online by the Product Development & Management Association (www.pdma.org; follow the link to the glossary).

Does the Field of New Products Offer Careers?

It does, though not many are entry positions for people right out of college. Generally, top managers want new products people to know the industry involved (for the customer understanding mentioned earlier) and the firm’s various operations (that multidimensional, orchestration task also mentioned). So, most new products managers get assigned to new products work from a position in a functional department. For example, a scientist finds

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6. 5. 4.

3.

2.

1.

working with marketing and manufacturing people interesting, a market researcher specializes in benefit segmentation, or a salesperson earns a reputation for good new product concepts. Each of these people is a candidate for full-time work on new products.

The specific jobs in this field are three. First is functional representative on a team, sometimes full time, more often part time. An example is a marketing researcher or a production planner. These people may be representatives on several teams or just one. The second job is project manager or team leader. This role is leader of a team of people representing the functions that will be required. The third position is new products process manager, responsible for helping project managers develop and use good new product processes.

Some of the career tips we hear are:

Be multifunctional, not functionally parochial. Have experience in more than one function (marketing, manufacturing, and so on). Be a risk taker, willing to do whatever is necessary to bring a product to market, including facing the wrath of coworkers. Think like a general manager. Scientists and sales managers can lead new products teams, but they must cease being scientists and sales managers. Be a combination of optimist and realist, aggressor and team player, leader and follower. Develop your creative skills, both for new product concepts and for new ways of doing things. Be comfortable in chaos and confusion. Learn to work with depressives, euphorics, and those with no emotion at all.

Fortunately, such managers do exist—and in increasing numbers. We hope you become one of them.

The Strategic Elements of Product Development

We cover a lot of product development material in this book, from opportunity identification right through to launch and postlaunch. Underlying all of this are three strategic elements, which will be a major focus in this book. These strategic elements provide a framework to guide management through product development and help them focus on what is most important. Top product development consultants, like Robert Cooper of the Product Development Institute, recommend a framework of this type to firms of all sizes to help guide product development.21 A key point here is that all three of the strategic elements must be in place, and each is coordinated with, and supports, all the others. The three elements are a new products process, a product innovation charter, and a well-managed product portfolio.

The new products process is the procedure that takes the new product idea through concept evaluation, product development, launch, and postlaunch. This procedure is usually depicted as a phased process with evaluative steps between the phases, but as you will see in upcoming chapters, it is rarely so straightforward. The product innovation charter is essentially a strategy for new products. It ensures that the new product team develops products that are in line with firm objectives and strategies and that address marketplace opportunities. Product portfolio management helps the firm assess which new products would be the best additions to the existing product line, given both financial and strategic objectives. In this chapter, we introduce the first strategic element, the new products process, as it serves as a framework for everything that follows in this book, and explore it more deeply in Chapter 2. In Chapter 3, we discuss the last two strategic elements, the product innovation charter and product portfolio management.

The Basic New Products Process

Figure 1.5 shows a simple new products process described in terms of phases and tasks. Research has shown that about 70 percent of firms use some kind of formal, cross-functional, phased new products process, and about 47 percent use clearly defined evaluation criteria after each phase. At least 40 percent of firms assign a process manager whose job it is to manage the phased new products process.22 The phased new products process is certainly well established among firms involved in new product development.

The idea behind the new products process is that the phases represent activities that are conducted by the new product team; between the phases are evaluation tasks, or decision points.23 It is at these points that the hard Go/No Go decisions need to be made (that is, whether the project looks promising enough to go on to the next phase). Throughout this book, we will be looking at the kinds of tests (from concept tests, to product use tests, to market tests) that are used to gather information for project evaluation.

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The goal of a new products process is to manage down the amount of risk and uncertainty as one passes from idea generation to launch. There are periodic

FIGURE 1.5 The Basic New Products Process

evaluations all the way through the process. A firm may have access to hundreds of ideas; weaker ones are immediately eliminated, and the better ones are refined into concepts. Later in the process, only the best concepts are approved and moved forward to the development phase. The product is continuously refined during the development phase and could still be halted before the launch phase if preliminary product use test results are not positive. By the time the product is launched, it has a much higher likelihood of succeeding (recall the roughly 60 percent success rate across many product categories cited earlier). Managing down the amount of uncertainty is important, because each additional phase means greater financial investment (possibly much greater), not to mention greater commitment of human resources. Firms using a new products process have reported improvements in product teamwork, less rework, greater success rates with new products, earlier identification of failures, improved launch, and up to 30 percent shorter cycle times.24 This is not to say, however, that all firms implement the process well. Other studies show that many firms that claim to have a new products process either designed it or implemented it poorly; thus, there is much room for improvement.25

One should note that the neat, linear sequencing of phases shown in Figure 1.5 is just not typical. The reality is that the activities are not sequential, but overlapping. It is not implied that one phase must be completed before work can begin on the next one, like a pass-the-baton relay race. In fact, overlapping is encouraged. There is much pressure for firms to accelerate time to market for new products, and a certain amount of phase overlapping is an important tool in speeding new products to market. To do this right, of course, requires that the product team members from different functional areas (marketing, R&D, manufacturing, design, engineering) communicate very effectively.26 Product development is truly multifunctional, where all functions (and, increasingly, the customer as well) work together on a cross-functional team to accomplish the required tasks. The whole of Chapter 14 investigates the organization and management of these cross-functional teams in depth. But even though we discuss teams later in the text, keep in mind that the team must become involved as early as possible in the new products process. It is the responsibility of the team leader to bring together the right individuals with the right skill sets, and to encourage communication within the team, between the team and top

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management, and between the team and communities of customers. The effective team leader knows how to deal with power conflicts as well as technical complexity.27

Another way that firms have been able to avoid delays and speed up time to market is to streamline the evaluation tasks. At Johnson & Johnson, the preparation for an evaluation task might have included preparing a 30- to 90-page review document. This was cut to a standardized presentation, with a one-page summary and a handful of slides—enough to inform senior management about the risks and commitments being decided upon. It was reported that weeks of preparation time were saved with the new format.28

Furthermore, we should clear up something about the evalulation tasks that occur after every phase in the new products process. Figure 1.5 implies that each phase is always followed by a Go /No Go decision. While this is often the case, it might be an oversimplification. If some key information is still missing or unavailable, a third option is possible, which we can call an “On decision.” This means that the project will move forward (a conditional “Go,” if you will), but the missing information must be gathered and the project could still be halted at a later phase. An evaluation task that includes conditional Go decisions is sometimes called a fuzzy gate. For example, a new packaged food product might do reasonably well at a concept test, but management might feel they don’t really have a read on the market until some product use testing (letting the customer actually taste the product) is conducted. An On decision would mean that the product is approved to move to development, but the product use test must yield positive results, otherwise the project would be halted at that point. Fuzzy gates, therefore, speed up the process because time is not wasted in obtaining complete information before the decision is made. They are relatively common; in the CPAS study, about 50 percent of projects move forward with some conditional decisions along the way. Nevertheless, the team must indeed make a firm decision once the necessary information is obtained; in other words, fuzzy gates still have teeth. A related problem occurs when teams actually make a full “Go” decision, but fail to commit any resources to the project. This is known as a hollow-gate problem and results in too many projects underway and, inevitably, cost overruns and launch delays. Similarly, a poor project may never be critically evaluated because it is the CEO’s pet project, or because a hidden personal or political agenda is influencing decision making. Gates without teeth, hollow gates, special treatment for executives, or hidden agendas can all hinder effectiveness of the new products process, but all are identifiable and avoidable.29

Another consideration is that the new products process might look very different for new-to-the-world, breakthrough products (more on these in Chapter 2) as compared to more incremental new products. A firm like P&G might use a simplified process for a low-risk project (such as a new detergent) in which some phases and evaluation tasks are combined or may even be omitted. The CPAS study showed that only about 40 percent of radical projects have phases that overlap or are skipped, while for incremental new products, about 59 percent have overlapping phases or skip some phases entirely. For a new-to-the-world product, such as Febreze or Dryel, P&G faces greater risks and higher expenses, and the complete new products process in all its detail will probably be followed. Thus, it is helpful to think of the process in Figure 1.5 as a guideline or framework, but to recognize that the new products process is really quite flexible. In fact, these characteristics (overlapping phases, fuzzy gates, and flexibility) are features of what is called the third-generation new products process, which is the way most firms interpret the process depicted in Figure 1.5.30

There is something else significant in Figure 1.5. The phases do not refer to functions or departments. Technical people may lead the technical portion of the development, but others participate, some very actively, including market research, sales, design, and others. Launch sounds like a marketing activity, but much of the marketing is done back during earlier phases. We discuss what we call the “marketing ramp-up” in detail in Chapter 15. Also, during launch, the manufacturing people are busy setting up production capability. Legal people are clearing brand names, and lab people are running tests on early product output. It is clear that the new products process is a job for a well-organized, efficient cross-functional team.

Additionally, different firms group the new product activities differently. There is certainly no agreement on the exact number of steps. That is not a cause for concern. Rather than thinking of the process as some number of discrete phases, look for the bigger picture of a large, evolving, general-purpose process, which we break up into five phases partly for our benefit in presenting the story about new product activities. Different firms simply break up the same underlying process differently.

We will go much deeper into the new products process in Chapter 2.

The Other Strategic Elements

The process depicted in Figure 1.5 is part of a firm’s new product strategy, but it leaves some questions unanswered. First, what is the firm’s underlying strategy for new products? What market and/or technology opportunities is it seeking to exploit? What is the strategic arena within which the firm will compete? How

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innovative does management want to be? Lacking a new product strategy, the firm will approach new product development in an unfocused manner. Without a clear boundary defining what new market or technology opportunities to pursue, any idea would seem to be all right, which leads to too many underfunded products. We call this new product strategy a product innovation charter, or PIC. The PIC is developed by senior management and provides guidance to all functional areas involved in innovation. It defines a scope of activity for new product development, helping the product team identify what opportunities lie within the boundaries and where they should focus their efforts. That way, perhaps fewer projects may be pursued, but they will generally be of higher value to the firm. And the advantages of establishing a PIC are clear-cut: In Robert Cooper’s research, firms with a strong product definition had about an 85 percent chance of success and averaged a 37 percent market share, while those with a weak product definition showed a 26 percent chance of success and a market share of about 23 percent.31

Additionally, many new product concepts may seem to be technically feasible and marketable. Before committing scarce financial and human resources, top management must also consider whether the new product, if developed, would fit the firm’s overall business strategy: whether it adds strategically to the products already being offered, or whether it throws the firm’s product line off balance. This is an issue of product portfolio management. While almost every firm will consider financial criteria such as expected sales revenues or profits when approving a new product development project, the best performing firms balance financial criteria with strategic considerations, such that the firm’s long-term objectives will be met and there will be a dependable flow of new products into the future.32

The product innovation charter, product portfolio management, and related issues are covered more deeply in Chapter 3.

Product Development in Action

To see the ongoing efforts of the best product developers in the business, check the Web site for the Product Development & Management Association (www.pdma.org). Among other things, the PDMA sponsors an Outstanding Corporate Innovator award. This award is not for a single great new product, but rather for a sustained program of new product success over at least five years. And award winners must tell attendees at the association’s annual conference how they did it. As we noted before, innovation can be taught—and managers from the best innovating firms serve as the teachers in these conference sessions. In most of these cases, one could take their systems right from this book. Winners have included Corning, Royal DSM, Merck, Hewlett- Packard, Dow Chemical, Maytag, Bausch & Lomb, Harley-Davidson, and many others (the full list is on the PDMA Web site).

The PDMA Web site also provides links to their academic journal, the Journal of Product Innovation Management, and their practitioner-oriented newsletter, Visions, as well as to the glossary mentioned earlier. As you take this course, you may want to check these publications for the most recent and timely articles on many aspects of new product development and innovation, and for the current hot topics among new product development professionals.

Summary

This chapter has introduced you to the general field of new products management. You read how the activity is (or should be) found in all organizations, not just business. You read how this course of study relates to others, what a new product actually is, and that services and business products are covered, not just cake mixes, cell phones, and cars. You learned about where the field stands today, the hallmarks of our activity, our problems with vocabulary, and possible careers. Chapter 2 will take us directly into the new product process.

Applications

At the end of each chapter are a few questions that arose (or could have) one time or another in a job interview. The candidate was a student who took a course in new products management, and the

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1.

2.

3.

interviewer was a high-ranking person in the firm (here portrayed as the president). The questions came up naturally during discussion, and they are tough. Often, the executive didn’t intend them to be answered so much as talked about. Occasionally, the executive just made a comment and then paused for the applicant’s reaction. Each question or comment relates to something in the chapter.

Imagine you are the person being interviewed. You do not have the option of ducking the question or saying “I really don’t know.” If, in fact, you really don’t know, then glance back over the reading to see what you missed. It’s also a good idea to exchange answers with another student taking the course, given that most of the applications involve opinions or interpretations, not recitation of facts.

“When you were talking a while ago about taking risks, I wondered just whose money you were talking about. A fellow I know out in California insists that all new product team members invest their own money (with his) in their projects. Fifty thousand dollars is not unusual. In that system I’ll bet you would be seeking to avoid risks, not trying to find them.” “Funny thing, though, it sure does frustrate me when I hear a division general manager’s strategy is to imitate other firms. Now, I know some firms might reasonably use imitation, but none of my divisions should. Should they?” “I would like to be sure as many of our people as possible support innovation, but I know some people in the firm just can’t react positively to proposed innovation, no matter how much we need it. Tell me, how do you think I should go about spotting the worst offenders, and what should I do with them when I find out who they are?”

1Anonym ous, “Dyson Fills a Vacuum ,” @ Issue, 8(1), 2003. 2M. Rice, R. Liefer, and G. O’Connor, “Assessing Transition Readiness for Radical Innovations,” Research-Technology Management, 45(6), 2002, pp. 50–56; and Gina O’Connor, Joanne Hyland, and Mark R Rice, “Bringing Radical and Other Innovations Successfully to Market: Bridging the Transition from R&D to Operations,” in The PDMA Toolbook 2 for New Product Development, ed. R Belliveau, A. Griffin, and S. M. Som erm eyer (Hoboken, NJ: Wiley, 2004), pp. 33–70. 3Industrial Research Institute 2001/2002 Annual Reports, Washington, DC, Industrial Research Institute; and Gary Ham el, “Innovation Now! (It’s the Only Way to Win Today),” Fast Company, Decem ber 2002, pp. 114–124. 4Marjorie Adam s, Competitive Performance Assessment (CPAS) Study Results, PDMA Foundation, 2004; and Stephen K. Markham and Hyunjung Lee, “Product Developm ent and Managem ent Association’s 2012 Com parative Perform ance Assessm ent Study,” Journal of Product Innovation Management, 30(3), 2013, pp. 408–429. Success rate has held steady at around 60 percent of products m arketed since the 1995 CPAS study; the 2012 study suggests the success rates are slightly lower in Europe and Asia. 5Robert Cooper, Winning at New Products: Accelerating the Process from Idea to Launch, 3rd ed. (New York: Perseus Books, 2001). 62003 CPAS results are found in Doug Boike and Marjorie Adam s, “PDMA Foundation CPAS Study Reveals New Trends—While the ‘Best-Rest’ Gap in NPD Widens,” Visions, 28(3), July 2004, pp. 26–29; and Gloria Barczak, Abbie Griffin, and Kenneth B. Kahn, “Perspective:Trends and Drivers of Success in NPD Practices: Results of the 2003 PDMA Best Practices Study,” Journal of Product Innovation Management, 26(1), January 2009, pp. 3–23. The 2012 results are sum m arized in Markham and Lee (2012), op. cit. 7The “Best” are defined in the CPAS study as those firm s that are in the top 25 percent in their industry and above the m ean in both program success and sales and profit success from new product developm ent. 8Stephen K. Markham and Hyunjung Lee, op. cit. 9Stephen K. Markham and Hyunjung Lee, op. cit. 10For a sum m ary of the Booz & Com pany findings, see Barry Jaruzelski and Kevin Dehoff, “‘Beyond Borders:The Global Innovation 1000’ Study Reveals a Global Shift in R&D Spending,” Visions, 33(3), October 2009, pp. 27–30. 11Elko J. Kleinschm idt, Ulrike de Brentani, and Sören Salom o, “Perform ance of Global New Product Developm ent Program s: A Resource-Based View,” Journal of Product Innovation Management, 24(5), Septem ber 2007, pp. 419–441; see sum m ary in K. Sivakum ar, “Global Product Developm ent,” in Jagdish N. Sheth and Naresh K. Malhotra, Wiley International Encyclopedia of Marketing, Volum e 5, Product Innovation and Managem ent (West Sussex, UK: John Wiley, 2011), pp. 68–74. 12Good references are: Roger J. Calantone and David A. Griffith, “From the Special Issue Editors: Challenges and Opportunities in the Field of Global Product Launch,” Journal of Product Innovation Management, 24(5), Septem ber 2007, pp. 414–418; and Ram Mudam bi, Susan Mudam bi, and Pietro Navarra, “Global Innovation in MNCs:The Effects of Subsidiary Self-Determ ination and Team work,” Journal of Product Innovation Management, 24(5), Septem ber 2007, pp. 442–455.

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13Elko J. Kleinschm idt, Ulrike de Brentani, and Sören Salom o, op. cit. 14Roger J. Calantone, S.T. Cavusgil, J. B. Schm idt, and G.-C. Shin, “Internationalization and the Dynam ics of Product Adaptation: An Em pirical Investigation,” Journal of Product Innovation Management, 22(2), March 2004, pp. 185–198. 15Jenny Darroch and Morgan R Miles, “Sources of Innovation,” in V. K. Narayanan and Gina C. O’Connor (eds.), Encyclopedia of Technology & Innovation Management (Chichester, UK: John Wiley, 2010), Chapter 14. 16Deborah L. Vence, “Just a Variation on aThem e,” Marketing News, February 2007, pp.18–20. 17 Deborah L. Vence, op. cit.; the Bob Golden quote is from Karen Heller, “It’s in the Snack Aisle, But Is It Food?” Philadelphia Inquirier, March 14, 2007, pp. E1, E4. 18Thom as D. Kuczm arski, “What Is Innovation? And Why Aren’t Com panies Doing More of It?” Journal of Consumer Marketing, 20(6), 2003, pp. 536–541. 19Elko J. Kleinschm idt and Robert G. Cooper, “The Im pact of Product Innovativeness on Perform ance,” Journal of Product Innovation Management, 8(4), Decem ber 1991, pp. 240–251; see also Abbie Griffin, Drivers of NPD Success: The 1997 PDMA Report (Chicago: Product Developm ent & Managem ent Association, 1997). 20Discussions of product success and failure can be found in R. G. Cooper, “New Products: What Separates the Winners from the Losers?” in M. D. Rosenau, A. Griffin, G. Castellion, and N. Anscheutz (eds.), The PDMA Handbook of New Product Development (New York: John Wiley, 1996), pp. 3–18; and R.G. Cooper, “The Im pact of Product Innovativeness on Perform ance,” Journal of Product Innovation Management, 16(2), April 1999, pp. 115–133. 21Roger J. Calantone, S.T. Cavusgil, J. B. Schm idt, and G.-C. Shin, “Internationalization and the Dynam ics of Product Adaptation: An Em pirical Investigation,” Journal of Product Innovation Management, 22(2), March 2004, pp. 185–198. 22Markham and Lee (2012), op. cit.; Robert G. Cooper, Scott G. Edgett, and Elko J. Kleinschm idt, Improving New Product Development Performance and Practices: Benchmarking Study (Houston, TX: Am erican Productivity and Quality Center, 2002); Marjorie Adam s (2004), op. cit., and Kenneth B. Kahn, Gloria Barczak, and Roberta Moss (2002), op. cit. 23Robert G. Cooper, Winning at New Products: Accelerating the Process from Idea to Launch, 3rd ed. (Cam bridge, MA: Perseus Publishing, 2001). 24Robert G. Cooper, “New Products: What Separates the Winners From the Losers and What Drives Success,” in K. B. Kahn, S. E. Kay, R. J. Slotegraaf, and S. Uban (Eds.), The PDMA Handbook of New Product Development (Hoboken, NJ: Wiley, 2013), Ch. 1, pp. 3–34. 25Robert G. Cooper, Scott J. Edgett, and Elko J. Kleinschm idt, Best Practices in Product Innovation: What Distinguishes the Top Performers, Product Developm ent Institute, 2003; Robert G. Cooper, “Perspective:The Stage-Gate® Idea-to- Launch Process—Update, What’s New, and NexGen System s,” Journal of Product Innovation Management, 25(3), May 2008, pp. 213–232. 26Preston G. Sm ith and D. G. Reinertsen, Developing Products in Half the Time (New York: Van Nostrand Reinhold, 1991). 27Hans J.Tham hain, “Managing Product Developm ent Project Team s,” in Kenneth B. Kahn, George Castellion, and Abbie Griffin (eds.), The PDMA Handbook of New Product Development (New York: John Wiley & Sons, 2005), pp. 127– 143. 28Robert G. Cooper, “What Leading Com panies Are Doing to Reinvent Their NPD Processes,” Visions, 32(3), Septem ber 2008, pp. 6–10. 29For m ore on all of these problem areas, see Cooper (2008), op. cit. 30See Robert G. Cooper, “Perspective:Third-Generation New Product Processes,” Journal of Product Innovation Management, 11(1), 1994, pp. 3–14; also Cooper (2008), op. cit.; also Robert G. Cooper, “Effective Gating,” Marketing Management, 18(2), 2009, pp. 12–17. 31 Robert Cooper, Winning at New Products: Accelerating the Process from Idea to Launch, 2nd ed. (Reading, MA: Addison-Wesley, 1993). 32Gary E. Blau, Joseph F. Pekny, Vishal A. Varm a, and Paul R. Bunch, “Managing a Portfolio of Interdependent New Product Candidates in the Pharm aceutical Industry,” Journal of Product Innovation Management, 21(4), July 2004, pp. 227–245.