Designing Value-Based Service
micell32
M2A2.pdf
The Art of Managing New Product Transitions
S P R I N G 2 0 0 7 V O L . 4 8 N O . 3
R E P R I N T N U M B E R 4 8 3 1 1
Feryal Erhun, Paulo Conçalves and Jay Hopman
Please note that gray areas reflect artwork that has been intentionally removed. The substantive content of the article appears as originally published.
Faster time to market and shorter product life cycles are pushing compa-nies into more frequent product transitions, requiring managers to confront the potential rewards and challenges associated with product intro-
ductions and phaseouts. Several studies show that most new products fail in
the marketplace for a variety of reasons,1 and both academics and practitio-
ners have identified strategies for improving the chances of success.2 With a
few exceptions, these studies focus on the success of a single product.3
However, companies often struggle with product transitions even when
the new product meets all the requirements for success. Consider, for
example, two consecutive generations of high-volume micropro-
cessors that we observed at Intel Corp., the U.S. semiconductor
manufacturer. For the sake of this discussion, we will refer to the
products as X and Y. (See “About the Research,” p. 74.)
Intel originally designed X as a transitional product to pave the
way for a stronger performance trajectory than was occurring with
the previous platform. While X itself performed only slightly better
than the previous generation at launch, its design allowed for perfor-
mance gains later based on a wide array of computing benchmarks.
Intel planned to move a substantial portion of the market to X and
then complete the transition to Y, which offered similar performance
at lower cost.
Unfortunately, the transition to X did not go smoothly. With capac-
ity in place to support a moderately strong ramp up, early production led to
excess inventory. X’s failure to meet customers’ needs and inability to usurp
sales from its predecessor resulted in continued demand and short supply for
the prior product. Consequently, competitors succeeded at increasing unit
sales of their products.
Intel quickly realized that there were problems with X’s components and
pricing strategy. Management seized upon several measures to improve sales,
including rebates, but X continued to languish. As the introduction of Y ap-
proached, the company started an ambitious marketing campaign and price
cut to spur sales and regain market share. These actions led to record demand
for Y, exceeding all expectations. With limited production capacity, Intel
SPRING 2007 MIT SLOAN MANAGEMENT REVIEW 73
P R O D U C T D E V E L O P M E N T
The Art of Managing New Product Transitions
Feryal Erhun is an assistant professor of management science and engineering at Stanford University, in Palo Alto, California. Paulo Gonçalves is an assistant professor of management science at the University of Miami, in Coral Gables, Florida. Jay Hopman is a strategic analyst and researcher at Intel Corp., in Folsom, California. Comment on this article or contact the authors through [email protected].
New product launches
are highly complex
and can pose major
challenges to companies.
But managing the
interplay between
product generations
can greatly increase
the chances for success.
Feryal Erhun,
Paulo Gonçalves and
Jay Hopman
P R O D U C T D E V E L O P M E N T
struggled to meet demand for some products within the Y family.
Finally, after several months, Intel succeeded in balancing demand
and supply, eventually regaining the market share it had lost.
Coordinating supply and demand between two product gen-
erations can be a difficult and costly problem. Although Intel’s Y
met all the requirements for a successful product introduction,
marketing and pricing decisions enacted in response to limited
market acceptance of X significantly shaped the outcome of the
Y launch. Intel’s operations management team did its best to
satisfy customers through the transition. However, customers
were frustrated by supply shortages, and the transition had sub-
stantial costs: lost revenues from discounting Y, marketing
campaign expenses, significant investments in capital equipment
and expedited shipping.
If the success of a single product is highly uncertain and can
pose a major challenge to companies, the interplay between gen-
erations of products greatly increases the level of complexity. For
example, when General Motors Corp. redesigned its Cadillac Se-
ville and Eldorado models in 1992, supply and demand problems
followed. Based on its initial forecasts, GM had allocated half of
the capacity of its Detroit-Hamtramck plant to the redesigned
Cadillacs, with the remainder going to Buicks and Oldsmobiles.
But demand quickly exceeded supply, leading to the loss of thou-
sands of potential customers. By the time GM was able to produce
enough of the most popular models, the damage had already
been done.4 Cisco Systems Inc. had a similar experience in early
1998 with the launch of product 3S-0, which was designed to ap-
peal to the lower end of the market. Unfortunately, because of its
impressive performance-price ratio, it cannibalized sales from
higher-end products. As a result,
sales of higher-end products suf-
fered, but the new product
revenue did not compensate for
the lost sales.5
Companies must learn to man-
age transitions to sustain their
competitive advantage. Our field
studies at Intel show that while
numerous factors affect the rate
and success of product transitions,
inadequate information sharing
and coordination among groups
is one of the more important chal-
lenges to successful transitions.6
Lack of information can prevent
managers from adequately assess-
ing the state of the transition and
impair the effective design and
implementation of contingency
planning in the face of unexpected
changes. For instance, during Intel’s product X-Y transition, the
marketing team did not thoroughly investigate the production ca-
pacity upside to support the new marketing plan for product Y,
leading to supply shortages.
The alignment of actions and decisions across different inter-
nal groups and across organizations helps level expectations and
synchronize responses across the various teams involved in the
transition, thereby improving the company’s ability to anticipate
and react to environmental changes. The ability to adapt to
change while meeting market objectives is a critical aspect of
managing product transitions. To promote alignment across
groups and the development of prevention and mitigation strate-
gies, we have developed a framework and a process for helping
managers make decisions during product transitions.
Using our framework, managers can design and implement
appropriate policies to ramp up sales for new products and ramp
down sales for existing products, balancing the supply and the
demand for both so that combined sales can grow smoothly. (See
“Smooth and Troubled Product Transitions.”)
Although the approach does not eliminate the uncertainty of
product transitions, it provides managers with an overall under-
standing of the risks and challenges and suggests possible courses
of action. Early experience suggests that the process can lead to
more robust, efficient and effective product transitions. 7
Managing Product Transitions The process of managing product transitions begins by identify-
ing specific market objectives. Once these have been selected,
companies need to understand the product drivers and risks and
74 MIT SLOAN MANAGEMENT REVIEW SPRING 2007
Our research is based on a three-year study between 2001 and 2004 at Intel Corp. on the
risks and drivers affecting product transitions. We conducted about 40 semi-structured inter-
views with managers in supply chain management, demand forecasting, sales, marketing
and product development. After studying multiple historical and current product transitions
at Intel, we learned that smooth transitions are difficult to achieve. The complexity of de-
mand and supply dynamics causes tremendous uncertainty before a product launch that is
not fully resolved until several quarters after it. We observed that functional teams across the
organization had access to specific information (for example, about macroeconomic condi-
tions in Asia or the availability of a particular part) that had significant bearing on the relative
demand and supply of old and new products. However, the lack of a formal mechanism to ag-
gregate and utilize such diverse information frequently caused misalignment. We saw the
need for a new process to overcome this obstacle. The process we designed begins with de-
fining a specific market objective. Subsequent steps involve identifying and measuring a set
of factors across departments for each product (old and new) to assess product drivers and
risks; exploring possible risks arising from interactions between products using the transition
grid; and developing a transition playbook, including prevention and contingency strategies
with which to manage and mitigate transition risks.
About the Research
SLOANREVIEW.MIT.EDU/SMR
conduct a factor assessment, which involves monitoring and
measuring the factors affecting both old and new products. The
process also necessitates a detailed analysis of the risks arising
from interactions between products and the development of a
transition playbook, which amounts to a catalog of primary and
contingency strategies for preventing and mitigating transition
risks. As market conditions change, managers need to be pre-
pared to initiate the process again.
Identifying Product Drivers and Risks Our research on multiple generations of products at Intel suggests numerous factors
that affect the adoption rate and success of a new product.
The factors fall into two general categories of risks and drivers:
demand and supply. Although either a demand risk or a supply
risk can lead to a complete product failure, successful product
introductions depend on a balance between demand and sup-
ply. Demand risks reflect the market’s uncertainty about a new
product (for example, concerns about product attributes and
transition policies). Supply risks often stem from the challenges
of utilizing new manufacturing processes or product designs,
or the difficulties of producing and distributing the product.
Across demand and supply risks, we focused on a set of factors
that influence the success of product transitions. (See “Product
Drivers and Risk Factors,” p. 76.)
The eight factors cover most of the risks affecting the adop-
tion rate of a new product. They encompass product features
(product capability); process features (internal execution); supply
chain features (external alignment and execution); managerial
policies (pricing, timing and marketing); and externalities (envi-
ronmental indicators and competition).
Although organizations may have access to de-
tailed information about the product drivers and
the risk factors affecting them, individual func-
tional groups rarely have a complete picture of the
overall forces impacting a product introduction.
Our process provides a method for developing a
cross-organizational transition assessment. This
structured and repeatable process benchmarks the
prospects and sales forecasts of new products
against the experience of current and prior genera-
tions of products.
Assessing Relevant Factors Effective planning de- pends on collaboration and shared insight across
the organization. If the best information is distrib-
uted among many different groups, the most one
can expect is disjointed decisions. During the fac-
tor assessment phase, managers conduct a complete
evaluation of the risks impacting a product, high-
lighting the different challenges. This provides
managers with an opportunity to make decisions based on spe-
cific information.
To assess the actual values of specific factors, it is necessary to
interview key players in functional groups involved in managing
the new product (including marketing, sales, planning and fore-
casting). Each group scores all eight factors from their particular
vantage point, using a five-point scale (with one very favorable
and five very unfavorable). The scores can be compared with
baselines from past products. Since different functional groups
typically have privileged understanding and information about
specific areas, each group scores every factor and documents the
reasons motivating their scores. Sharing the comments and con-
solidating the information provides everyone with an
understanding of how each group assesses the overall risks for a
given product. After meeting with all groups, a cross-functional
product management team can develop a composite score for
each factor, providing a simple metric for the state of a product.
(See “Mapping Intel’s Transition from X to Y,” p. 78.)
Since managerial and environmental changes continually im-
pact product sales, updating factor assessments allows managers
to identify risky areas and evaluate the results of previously im-
plemented strategies. In our experience, however, updating
information too frequently can be a distraction since it often
takes time for strategies to kick in. Frequent updates may also
induce managers to take premature or unnecessary actions. The
frequency of updates should depend on the industry in question
and the life expectancy of the products. For example, in high
tech, the appropriate interval between updates might be monthly,
whereas in other industries it might be no more than every quar-
ter or any time a significant change occurs in one of the factors
SPRING 2007 MIT SLOAN MANAGEMENT REVIEW 75
New product transitions should be organized to allow companies to
increase sales over time without disrupting sales or profitability. When
transitions are rocky, total revenues decline.
Smooth and Troubled Product Transitions
SLOANREVIEW.MIT.EDU/SMR
Time (years)
Sales (units/month)
71 2 3 4 5 6
Old Product
New Product
New Generation
Total Sales
P R O D U C T D E V E L O P M E N T
76 MIT SLOAN MANAGEMENT REVIEW SPRING 2007
(such as competitors launching a marketing campaign or lower-
ing their prices). Managers should balance the availability of new
information and the amount of time required for decisions to
have a measurable impact.
Looking Across Product Generations To understand the risks of a transition from one product to another, it is important to evalu-
ate the interplay between products. A simple method for doing
this is to study the interactions between demand and supply risks
for the products. Using the composite factor analysis, managers
can assess an overall demand risk and an overall supply risk for
each product by assigning weights to each factor that composes
demand and supply, and then creating a weighted average. For
example, by comparing the overall demand risk of a given prod-
uct to a threshold value, managers can rate the risk above that
level as high and below it as low. As a result, the demand and sup-
ply risks for either the old or the new product can be either high
or low. For any product transition, there are 16 possible combina-
tions of risks, which can be represented in something we call a
transition grid. (See “A Sample Transition Grid: Demand and
Supply Risks of Two Products.”)
Generally, comparative rankings of demand and supply risks
indicate that risks for the new product have a stronger impact on
profitability than risks for the old product and that companies
have less ability to manage demand risks than supply risks.
Therefore, demand risks and new product risks tend to have
higher risk scores than supply risks and old product risks, re-
spectively. Based on comments from the functional groups,
transition team members can use these comparisons to gain in-
sight into key questions, including: Are we producing the right
products? Can we meet customer demand? And do customers
want the products we supply?
Positioning a particular product transition within the grid
enables transition teams to look beyond a single product and
evaluate the potential impact that products may have on each
other. Even when only one of the products is prone to supply or
demand risks, managers should consider potential demand can-
nibalization and spillover effects on the other product as well as
the potential for supply imbalances.
Developing a Transition Playbook Companies often resort to contin- gency strategies to rescue a product after it is launched. However,
their ability to rescue a product using contingency strategies is
limited.8 Factor analysis and the transition grid provide strategic
and tactical assessment tools for anticipating potential challenges
in launching new products. However, they do nothing to generate
Eight factors significantly contribute to demand and supply risk during product transitions.
Risks Factors Definition (Example)
D e
m a
n d
R is
k s
Environmental Indicators Demand due to macroeconomic and business forces/cycles
(overall business climate)
Competition Overall threat posed by competitive products
(market share, manufacturing capacity)
Product/Platform Pricing Product/platform price relative to alternative products
(bill-of-material cost, expected price changes)
Timing Timing relative to past, present and future alternative products
(time since last introduction, time until next introduction)
Marketing Indicators/Policies Positioning and measures of market response
(market size, number of potential product applications, budget size, breadth
and timing of advertising, promotions)
S u
p p
ly R
is k
s
Product Capability Product capability relative to alternative products
(performance, quality, longevity, reliability, compatibility with previous
generations, complementarity with other products)
External Alignment and Execution Acceptance and drive from supply chain partners
(partners’ ability to manufacture products using state-of-the-art technology
and standards, acceptance of the new product within the product platform)
Internal Execution Ability to supply the product in volume
(execution of internal design, designing products for manufacturability,
manufacturing (or testing) capacity and flexibility, distribution)
Product Drivers and Risk Factors
SLOANREVIEW.MIT.EDU/SMR
specific strategies or fallback alternatives when the original plans
don’t materialize. By assessing the state of a transition early on,
companies can gain an overall understanding of the risks impact-
ing the transition and factors requiring immediate attention,
allowing them to adopt prevention strategies.
Rather than having to react to problems in the heat of battle,
companies can use prevention strategies to help identify the le-
vers that may have the most direct impact on the outcomes they
are trying to achieve. Some levers can impact several high-risk
factors at once, but only in a longer time frame. As such, these
holistic levers target the product road maps rather than the im-
mediate transition. Others affect specific factors that hinder
supply or demand during the transition at hand. Managers con-
sidering prevention strategies need to consider cost as well as ease
of implementation, recognizing which levers are available and
which ones they control. For example, companies can have strong
influence over pricing, the timing of product introductions,
product capability and internal execution but only indirect con-
SPRING 2007 MIT SLOAN MANAGEMENT REVIEW 77
Rank
Old Product New Product
Comment Risk
CategoryDemand Risk
Supply Risk
Demand Risk
Supply Risk
1 Low Low Low Low Most desirable transition. 1
2 High Low Low Low Customers do not want old product (indifferent to line below).
1
3 Low High Low Low Limited availability of old product indifferent to line above).
1
4 High High Low Low Customers do not want old product; challenging to supply it.
2
5 Low Low Low High Challenging to supply new product. 2
6 Low Low High Low Customers do not want new product. 3
7 Low Low High High Customers do not want new product; challenging to supply it.
3
8 High Low Low High Challenging to supply new product; customers do not want old.
4
9 Low High Low High Challenging to supply either product. 4
10 High Low High Low Customers do not want either product. 5
11 Low High High Low Customers do not want new product; challenging to supply old.
5
12 High High Low High Customers want new product; challeng- ing to supply it.
5
13 Low High High High Customers want old product; challenging to supply old and new.
5
14 High High High Low Can only supply new product, but cus- tomers do not want it.
5
15 High Low High High Can only supply old product, but cus- tomers do not want it.
5
16 High High High High Customers do not want either product; challenging to supply them.
5
A Sample Transition Grid: Demand and Supply Risks of Two Products
The table below provides a snapshot assessment of a typical transition. When both products have high demand or supply risks,
the product interactions may further intensify the risks. For example, demand risk is high for both generations of products in
rows 10, 14, 15 and 16, suggesting that managers need to monitor inventories closely.
SLOANREVIEW.MIT.EDU/SMR
78 MIT SLOAN MANAGEMENT REVIEW SPRING 2007
P R O D U C T D E V E L O P M E N T
trol over what their competitors do. Managers need to be mindful
that prevention strategies can have unintended consequences;
once they signal a new strategy, competitors might follow suit.
Weighing these kinds of considerations in advance allows
managers to address potential weaknesses before they become
crippling. Although a well-designed strategy often takes several
factors into account, companies are frequently most vulnerable
to factors they have the least control over and rely too heavily on
the factors they can control most easily. For instance, a company
might have several different ways to mitigate the risk of a supply
problem caused by development or production issues. One op-
tion may be to increase prices, thereby reducing the likelihood
In transitioning from product X to product Y, Intel’s primary market objective was to recover market share lost by X. The transition
was built on four main factors. On the demand side, the product/platform pricing risk fell from high (for X) to medium (for Y) based
on lower component costs and price cuts that accompanied the launch of Y. The risk linked to marketing indicators also improved,
from medium to low, since the price-performance ratio made Y an attractive mainstream product. In addition, external alignment
improved from medium to low as customers, many of whom had resisted X, looked forward to using Y. On the supply side, risk asso-
ciated with internal execution rose (from low to medium) for two main reasons: Capacity for producing Y was limited, and the
higher-speed products in the Y family reduced factory output. (Since Y was larger than X, it required more factory runs to produce
the same number of units.) Overall, the factor assessment process highlighted the differences between the two products: There was
high demand risk for X, whereas for Y there was little demand risk but some new supply risk.
Based on this analysis, it should not have been surprising that Y would cannibalize sales of X. In fact, that is what happened: Intel
faced shortages of Y and excess inventory of X. An effective strategy for Intel would have been to set a higher price for Y rather than of-
fering it at a discount. As contingencies, Intel could have lowered the price of X in hopes of promoting sales and allocated more
manufacturing capacity to Y. Such actions would have rebalanced demand between the two products both in the short term and in the
long term. Although price discounting and a marketing campaign potentially might have helped X, using them on Y led to shortages.
Intel recouped its lost market share in the quarters following the launch of Y, so the transition achieved some success. However,
the lack of supply strained customer relationships, and by pushing factories to the limit and operating with insufficient inventory,
Intel’s operating costs rose during that period.
Factor Product X Score Product Y Score
Environmental Indicators
Demand and economy relatively slow;
no imminent improvement on horizon
3 Demand and economy relatively slow;
no imminent improvement on horizon
3
Competition Competing products are better aligned to mainstream market
3 Competitors’ sales strong relative
to historical levels but limited by
manufacturing capacity
2.75
Product/ Platform Pricing
Platform cost significantly higher than
prior generation
4 Reduction in overall platform cost and
marketing decision to cut prices
2.5
Timing Released less than one year after prior generation; Y known to be only a few
quarters away
3.5 Release closely follows X; Y will not be
replaced in the near term
3
Marketing Indicators
Positioned toward higher end of market
with higher price and performance
2.75 Price reduction brings product back to
mainstream market segments
1.5
Product Capability
Faster clock speed than prior generation,
but benchmarks show only modest
performance gains in many applications
3.5 Potential clock speed is high, but overall
speed gains are impaired by localized
bottlenecks
2.5
External Alignment and Execution
Strong resistance to adopting some new
technologies in the platform; higher
materials cost; platform architecture
will change with Y
3.5 New architecture and accompanying plat-
form materials cost reduction bring record
number of design wins; price cuts enable
greater performance at lower price points
2
Internal Execution/Risk
Supply positioned for moderately paced
ramp up
1 Decreased supply capability due to less
efficient production and lower yields
associated with road map acceleration
2
Mapping Intel’s Transition From X to Y
SLOANREVIEW.MIT.EDU/SMR
SPRING 2007 MIT SLOAN MANAGEMENT REVIEW 79
that the products customers order
are out of stock. This approach
could shift demand to the future,
but it may prompt customers to
buy competing products. In con-
sidering their options, companies
need to evaluate the costs. Rather
than increase prices, the company
may be better off outsourcing ca-
pacity to other producers. But that
is not always feasible in light of
concerns about proprietary infor-
mation and lead times. To preserve
the option of using outsourcing as
a contingency strategy when the
need arises, companies may need a
corresponding prevention strategy
to line up alternative resources
ahead of time. Once companies complete their
transition risk assessments, man-
agers can create playbooks
containing relevant transition sce-
narios, prevention strategies and
contingency strategies. A good
playbook identifies events or sce-
narios that lead to major risks,
assesses the impact these events
may have on new and current
products and lays out prevention
and contingency strategies for the
transition team. (See “A Sample
Transition Playbook.”)
Even well-planned and well-executed product transitions
often require strategy updates. By mapping out prevention strat-
egies, risks and contingency strategies in advance, a transition
playbook can minimize risks. It allows managers to monitor key
supply and demand risk indicators, so they can make strategy
revisions and invoke contingency strategies as needed.
Although companies place enormous emphasis on new prod-
uct introductions, products with many successful attributes still
experience difficulty when they interact in unexpected ways with
current products. Transition mapping provides a structured ap-
proach to collecting information and coordinating actions across
the organization. It pulls together the key differences in perspec-
tives from different functional groups, saving companies from
some of the second-guessing and manipulation that often occurs
when important information is revealed later. While our process
was developed at Intel and has been used successfully in transi-
tions there, it can be applied broadly to different settings. The
implementation details will change depending on the industry,
the company and the product, but the overall methodology will
stay essentially the same.
EVALUATING PRODUCT INTERACTIONS is central to the success of
product transitions. By anticipating risks, companies can seek
ways to align their products. Playbooks can help managers de-
velop robust prevention and contingency strategies to deal with
the supply and demand risks identified by the transition grid.
They can help managers see potential shifts in the business envi-
ronment before they occur, allowing managers to make timely
adjustments that are particularly critical for products with short
life cycles and long production delays.
REFERENCES
1. See, for example, G.S. Lynn and R.R. Reilly, “Blockbusters: The Five Keys to Developing Great New Products” (New York: HarperBusiness, 2002); E.E. Bobrow and D.W. Shafer, “Pioneering New Products: A
A transition playbook identifies relevant scenarios and maps their impact on old products
(OP) and new products (NP) to outline possible prevention and contingency strategies.
Scenarios should be developed in response to risks identified in the factor assessment
and the transition grid.
Events/ Scenarios
Demand for NP higher than expected
Supply problems for NP
Demand for NP lower than expected
Impact on OP • Demand cannibalization
• Demand spillover • Demand spillover
Expected Outcome
• Supply shortage for NP
• Excess supply for OP
• Excess demand and hence possible supply shortage for OP
• Supply shortage for NP
• Supply shortage for OP
• Excess supply for NP
Prevention Strategies
• Supply portfolio
• Product pricing
• Internal execution
• Product design
• Internal execution (process yield)
• Product pricing
• Product characteristics
• External alignment and execution
Contingency Strategies
• Gradually phase out OP
• Outsource OP
• Decrease OP price
• Increase NP price
• Allocate more capacity to NP
• Gradually phase out OP
• Outsource OP or NP
• Decrease OP price
• Increase NP price
• Allocate more capacity to NP
• Gradually phase out OP
• Increase OP price
• Increase production of OP
• Accelerate road map
• Decrease NP price (rebates/promos)
• Heavy marketing of NP
• Work on external alignment and execution
A Sample Transition Playbook
SLOANREVIEW.MIT.EDU/SMR
80 MIT SLOAN MANAGEMENT REVIEW SPRING 2007
P R O D U C T D E V E L O P M E N T
Market Survival Guide” (New York: Irwin, 1987); and R.M. McMath and T. Forbes, “What Were They Thinking?” (New York: Crown Business, 1998).
2. See R.G. Cooper, “How New Product Strategies Impact On Perfor- mance,” Journal of Product Innovation Management 1, no. 1 (January 1984): 5-18.
3. See N.P. Trepanning, “Understanding Fire Fighting in New Product Development,” Journal of Product Innovation Management 18, no. 5 (September 2001): 285-300. See also C. Billington, H.L. Lee and C.S. Tang, “Successful Strategies For Product Rollovers,” Sloan Manage- ment Review 39, no. 3 (spring 1998): 23-30.
4. M.L Fisher, J.H. Hammond, W.H. Obermeyer and A. Raman, “Making Supply Meet Demand in an Uncertain World,” Harvard Business Review 72, no. 3 (May-June 1994): 83-93.
5. The Cisco Systems transition example is based on a 2001 white paper, “Strategizing for Success: Cisco Systems Overcomes a Product Transition Dilemma,” ZDNet UK, London, February 20, 2001, http:// whitepapers.zdnet.co.uk/0,39025945,60045032p-39000468q,00.htm.
6. Billington, Lee and Tang corroborate this finding and present a high- level process for managing new product transitions. They recommend dual-product rollovers (that is, introducing the new product before the end of life of the old one) for transitions with high demand and supply risks and solo-product rolls (the new product introduction concurring with the old product’s end of life) for low demand and supply risk envi- ronments. Oftentimes, however, the industry dictates the choice of solo versus dual roll. Dual-product roll is standard in the high-tech industry where product platforms are common, even for products with low de- mand and supply risks. Further, the process proposed by Billington, Lee and Tang does not provide much insight into tactical and operational de- cisions regarding pricing, capability, marketing budgets or product deployment, all of which can have a substantial impact in the success of a transition.
7. We tested the transition mapping process, particularly the factor analy- sis process, using a large-scale product transition at Intel. For this transition, Intel’s central business planning group felt that sales of the new product would come in fairly strong. Defining x as the realistic “whisper” estimate among forecasters, a figure of roughly 1.2x was cir- culated to drive supply. Meanwhile, estimates aggregated from the geographical sales organizations suggested lower sales, ranging over time from 0.65x to 0.9x. Based on the results of the factor analysis and historical sales in the same product family, the transition mapping team predicted that sales were unlikely to exceed 0.93x and would likely be lower. The drivers for this recommendation included solid evidence that component cost would reduce demand early in the transition and that the complexity of the new platform posed significant supply risk. Sales forecasts were revised downward from 1.2x prior to the launch to about 0.9x six weeks after launch and then dropped even lower. By the begin- ning of the second quarter after launch, the forecast, informed by the transition mapping process, was trimmed to 0.79x for the first two quar- ters’ total sales. This helped avoid overbuilding supply for the new product while maintaining sufficient stocks of the old product. The pro- cess also supported decisions, such as increasing the marketing budget, that helped drive product sales early in the life cycle.
8. For example, refer to H.L. Lee and C. Billington, “Managing Supply Chain Inventory: Pitfalls and Opportunities,” Sloan Management Review 33, no. 3 (spring 1992): 65-73; or G.A. Zsidisin, A. Panelli and R. Upton, “Purchasing Organization Involvement in Risk Assessments, Contin- gency Plans, and Risk Management: An Exploratory Study,” Supply Chain Management 5, no. 4 (2000): 187-198.
SLOANREVIEW.MIT.EDU/SMR
Reprint 48311. Copyright © Massachusetts Institute of Technology, 2007. All rights reserved.
PDFs ■ Reprints ■ Permission to Copy ■ Back Issues
Electronic copies of MIT Sloan Management Review articles as well as traditional reprints and back issues can be purchased on our Web site: www.sloanreview.mit.edu or you may order through our Business Service Center (9 a.m.-5 p.m. ET) at the phone numbers listed below.
To reproduce or transmit one or more MIT Sloan Management Review articles by electronic or mechanical means (including photocopying or archiving in any information storage or retrieval system) requires written permission. To request permission, use our Web site (www.sloanreview.mit.edu), call or e-mail:
Toll-free in U.S. and Canada: 877-727-7170 International: 617-253-7170 Fax: 617-258-9739 e-mail: [email protected]
MIT Sloan Management Review 77 Massachusetts Ave., E60-100 Cambridge, MA 02139-4307 e-mail: [email protected]
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.
