The dynamics of markets, technology, and competition have brought changes to virtually every market sector and have made new product development one of the most powerful business activities. The monumental changes that constantly impact commerce have forced companies to innovate with increasing speed, efficiency, and quality. In turn, this has made new product development one of the most complex and difficult business functions. However, firms must innovate in order to survive. The power of innovation is revealed in numerous studies, which show that companies leading their industries attribute about half of their revenues to products developed in the most recent five years. By comparison, companies at the bottom of their industries achieve approximately one-tenth of their sales from new products.
A firm's new product development efforts are shaped by its size, as well as the nature of the industry in which it operates. New products may be defined as any product, service, or idea not currently made or marketed by a company, or which the consumer may perceive as new. Many types of new products exist, from never-seen-before products like Apple's personal communicator, to repositioned standards like Sears' shift to Sears Brand Central. Various studies suggest that between 50 and 80 percent of new products fail—the greater the rate of new product development, the higher the failure rate. New Product News predicts that more than 36,000 new products will be brought to market in 2005. Although there are numerous reasons why new products fail, faulty management and planning are at the core of most failures. Therefore, managing the new product development process is a key to a healthy organization.
The history of product innovation can be divided into three stages, beginning with the product-oriented or technology-pushed stage. In the post-World War II era Americans were coming off wartime shortages and were in the mood to buy the many goods that manufacturers produced. Engineers, who were more product-oriented than consumer oriented, designed new products that might or might not find places in consumers' hearts and minds. This was a product-oriented process in which the market was considered the receptacle for products that emerged from the firm's research and development efforts.
However, competition escalated and consumers became more skeptical and selective about the types of products they purchased. Marketers found it increasingly difficult to rely on persuasive sales techniques to move products. Retailers grew restless when these products did not move off shelves as quickly as planned. Companies had to know more about their target markets. What were the wants and needs of the people who were buying their products? How could their firm satisfy these wants and needs?
The second stage was marked by the emergence of the market as the driver of innovation. Instead of being technology-driven, new product development evolved into a market-led process in which new products emerged from well-researched customer needs. The new product development process was placed in the hands of marketers who knew consumers' wants and needs. Customer demand "pulled" the product through the development process.
Modern new product development is a blending of these two orientations into a "dual-drive" approach to innovation. Companies recognize that innovation is a complex process that requires sound investment in research and development, as well as significant marketing expertise that focuses on satisfying consumers' wants and needs.
The rapid pace of change that engulfed businesses toward the end of the twentieth century put an even greater burden on companies to build adaptive capabilities into their organizations. Global competition means there are more competitors capable of world-class performance. This has made competition more intense, rigorous, and aggressive than ever before. Fragmenting and more sophisticated markets mean that consumers demand more from products in terms of quality, differentiation, and "meaningfulness."
New technologies have had two important outcomes in regards to innovation. First, new technologies are responsible for this new market sophistication in which consumers have more choices and are thus more demanding. Secondly, new technology has increased manufacturers' capabilities for rapid response to shifting market needs.
Finally, product life cycles have become more compressed as the skills required for developing new products increase in complexity. For example, consider the development of a new type of computer software. The expertise needed to develop the software from conception to commercialization might take years. The product's life cycle in such a competitive and turbulent environment might last only a few months. Therefore, companies have embraced the view that new products are transient, whereas the skills and expertise needed to develop these products are a much more persistent requirement for success. Instead of the mono-approach, in which technology or markets drive innovation, new product development now requires a convergence of technology, marketing, product design, engineering, and manufacturing capabilities. Speed, efficiency, and quality in product development are the challenges that new product development faces in today's intense competitive environment.
There are five categories of new products. New-to-the-world products or services are new inventions like in-line skates and health maintenance organizations. New category entries, such as sport utility vehicles, are products or services that are new to a firm. Additions to product lines add products or services to a firm's current markets. For example, when a powder laundry detergent offers a liquid version it is considered a line extension. Product improvements are another type of new product and are common to every product category. Repositionings target products to new markets or for new uses.
Firms can obtain new products internally or externally. External sourcing means the company acquires the product or service, or obtains the rights to market the product or service, from another organization. Internal development means the firm develops the new product itself. This is riskier than external development because the company bears all of the costs associated with new product development and implementation. Collaborations, which include strategic partnerships, strategic alliances, joint ventures, and licensing agreements, occur when two or more firms work together on developing new products.
Historically, the new product development process has been conceived in discreet terms with a beginning and an end. Different companies and different industries may alter this seven-step process for different products, or the steps themselves may become blurred as companies become engaged in several stages at the same time.
The process begins with idea generation. For every successful new product, many new product ideas are conceived and discarded. Therefore, companies usually generate a large number of ideas from which successful new products emerge.
Idea screening, the second step, considers all new product ideas in the idea pool and eliminates ones that are perceived to be the least likely to succeed. Not only should the firm's manufacturing, technology, and marketing capabilities be evaluated at this stage, but also how the new idea fits with the company's vision and strategic objectives.
The third stage, concept development and testing, requires formal evaluations of the product concept by
The business analysis stage is next. At this point the new product idea is analyzed for its marketability and costs. After passing the first three stages an idea may be discarded once marketing and manufacturing costs are analyzed, due to limited potential for profitability or commercial success. Throughout these four stages, the new idea has remained on paper with a relatively small investment required.
The fifth stage, prototype development, is the first stage where new product costs begin to escalate. Because of this, many companies have placed greater emphasis on the first four stages and reduced the proportion of new products that reach the prototype stage from about 50 percent to around 20 percent. At this stage the concept is converted into an actual product. A customer value perspective during this phase means the product is designed to satisfy the needs expressed by consumers. Firms may use quality function deployment (QFD) as they develop the prototype. QFD links specific consumer requirements such as versatility, durability, and low maintenance with specific product characteristics (for example, adjustable shelves, a door-mounted ice and water dispenser, and touch controls for a refrigerator). The customer value perspective requires the new product to satisfy customer needs and meet desired quality levels at specified production costs.
Test marketing tests the prototype and marketing strategy in simulated or actual market situations. Because of the expense and risks associated with actual test markets, marketers use them with caution. Products that test poorly are pulled back and reconceptualized or discarded.
Commercialization, the final stage, is when the product is introduced full scale. The level of investment and risk are highest at this stage. Consumer adoption rates, timing decisions for introduction, and coordinating efforts with production, distribution, and marketing should be considered.
The seven-step process assumes a definite beginning and end. However, studies suggest that what goes on before and after new products are introduced is as important as the process itself. Organizational structure, leadership, and team building influence the speed and efficiency with which new products are introduced. Structure influences efficiency, autonomy, and coordination. New product innovation requires structure that optimizes direction and guidance. Structure that facilitates internal information exchange, decision making, and materials flow is essential. A "fast-cycle" structure allows more time for planning and implementing activities to gain competitive advantage. This type of structure also cuts costs because production materials and information collect less overhead and do not accumulate as work-in-process inventory. Autonomy refers to the amount of decision making allowed at lower levels of management. The coordination of the engineering, product design, manufacturing, and marketing functions in the new product development process is vital.
Leadership influences strategy, culture, and the firm's overall ability to undertake new product development. Top management can demonstrate involvement in the development process by providing career advancement for entrepreneurial skills and encouraging broad employee participation. Clarity and vision are crucial to ensuring that new product ideas are good strategic fits for the company. The degree to which leadership allows trial and error and promotes individual initiative positively influences the development of new products. This acceptance of risk and support for an entrepreneurial spirit within the organization are crucial in order for innovation to flourish. New products emerge in a variety of ways and their development does not always proceed in rational and consistent manners. It is necessary for leadership to view the process as iterative and dynamic, and to foster adaptation and flexibility. Management flexibility and responsiveness to change also are needed. This type of leadership is particularly important to the project manager who must coordinate and integrate the various parts of the new product development process so that a coherent system emerges that produces a product with compelling value. Initiative encourages creativity and problem-solving skills.
Teams provide mechanisms for breaking down functional biases created by a strict adherence to structure. The amount of interdepartmental conflict in the organization, the social cohesion among team members, and the frequency and directionality of interdepartmental communication influence team building. Through shared understanding of the objectives and purposes of the project, as well as the tasks required in the development process, teams can shape the project and influence how work gets done in the organization.
New products often fail because of unanticipated market shifts that result in missed opportunities and misused channels of distribution. Failures also occur because companies miscalculate their own technological strengths or the product's technological challenges. These potential problems often crop up in the latter stages and result in delays, redesigns, or poor quality products.
Companies are constantly seeking ways to avoid these pitfalls. One solution is new product development maps that chart the evolution of a company's product lines. This historical perspective helps the firm to identify and analyze functional capabilities in a systematic, repetitive fashion that allows for the development of linkages and the identification of resources for new endeavors. These maps can direct the firm to new market opportunities and point out technological challenges.
Aggregate plans for projects offer another solution. Rather than viewing each new product development project individually, they consider all of the new product development projects under consideration by the firm. This is particularly important in firms with hundreds of new product development projects going on at the same time. Projects are categorized according to resources required and contribution to the firm's bottom line. Aggregate project plans enable management to improve the management of new product development by providing greater control over resource allocation and utilization. These plans help to point out where capabilities need to be improved, how sequencing projects may help, and how projects fit with the firm's development strategies.
Return maps graphically represent the contributions of all team members to product success in terms of time and money. Their focus is on the point at which product sales generate sufficient profit so that the firm's initial investment in development is returned. Return maps show team members the time and money needed to complete their tasks in the development process so that they may estimate and re-estimate their investment in the process. In doing this return maps illustrate the impact of their actions on the project's overall success.
Another way to improve the speed and efficiency with which new products are introduced is to involve purchasing in the development process. When purchasing expertise is introduced into the development project team, quality may increase, time to market entry may decrease, investment in inventory may diminish, and costs may significantly decrease.
Technology continues to change and create new opportunities and threats. Customer requirements and expectations continue to shift and create new demands. Old channels of distribution are becoming obsolete and new channels are opening new opportunities. Some competitors are falling by the wayside while others are surging to the forefront by making new and unexpected moves to gain advantage. The very structure of industry is changing. A key to success in this tumultuous environment will continue to be the ability to sustain a competitive advantage through innovation. However, speed, efficiency, and quality in product development will be paramount. Building capabilities in all aspects of product creation and implementation, overcoming uncertainty and facilitating decision-making, ensuring these innovations are strategically linked to the firm's vision, and doing this on a continuous basis is the challenge of new product development in the next century.
Charles M. Mayo
Revised by Deborah Hausler
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