Marketing and New Product Development - Kotler and Keller's Book Chapter Summary

Marketing Management Revision Article Series





The questions addressed in the chapter

1. What challenges does a company face in developing new products and services?
2. What organizational structures and processes are used to manage new product development?
3. What are the main stages in developing new products and services?
4. What is the best way to manage the new-product development process?
5. What factors affect the rate of diffusion and consumer adoption of newly launched products and services?

Marketing management plays a key role in the new-product-development process along with the research and development department and other related departments.

New Products

The consulting firm Booz, Allen & Hamilton has identified six categories of new products in terms of their newness to the company and the marketplace.

New-to-the-world products (Product new to the company and the market)

New product lines: New products that allow a company to enter an established market for the first time (the product is new to the company not the market)

Additions to existing product lines: New products that supplement a company’s established products lines (package sizes, flavors, and so on)

Improvements and revisions of existing products: New products that provide improve performance or greater perceived value and replace existing product (Improvements in features and benefits of a product)

Repositionings: Existing products that are targeted to new markets or market segments (to be called a new product there must be some changes in the existing product to suit the new segments targeted).

Cost reductions: New products that provide similar performance at lower cost to the company.

Kotler says only 10% of all new products are truly innovative and new to the world.

New product development in various categories mentioned above is very important for any organization because existing products are vulnerable to changing consumer needs and tastes, new technologies, shortened product life cycles, and increased domestic and foreign competition.  Organizations have to be on the lookout for new products.

Factors That Contribute to Success in New Product Marketing

Madique and Zirger found the following factors:

1. Deep understanding of the customer needs.

2. High performance to cost ratio of the product 

3. Being the early entrant into the market

4. Higher contribution margin

5. Larger amount of marketing expenditure

6. Strong top management support

7. Greater cross-functional teamwork among R&D, Engineering, Manufacturing, Purchasing, Marketing and Finance from the beginning

Effective Organizational Arrangements for New Product Development

An effective new product development organization starts with top management. The amount of money spent on R & D is an important top management decision related to new product development. Companies give the responsibility for new product development to product mangers, or new-product managers, or new-product committee, or new-product department, or new-product venture teams. In general product managers may not be able to devote adequate time to new products as they have to take care of existing products' marketing and selling issues.

Managing the New Product Development Process

Eight stages are involved in the new product development process.

1. Idea generation

2. Idea screening

3. Concept development and testing

4. Marketing strategy development

5. Business analysis

6. Product development

7. Market testing

8. Commercialization

Idea Generation

A number of creative idea generating techniques can help individuals and groups generate ideas. Some of them are:

• Attribute listing
• Forced relationships
• Morphological analysis
• Reverse assumption analysis
• New contexts
• Mind mapping
• Need/Problem identification
• Brain storming
• Synectics

Idea Screening

The purpose of screening is to drop poor ideas as early as possible and allow only promising ideas for further stage in the new product development process.

There is likelihood of two opposite types of errors occurring in this process. One, the drop error, results in dismissing a good idea. The other, the go-error, results in moving a poor idea forward.

Poor ideas result in product failures. Three types of product-marketing failures can be categorized: Absolute product failure loses money even on variable cost. Partial product failure recovers variable cost and some fixed cost. Relative product failure yields a profit, means it recovers variable cost and fixed cost, but the profitability is less than the company's target rate of return.

Concept Development and Testing

A product concept is an elaborated version of the product idea and it is expressed in meaningful consumer terms so that consumer can visualize the product.

Example of a product concept based on the idea of powder to add to milk to increase the nutritional value and taste.

Product concept: Product is a powdered mixture added to milk to make an instant breakfast that gives the person all the day's needed nutrition along with good taste and high convenience. The product comes in three flavors (chocolate, vanilla, and strawberry) and individual packets, six to box, at $2.49 a box.

Concept testing involves an appropriate group of target consumers giving their reactions to the concept.  The questions are related to communicability and believability, need level and satisfaction, gap level with respect to other products claiming to satisfy the same need, perceived value, purchase intention, and purchasing frequency & occasion. Who are likely to buy the product has also to be determined during concept testing phase.

New Product - Will it Sell?

Conjoint Analysis

Consumer preferences for alternative product concepts are identified using conjoint analysis. Green and Wind have illustrated use of this approach in connection with developing a new spot-removing, carpet cleaning agent for home use.

New Product Marketing Strategy Development

After the concept is finalized, marketing strategy needs to crystallized. At this stage the marketing strategy is expressed in three parts.

The first part: It describes the target market's size, structure, and behavior. Product positioning is defined. The sales size, market share and profit goals are expressed.

The second part: The price and distribution strategy and the required marketing budget  for the first year are specified.

The third part: It describes marketing-mix strategy over time and evolution of sales and profit.

Business Analysis

At this stage, marketing department has finalized its market understanding and converted it into sales revenues and related marketing costs. The next stage is analysis of operating costs and profit analysis.

Product Development

If the business analysis clears the product, actual product development work is given to the research and development department. Up to now the product has existed only as a word description, a drawing, or at best a rapid prototype. In the next step a working prototype has to be prepared that incorporates all requirements of customers that were expressed as a reaction to product concept. When the prototypes are ready, they must be put through rigorous functional tests and customer tests. Alpha testing is testing the product within the firm. Beta testing is done with customers.

Test Marketing or Market Testing

Based on the consumer testing, if the management is satisfied with functional, psychological performance of the product, and the business analysis shows the required profit, it is time to dress up the product with a brand name and packaging and do market test with actual package offered to market. Production for market testing is done in pilot plants or as contract manufacture.

High investment/high-risk products, where the chance of failure is high must be market tested. The cost of the market tests will be an insignificant percentage of the total project cost (both production facilities and full marketing costs). Various types of market testing are:

Sales-wave research

Simulated test marketing

Controlled test marketing

Test Markets

 Commercialization

Based on marketing, if the company decides  to go for the manufacture and sale of the product, capacity decisions are to be made. The timing of the launch, the geography of the initial launch, the niche market within the target market and how to launch the product become important decisions.

In introduction of new products, substantial marketing cost is involved. To introduce a major new customer packaged good into the national market, $25 million to $100 million is needed to advertise, promote, and communicate the availability of new product in the first year. In the case of new food products, marketing expenditures are typically of the order of 57% of sales during the first year.

Consumer Adoption Process

Marketers need to understand the new product adoption process to build an effective strategy for developing market for the product. Adoption is an individual’s decision to become a regular user of a product. The adoption process is followed by loyalty process.

Stages in the adoption process

Rogers defines the innovation diffusion process as “the spread of a new idea from its source of invention or creation to its ultimate users or adopters.”

Adopters go through the following five stages:

Awareness

Interest

Evaluation

Trial

Adoption

New product marketer has to aim his effort at facilitating the movement of consumer through these stages. 

Factors influencing the Adoption Process

Marketers have identified the following characteristics of adoption process:
Differences in individual readiness to try new products,
The effect of personal influence,
Differing rates of adoption based on the characteristics of the innovation
Differences in organization

Differences in individual readiness to try new products,

Certain persons have innovativenss. It is defined as "the degree to which an individual is relatively earlier in adopting new ideas than the other members of his social system." In each product area, there are innovators and early adopters.

Kotler and Keller gave an idea of relative percentages of people in various adoption categories based on Everett Rogers book.

Innovators  2.5%

Early adopters  13.5%

Early majority  34%

Late majority 34%

Laggards  16%

Certain people have influence on others adopting an innovation. If such people promote a new product, faster adoption will take place.

Characteristics of  the Innovation

Relative advantage of the new product compared to existing products

Compatibility

Complexity

Divisibility

Communicability

Cost

Risk and uncertainty

Scientific credibility

Social approval

The new product marketers has to research and find out the role of all these factors in increasing the adoption of the product.

Organizations' Readiness to Adopt Innovations

Similar to individuals, certain organizations are more ready to try the new product.

References

 

Philip Kotler and Kevin Keller, Marketing Management, 13th Edition
Philip Kotler, Marketing Management, 9th Edition (Main text for revision and article)

Marketing Management Online Text Book by Tanner and Raymond - Principles of Marketing

Green, Paul and Yoram and Wind, "New Ways to Measure Consumers' Judgments," Harvard Business Review, July-August 1975, 107-17.

Modesto A. Maidique and Billie JO Zirger, " A Study of Success and Failure in Product Innovation: the Case of the U.S. Electronics Industry," IEEE Transactions on Engineering Management, November 1984, pp. 192-203

See Bibliography also

Bibliography

Determinants of New Industrial Product Performance: A Strategic Reexamination of the Empirical Literature by GARY L. LILIEN AND EUNSANG, 1989

http://www.garylilien.info/publications/47%20-%20Determinants%20of%20new%20industrial....pdf

New Product Successes in Japanese Consumer Goods Market,

Hotaka Katahira, Makoto Mizuno, and Yoram Wind, 1994, Wharton School Working Paper

http://marketing.wharton.upenn.edu/documents/research/9402_New_Product_Success_in_the.pdf

New Product Diffusion Models in Marketing: An Assessment of Two Approaches by Malcolm Wright and Don Charlett, Marketing Bulletin, 1995

http://marketing-bulletin.massey.ac.nz/V6/MB_V6_A4_Wright.pdf

______________________________________________________________________________
Migration from Knol
All management knols are being collected in http://nraomtr.blogspot.com/ .





Marketing articles are available under the label http://nraomtr.blogspot.com/search/label/Marketing%20Management
Article on differentiating and positioning http://nraomtr.blogspot.com/2011/11/marketing-strategy-differentiating-and.html

Planned Revision schedule for marketing chapters is in February and March

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Article Originally Posted by me in
http://knol.google.com/k/marketing-and-new-product-development



Updated 30 Jan 2015, 2 Dec 2011