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New Product Development. Risky Business 95% of new businesses fail in the first 5 years Failure rates for new consumer packaged goods: 1961 45.6% 1971.

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Presentation on theme: "New Product Development. Risky Business 95% of new businesses fail in the first 5 years Failure rates for new consumer packaged goods: 1961 45.6% 1971."— Presentation transcript:

1 New Product Development

2 Risky Business 95% of new businesses fail in the first 5 years Failure rates for new consumer packaged goods: 1961 45.6% 1971 53.4% 1981 64.5% 1991 80.0%

3 Why Introduce New Products? Large Firms If you do not attack your own brands someone else will (Barco) Approximately 30% of corporate profits come from new products (5 years old or less) Innovation by large firms tends to be more incremental despite: –additional resources –greater risk of cannibalization –lower risk aversion

4 Why Introduce New Products? Start-Ups Not aware of the risks Never hear about the failures Over-estimate own abilities Positive expected return despite the risks Large upside Can manage downside (jumping into a cold pool)

5 Test Before You Leap

6 Stages in the Process 1.Idea generation 2.Screening 3.Concept testing 4.Product development 5.Market testing 6.Launch Business plan

7 Idea Generation: Examples Channel suggestions: aspirin prevents heart attacks Foreign markets : Muesli breakfast cereal Consumers: Litebeer Basic research: nylon Competitors: diet colas Employees: baking soda is a deodorizer Existing products: personal computers

8 Idea Screening Conservatively screen impractical, infeasible or unmarketable ideas Set Criteria: product can be introduced within 5 years market potential of at least $50 million market has at least a 15% growth rate product will yield at least 30% return on sales product will yield at least 40% return on investment product will achieve technical or market leadership Allow trade-offs between criteria Separate tasks of sponsoring and evaluating the idea: start ups need a mentor banks are not a good screen (SBA distortion)

9 Concept Testing Product Concept: target market needs Powder to add to milk to increase its nutritional value and taste An instant breakfast drink for adults who want a quick nutritious breakfast with little preparation A tasty snack drink for children as a midday refreshment A health supplement for older adults to drink before retiring

10 Concept Testing A powdered product that is added to milk to make an instant breakfast providing all of the required nutrition in a convenient, tasty drink. The product would be offered in chocolate, vanilla and strawberry flavors and would be packaged individually and sold in packs of 6 for 79cents. 1. Does this product satisfy a need for you? 2. Do other products currently satisfy this need? 3. Is the price reasonable in relation to value? 4. Would you purchase this product? 5. How frequently would you use this product?

11 Concept Testing Begin informally (CD exchange service) If advertising is important, advertise before the product is available Do not ignore the results: just using the wrong copy

12 Business Plan 1.Strategic plan 2.Tactics 3.Financial predictions 4.Timetable 5.Hurdles

13 Business Plan: Financial Predictions Estimate costs: additive Estimate demand: multiplicative do sensitivity analysis Estimating demand is even harder when: –customers have multiple needs –customers needs vary (segments) –needs are measured on non-monetary scales –the product is very new/different –the benefits are hard to evaluate (need to predict credibility)

14 Product Development Extensive topic of ongoing research Examples: 1.Involve suppliers: –increase surplus (coordination) –share surplus (horizontal competition) 2.Resolve language problems: –House of Quality

15 Market Testing Generally optimistic because attention is focussed Consumer Products: –Simulated Test –Controlled Test –Test Market Industrial products –Alpha Test –Beta Test –Test Market Under-test: perceived risk of competitive entry

16 Launch Few firms use a national or global launch Phased roll-out is an extension of market testing Which markets?

17 Example Large industrial equipment manufacturer: EngTech Idea Generation: Bain & Co. Idea Screening: Phase 1 research Concept Testing: Phase 2 research Product Development: go/no go

18 Phase 1 Research Screen out training services that customers do not need Process: telephone interviews with 20 customers –do you need? –what do you currently do? –how much do you spend? –is EngTech appropriate?

19 Willingness to Pay

20 Number of Customers Factors: Willingness to Pay Number of Customers Cost of Delivery

21 Overall Attractiveness of Training Options

22 Phase 2 Research Objectives: –identify whether to proceed with Product Development –identify customer response to different product features Process: –e-mail interview with 20 customers –asked to choose between different product alternatives –varied delivery format, price and length of consulting services –focussed on concepts that survived the Phase 1 research

23 Phase 2 Results Many prefer these alternatives over their current solution. Strongly prefer on-site over interactive Price insensitive More depth is preferable to less depth Wide variance in number of operators from each plant who would be sent for training.


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