1 8-1 McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

2 8-2 CONCEPT/PROJECT EVALUATION P ART T HREE

3 8-3 Concept/Project Evaluation Figure III.1

4 8-4 CHAPTER EIGHT THE CONCEPT EVALUATION SYSTEM

5 8-5 The Evaluation System Figure 8.1

6 8-6 Cumulative Expenditures Curve % of expenditures TimeLaunch Many high-tech products Many consumer products Figure 8.2

7 8-7 Risk/Payoff Matrix at Each Evaluation Cells AA and BB are “correct” decisions. Cells BA and AB are errors, but they have different cost and probability dimensions. Figure 8.3

8 8-8 Planning the Evaluation System: Four Concepts Rolling Evaluation (tentative nature of new products process) Potholes People Surrogates

9 8-9 Rolling Evaluation (or, "Everything is Tentative") Project is assessed continuously (rather than a single Go/No Go decision) Financial analysis also needs to be built up continuously Not enough data early on for complex financial analyses Run risk of killing off too many good ideas early Marketing begins early in the process Key: new product participants avoid "good/bad" mindsets, avoid premature closure

Potholes Know what the really damaging problems are for your firm and focus on them when evaluating concepts. Example: Campbell Soup focuses on: 1. Manufacturing Cost 2. Taste

People Proposal may be hard to stop once there is buy-in on the concept. Need tough demanding hurdles, especially late in new products process. Personal risk associated with new product development. Need system that protects developers and offers reassurance (if warranted).

Surrogates Surrogate questions give clues to the real answer. Real Question Surrogate Question Will they prefer it? Did they keep the prototype product we gave them after the concept test? Will cost be competitive? Does it match our manufacturing skills? Will competition leap in? What did they do last time? Will it sell? Did it do well in field testing?

An A-T-A-R Model of Innovation Diffusion Profits = Units Sold x Profit Per Unit Units Sold = Number of buying units x % aware of product x % who would try product if they can get it x % to whom product is available x % of triers who become repeat purchasers x Number of units repeaters buy in a year Profit Per Unit = Revenue per unit - cost per unit Figure 8.5

The A-T-A-R Model: Definitions Buying Unit: Purchase point (person or department/buying center). Aware: Has heard about the new product with some characteristic that differentiates it. Available: If the buyer wants to try the product, the effort to find it will be successful (expressed as a percentage). Trial: Usually means a purchase or consumption of the product. Repeat: The product is bought at least once more, or (for durables) recommended to others. Figure 8.6

A-T-A-R Model Application 10 million Number of owners of Walkman-like CD players x 40% Percent awareness after one year x 20% Percent of "aware" owners who will try product x 70% Percent availability at electronics retailers x 20% Percent of triers who will buy a second unit x $50 Price per unit minus trade margins and discounts ($100) minus unit cost at the intended volume ($50) = $5,600,000 Profits

Points to Note About A-T-A-R Model 1. Each factor is subject to estimation. Estimates improve with each step in the development phase. 2. Inadequate profit forecast can be improved by changing factors. If profit forecast is inadequate, look at each factor and see which can be improved, and at what cost.

Getting the Estimates for A-T-A-R Model XX: Best source for that item. X: Some knowledge gained. Figure 8.7