Chapter 1 New Product Introduction

Chapter 1 New Product Introduction
Certificate in Manufacturing Operations Management

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Contents
Chapter - 1 New Product Introduction ............................................................................................................... 4
1.1 Introduct ion ......................................................................................................................................... 4
1.2 Learning Objectives ............................................................................................................................. 4
1.3 Definit ions ........................................................................................................................................... 5
1.4 New Product Introduction ................................................................................................................... 5
1.5 New Product Introduct ion Process Overview ....................................................................................... 6
1.6 Measuring the Effectiveness of New Product Introduction process ..................................................... 9
1.7 New Product Pricing Process ............................................................................................................. 10
1.8 Reasons for New Product Failure: ...................................................................................................... 13
Summary ......................................................................................................................................................... 17


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Chapter - 1 New Product Introduction

1.1 Introduction
Introduct ion of a new product is an important source of revenue generation for a number
of organizat ions. A research conducted by Aberdeen Group (is a provider of fact-based
business intelligence research) indicated that 37% of a company's revenue is generated by a
new product and 43% of the companies are enjoying more than 10% profit margins on the
new product.
New Product Introduct ion (NPI) process includes act ivit ies that organizat ions undertake to
understand the requirements of the customers / markets, articulate these requirements into
definit ive metrics, and design and ensure that the supply chain process is capable of
delivering the developed product to the market. Timely introduct ion of new products and
sustenance of exist ing products are the key aspects of every manufacturer's product
development funct ion.
1.2 Learning Objectives

After completing this chapter, you will be able to understand:
Definit ion of New Product Introduct ion (NPI)
New Product Introduction and its process
Importance of measuring the effectiveness of New Product
Introduct ion process.
New Product Pricing (NPP) process.
Reasons of New Product Failure.(NPF)


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1.3 Definitions
New Product Introduction (NPI) refers to the complete business process of introducing
new products to market. It spans the entire product life-cycle from initial identificat ion of
market/technology opportunity, concept ion, design and development through to
production, market launch, support, enhancement and ret irement. As such, NPI is one of
the forms of innovat ion, namely product innovation.
Source: http://www.ifm.eng.cam.ac.uk/ctm/npi/
Product Portfol io Management (PPM): A business process to manage the mix of products
and ideas the company is considering bringing to market or has already brought to market.
The object ive is to determine the opt imal mix and sequencing of proposed products to best
achieve organizat ions goals while honoring constraints imposed by management or
external real-world factors.
Source: product portfolio management at Aberdeen group by michelle bourcher and nuris ismail
1.4 New Product Introduction
NPI is widely recognized as an important source of competitive advantage because it
enables companies to consistently bring new products to market on time with opt imal use
of resources. The product should meet all the market specifications such as quality, variety,
speed of response and customization within budget. These specificat ions are identified by
conduct ing Market Research.
Market Research is a key component in introducing a new product as it provides critical
information such as market wants, needs, product features, quality, pricing, variety, speed
of response, customization, distribut ion channel and promot ional strategies. This
information is critical while deciding on new products. Usually, two out of five new
products launched in the market fail due to the negligence of companies either for not
doing proper research before introducing or for not solving the issues which the researchers
have identified. For example, researchers have ident ified that promot ional and
distribut ion channels are not performing well but the suggestion was not considered by the
higher authority of the company, which ult imately led to the product failure in the market.

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1.5 New Product Introduction Process Overview
NPI process has different terms such as New Product Development (NPD), Innovat ion
process or Product Creat ion process. The accurate meanings of the term vary from
company to company depending on the degree of integrat ion across different
departments.
NPI process is categorized into following three funct ional divisions:
Market ing
Research and Development
Manufacturing.
Traditionally, NPI was implemented either with little communication among these
functional divisions or without any communicat ion. At present, NPI process is integrated
with both funct ional divisions and external suppliers or partners to improve
communication.

New Product Development Process:
New Product Development (NPD) process may vary from industry to industry and from
company to company. Some companies may not follow deliberate step-by-step approach
that is useful in showing the input informat ion and decision. For developing a successful
NPD process, companies must follow this process in the same order. The following are the
7steps of NPD process, which are applicable for numerous industries:
STEP 1: Idea Generation
The initial step of NPD process is to gather ideas from different stakeholders of the
organization and evaluate them for potential product opt ions. Most of the organizations
use brainstorming as an important technique to generate ideas. In brainstorming, all open-
minded, creative thinkers are invited both from inside and outside the organizat ion to float
their ideas. These ideas give a wide range of possible products that can be pursued further.
Apart from this technique, other market research techniques include collecting feedback,
suggestions from customers and running focus groups with customers, channel members
and with sales force team to generate ideas.


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STEP 2: Idea Screening
In this stage, all the gathered ideas are evaluated by the organization on different aspects
such as feasibility of ideas, product potentiality, attractive options, product ion cost, profit
potent iality and compet itors response (if product is introduced).
STEP 3: Concept Development and Testing
After screening the ideas, marketers obtain feedback and suggest ions from their own
employees, distributors and customers. These ideas are presented to focus groups either in
the form of presentation or storyboard. For example, the product idea is shown to a set of
customer and distributor group either in the form of concept board displaying drawings of
product idea or in an advert isement. Marketers seek informat ion from these focus groups
on the product, level of interest in purchasing the product, frequency of purchase and price
of the product (how much customer is willing to pay for this product).
STEP 4: Business Analysis
The market research team gathers information on the market size (forecast the overall
demand), operat ional cost (product ion costs), market ing costs (promotional costs) and
financial project ions (sales, revenues and profits) of the product. Moreover organizations
need to determine whether the product idea fits within the companys overall mission,
vision and strategy. To gather the full-fledged product idea and informat ion, both internal
research team and external research team need to work hard. The internal research team
should organize discussions with production and sales teams about product ion and
market ing costs. Whereas, the external team should conduct surveys with customers and
distributors about the market size, demand and so on. The external team also needs to
conduct secondary research to find out the competitors analysis.

STEP 5: Product and Marketing Mix Development
Organization directs their research and development team to build an initial design or
prototype of the idea from the gathered requirements. Organization directs its market ing
team to formulate the marketing strategy for the new product. With the help of prototype a
pilot product is launched to specific customers and distributors, where marketer seeks
feedback from them. If the customers are favorable towards the product, marketer decides
to introduce the product by providing other valuable informat ion such as purchase rates

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and how the product is useful to customer. If the customers react ions are less favorable,
marketer suggests adjustments and improvements in the market ing mix. Once the
adjustments are made to the product, marketer may again have the customer test the
product. In this stage, apart from gaining customer feedback, marketer measures the
feasibility of large-scale, cost effect ive product ion for manufacturing the products.
STEP 6: Market Testing
Some organizat ions implement all the suggestions in concept testing and skip the market
testing. Whereas, many organizat ions implement market testing in order to seek inputs
from customers and distributors before commercializat ion of the product. Generally,
market test ing makes the product available to a selective market, which is a small segment
of the target market (i.e. one city) and test if the early innovators of the market are ready to
purchase the new product. There are several other approaches for market testing such as
virtual reality and computer simulat ions testing. In virtual reality testing, customers are
involved directly and are taken to a computer-projected environment to locate and select
products. Whereas, in computer simulat ions customers are not involved directly but certain
variables are entered by customer into a sophisticated computer program which estimates
the response of a target market.
STEP 7: Commercial ization
At this stage, the product is ready to be introduced to a wider market and in large
quant it ies. But this completely depends on the organizat ion and type of the product. Some
organizations introduce the product in batches for small parts of the market which helps
organization to ramp up product ion in a controlled way and also helps them in fine tuning
the marketing mix as the product is distributed to new areas. The main purpose of the
production ramp up is, when the new product is designed by R&D, they have to train the
factory personnel and also resolve the problems faced by them during the actual
production.
The following figure is an example of New Product Development Process overview. This
process may vary from industry to industry and from company to company.

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Fig 1.1 NPD Process Overview
Source: http://www.emeraldinsight.com/journals.htm?articleid=873144&show=html
1.6 Measuring the Effectiveness of New Product Introduction Process
Measuring the effect iveness of NPI process is a difficult task, because projects are spread
over with various functions which are performed at various levels. An average of the
individual performance at these levels may not provide the correct measure of the NPI
effect iveness. Companies measure their NPI effect iveness based on four object ives as
listed below:
The actual product release date is within the original scheduled release
date.
The product comes within, over, or under the est imated budget.
There are any major product problems or upgrades within one year of
release (i.e. product returns).

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There is a product-related spike in Customer service/support calls (i.e. after
sales services).
This type of measurement is done in qualitative level which calculates the effect iveness of
the new product. In any measurement, there will be some deviat ions from actual or
forecasted value. Smaller the deviat ions, better the performance. This NPI process
effect iveness is kept as a record by the company for further reference. This record helps the
company in improving:
1. NPI process.
2. Product.
Measuring the effectiveness of NPI process helps the company to ident ify the problems in
NPI process. But, most companies do not track the effect iveness of the NPI process
because there are no industry standards for measuring the process and level of difficulty is
high.
1.7 New Product Pricing Process
New Product Pricing (NPP) process is one of the important factors for any new product to
succeed. It provides a systemat ic structure to deal with the price of the product based on
customer perception towards product design, value given by customer, competitors
products (If any relevant product exists in market) and targeted segment. Implementat ion
of NPP process will reduce the risk involved in pricing a new product, which otherwise many
managers are petrified of implementing.
The NPP process is foundat ion for a set of key market ing activit ies, which also helps in
achieving the business strategy and financial objectives of the company. This process
should be guided by the characterist ics of both exist ing market and future market products.
Figure below explains about New Product Pricing Process:

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Fig 1.2 New Product Pricing Process
Source: The New Product Pricing Process at Emerson by Jerry Bernstein and David Macias
Business Strategy and Market Characteristics are the two boundaries within which the
entire pricing process will take place. This process requires a clear understanding and
integrat ion of a number of elements which are necessary for getting a successful outcome.
There is no specific start point or direct ion of flow for this diagram. The interdependent
act ivities shown in the diagram are broken into manageable pieces, which ensure that all
the required elements are considered in the process. The intention of this diagram is to
focus on specific areas in each element, re-examine it and update the areas when ever new
information is received. The following are the two important object ives of the process:
Ability to set the right price.
A prediction of revenue & profitability.
The most important object ive of the NPP process is to ensure that customers will receive
fair value based pricing of the product and enabling the supplying company to maintain
overall industry price equilibrium.
The following are the important areas that are included in the NPP diagram:

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Value Analysis:
Value Analysis recognizes the different attributes that contain product value.
Generally, attributes are intangible such as brand, quality etc. By using these
attributes it is easy to determine the value of new product. For example, by using
rank method, a company can weigh its own brand with its competitors brand and
quant ify the value of the new product.
Portfolio Management:
Portfolio Management not only helps in understanding cannibalization but also
tries to avoid introduct ion of a product that decreases product line profitability.
Often, new product introduct ion gives an opportunity to optimize the pricing of the
total product line. Portfolio Management should be a start ing step for new product
introduct ion process because both market ing and development teams are well-
known about the existing product lines. This helps them in identifying the issues of
cannibalization.
Competitive Positioning:
Compet it ive Posit ioning ident ifies the purchase decisions, which are made only
after completely analyzing the compet itors data. For example, competitive
posit ioning uses the Value Analysis data for comparing the new product versus
competit ive suppliers and technologies.
Product Design:
Generally, Product design is implemented in the early stages of product
development cycle because customers pay only for the features that they want
rather than for the features that product already has. This design is included in the
NPP process to acknowledge that the product features match the customer needs.
Value Segmentation:
Value Segmentat ion identifies different groups of customers who having different
perceptions towards the product value. These values may be defined by an
applicat ion of the product or the region it is being sold to or the industry that the
product is being purchased.

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Cost:
In NPP process, cost is an important term in order to understand product and its
portfolio profitability. This process recognizes that cost must be understood from
finance perspect ive that is fixed versus variable components because product cost
changes over t ime. Cost is also dependent upon the predicted volume demand of
the product.
Numbers Story:
The Numbers Story is an activity that converts all the previously collected data into
a profit and loss spreadsheet model. This model can forecast the revenue and
profits for a variety of pricing scenarios. For this it integrates price with unit volume
of predict ions.
Customer Value Research:
Customer Value Research is the most import step in the ent ire new product
introduct ion process because many factors are dependent on it such as product
design, compet itive positioning, and pricing. These types of researches are
conducted both in qualitat ive and quantitat ive methods in order to understand the
customer percept ions towards value. From this research, company can understand
the customer needs and perceived value of the product that helps in pricing the new
product.
1.8 Reasons for New Product Failure:
Whenever a new product fails in the market, company needs to ident ify the causes of
failure. This is used as prescript ions for ident ifying the problems and to avoid them for the
future. The reasons for product failure remains constant over the years as shown in the
below figure 1.3:


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Fig 1.3: Main Causes of New Product Failure
One of the Conference Board has reported that most of the managers do these common
mistakes:
Poor Marketing Research:
Poor marketing research is one of the major causes for New Product Failure. Poor
market ing research involves insufficient or faulty market ing research, real needs of
market are not properly ident ified, and failure in spott ing early signs of
competitors takes the offense
Managers admit to make serious mistakes such as misreading of customer needs or
too little field test ing or overconfidence about the forecast of market needs and
acceptance which may not be correct all the t ime. Often, Managers fall into trap of
product failure without identifying market needs and priorities. For example, a
manager decides to launch a new product for a part icular market without gathering
the requirements of what actually are the market needs or what its priorities are.
The other common mistake that most of the managers do is assumption if R&D
department and product design department are happy with the product
performance, this will ult imately sat isfy the customer. The very important lesson
that managers need to learn is to gather the requirements of the marketplace

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through market surveys, and then to interpret that need to our engineers for
product development.
Technical Problems:
New Product Failure occurs due to technical problems in design and production.
The common issues that occur in product ion are
Difficulty in conversion of pilot-plant scale to full-scale product ion
Product quality
Glitches problems
These problems occur due to lack of proper analysis in the starting phases such as
technical research, design and engineering before moving to the commercializat ion
phase. Sometimes, these problems arise due to lack of understanding of the
customer's requirements or insufficient customer requirements. For example, an
organization has decided to develop the "perfect product", it has over-engineered
the product which made it too costly compared to what the customer wanted.
Insufficient Marketing Effort:
This problem occurs due to assumptions of management without any proper
market ing, product would not sell by itself. For any type of product launch
organization needs to support with sufficient market ing, selling and promot ional
resources. Otherwise new product may end up as a failure product. To prevent this,
organization needs to plan its market ing strategies before the product enters
development stage.
Bad Timing:
Bad t imings are one of important reasons for failure of the products. They occur
due to slow or fast product ion movement due to technical problems or flawed
planning and control.

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These are the problems that occur if development cycle moves slowly: shift in
customer preferences, competitor moves quickly with a new product and seizes the
market opportunity.
These are another set of problems occur if development cycle moves quickly:
production shortcuts are followed to reduce the development cycle, which result in
disaster. Important stages and steps are handled either quickly or are skipped,
such as market studies, prototype test ing, and field trials. This certainly lead to
major quality problems. Low quality product fails in market which ultimately leads
to redesign of ent ire product development cycle, market ing and sales planning.

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1.9 Summary

Market Research is one of the key component while introducing new product to
the market because it provides critical informat ion such as market wants,
needs, product features, quality, pricing, variety, speed of response,
customizat ion, distribution channel and promot ional strategies.
For developing a successful NPD process companies must follow this process in
the same order. The following are the 7steps of NPD process:
STEP 1: Idea Generation
STEP 2: Idea Screening
STEP 3: Concept Development and Test ing
STEP 4: Business Analysis
STEP 5: Product and Marketing Mix Development
STEP 6: Market Test ing
STEP 7: Commercializat ion
In, general companies measure their NPI effectiveness on four object ives
as listed below. They are if: The actual product release date is within the
original scheduled release date .
The product comes within, over, or under the planned budget.
There are any major product problems or upgrades within 1 year of
release (i.e. product returns).
There is a product-related spike in Customer service/support calls (i.e.
after sales services)
The following are the important areas that are included in the NPP process
diagram:
Value Analysis
Portfolio Management
Competit ive Positioning

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Product Design
Value Segmentation
Cost
Numbers Story
Customer Value Research

Reasons for New Product Failure
Poor Market ing Research
Technical Problems
Insufficient Marketing Effort
Bad Timing

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