Introduction

All businesses simultaneously pursue multiple activities in order to survive in highly competitive, dynamic, and global markets. Among these are supply chain management; billing and account management; human resource management and development; quality control; and financial analysis, control, and reporting to mention a few. Equally important, and certainly not to be overlooked, is the continuous introduction of new products. It should be acknowledged, without discussion or argument, that your competition will be doing this especially in 21^st century global markets. The surest way to fail is to let your competition gain the upper hand.

It is not enough, however, to merely introduce new products. It also is imperative that they be one’s customers, whether consumers or businesses, will buy. This should be obvious, but knowing and acknowledging this and finding these new products are two different issues. A business’s pipeline, the collection of new products at their various stages of development from inception to introduction to the market, must always be full of innovative products that satisfy customers’ needs and solve their problems and are also one step ahead of the competition. If your pipeline is not full with the right products, new products, or any products, then your business will be forced out of the market.

In today’s world, technology' evolves quickly and as a result the competitive landscape constantly changes. Technologies change because they tend to feed on themselves, always evolving from one “species” to a new one. The new species of technology could be a new method of doing something (e.g., communicating through social media) or a new device (e.g., smartphone) or modification of an older device (e.g., snap-on modules for smartphones). At the same time, people’s needs constantly and continuously change in part because they themselves are part of the market but also because they adapt to the new technologies. In the process of adapting, however, their needs, both materialistic and psychological, or external

FIGURE 1.1 There is a constant circular pattern from technology' changes to customer needs changes and back again.

and internal needs, change and evolve. This evolution itself puts pressure on technology to further evolve to meet changing needs. And so there is a circular pattern from technology changes to people’s needs changes and back again. This is depicted in Figure 1.1. How the market changes and how people change are one and the same thing.

This dynamism puts pressure on all businesses to always decide what to produce and introduce as well as what to remove from the market. Old products are therefore an integral part of the cycle in Figure 1.1. So in addition to being full, the content of the pipeline, the nature of the products themselves, must keep pace with the changing technologies and customer wants and needs; basically, their evolving problems. This means technology' changes and customer problems must be anticipated and identified. See Arthur [2009] for a good discussion of how technology evolves and the implications of this evolution.

This chapter is divided into four sections. The bases for, not product success, but product failures are described in the first section. The focus is on the failures because this sets the stage for what should be done. It is the failures that motivate people to push ahead and improve, not their successes. The second section draws on these failures and presents a process for generating new products that will have a better chance of success because the process highlights those features that make products fail. In essence, it is a roadmap for what to avoid as much as for what to do. This process is a road map that will be followed and developed throughout the book. The third section describes the main parts of a deep analytical tool set needed for new product development. I refer to this as the heart of the new product development process. The last section is a summary.

New product failures

All businesses know they must constantly innovate and maintain a full pipeline. The fact that today’s markets are highly competitive, dynamic, and global does not change anything. This just intensifies the problem; makes it more imperative; makes it more complex to deal with and manage. Businesses always innovated; to be the first on the block with the newest and most creative products. Unfortunately, not all new products are successful. Some studies of the status of new products soon after their launch have shown that:¹

• • About 80% fail.
• • About 66% fail within 2 years of introduction.
• • About 80% stay on store shelves less than 12 months.
• • About 96% fail to return the cost of capital.

Consider the 80% failure rate. Whether this is too low or too high is immaterial. The fact that it is not 0% or 5% (and not 100%) is the important point. The 80% failure rate implies that the odds of failure are 4:1.² Based on this one fact, any new product is 4 times more likely to fail than succeed. The risk of failure is high, so every firm must try hard to “get it right” and get it right the first time; the market very rarely, if ever, gives you a second chance. This risk of failure is important because the cost of developing a new product can be significantly high. These costs include design, retooling of plant and equipment, advertising and promotion, marketing, and personnel hiring and training just to mention a few. If the innovation is just a minor “tweak” to an existing design, the cost may not be substantial, but nonetheless there will be a cost. If the innovation is a major paradigm shift in what the business has traditionally produced or a new-to-the- world innovation, then these cost elements will be substantial. In either case, there is a cost that must be incurred which could lead to financial devastation if the product fails. The higher the risk of a product failure, the greater the risk of financial devastation. So the business has to get it right. But they have only the one chance to get it right! Unfortunately, since there are no guarantees, “getting it right” means reducing the risk of failure, not eliminating it before the product is launched. This reduced risk of failure can only be achieved by having the best information at each stage of a new product’s development so that the right decisions are made about it including whether or not it should even be pursued. The information needed for these decisions includes, but is not limited to, what customers want, what is technologically possible, what is the best product design, and what is the best marketing campaign and pricing.

There are many specific reasons for the failure rates listed above, but I will categorize them into three groups displayed in Figure 1.2. These are aggregations

FIGURE 1.2 There are three reasons for new product failures: design, pricing, and messaging. Each one has its own components, some of which are stated here.

of the reasons for the lack of information. A fundamental Design Failure involves a concept that does not meet customers’ needs or solve their problems. In fact, its use may actually increase the problem rather than ameliorate if there is a fundamental technical fault with the product. The Pricing Failure involves a pricing strategy or a price point that is inappropriate for the market, either placing the product out of reach of most customers or giving the impression that the product is “cheap” so customers will not be willing to pay for it. Finally, the product could have a Messaging Failure so that the wrong claims are made, especially for the target audience. I will discuss each failure group in the following subsections.

Design failures

Design failures refer to flaws in two design components: concept design and technical design. The concept is an idea, a vision, an intangible statement or description of what should be produced to solve a problem. It consists of a problem statement; a description of the intended target customers who have that problem; an operational statement; and sufficient description so that someone could build it. It is an abstract idea. The technical design, however, is the engineering specification of what can be built given current technology and internal engineering talent. It is a statement of what can be practically done and how. Usually, a prototype or mock-up design reflecting an interpretation of the abstract design concept is constructed from this technical design.

The critical factor for survival is having a new product concept that is brought to market before the competition, but this concept has to be one customers want and need in order to solve a problem, whether real or perceived. It is the customers who count since they buy the product, and this means their wants and needs come first. It is not enough that a business manager “just knows” what should be in the product or what are the customers’ needs.

The problem solution, however, is not singularly focused, meaning that one and only one attribute or feature of the product solves a customer’s problem. Typically, a product has multiple physical attributes such as form, size, weight, number of buttons, display screen, and so forth. Some of these are important to customers while others are not. Each attribute is a technology unto itself so a product is really a container of subordinate technologies. It is the important ones that customers will key on and that will determine whether or not the product will succeed. The design concept must have these critical and important customer-focused attributes.

I will discuss methodologies for assessing physical attribute importances in Chapter 3. See Arthur [2009] on the notion of technology as a series of containers.

The design concept may be a good one if it solves the customer’s problem, but it is meaningless if the technical design reflected in a prototype is flawed. Sizes are too small or too large; key buttons (e.g., power button) are difficult to access or operate; the form is awkward; the weight is too high; and so forth. All these interfere with the product’s intended use. An area in psychology called human factors or human factors engineering is concerned with the interaction between humans and the tools they use (e.g., computers, trucks, hammers) to make the tools as effective as possible for their intended use. If a tool is difficult to use or understand, even though the concept is worthwhile, it will fail in the market. If human factors experts are not involved in the technical design of the concept, then the odds of the product failing in the market because of technicalities are higher.

The worst case of a technical design failure occurs when the important physical attributes, those that are important as determined by the customers, are either absent or poorly executed. This can occur because the concept design did not clearly specify the attributes, the technical designers did not implement them well, or the designers’ technical knowledge is insufficient to even begin to implement a new technology. Regardless of the reason, the product will not be accepted in the market simply because it will be viewed as insufficient. This will provide an opening for your competition to develop a product that has these attributes.

The two design components (concept and technical) do not always have to agree, primarily because the design concept is abstract. An engineer or other technical designer should have wide latitude and freedom to build a prototype product, within the vision of the concept design, but the goal is certainly to have them agree as closely as possible since they have to solve only one problem, the customer’s problem. If the two designs diverge, or solve the wrong problem, or simply fail to solve the problem altogether then the resulting product will fail in the market.

Pricing failures

Even if the concept is a good one and the technical version works as intended, the product can still fail on introduction because the price point is not in line with market assessments or expectations. If the initial price point is too high, then no one will buy the product. If the price point is too low, then the business runs the risk of customers viewing the product as cheap, of poor quality with little or no value for the price. Price acts as an indicator of quality and a price point that is too low relative to expectations could indicate that the product quality is also low. See Monroe [1990| for some discussion about the relationship between price and perceived quality. Also see Paczkowski [2018] for a discussion about assessing the price point below which the product is viewed as “cheap.”

A price is needed before the product goes to market to determine if it will be profitable and meet the business’s financial goals. All businesses have financial goals both for their current fiscal year and for several years into the future (e.g., five-year plans). One part of the business planning process for new product development is the business case. This is a complex assessment of the viability of a product, an assessment usually done at different stages of the development process, i.e., the different times as a product moves through the pipeline. The structure of a business case varies from business to business, but generally it has two major components: a competitive assessment and a financial assessment. For the competitive assessment, a Competitive Environment Analysis (CEA) shows the space of likely competitive products and key market players (KMPi) by product attributes and their importance to customers. This shows unmet possibilities in the market but more importantly it also shows the degree of competition in that space. If there are many KMPs offering virtually the same product with attributes or features that are almost identical and where those attributes are important to customers, then any new product would face a high barrier to entry. If the product space, however, is sparse and the concept design emphasizes attributes that are important to customers but are not provided by existing products, then the risk of failure is reduced, but certainly not eliminated. A CEA will certainly help minimize the risk of a design failure. A CEA will be further discussed in Chapter 2.

The financial analysis component of the business case, under the guidance of the Chief Financial Officer (CFO) or the CFO organization, shows whether or not the product concept will meet the financial goals established by the Chief Executive Officer (CFO) and the Board of Directors (BOD). The financial requirement may be a return on investment (ROI) requirement (e.g., a 10% return on investment) or a market requirement (e.g., garner a 5% share of market in two years). If the target is deemed unattainable with the current design, then it will be terminated and removed from the pipeline as financially nonviable; otherwise, it will continue through the pipeline. So the business case results in a Go/No-Go decision.

This is where pricing becomes an issue since the financial assessment involves the calculation of net contribution and contribution margin. Net contribution is what economists typically refer to as profit or the difference between revenue, which is price times units sold, and product-specific costs. Net contribution divided by revenue is the contribution margin and is normally expressed as percent of revenue. Profit per se is an enterprise-wide value, not a product or business unit item. A product contributes to the business unit’s financial status while the business unit contributes to the enterprise’s financial status. There is a rolling-up from the product to the business unit to the enterprise, each piece contributing to the whole.

A new product, and all existing ones for that matter, must contribute to the whole. How much they are required to contribute is determined by the CEO and BOD. The purpose of the business case is to make sure the contribution goals, the requirements, are met. The price point is needed to calculate the revenue. If the price point is incorrect, then the product will either be viewed as unrealistically profitable or a financial disaster that must not be pursued. A range for key financial measures, rather than definite values, is usually acceptable between the time of concept development and product launch. The range is typically bounded by an optimistic and a pessimistic view of market success. As long as the optimistic to pessimistic range covers the financial target then the product development will continue; otherwise, it will be terminated.

The product-specific costs are also important for the net contribution. These costs are wide and varied, but all internal to the business. These involve, but are not limited to, personnel, marketing, sales, supply chain contracts, and so forth. Obtaining estimates for these is a complex endeavor, but doable. See Chwastyk and Kolosowskia [2014] for a discussion about these costs and how to estimate them for new product development.

The price point for the business case is sometimes compiled by determining how much customers are willing to pay for components of the product. The sum of the amounts they are willing to pay is the overall value or worth of the product to them. This is the price point. Methodologies exist for determining the willingness- to-pay for components. I will describe these in Chapter 4. Unfortunately, they are applicable before launch when the product is almost definitely defined. In the concept stage, the product is still too amorphous for customers to definitely express any willingness-to-pay. Since a price point is hard to determine much in advance of a product launch, another methodology' is needed to at least determine a range of feasible prices. It is this range that is used in the business case financial analysis for determining an optimistic and pessimistic financial view of the new product. I will discuss some methodologies for price range assessment in Chapter 3.

Messaging failures

Not only must the product and price be “right” for the market, but how it is sold or positioned must be correct. This involves two intertwined activities: messaging and targeting. The former is part promotional - letting customers know the product exists and where to buy it - but also part customer-specific - having the right messaging to position the product in the customer’s product mindset. The messages are claims about what the new product can or will do to satisfy customers’ wants and needs and solve their problems; they are about the product’s capabilities. Exaggerated or unbelievable, factually baseless or unsupportable, typical, hard to remember, or not very' motivating claims will be spotted instantly by potential customers which will make selling it difficult at best or doom the product at worst.

For the targeting activity, customers have to believe the new product fits their lifestyle and requirements, especially their budget. A claim that positions the new product as being very luxurious and targeted to higher income customers will not sell at all to those in the lower income brackets. This is just as important as the claim made about the product’s capabilities. This is where the design concept plays a role because the design statement should include a description of the target market. I discuss messaging in Chapter 5.