New-product development is an essential activity for companies seeking growth. By adopting the new-product strategy as their posture, companies are better able to sustain competitive pressures on their existing products and make headway. The implementation of this strategy has become easier because of technological innovations and the willingness of customers to accept new ways of doing things. Despite their importance in strategy determination, however, implementation of new-product programs is far from easy. Too many products never make it in the marketplace. The risks and penalties of product failure require that companies move judiciously in adopting new-product strategies. Interestingly, however, the mortality rate of new product ideas has declined considerably since the 1960s. In 1968, on average, 58 new-product ideas were considered for every successful new product. In 1981, only seven ideas were required to generate one successful new product. However, these statistics vary by industry. Consumer nondurable companies consider more than twice as many newproduct ideas in order to generate one successful new product, compared to industrial or consumer durable manufacturers. Top management can affect the implementation of new-product strategy; first, by establishing policies and broad strategic directions for the kinds of new products the company should seek; second, by providing the kind of leadership that creates the environmental climate needed to stimulate innovation in the organization; and third, by instituting review and monitoring procedures so that managers are involved at the right decision points and can know whether or not work schedules are being met in ways that are consistent with broad policy directions. The term new product is used in different senses.

For our purposes, the newproduct strategy will be split into three alternatives: (a) product improvement/ modification, (b) product imitation, and (c) product innovation. Product improvement/modification is the introduction of a new version or an improved model of an existing product, such as “new, improved Crest.” Improvements and modifications are usually achieved by adding new features or styles, changing processing requirements, or altering product ingredients. When a company introduces a product that is already on the market but new to the company, it is following a product-imitation strategy. For example, Schick was imitating when it introduced its Tracer razor to compete with Gillette’s Sensor. For our purposes, a product innovation will be defined as a strategy with a completely new approach in fulfilling customer desires (e.g., Polaroid camera, television, typewriter) or one that replaces existing ways of satisfying customer desires (e.g., the replacement of slide rules by pocket calculators). About 90% of new products are simply line extensions, such as Frito-Lay’s Doritos Flamin, Hot Tortilla Chips in snack-size bags. This is despite the fact that truly original products the remaining 10% possess the real profit potential. New-product development follows the experience curve concept; that is, the more you do something, the more efficient you become at doing it (for additional details, see Article 12). Experience in introducing products enables companies to improve new-product performance. Specifically, with increased new-product experience, companies improve new-product profitability by reducing the cost per introduction. More precisely, with each doubling of the number of new-product introductions, the cost of each introduction declines at a predictable and constant rate. For example, among the 13,000 new products introduced by 700 companies surveyed by Booz, Allen, and Hamilton between 1976 and 1981, the experience effect yielded a 71 percent cost curve. At each doubling of the number of new products introduced, the cost of each introduction declined by 29 percent.

Product Improvement Modification An existing product may reach a stage that requires that something be done to keep it viable. The product may have reached the maturity stage of the product life cycle because of shifts in the environment and thus has ceased to provide an adequate return. Or product, pricing, distribution, and promotion strategies employed by competitors may have reduced the product to the me-too category. At this stage, management has two options: either eliminate the product or revitalize it by making improvements or modifications. Improvements or modifications are achieved by redesigning, remodeling, or reformulating the product so that it satisfies customer needs more fully. This strategy seeks not only to restore the health of the product but sometimes seeks to help distinguish it from competitors’ products as well. For example, it has become fashionable these days to target an upscale, or premium, version of a product at the upper end of the price performance pyramid. Fortune‘s description of Kodak’s strategy is relevant here: On the one hand, the longer a particular generation of cameras can be sold, the more profitable it will become. On the other hand, amateur photographers tend to use less film as their cameras age and lose their novelty; hence, it is critical that Kodak keep the camera population eternally young by bringing on new generations from time to time. In each successive generation, Kodak tries to increase convenience and reliability in order to encourage even greater film consumption per camera a high “burn rate,” as the company calls it. In general, the idea is to introduce as few major new models as possible while ringing in frequent minor changes powerful enough to stimulate new purchases. Kodak has become a master of this marketing strategy. Amateur film sales took off with a rush after 196

3. That year the company brought out the first cartridge-loading, easy-to-use instamatic, which converted many people to photography and doubled film usage per camera. A succession of new features and variously priced models followed to help stimulate film consumption for a decade. Then Kodak introduced the pocket instamatic, which once again boosted film use both because of its novelty and because of its convenience. Seven models of that generation have since appeared. Kodak’s strategy points out that it is never enough just to introduce a new product. The real payoff comes if the product is managed in such a way that it continues to flourish year after year in a changing and competitive marketplace. In the 1990s, the company continued to pursue the strategy with yet another new product, the throwaway camera. Fun, cheap, and easy to use are the features that have turned the disposable camera (basically a roll of film with a cheap plastic case and lens) into a substantial business. In 1992, the sales at retail reached over $200 million with Kodak holding over 65% of the market. There is no magic formula for restoring the health of a product.

Occasionally, it is the ingenuity of the manager that may bring to light a desired cure. Generally, however, a complete review of the product from marketing perspectives is needed to analyze underlying causes and to come up with the modifications and improvements necessary to restore the product to health. For example, General Mills continues to realize greater profits by rejuvenating its old products cake mixes, Cheerios, and Hamburger Helper. The company successfully builds excitement for old products better than anyone else in the food business by periodically improving them. Compared with Kellogg, which tends not to fiddle with its core products, General Mills takes much greater risks with established brands. For instance, the company introduced two varieties of Cheerios Honey Nut in 1979 and Apple Cinnamon in 1988 and successfully created a megabrand. To identify options for restoring a damaged product to health, it may be necessary to tear down competing products and make detailed comparative analyses of quality and price. In 1978, Japan’s amateur color film market was dominated by Kodak, Fuji, and Sakura, the last two being Japanese companies. For the previous 15 years, Fuji had been gaining market share, whereas Sakura, the market leader in the early 1950s with over half the market, was losing ground to both its competitors. By 1976, Sakura had only about a 16 percent market share. Marketing research showed that, more than anything else, Sakura was the victim of an unfortunate word association. Its name in Japanese means “cherry blossom,” suggesting a soft, blurry, pinkish image.

The name Fuji, however, was associated with the blue skies and white snow of Japan’s sacred mountain. Being in no position to change perceptions, the company decided to analyze the market from structural, economic, and customer points of view. Sakura found a growing cost consciousness among film customers: to wit, amateur photographers commonly left one or two frames unexposed in a 36-exposure roll, but they almost invariably tried to squeeze extra exposures onto 20-exposure rolls. Here Sakura saw an opportunity. It decided to introduce a 24-exposure film. Its marginal costs would be trivial, but its big competitors would face significant penalties in following suit. Sakura was prepared to cut its price if the competition lowered the price of their 20-frame rolls. Its aim was twofold. First, it would exploit the growing number of costminded users. Second, and more important, it would be drawing attention to the issue of economics, where it had a relative advantage, and away from the image issue, where it could not win. Sakura’s strategy paid off. Its market share increased from 16 percent to more than 30 percent. PepsiCo has developed a new product, Pepsi One, to fulfill the unmet needs of young men. The company launched the product with about $100 million promotion and hoped to generate $1 billion in annual retail sales. Overall, the product-improvement strategy is conducive to achieving growth, market share, and profitability alike.

Product Imitation Not all companies like to be first in the market with a new product. Some let others take the initiative. If the innovation is successful, they ride the bandwagon of the successful innovation by imitating it. In the case of innovations protected by patents, imitators must wait until patents expire. In the absence of a patent, however, the imitators work diligently to design and produce products not very different from the innovator’s product to compete vigorously with the innovator. The imitation strategy can be justified in that it transfers the risk of introducing an unproven idea/product to someone else. It also saves investment in research and development. This strategy particularly suits companies with limited resources. Many companies, as a matter of fact, develop such talent that they can imitate any product, no matter how complicated. With a limited investment in research and development, the imitator may sometimes have a lower cost, giving it a price advantage in the market over the leader. Another important reason for pursuing an imitation strategy may be to gainfully transfer the special talent a company may have for one product to other similar products. For example, the Bic Pen Corporation decided to enter the razor business because it thought it could successfully use its aggressive marketing posture in that market. In the early 1970s, Hanes Corporation gained resounding success with L’eggs, an inexpensive pantyhose that it sold from freestanding racks in food and drugstore outlets. The imitation strategy may also be adopted on defensive grounds. Being sure of its existing product(s), a company may initially ignore new developments in the field. If new developments become overbearing, however, they may cut into the share held by an existing product. In this situation, a company may be forced to imitate the new development as a matter of survival. Colorado’s Adolph Coors Company conveniently ignored the introduction of light beer and dismissed Miller Lite as a fad.

Many years later, however, the company was getting bludgeoned by Miller Lite. Also, Anheuser-Busch began to challenge the supremacy of Coors in the California market with its light beer. The matter became so serious that Coors decided to abandon its one-product tradition and introduced a low-calorie light beer. Another example of product imitation is the introduction of specialty beers by major brewers. While the U.S. beer industry has been stagnating throughout the 1990s, the specialty brews have been growing at better than a 40 percent annual rate. This has led the four major beer companies that control 80 percent of the market to offer their own brands of specialty beers: Anheuser (Redhook Ale, Red Wolf, Elk Mountain, Crossroads); Miller (Red Dog, Icehouse, Celis); Coors (Sandlot, George Killman); and Stroh (Steeman, Red River Valley). Imitation also works well for companies that want to enter new markets without resorting to expensive acquisitions or special new-product development programs. For example, Owens-Illinois adapted heavy-duty laboratory glassware into novelty drinking glasses for home use. Although imitation does avoid the risks involved in innovation, it is wrong to assume that every imitation of a successful product will succeed. The marketing program of an imitation should be as carefully chalked out and implemented as that of an innovation. Imitation strategy is most useful for achieving increases in market share and growth.

Product Innovation Product-innovation strategy includes introducing a new product to replace an existing product in order to satisfy a need in an entirely different way or to provide a new approach to satisfy an existing or latent need. This strategy suggests that the entrant is the first firm to develop and introduce the product. The ballpoint pen is an example of a new product; it replaced the fountain pen. The VCR was a new product introduced to answer home entertainment needs. Product innovation is an important characteristic of U.S. industry. Year after year companies spend billions of dollars on research and development to innovate. In 1997, for example, American industry spent almost $100 billion on research and development. Research and development expenditures are expected to continue rising at an average of 10 percent annually as we enter the next century. This shows that industry takes a purposeful attitude toward new-product and new-process development. Product innovation, however, does not come easy. Besides involving major financial commitments, it requires heavy doses of managerial time to cut across organizational lines. And still the innovation may fail to make a mark in the market. Anumber of companies have discovered the risks of this game. Among them is Texas Instruments, which lost $660 million before withdrawing from the home computer market. RCA lost $500 million on ill-fated videodisc players. RCA, GE, and Sylvania, leaders in vacuum-tube technology, lost out when transistor technology revolutionized the radio business. RJR Nabisco abandoned the “smokeless” cigarette, Premier, after a 10-year struggle and after spending over $500 million. Most innovative products are produced by large organizations. Initially, an individual or a group of individuals may be behind it, but a stage is eventually reached where individual efforts require corporate support to finally develop and launch the product. To encourage innovation and creativity, many large companies are spinning off companies.

For example, Colgate-Palmolive Co. launched Colgate Venture Co. to support entrepreneurship and risk taking. In this way, a congenial environment within the large corporation is maintained for generating and following creative pursuits. In essence, innovation flourishes where divisions are kept small (permitting better interaction among managers and staffers), where there is willingness to tolerate failure (encouraging plenty of experimentation and risk taking), where champions are motivated (through encouragement, salaries, and promotions), where close liaison is maintained with the customer (visiting customers routinely; inviting them to brainstorm product ideas), where technology is shared corporate wide (technology, wherever it is developed, belongs to everyone), and where projects are sustained, even if initial results are discouraging. The development of a product innovation typically passes through various stages: idea generation, screening, business analysis, development of a prototype, test market, and commercialization. The idea may emerge from different sources: customers, private researchers, university researchers, employees, or research labs. An idea may be generated by recognizing a consumer need or just by pursuing a scientific endeavor, hoping that it may lead to a viable product. Companies follow different procedures to screen ideas and to choose a few for further study. If an idea appears promising, it may be carried to the stage of business analysis, which may consist of investment requirements, revenue and expenditure projections, and financial analysis of return on investment, pay-back period, and cash flow. Thereafter, a few prototype products may be produced to examine engineering and manufacturing aspects of the product. A few sample products based on the prototype may be produced for market testing. After changes suggested in market testing have been incorporated, the innovation may be commercially launched. Procter & Gamble’s development of Pringles is a classic case of recognizing a need in a consumer market and then painstakingly hammering away to meet it. Americans consume about one billion dollars’ worth of potato chips annually, but manufacturers of potato chips face a variety of problems. Chips made in the traditional way are so fragile that they can rarely be shipped for more than 200 miles; even then, a quarter of the chips get broken. They also spoil quickly; their shelf life is barely two months. These characteristics have kept potato chip manufacturers split into many small regional operations. Nobody, before Procter & Gamble, had applied much technology to the product since it was invented in 185

3. Procter & Gamble knew these problems because it sold edible oils to the potato chip industry, and it set out to solve them. Instead of slicing potatoes and frying them in the traditional way, Procter & Gamble’s engineers developed a process somewhat akin to paper making. They dehydrated and mashed potatoes and pressed them for frying into a precise shape, which permitted the chips to be stacked neatly on top of one another in hermetically sealed containers that resemble tennis ball cans. Pringles potato chips stay whole and have a shelf life of at least a year. After a new product is screened through the lab, the division that will manufacture it takes over and finances all further development and testing. In some companies, division managers show little interest in taking on new products because the costs of introduction are heavy and hold down short-term profits. At Procter & Gamble, executives ensure that a manager’s short-term record is not marred by the cost of a new introduction. Before a new Procter & Gamble product is actually introduced to the market, it must prove that it has a demonstrable margin of superiority over its prospective competitors. A development team begins refining the product by trying variations of the basic formula, testing its performance under almost any conceivable condition, and altering its appearance. Eventually, a few alternative versions of the product are produced and tested among a large number of Procter & Gamble employees. If the product gets the approval of employees, the company presents it to panels of consumers for further testing. Procter & Gamble feels satisfied if a proposed product is chosen by fifty-five out of one hundred consumers tested. Though Pringles potato chips passed all these tests, they only recently started showing any profits for Procter & Gamble. There is hardly any doubt that, if an innovation is successful, it pays off lavishly. For example, nylon still makes so much money for Du Pont that the company would qualify for the Fortune 500 list even if it made nothing else. However, developing a new product is a high-risk strategy requiring heavy commitment and having a low probability of achieving a breakthrough. Thus, the choice of this strategy should be dictated by a company’s financial and managerial strengths and by its willingness to take risks.

Consider the case of Kevlar, a super-tough fiber (lightweight but five times stronger than steel) invented by Du Pont. It took the company 25 years and $900 million to come out with this product, more time and money than the company had ever spent on a single product. Starting in 1985, however, the payoff began: annual sales reached $300 million. Du Pont forecasts Kevlar’s annual sales growth at 10 percent during the 1990s. Meanwhile, the company continues its quest for new applications that it hopes will make Kevlar a blockbuster. As a company grows more complex and decentralized, its new-product development efforts may fail to keep pace with change, weakening vital lines between marketing and technical people and leaving key decisions to be made by default. From this grid, innovations may be grouped into three classes: heavy emphasis (deserving full support, including basic research and development); selective opportunistic development (i.e., may be good or may be bad; may require a careful approach and top management attention); and limited defense support (i.e., merits only minimum support).