The Need for New Products
In dynamic markets companies must constantly introduce new products and services to keep up with changing consumer wants and needs.
Discuss the common challenges of developing successful new products
- A company must establish a series of successful products over time if it wants to maintain a consistent stream of sales, or grow sales over time.
- New product generation involves multiple stages and a high level of financial investment, and has no guarantee of success.
- When a new product is introduced, companies must still convince buyers to adopt them into their routines, in order for sales to be consistent.
- Innovation may be ‘continuous’ or ‘discontinuous’ – the former occurring in established markets, while the latter has the potential to create new markets or consumer behaviors.
- obsolescence: The process of becoming obsolete, outmoded or out of date.
- innovation: As used here, innovation describes an idea or product that is new to the company in question.
- planned obsolescence: a policy of deliberately planning or designing a product with a limited useful life, so it will become obsolete or nonfunctional after a certain period
- new product: a good or service that was previously not offered by the company
The marketplace is never static: it is dynamic and fast changing, and demand for products is constantly shifting as needs, wants, and technology all change. As a result, companies must always evaluate their existing product line and look for ways to ensure that it is up to date and in line with consumer desires. Continuous decisions must be made about whether new products should be added (and whether old products should be removed).
For instance, the graph in shows how an organization must establish a series of successful products if it wants to maintain a consistent stream of sales, or grow sales over time. As shown in the graph, no product lasts forever, and sales levels can fluctuate dramatically over time. This fictitious company has marketed eight different products over time.
In the past, four of these products have been deleted as they near obsolescence (the products labeled as A, B, C, and F). As a result, the sales level in the most current period depends upon the success of the remaining four products. If the firm has a goal to increase sales in the coming years, then it is imperative for that firm to introduce a new group of successful products.
Organizations invest a lot of money to create new products that perform effectively. Nonetheless, firms often struggle to convince people to try out these products, and to use them on a regular basis (and thus incorporate them into their habits and routines). For example, it took 18 years for microwave ovens to gain acceptance in Greece. The ultimate success of new products depends on consumers accepting them.
‘Innovation’ is used here to describe an idea or product that is new to the company. A ‘continuous innovation’ introduces a new entrant into an existing category, and does not challenge established patterns of consumer behavior. An example of this is a new, technologically advanced cell phone. A ‘discontinuous innovation’ may alter existing consumption patterns, and even create new ones. For example, portable audio equipment has evolved from the radio, to the cassette tape player, to the compact disk player, and to the digital audio player – and now, to Cloud-based systems. Discontinuous innovation has the potential to radically shift consumer habits and thus create new demand for a whole category of products and services, but understandably entails more risk for the organization.
A good NPDS can help organize research, prioritize customer needs, and reduce cost overruns, to ensure a smooth development process.
Describe the three common approaches to strategically developing new products
- Three common approaches to NPDS are user-centered design, flexible product development, and the phase-gate model. There are many other approaches used as well, and what approach to use depends on the nature of the management, the product, and the market.
- User-centered design emphasizes the wants, desires and limitations of the end-user in designing how to develop the product.
- Flexible product development emphasizes a flexible development process, instead of focusing on users as user-centered design does. By making the process as flexible as possible, necessary changes can take place very late in the development process with minimum disruption.
- The phase-gate model separates the different phases by using “gates”–at each gate, a steering committee uses all available information to decide whether to proceed with the development process or not.
- user-centered design: A new product development strategy where the needs of the end users are given the most attention.
- flexible product development: A new product development strategy designed so that changes can be made late in the process without excessive disruption.
- Phase-gate model: A new product development strategy that is divided into phases, separated by gates.
New Product Development Strategy
A well thought out new product development strategy (NPDS) helps a company avoid wasting time and resources by helping to organize planning and research, understanding customer expectations, and accurately resourcing the project. By avoiding common errors such as overestimating the target market, incorrectly setting the price, and accruing higher than predicted costs, a NPDS helps the product to be developed and launched as planned.
The nature of the business and the product in question will determine the NPDS, and what steps need to be taken. Certain steps may be iterated as needed, and others may be eliminated. To speed up the process, many companies complete several steps at the same time (known as “time to market”). For some more complicated products, a large amount of uncertainty makes it impossible to plan the complete project before starting it, and thus a flexible approach is required.
There are many different ways to approaching NPDS. Some of the more common ways are described below.
User-Centered Design (UCD)
Here, the needs, wants and limitations of end users of a product are given a great deal of attention at each stage of the design process. The main element in this process is that user-centered design tries to optimize the product around how users can, want, or need to use the product, rather than forcing users to change their behaviors to accomodate the product.
Flexible Product Development
Flexible product development is the ability to make changes in the product being developed or in how it is developed, even relatively late in development, without being too disruptive. Flexibility is important because the development of a new product naturally involves change from what came before it. Change can be expected in what the customer wants and how the customer might use the product, in how competitors might respond, and in the new technologies being applied in the product or in its manufacturing process. The more innovative a new product is, the more likely it is that the development team will have to make changes during development.
Flexible development counteracts the tendencies of many contemporary management approaches to plan a project completely at its outset and discourage change thereafter. These include Six Sigma, which aims to drive variation out of a process; Lean, which acts to drive out waste; and traditional project management and phased development systems (including the popular Phase–gate model, discussed next), which encourage upfront planning and following the plan. Although these methodologies have strengths, their side effect is encouraging rigidity in a process that needs flexibility to be effective, especially for truly innovative products. Flexibility techniques must be used with discretion, for instance, only in the portions of a product likely to undergo change, in order to minimize potential disruptions, delays, and cost overruns.
In a phase–gate model, also referred to as a phase–gate process, the process is divided into stages or phases, separated by gates. At each gate, the continuation of the process is decided by (typically) a manager or a steering committee. The decision is based on the information available at the time, including the business case, risk analysis, and availability of necessary resources (e.g., money, people with correct competencies). The phase–gate model may also be known as stage-limited commitment or creeping commitment.
The success of product-driven companies is directly tied to new product development, which is generated through innovative ideas.
Identify the five primary sources of product innovation
- The five main sources of innovation are technological breakthough, non-technological development, environment, serendipity, and purposeful development.
- It is possible to create new ideas and new ways of producing products through non-technical means. This would involve using well-known business models and slightly modifying the production process to appear unique.
- The process of serendipity frequently occurs due to government funding of general and scientific research, causing technological and other spillovers into the commercial realm. These spill over effects generate new ideas for products that would have otherwise not been discovered.
- purposeful development: Innovation that occurs in response to a market need that existing product lines cannot satisfy.
- SWOT Analysis: A structured planning method used to evaluate the strengths, weaknesses, opportunities, and threats involved in a project or in a business venture.
- Generation X: the generation of people born after the baby boom that followed World War II, especially those born in the 1960s and 1970s
Ideas for new products can be obtained from basic research using a SWOT analysis. Market and consumer trends, R&D departments, competitors, focus groups, etc. may also be used to get an insight into new product lines or product features. New product innovations are responsible for employment, economic growth, technological process, and high standards of living. Innovation is crucial for the development of successful new products. Described below are different sources of innovation that lead to the generation of ideas for new products.
Sources of Innovation that Generate Ideas
While innovation is crucially important to any forward-thinking organization, developing and evaluating innovations is a challenge. Where do innovative ideas come from? Discussed below are five crucial sources of innovation: technical breakthrough, non-technical idea development, environment, serendipity, and purposeful development. These are discussed in turn below (see ).
Technical breakthroughs refer to product innovations that result from technical developments. New brands that have emerged from this process include MP3 players, GPS navigation devices, and cell phones. Technological breakthroughs are often born in R&D departments or through government funding of research, which ultimately lends itself to commercial uses.
This approach involves finding a niche in the market without making radical changes to the basic product category (i.e., in terms of the underlying technology). “Build a Bear Workshop” provides a good example of this style of innovation: Unlike other conventional stuffed animal manufacturers, the Build a Bear Workshop allows customers to choose their bear’s body, sound, clothing, stuffing, and heart. For example, a customer can choose a lower-priced paper heart with their wish, or they can invest in a higher-priced electronic heart. After customers make choices, they then observe the production process in the shop. In this way, customers create their own custom-designed toy. This business model does not rely on developing new technology, but a modified production process and a unique idea that draws the consumer in.
Certain ideas developed in one environment or geographical location have the potential to do well when imported into new environments. Good examples of this style of innovation are Wal-mart in China and IKEA in the United States–ideas that proved a big hit outside of the cultures that they were traditionally employed in. Large-retail stores are now achieving success in Asian nations, through importing the idea of economies of scale, which in turn enable one-stop shopping and lower prices. Similarly, IKEA achieved great success in the United States through importing the idea of a warehouse-type retail setting from Europe.
Serendipity plays a role in product innovation. The word serendipity derives from “serendip,” which means “Sri Lanka” in Persian. The fairy tale, The Three Princes of Serendip, tells the story of three men who continuously discover something that is completely unrelated to what they originally set out to find. Thus, the term “serendipity” describes a situation where one accidentally discovers something fortunate, while looking for something else entirely. For example, penicillin was discovered quite by accident when Alexander Fleming discovered that a mold contaminating one of his experiments possessed powerful antibacterial properties. While not exactly a strategy that can be purposefully conducted by companies attempting to come up with a specific product, the process of serendipity frequently occurs due to government funding of general and scientific research, causing technological and other spillovers into the commercial realm.
Purposeful development occurs when there is a strong need for certain goods or services. As Plato once said, “Necessity is the mother of invention.” In other words, this type of innovation occurs when existing product lines cannot satisfy current needs or current demand. As a result, organizations are willing to invest considerable funds to create a successful innovation. Thus, purposeful development occurs when there is a need that requires satisfaction, as opposed to when demand creation is required for a new product for which there is no initial desire in the marketplace. A good example of purposeful development is the heavy investment that pharmaceutical firms make to discover new prescription drugs.
During screening, the company evaluates whether to devote further resources to the development of a product at various stage gates.
Discuss the benefits and shortcomings of product screening
- The company must ask itself a number of questions, such as whether there is a potential market for the product, whether the product will meet the demands of the consumer base, and whether the product can be profitable.
- Two major risks arise during screening: an unviable product may be admitted to the next stage, and a potentially successful product may be rejected.
- Products are often rated on a scale from poor to good on a variety of different criteria in order to determine their viability. This process is taken a step further by assigning weights to the criteria, so as to give more importance to factors considered crucial for a product’s success.
- screening: A step in the product development process where products are evaluated according to a certain set of criteria on whether they will be successful in the marketplace.
It is important for businesses to continually devise new products, as products do not last forever. While there are millions of products available to consumers, many more products do not make it to market at all. As it is expensive to bring a product to market, products go through a product development process where they are evaluated at every stage before they are brought to commercialization. For example, of the 5,000 drug ideas that go through the screening process of the Federal Drug Administration, only 10 end up getting approved, and of these only 3 become profitable. With an average cost of $1 billion to bring a drug to market, it would take several billion in sales to recoup the cost.
The objective of the screening stage is to eliminate unsound concepts prior to devoting resources to them. The screeners should ask several questions: Will the customer in the target market benefit from the product? What is the size and growth forecast of the target market? What is the current or expected competitive pressure for the product idea? Is it technically feasible to manufacture the product? Will the product be profitable when manufactured and delivered to the customer at the target price? By answering these questions, the company can get a better idea of the likelihood of a product becoming a commercial success.
The screening step is a critical part of the new product development process. Product ideas that do not meet the organization’s objectives should be rejected. Two problems that may arise during the screening stage are the acceptance of a poor product idea, and the rejection of a viable product idea. In the former case, money and effort are wasted in subsequent stages until the product idea is abandoned. In the latter case, a potential winner never sees the market.
There are two common techniques for screening new product ideas. Both involve the comparison of a potential product idea against the criteria for acceptable new products. The first technique is a simple checklist. For example, new product ideas can be rated on a scale ranging from very good to poor, in respect to factors such as value added, sales volume, patent protection, and effect on present products. Unfortunately, it is often very challenging for evaluators to define what is fair or poor in any given category. Also, this system does not address the issue of the time and expense associated with each idea, nor does it provide instructions with regard to the scores.
The second technique goes beyond the first in that the criteria are assigned weights based on their importance. These scores are then multiplied by their respective weights and added to yield a total score for the new product idea.
Concept testing is important for evaluating consumer responses to a product before market introduction.
Explain concept testing, its disadvantages, and alternative methods used to evaluate consumer behavior toward new concepts
- Concept testing can also be useful in altering existing attitudes towards existing products in the market.
- Concept testing uses qualitative and quantitative methods. Concept generation portions of concept testing are generally qualitative, while evaluations, positioning, and product/concept tests are usually quantitative.
- Traditional methods of concept testing faced many shortfalls, including not providing consistent information on the ranking of consumer preferences. However, newer methods are alleviating such issues and providing more useful information.
- concept testing: The process of evaluating consumer response to a product idea prior to the introduction of the product to the market.
Concept testing is the process of using quantitative and qualitative methods to evaluate consumer response to a product idea prior to the introduction of a product to the market. It is a vital part of the idea screening stage of new product development. It can also be used to generate communication designed to alter consumer attitudes toward existing products. These methods involve the evaluation by consumers of product concepts having certain rational benefits, such as “a detergent that removes stains but is gentle on fabrics,” or non-rational benefits, such as “a shampoo that lets you be yourself.” Concept testing is often performed using field surveys, personal interviews and focus groups, in combination with various quantitative methods.
The concept generation portions of concept testing are generally qualitative. Advertising professionals create concepts and communications of these concepts for evaluation by consumers, on the basis of consumer surveys and other market research, or on the basis of their own experience as to which concepts they believe represent product ideas that are worthwhile in the consumer market.
The quantitative portions of concept testing procedures have generally been placed in three categories: (1) concept evaluations, where concepts representing product ideas are presented to consumers in verbal or visual form and then quantitatively evaluated by consumers by indicating degrees of purchase intent, likelihood of trial, etc., (2) positioning, which is concept evaluation wherein concepts positioned in the same functional product class are evaluated together, and (3) product/concept tests, where consumers first evaluate a concept, then the corresponding product, and the results are compared.
Shortcomings of Traditional Concept Testing
Traditional systems of concept testing generally failed to provide a systematic, proven way of showing consumer preference of one concept over another. The relative importance of the factors responsible for or governing why consumers, markets and market segments reacted differently to concepts presented to them in the concept tests were not demonstrated. Thus, communication of the concept was generally left to the creativity of the advertising agency, with no systematic quantitative method known or employed that could identify the criteria on which consumer choices were made (at least, not with any real accuracy).
Moore and William (1982), in a literature survey and review of concept testing methodology, point out that concept tests have failed to account for changes between the concept tested and the communication describing the benefits of the product which embodies the concept. The paper reports that “no amount of improvement in current concept testing practices can remedy these problems. ” This is reflective of the fact that none of the traditional methods provided a quantitative means for ascertaining the relative importance of the underlying criteria of concept choices as a means for identifying the visual and verbal expressions of the concepts which best communicate the benefits sought by the consumer. Nor did the traditional methods quantify the relationships between concepts and existing products offered in the same consumer market. The ability of a method to ameliorate or overcome the above shortcomings would provide substantial improvement in communication of the concepts identified in testing and offered to the market as a product.
One such method is conjoint analysis and another is choice modeling. In addition, with online retailing becoming increasingly prominent, many online respondents are also online consumers. Thus, they are able to easily place themselves in the mindset of a consumer looking to buy goods or services. Since the arrival of these methods, market researchers have been able to make better, more accurate, suggestions to their clients regarding the decision to move forward, revise, or start over with a product concept. Online choice modeling, for example, can produce detailed econometric models of demand for various attributes of the new product such as feature, packaging and price.
The output of the business analysis stage is a prediction about whether the product is likely to be profitable or not if ultimately produced.
Demonstrate knowledge of the components included in the business analysis stage of product development
- The first step in the business analysis process is to examine the likely demand for the product, as well as possible licensing of technologies associated with the product.
- A cost appraisal is also carried out, which involves looking at development costs, management costs, operating costs, set-up costs, and marketing costs.
- Based on the above costs, as well as the level of competition and customer feedback, a selling price and break-even point can be identified.
- Fourt-Woodlock equation: a market research tool to describe the total volume of consumer product purchases per year based on households which initially make trial purchases of the product and those households which make a repeat purchase within the first year.
After the initial screening stage, the number of viable proposals available to progress to the next stage will have decreased significantly. However, before the company begins the development of prototypes, there is one more evaluation process that must take place, and this is the business analysis stage. In this stage, additional information is gathered on the remaining innovations in order to decide whether the significant costs that development will require are justified.
The primary focus of the business analysis stage is to determine whether the product idea will ultimately be profitable or not. However, while this is the primary consideration, it is not the only consideration. Social and environmental issues are frequently considered as well, particularly if there are certain regulations that the company must adhere to in these realms.
The first step in the business analysis process is to examine the projected demand for the product. While the major source of revenue would be product sales, another possible significant source of revenue is the licensing of the technology generated as a byproduct of the given product. Clearly this is not applicable to all products, but for certain classes of products, this can be a very significant source of income.
A complete cost appraisal is also necessary as part of the business analysis. As you can expect, it is difficult to anticipate all the costs that will be involved in product development. However, the following cost items are typical:
- Expected development cost, including both technical and marketing R&D
- Expected set-up costs (production, equipment, distribution)
- Operating costs that account for possible economies of scale and learning curves
- Marketing costs, especially promotion and distribution
- Management cost
Based on these costs, the business analysis stage will estimate the likely selling price. This figure will also depend on the level of competition, as well as customer feedback. Sales volumes must also be estimated based on the size of the market (using, for instance, the Fourt-Woodlock equation). Ultimately, profitability and the estimated break-even point can be derived. Customers base buying decisions on a personal value equation where the value is calculated by weighing the cost versus the benefits. This relates to the viability and feasibility of products that companies are considering to add to their line.
Development involves setting product specifications as well as testing the product with intended customer groups to gauge their reaction.
Describe the steps involved in the technical and marketing development stages of new product development
- Technical development involves creating a prototype to develop exact product specifications.
- The technical development stage also involves getting a good idea for the different methods and costs of making the product in a factory setting.
- The concept test is usually the first stage for the marketing department during the development stage. In addition to the product, elements such as packaging and labeling can also be tested with potential consumers.
- development: the complete process of bringing a new product to market
- development stage: The stage where prototypes are created, and questions of production and marketing are asked.
Once a potential product has passed the screening and business analysis stages, it goes onto the technical and marketing development stage. This stage includes identifying the target market and the decision maker in the purchasing process, determining what features must be incorporated into the product and the most cost-effective way to produce it, and establishing what the actual cost of production will be.
Technical development involves two steps. The first is the applied laboratory research required to develop exact product specifications. The goal of this research is to construct a prototype model of the product that can be subjected to further study. Once the prototype has been created, manufacturing methods research can be undertaken to plan the best way of making the product in commercial quantities under normal manufacturing conditions. This is an extremely important step, because there is a significant distinction between what an engineer can assemble in a laboratory and what a worker can produce in a factory.
While the laboratory technicians are working on the prototype, the marketing department is responsible for testing the new product with its intended consumers and developing the other elements of the marketing mix.
The testing process usually begins with the concept test. The product concept is a synthesis or a description of a product idea that reflects the core element of the proposed product. For example, a consumer focus group might be assembled and the interview session might begin with the question: “How about something that would do this?”
The second aspect of market development involves consumer testing of the product idea. This activity usually follows the construction of the prototype or limited production models. Various kinds of consumer preference can be conducted. The product itself can be exposed to consumer taste or use tests. Packaging, labeling, and other elements in the mix can be similarly studied.
Test marketing is the final stage before commercialization, and is where all the elements of the marketing plan are tested.
Discuss the requirements that must be satisfied to conduct successful test marketing of new products and distinguish test marketing from initial product testing
- Initial product testing and test marketing are very different. The former involves providing consumers with the test product, and giving them an incentive to participate. The latter involves all the elements of the marketing plan, in a real-world setting meant to simulate the broader market.
- There are risks in test marketing, such as high initial marketing costs, the potential to lose customer goodwill before the official launch, and giving competitors the opportunity to quickly copy the product.
- Variables in the test marketing process include the selection and number of test cities, as well as the ideal sample size to use.
- test marketing: The stage where all the variables in the marketing plan, as well as the product characteristics, are tested in a real-world setting.
This is the final step before commercialization. The objective of the this marketing phase is to test all the variables in the marketing plan, including different elements and characteristics of the product. This stage represents the launching of the total marketing program, albeit on a limited basis.
Three questions can be answered through test marketing:
- Is the overall workability of the marketing plan realized as planned?
- Do alternative allocations of the budget need to be evaluated?
- Can we determine whether users are being inspired to switch from their previous brands to the new one, and whether repeat purchases are taking place?
In the end, the test market should include an estimate of sales, market share, and financial performance over the life of the product.
Initial product testing versus test marketing
Initial product testing and test marketing are not the same. Product testing is totally initiated by the producer: he or she selects the sample of people, provides the consumer with the test product, and offers the consumer some sort of incentive to participate.
Test marketing, on the other hand, is distinguished by the fact that the test cities represent the national market. The consumer must make the decision herself, must pay his or her own money, and the test product must compete with the existing products in the actual marketing environment. For these and other reasons, a market test is meant to serve as an accurate simulation of the national market and serves as a method for reducing risk. It should enhance the new product ‘s probability of success and allow for final adjustment in the marketing mix before the product is introduced on a large scale.
Test marketing is not without inherent risks. First, there are substantial costs in buying the necessary productive capacity needed to manufacture the product or locating manufacturers willing to make limited runs. There are also promotional costs, particularly advertising and personal selling. Although not always easy to identify, there are indirect costs as well. For example, the money used to test market could be used for other activities. The risk of losing consumer goodwill through the testing of an inferior product is also very real. Finally, engaging in a test-market might allow competitors to become aware of the new product and quickly copy it.
Because of the special expertise needed to conduct test markets and the associated expenses, most manufacturers employ independent marketing research agencies with highly-trained project directors, statisticians, psychologists, and field supervisors. Such a firm would assist the product manager in making the remaining test market decisions.
- Selection of test market cities: these cities should reflect the norms for the new product in such areas as advertising, competition, distribution system, and product usage.
- Number of test cities: should be based on the number of variations considered (i.e. vary price, package, or promotion), representativeness, and cost.
- Sample size determination: the number of stores used should be adequate to represent the total market.
Even after all the test results are in, adjustments in the product are still made. Additional testing may be required, or the product may be deleted if it does not perform well during this stage, or if it becomes apparent that the product is not likely to become a commercial success.
Commercialization the process of launching a new product; it may involve heavy promotion and filling the distribution networks with the product.
Describe the three steps that must be implemented during the commercialization of new products
- The timing of the launch should coincide with a good economic situation to maximize sales. Cannibalization of existing products should be avoided, and the product should only be launched when no further improvements are foreseeable.
- Companies must decide which location(s) to launch, depending on their target markets, capabilities, and marketing strategy.
- By targeting the primary consumer group (which includes innovators, early adopters, and opinion leaders ), the company can ensure adoption by other buyers in the market place during the product growth period.
- commercialization: The process of introducing a new product into the market.
At last the product is ready to go. It has survived the development process and it is now on the way to commercial success (if all goes well, that is!). ‘ Commercialization ‘ is the process or cycle of introducing a new product or production method into the market. In this stage, the product is launched, advertisements and promotional activity begins and increases heavily, and the distribution pipeline is filled with the product. The actual launch of a new product is the final stage of new product development, and the one where the most money will have to be spent for advertising, sales promotion, and other marketing efforts.
The commercialization process
Commercialization of a product will only take place, if the following three issues are satisfied:
- Timing of launch: When facing the danger of cannibalizing the sales of the company’s other products, if the product can be improved further, or if the economy is down, the launch should be delayed.
- Launch location: It can be in a single location, one or several regions, a national or the international market. This decision will be strongly influenced by the company’s resources, in terms of capital, managerial confidence and operational capacities. Smaller companies usually launch in attractive cities or regions, while larger companies enter a national market at once. Global roll outs are generally only undertaken by multinational conglomerates, since they have the necessary size and make use of international distribution systems (e.g., Unilever, Procter & Gamble). Other multinationals use the “lead-country” strategy: introducing the new product in one country/region at a time.
- Target consumers: The primary target consumer group will have been identified earlier by research and test marketing. This primary consumer group should consist of innovators, early adopters, heavy users and/or opinion leaders. This will ensure adoption by other buyers in the market place during the product growth period.
The company has to decide on an action plan for introducing the product by implementing the above decisions. It has to develop a viable marketing-mix and create a respective marketing budget. When a plan is in place for each of these three issues, then the commercialization process may begin.
Success and Failure: Strategies to Improve Success
Marketers must learn from their own previous failures, and others’ failures, to ensure that they are successful for the next product launch.
Describe how market structure and business model, culture and communication, political and regulatory, and product/service factors impact a company’s market success and failure
- Four areas that marketers must pay attention to in order to maximize the chances of success are: (a) market structure and business model; (b) cultural and communication; (c) politics and regulation; and (d) product / service failure.
- Companies must align their business model to the structure of the market that the product is entering. No business model will work in all situations, and so it must be altered appropriately.
- Any product will run up against certain cultural factors. By understanding these, and avoiding problems (or even making use of such factors), companies can increase their chances of success.
- Companies must be aware of all legal regulations as well as potential political issues that may arise from the release of their product, and act accordingly to negate such issues.
- cultural factors: Differences in cultures (be they national or corporate cultures) that managers must pay attention to in order to ensure success.
Success and Failure
A product fails when it does not meet the objectives that were established before its release. The following case study describes Wal-Mart’s failure to enter the German market, and highlights many of the problems faced by marketers in making a successful product. By learning from the failures of others (and their own prior failures), marketers may learn how to succeed in future. For a summary of the reasons why products fail as applied to the Wal-Mart case.
Wal-Mart case study
Wal-Mart is the world’s biggest food retailer. In some nations, it is a great success. However, it has failed in some countries (e.g. Germany, South Korea). Here, we will describe Wal-Mart’s failure in Germany, and use its experiences there to illustrate some key principles relating to product failure and deletion.
There is fierce competition in the German grocery industry, and thus, low profitability in the food retail sector; profit margins range from 0.5-1%. The main feature of Wal-Mart’s business model is to continuously cut costs and so offer lower prices than its competitors. Wal-Mart also continuously pressures its suppliers to cut costs.
In 1997-1998, Wal-Mart acquired over 95 stores from existing German supermarket chains, making it the fourth biggest supermarket operator in Germany. The objective was to expand to 500 stores. However, Wal-Mart never grew from the original 95 stores. By 2007, it was bought out by one of Germany’s largest retail groups. Ultimately, Wal-Mart left the German market with a loss of one billion dollars before tax.
There are four key issues related to Wal-Mart’s failure in Germany: (a) market structure and business model; (b) cultural and communication; (c) politics and regulation; and (d) product/service failure.
Market structure and business model
A retailer that wants to follow Wal-Mart’s strategy of low prices needs to expand rapidly. In Germany, there were not enough appropriate locations to support such expansion. Wal-Mart did not build their own stores, but took over existing supermarkets that had a completely different business model – they were very small and had a limited range of goods. They were also located far apart, which resulted in high logistical costs.
With their strategy of “everyday low prices,” Wal-Mart is very successful in the United States and elsewhere. However, due to the extreme competition, Germans are accustomed to the low prices that are offered by numerous discount supermarket chains. For this reason, Wal-Mart’s low price strategy did not create sufficient competitive advantage.
When products are introduced, it is important to consider cultural factors. Wal-Mart decided to operate its German locations from the UK. Thus, its “corporate language” was English. However, many of the older German Wal-Mart managers did not speak English. Some managers did not stay on after the Wal-Mart acquisition. Key business connections were lost, which resulted in the loss of major suppliers. It would have been far better to retain and communicate effectively with the German managers who had know-how about the local market.
Politics and regulation
Wal-Mart’s managers violated German laws repeatedly, simply because they were unfamiliar to them. For example, Wal-Mart always stays union-free, but Germany has a history of strong, politically powerful unions. Ver.di, one of Germany’s biggest unions, sued the company for failing to publish key financial statements in 1999 and 2000. A fine, as well as much negative press, harmed Wal-Mart’s reputation.
After its expansion strategy failed, Wal-Mart began a price war to drive small competitors out of business. One part of the price war was to introduce a private label called “Smart Brand” and sell most of these products below manufacturing costs. The reaction of many competitors was also to decrease their prices, which led to a profit setback for the entire industry. Finally, the Federal Cartel Office interceded and stopped the price war.
Good customer service, combined with low prices, could have been a new market niche in Germany. One part of Wal-Mart’s customer service program was to ensure someone was always there to help. However, customer reaction was negative, because customers who normally do their grocery shopping in discount supermarket chains are used to self-service. They found this annoying, and it did not create a reputation for providing good customer service.
Wal-Mart tried to apply its U.S. success formula in an unmodified manner to the German market. As a result, they didn’t have sufficient knowledge about the market structure and key cultural / political issues. In addition, structural factors prevented Wal-Mart from fully implementing its successful business model. The final outcome was that it had to abandon its offerings in Germany. Had Wal-Mart paid careful attention to these issues prior to entering the German market, it could have had a very different outcome.