9.6: New Product Development

9.6.1: The Need for New Products

Learning Objective

Discuss the common challenges of developing successful new products

Key Points

• 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.

Key Terms

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

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The process of becoming obsolete, outmoded or out of date.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.

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.

Company Sales

Sales of individual products and total company sales for a fictitious company with multiple products.

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

‘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.

9.6.2: Strategy

Learning Objective

Describe the three common approaches to strategically developing new products

Key Points

• 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.

Key Terms

flexible product development

A new product development strategy designed so that changes can be made late in the process without excessive disruption.

user-centered design

A new product development strategy where the needs of the end users are given the most attention.

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.

Six Sigma

The symbol for Six Sigma, which is a contemporary management approach.

Phase-Gate Model

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.

9.6.3: Idea Generation

Learning Objective

Identify the five primary sources of product innovation

Key Points

• 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.

Key Terms

Generation X

the generation of people born after the baby boom that followed World War II, especially those born in the 1960s and 1970s

SWOT Analysis

A structured planning method used to evaluate the strengths, weaknesses, opportunities, and threats involved in a project or in a business venture.

purposeful development

Innovation that occurs in response to a market need that existing product lines cannot satisfy.

Idea Generation

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 ).

Different Sources of Innovation

A summary of different sources of innovation, as described in this section. Being innovative is key to generating new ideas in product development.

A table to shows different sources of innovation (technical breakthrough, non-technical idea development, idea from environment, serendipity, and purposeful development).

Technical Breakthroughs

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.

Non-technical Development

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.

Environment

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

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

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.

9.6.4: Screening

Learning Objective

Discuss the benefits and shortcomings of product screening

Key Points

• 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.

Key Term

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.

Screening

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 .

Screening

This figure illustrates the long process it takes for a drug to enter the market.

Screening Objectives

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.

Screening Techniques

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.

9.6.5: Concept Testing

Learning Objective

Explain concept testing, its disadvantages, and alternative methods used to evaluate consumer behavior toward new concepts

Key Points

• 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.

Key Term

concept testing

The process of evaluating consumer response to a product idea prior to the introduction of the product to the market.

Concept testing

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.

Focus Group

Using focus groups to generate user feedback is one method used to perform concept testing.

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.

9.6.6: Business Analysis

Learning Objective

Demonstrate knowledge of the components included in the business analysis stage of product development

Key Points

• 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.

Key Term

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.

Business Analysis

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 .

Business Analysis

Financial ratio analysis allows an observer to put data provided by a company in context. The observer can gauge the strength of different aspects of the company’s operations.

Stacks of gold coins.

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.

9.6.7: Development

Learning Objective

Describe the steps involved in the technical and marketing development stages of new product development

Key Points

• 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.

Key Terms

development stage

The stage where prototypes are created, and questions of production and marketing are asked.

development

the complete process of bringing a new product to market

Development

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

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.

Prototype

A company develops a prototype in order to conduct further testing on a potential product.

A Toyota car prototype on display.

Testing Process

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.

Concept Test

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?”

Consumer Testing

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.

9.6.8: Test Marketing

Learning Objective

Discuss the requirements that must be satisfied to conduct successful test marketing of new products and distinguish test marketing from initial product testing

Key Points

• 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.

Key Term

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.

Test Marketing

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.

Risks

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.

Test Marketing

Aggressive promotion in a limited geographical area is often a key element of the test marketing phase.

A Red Bull mini truck that’s used for test marketing.

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.

Variables

• 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.

9.6.9: Commercialization

Learning Objective

Describe the three steps that must be implemented during the commercialization of new products

Key Points

• 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.

Key Term

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 .

Launching a New Product

Whenever Apple launches a new product, there are crowds outside waiting to get their hands on the new product.

9.6.10: Success and Failure: Strategies to Improve Success

Learning Objective

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

Key Points

• 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.

Key Term

cultural factors

Differences in cultures (be they national or corporate cultures) that managers must pay attention to in order to ensure success.

Example

• As we saw in the case study, Wal-Mart came up against all these factors when attempting to launch in Germany. With a finer appreciation of these potential issues, and a plan to counteract them, it would have had more success in the country.

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’s Failure in Germany

Marketers face many challenges when making and introducing a successful product.

A chart that summarizes a case study of why Wal-Mart failed in Germany.

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.

Culture

and communication

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.

Product/service failure

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.

Conclusion

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.

9.7: Differentiating Factors in Product Design

9.7.1: Quality

Consumers place a value on quality; therefore high quality products may be able to win share and/or command a price premium.

Learning Objective

Identify the attribute of quality at the design stage as a differentiating factor

Key Points

• Quality is considered a non-functional requirement in product design, affecting the execution and evolution of a product.
• The five aspects of quality in a business context include producing, checking, controlling, managing, and assuring quality in products and services.
• Manufacturers often view quality as a driver for productivity, increased revenues, and technological advances.

Key Terms

extensibility

A quality of design that takes possible future advances into consideration and attempts to accommodate them.

ISO

The ISO is the International Organization for Standardization.

conformance

The act of conforming; conformity.

Quality

Quality in business, engineering, and manufacturing has a pragmatic interpretation as the non-inferiority or superiority of something; it is also defined as fitness for purpose. Product quality can vary depending on perception and is considered somewhat subjective since it may be understood differently by different people. When it comes to quality in product design, manufacturers might measure how well products conform to certain requirements or the level of accuracy in products and services following production. Consumers may focus on product features and how well the product compares to competing brands in the marketplace. Support personnel may measure quality in the degree that a product is reliable, maintainable, or sustainable.

Improving Product Quality

Improving product quality in businesses can lead to better productivity and more innovation.

Quality is considered a non-functional requirement in engineering, affecting the execution and evolution of a product. Product qualities can be divided into two main categories:

• Execution qualities, such as security and usability.
• Evolution qualities, such as testability, maintainability, extensibility, portability, and scalability.

Product Quality in Business

During the 1960s, the U.S. military, aerospace, and nuclear industries developed the original versions of the Quality Management System Standards (eventually merged to ISO 9001). These standards were established to produce better products on a consistent basis, while focusing on production, conformance, and quality control mechanisms. Within areas such as product design and manufacturing, five main aspects of quality fall under this scheme. They include:

1. Producing – providing a product or service.
2. Checking – confirming that a product or service has been produced correctly.
3. Quality Control – controlling a process to ensure that the outcomes are predictable.
4. Quality Management – directing an organization so that it improves its performance through analysis and innovation.
5. Quality Assurance – obtaining confirmation (usually from the purchaser or a third-party) that a product or service will be satisfactory.

Managing quality is fundamental to any activity, particularly in the design and manufacturing of consumer and industrial goods. For manufacturers of products, it is commonly stated that “quality drives productivity.” Better productivity is viewed in direct correlation to increased revenues, employee opportunities, and technological advances. Thus, businesses must have a clear understanding of all aspects of product quality, measure product performance, and adapt their market strategy for longevity and growth.

9.7.2: Design and Feature Set

Premium features and design may help differentiate a product to earn it share or a price premium in the marketplace.

Learning Objective

Outline the concept of design and feature sets as differentiating factors in product design

Key Points

• During product design, companies must consider factors such as cost, producibility, quality, performance, reliability, serviceability, and user features.
• Companies must be cognizant of feature creep, which is the ongoing expansion or addition of new features in a product.
• Product design teams can control feature creep by setting strict limits for allowable features or limiting features in some product versions.
• Once products reach the stage of maximum functionality, manufacturers face the choice of adding extraneous functions, sometimes at the cost of efficiency.

Key Terms

feature creep

The tendency of a design project or product cycle to accumulate more and more features or details, rather than to be completed and released at a more basic level.

serviceability

The property of being serviceable, of being useful for some function.

Design and Feature Set

In systems engineering, a requirement (often referred to as a functional requirement) can be a description of what a system must do. Another type of requirement specifies something about the system itself, and how well it performs its functions. Such requirements are often called non-functional requirements, performance requirements. or quality of service requirements. Examples of such requirements include usability, availability, reliability, supportability, testability, and maintainability. These requirements define the characteristics or features of the desired product during the design process .

Product Features

Features must meet usability and reliability requirements before being built into products and systems.

Product Design Process

Product design involves developing a device, assembly, or system into an item for sale using a production manufacturing process. During product design, engineers and designers must consider factors such as cost, producibility, quality, performance, reliability, serviceability, and user features. A product must go through the design and development of its mechanical, electronics, and software components before transitioning to manufacturing for mass production.

For example, the development of digital cameras would include defining the feature set; designing the optics, as well as the mechanical and ergonomic aspects of the packaging; developing the electronics that control the various components; and developing the software that allows users to view and manipulate photos, store them to memory, and download to them to a computer.

Dangers Of Feature Creep

Customer demand for particular features or functionality can result in products tailored to very specific, niche markets. However, manufacturers must be cognizant of feature creep, which is the ongoing expansion or addition of new features in a product. Although providing consumers more useful or desirable products and increasing sales are priorities for most businesses, extra features going beyond product function can result in over-complication.

Once products reach the stage of maximum functionality, manufacturers face the choice of adding extraneous functions, sometimes at the cost of efficiency. On the other hand, the manufacturer must deal with ignoring older versions at the cost of being perceived by the market as stagnant or dated. Nevertheless, introducing a bloated feature set can move the product or system beyond its initial goals, increasing production costs and schedule overruns. Introducing too many requirements into a feature set has often been blamed for endangering and even killing products and projects.

Another major cause of feature creep might be a compromise from a committee which decides to implement multiple, different viewpoints in the same product. As more features are added to support each viewpoint, it might be necessary to have cross-conversion features between the multiple viewpoints, further complicating the total features.

Feature Control In Product Design

To control the number of product features during the design phase, manufacturers set strict limits for allowable features and multiple variations. Excess features are removed or delayed until the later delivery phases of the project. Quality control is also maintained through multiple variations of products, where features are kept limited in some versions. Because the ever-growing, ever-expanding addition of new features might exceed available resources, a minimal “basic” version of a product can be maintained separately to ensure operation in smaller operating environments.

Other companies might use the “80/20 Rule”, where more basic product variations might support the needs of about “80%” of the users. Thus, the bulk of end-users are not subjected to the complexity (or extra expense) of features requested by the remaining 20% of users. These extra features are still available, but may be available in only select versions of the products.

9.7.3: Support and Help

Excellent customer service can help differentiate a product or brand and may lead to increased brand loyalty over time.

Learning Objective

Examine the role of support and help programs as a differentiating factor in product design

Key Points

• Today, most major telecommunications, IT and electronic companies run virtual support and help desks to provide user assistance around the world.
• Virtual product support allows organizations to optimize their overall IT support process and gain competitive advantages when it comes to delivering quick and efficient technical support.
• Companies, especially larger organizations, often offer internal technical support and help desk services to their staff for computer-related problems.
• In addition to virtual help desks, product support and help services are delivered via email, toll-free numbers, or at physical locations.

Key Term

extranet

A private computer network that uses Internet protocols and can be accessed by authorized individuals via the Internet.

Support and Help

Rapid globalization and expansion of technology are quickly making geography irrelevant; eliminating time constraints for customer support and help functions in organizations. Moreover, as more people telecommute from home and work from remote locations, internal information technology (IT) administrators must spend more time troubleshooting and fixing employees’ problems.

Customer Support

In today’s interconnected world, product support and help services are delivered through multiple channels.

An illustration that shows how companies have tried to streamline the customer support process.

This increased demand for technical services requires IT support organizations to be more agile in diagnosing and resolving product issues. Today, most major telecommunications, IT and electronic companies run virtual support and help desks to provide user assistance around the world. As a result, these organizations are able to optimize their overall IT support process and gain competitive advantages when it comes to delivering quick and efficient technical support.

The Role of Product Support and Help Services

Users of mobile phones, televisions, computers, software products, and other electronic or mechanical goods will occasionally need product support services. This service is usually offered in the form of a help desk that acts as an information and assistance resource. Product support professionals attempt to help users solve specific problems with a product—rather than providing training, customization, or other support services.

Most companies offer either free customer support or charge for premium customer support and help services. Companies, especially larger organizations, offer internal technical support and help desk services to their staff for computer-related problems.

Types of Product Support and Help Services

The Internet serves as a primary source for freely available product support. Virtual help desks, which allow organizations to virtually deploy IT technicians on demand to support users can efficiently manage and allocate organizational resources. Product support personnel can access any computer to provide support despite the end users’ or technicians’ location.

Some companies develop extranet sites, or customer websites that allow users to log calls and report incidents. Virtual help desks access these systems through support sessions where they can diagnose and fix computer issues quickly. This eliminates in-person customer service calls and ineffective phone-only tech support sessions, making the help desk more efficient.

However, many organizations still offer support services via email and toll-free numbers. Some companies also offer live support at physical stores and locations. Nevertheless, the Internet has allowed for a new form of product support to develop. Some online communities, which are moderated by product users, have emerged to give support where manufacturer support is lacking. These experienced users may provide advice and assistance with problems, or offer work-arounds to fellow users unable to find solutions on their own or through the vendor.

9.7.4: Deletion

Product deletion, either through product replacement or product elimination, results when products fail to meet company expectations.

Learning Objective

Illustrate the reasons for and the impact of product deletion

Key Points

• Companies are increasingly under pressure to evaluate their existing product line and make continuous decisions about adding new products or deleting existing ones.
• In addition to weak sales and profit, brands delete products that fail to align with marketing strategies or that demonstrate an unfavorable market outlook.
• Product failure rates vary by industry, but it is estimated that failure rates for new packaged goods range anywhere from 75% to 90%.

Key Term

revenue stream

A revenue stream is a method that a company, organization, or individual uses to collect money—often automated—from users of their product or service. In essence, it is a method of earning money and a way to protect it.

Example

• Coca-Cola Vanilla is the limited relaunch of the formerly produced Vanilla Coke soft drink from the early 2000s to compete with Pepsi Vanilla. Doubt was cast over the future of Vanilla Coke and its splinter beverages when the company announced the 2004 sales figures: 35 million unit cases in North America compared to 90 million in 2002; Vanilla Diet Coke dropped from 23 million unit cases in its inaugural year (2003) to 13 in 2004. On November 3, 2005, The Coca-Cola Company announced that Vanilla Coke and its diet counterpart would be discontinued in the United Kingdom and Ireland by early 2006. A day later, it was announced that it would be phased out in North America by the end of 2005.

Deletion

The twenty-first century marketplace is dynamic, fast-changing, and increasingly fickle. More and more businesses realize that no product lasts forever, and that sales levels can fluctuate dramatically over time. As a result, companies are under pressure to evaluate their existing product line and to make continuous decisions about adding new products or deleting existing ones. Brands must task their engineering and design teams to produce successful products that generate a consistent stream of sales for both short-term profit and long-term survival. An organization must establish a series of successful products, if that organization wants to maintain a consistent stream of sales or else grow sales over time. One reason for this pattern is the product life cycle. No product lasts forever, and sales levels can fluctuate dramatically over time.

Factors in Product Deletion

Deletion is the process of removing products that perform below market expectations or fail to meet company objectives. Deletion results in either product replacement or product elimination. Product deletion requires the company to evaluate its entire product mix and pinpoint where organizational resources can be allocated elsewhere to generate consistent revenue streams.

In addition to weak sales and profit, brands delete products that fail to align with marketing strategies, or that demonstrate an unfavorable market outlook. Market trends and consumer tastes often dictate whether products perform well in the long-term or taper off as a passing fad. However, factors including a company’s business model, culture (or local tastes), government politics and/or regulations, and product malfunction can all contribute to the removal of a product.

Failure rates of products vary by industry. Despite significant investment in product development and market research, it is estimated that failure rates for new packaged goods range anywhere from 75% to rates as high as 90% (source: catalinamarketing.com). When considering “innovative” new products, Harvard Professor John T. Gourville estimates that approximately half of all such products fail.

Business Impact of Product Deletion

Once a company eliminates a product from its offering, the brand must decide whether its goal is to maintain or increase sales. To maintain revenues, the company must continue investing in its remaining products and ensure they are competitively positioned in the marketplace. However, if the company seeks to increase sales in the near future, then it must introduce a new group of successful products to generate additional revenue.

Coca-Cola Vanilla

Coca-Cola Vanilla was the limited relaunch of Vanilla Coke from the early 2000s to compete with Pepsi Vanilla. It was phased out in North America by the end of 2005 due to low sales.

9.7.5: Organizational Requirements for Product Development and Management

Product development combined with product marketing make up the product management function within an organization.

Learning Objective

Construct the relationship between product development and product management

Key Points

• Product management spans many activities, from strategic to tactical, and can be shared by other roles, such as product engineering.
• Many interpretations exist for product management roles and functions and vary depending on company size, history and industry.
• Product management often serves an interdisciplinary role, bridging gaps within the company between engineering-oriented teams and commercially oriented teams.
• To facilitate the launch and marketing of new products, product management teams may perform tasks, including research and competitive intelligence, and sales training.

Key Term

lifecycle

the stages through which a product or its category bypass, from its introduction to the marketing, growth, maturity to its decline or reduction in demand in the market.

Organizational Requirements for Product Development and Management

Product management is an organizational lifecycle function within a company dealing with the planning, forecasting, or marketing of a product or products at all stages of the product lifecycle. Product development – the process of bringing new products to the marketplace – combined with product marketing, make up the product management function that oversees the launch of a company’s new products.

Product Launch

Some organizations set up product management teams so that they intersect between marketing and engineering activities.

Product management spans many activities, from strategic to tactical, and varies based on the organizational structure of the company. Product management can be a function separate on its own, or fall under marketing or engineering.

Functional Requirements of Product Management

Depending on the company size and history, product management has a variety of functions and roles, and can be shared across different departments, such as product development or engineering. A product manager investigates, selects, and develops one or more tangible products for an organization. However, product management also deals with intangible products, such as music, information, and services. Many interpretations exist for product management roles and functions and vary depending on company size, history, and industry.

The Intersection between Product Management, Product Development and Marketing

Frequently there is Profit and Loss (P&L) responsibility as a key metric for evaluating product management performance. In some companies, the product management function is the hub of many other business activities around the development and launch of a product. In other organizations, product management is one of several things that need to occur to successfully launch, monitor, and manage a product. Product management often serves an interdisciplinary role, bridging gaps within the company between different sets of expertise.

This intersection most commonly happens between engineering-oriented teams and commercially-oriented teams. Often, product management professionals serve as the middlemen between product development and engineering and marketing and sales teams. They often translate business objectives set for a product by marketing or sales into engineering requirements for product development. Conversely, the product management team may work to explain the finished product’s capabilities and limitations to marketing and sales professionals. This constant exchange between technical and business teams ensures that product benefits and features are accurately communicated to target audiences.

To facilitate this communication process, product management teams will perform activities including customer research, competitive intelligence, industry analysis, and competitive analysis. Likewise, product management works closely with marketing distributing messages, training sales people, developing market strategies, and communicating messages through advertising and public relations channels.

9.8: The Spread of New Products

9.8.1: The Diffusion of Innovation

The diffusion of innovation theory seeks to explain how, why, and at what rate new ideas and technology spread through cultures.

Learning Objective

List the four main elements that influence the spread of new ideas and technologies

Key Points

• Everett Rogers, a professor of rural sociology, popularized the theory in his 1962 book Diffusion of Innovations.
• Four main elements that influence the spread of a new idea are the innovation, communication channels, time, and the social system.
• Diffusion of innovations manifests itself in different ways in various cultures and fields and is highly subjective to the type of adopters and innovation decision process.
• Marketers are particularly interested in the diffusion process as it determines the success and failure of any new product introduced in the market.

Key Term

innovation

As used here, innovation describes an idea or product that is new to the company in question.

The Diffusion of Innovation

The diffusion of innovation is a theory that seeks to explain how, why, and at what rate new ideas and technology spread through cultures. The origins of the diffusion of innovation theory are varied and span multiple disciplines. Everett Rogers, a professor of rural sociology, popularized the theory in his 1962 book Diffusion of Innovations. He said diffusion is the process by which an innovation is communicated through certain channels over time among the members of a social system. Rogers synthesized research from over 508 diffusion studies and produced a theory for the adoption of innovations among individuals and organizations. Rogers (1962) espoused the theory that there are four main elements that influence the spread of a new idea:

1. The innovation – According to Rogers, an innovation is “an idea, practice, or object that is perceived as new by an individual or other unit of adoption.”
2. Communication channels – These are “the means by which messages get from one individual to another.”
3. Time – Rogers wrote that “the innovation-decision period is the length of time required to pass through the innovation-decision process. The rate of adoption is the relative speed with which an innovation is adopted by members of a social system.”
4. Social system – According to Rogers, a social system is “a set of interrelated units that are engaged in joint problem solving to accomplish a common goal.”

Diffusion of innovations manifest themselves in different ways in various cultures and fields and is highly subjective to the type of adopters and innovation decision process. Marketers are particularly interested in the diffusion process as it determines the success and failure of any new product introduced in the market. They usually look forward to procuring the largest amount of adoption within the shortest period of time. Thus, it is quite important for a marketer to understand the diffusion process so as to ensure proper management of the spread of the new product or service.

Market Share

With successive groups of consumers adopting the new technology (shown in blue), its market share (yellow) will eventually reach the saturation level.

9.8.2: The Rate of Adoption

The rate of adoption is defined as the relative speed with which members of a social system adopt an innovation.

Learning Objective

Discuss the factors leading to adoption of an innovation, and the strategies for making innovation sustainable

Key Points

• Critical mass is the point within the adoption curve that enough individuals have adopted an innovation such that that the continued adoption of the innovation is self-sustaining.
• The adoption process is an individual phenomenon the describes the series of stages an individual undergoes from first hearing about a product to finally adopting it.
• The diffusion process essentially encompasses the adoption process of several individuals over time.

Key Terms

intrinsic

Innate, inherent, inseparable from the thing itself, essential.

critical mass

A quantity or amount required to trigger a phenomenon.

The Rate Of Adoption

The rate of adoption is defined as the relative speed with which members of a social system adopt an innovation. It is usually measured by the length of time required for a certain percentage of the members of a social system to adopt an innovation. Within the rate of adoption there is a point at which an innovation reaches critical mass. Critical mass is the time in the adoption curve when enough individuals have adopted an innovation so that the continued adoption of the innovation is self-sustaining. Everett Rogers outlines several strategies to help an innovation reach this stage:

Diffusion of Innovation

This graph shows the innovation curve and the tipping point, or critical mass.

1. Have an innovation adopted by a highly respected individual within a social network, creating an instinctive desire for a specific innovation.
2. Inject an innovation into a group of individuals who would readily use an innovation.
3. Provide positive reactions and benefits for early adopters of an innovation.

The adoption process is an individual phenomenon describing the series of stages an individual undergoes from first hearing about a product to finally adopting it. On the other hand, the diffusion process signifies a group of phenomena, which suggests how an innovation spreads among consumers. Overall, the diffusion process essentially encompasses the adoption process of several individuals over time.

Five Adoption Factors

Rogers defines several intrinsic characteristics of innovations that influence an individual’s decision to adopt or reject an innovation:

1. Relative Advantage: How improved an innovation is over the previous generation.
2. Compatibility: The level of compatibility that an innovation has to be assimilated into an individual’s life.
3. Complexity or Simplicity: If the innovation is perceived as complicated or difficult to use, an individual is unlikely to adopt it.
4. Trialability: How easily an innovation may be experimented. If a user is able to test an innovation, the individual will be more likely to adopt it.
5. Observability: The extent that an innovation is visible to others. An innovation that is more visible will drive communication among the individual’s peers and personal networks, and will in turn, create more positive or negative reactions.

9.8.3: Stages of Adopters

The stages of adopters for the diffusion of innovation include knowledge, persuasion, decision, implementation, and confirmation.

Learning Objective

Describe the five stages detailed in Everett Rogers’ adoption process

Key Points

• Diffusion occurs through a series of communication channels over a period of time among the members of a similar social system.
• An individual might reject an innovation at any time during or after the adoption process.
• Previous terminology for the stages of adopters included awareness, interest, evaluation, trial, and adoption.

Key Terms

social system

The interaction of at least two personal systems or two persons acting in their own roles.

diffusion

The act of diffusing or dispersing something, or the property of being diffused or dispersed; dispersion.

Stages of Adopters

Diffusion of an innovation occurs through a five–step process. This process is a type of decision-making. It occurs through a series of communication channels over a period of time among the members of a similar social system. Everett Rogers categorizes the five stages (steps) of adopters as:

1. Awareness
2. Interest
3. Evaluation
4. Trial
5. Adoption

An individual might reject an innovation at any time during or after the adoption process. In later editions of The Diffusion of Innovations, Rogers changes the terminology of the five stages to: knowledge, persuasion, decision, implementation, and confirmation. However the descriptions of the categories have remained similar throughout the editions. The five stages of the adoption process are:

1. Knowledge: In this stage the individual is first exposed to an innovation but lacks information about that innovation. During this stage of the process the individual has not been inspired to find more information about the new idea.
2. Persuasion: In this stage, the individual is interested in the innovation and actively seeks information and details about it.
3. Decision: In this stage, the individual takes the concepts of change (switching cost), weighs the advantages and disadvantages of using the innovation, and decides whether to adopt or reject the innovation. Due to the individualistic nature of this stage, Rogers notes that it is the most difficult stage to acquire empirical evidence.
4. Implementation: In this stage, the individual employs the innovation to a varying degree depending on the situation. During this stage the individual determines the usefulness of the innovation and may search for further information about it.
5. Confirmation: Although the name of this stage may be misleading, in this stage, the individual finalizes his or her decision to continue using the innovation and may end up using it to its fullest potential.

Stages of Diffusion

There are five stages of the diffusion of innovation.

A chart that shows the five stages of decision innovation process – knowledge, persuasion, decision (reject or accept), implementation, and confirmation.

9.8.4: Applying the Diffusion of Innovation Theory

In applying the diffusion of innovation theory, it is important to understand potential adopters and their decision-making process.

Learning Objective

Illustrate how the diffusion of innovation theory influences consumer adoption of products and services

Key Points

• Important factors in decision making include whether the decision is made freely and implemented voluntarily, and who makes the decision.
• Opinion leadership tends to be organized into a hierarchy within a society, with each level having the most influence over other members in the same level, and on those in the level below it.
• Public consequences refer to the impact of an innovation on those other than the actor, while private consequences refer to the impact on the actor itself.
• Direct costs of the diffusion of innovation are usually related to financial uncertainty and the economic state of the actor. Indirect costs may be social, such as social conflict caused by innovation.

Key Terms

horizontal conflict

channel conflict between intermediaries at the same level within a channel

hierarchy

Any group of objects ranked so that every one but the topmost is subordinate to a specified one above it.

vertical conflict

psychological tension or anxiety between two alternatives that are not simply different, but where one is genuinely higher than the other

Applying the Diffusion Of Innovation Theory

In applying the diffusion of innovation theory, it is important to understand potential adopters and their decision-making process. Important factors in decision making include who makes the decision, and whether the decision is made freely and implemented voluntarily. Based on these considerations, three types of innovation decisions have been identified:

1. Optional innovation decision: This is made by an individual who is in some way distinguished from others in a social system.
2. Collective innovation decision: This is made collectively by all individuals of a social system.
3. Authority innovation decision: This is made for the entire social system by a few individuals in positions of influence or power.

There are categories of adopters that serve as a classification of individuals within a social system on the basis of innovativeness. According to Everett Rogers , these categories include:

Categories of Adopters

Categories of innovation adopters include innovators, early adopters, early majority, late majority, and laggards.

A chart that shows that innovators are the first category of adopters.

1. Innovators: Innovators are the first individuals to adopt an innovation. Innovators are willing to take risks, youngest in age, have the highest social class, have great financial liquidity, are very social, and have the closest contact to scientific sources and interaction with other innovators. Risk tolerance has them adopting technologies which may ultimately fail, though their financial resources help them absorb these failures.
2. Early adopters: This is the second fastest category of individuals who adopt an innovation. These individuals have the highest degree of opinion leadership among the other adopter categories. Early adopters are typically younger in age, have a higher social status, have more financial liquidity, possess an advanced education, and are more socially forward than late adopters. They are more discrete in adoption choices than innovators, as they realize that judicious choice of adoption will help them maintain a central communication position.
3. Early majority: Individuals in this category adopt an innovation after a varying degree of time. This time of adoption is significantly longer than with the innovators and early adopters. The early majority tends to be slower in the adoption process, has above average social status, has contact with early adopters, and seldom holds positions of opinion leadership in a system.
4. Late majority: Individuals in this category will adopt an innovation after the average member of the society does. These individuals approach an innovation with a high degree of skepticism. The late majority typically has below average social status, has very little financial liquidity, shares contact with others in the late majority and the early majority, and has very little opinion leadership.
5. Laggards: Individuals in this category are the last to adopt an innovation. Unlike some of the previous categories, individuals in this category show little to no opinion leadership. Laggards typically tend to be focused on “traditions”, are likely to have the lowest social status, have the lowest financial liquidity, be the oldest of all other adopters, and are in contact with only family and close friends.

Research done in the early 1950s at the University of Chicago attempted to assess the cost-effectiveness of broadcast advertising on the diffusion of new products and services. The findings were that opinion leadership tended to be organized into a hierarchy within a society, with each level having most influence over other members in the same level, and on those in the next level below it. The lowest levels were generally larger in numbers, and tended to coincide with various demographic attributes that might be targeted by mass advertising. However, the study found that direct word of mouth were far more influential than broadcast messages, which were only effective if they reinforced the direct influences. This led to the conclusion that advertising was best targeted, if possible, on those next in line to adopt, and not on those not yet reached by the chain of influence.

Consequences Of Adoption

There are both positive and negative outcomes when an individual or organization chooses to adopt a particular innovation. In her article, “Integrating Models of Diffusion of Innovations,” Barbara Wejnert details two categories for consequences: public and private. Public consequences refer to the impact of an innovation on those other than the actor, while private consequences refer to the impact on the actor itself. Public consequences are usually concerned with issues of societal well-being, while private consequences are usually concerned with the improvement of quality of life or the reform of social structures.

Benefits Versus Costs

The benefits of an innovation obviously refer to the positive consequences, while the costs refer to the negative. Direct costs are usually related to financial uncertainty and the economic state of the actor. Indirect costs may be social, such as social conflict caused by innovation.