New Product Management (8)

Chapter 8

The Concept Evaluation System

New products fail because there was no basic need for the item (as seen by the intended user), the new product did not meet its need, and the new product idea was not properly communicated to the intended user – they did not need it, it did not work, and they did not get the message.

The Evaluation System for the basic new products process

Though overall purpose of evaluation is to guide us to profitable new products, each individual evaluation step task has a specific purpose in the new product process. Ideas become concepts, concepts get refined, evaluated, and approved, development projects are initiated, and products are launched.

Phase 1 (Opportunity identification and selection) – someone decided the firm had a strong technology, or an excellent market opportunity, or a serious competitive threat – where should we look? What should we try to exploit? And what should we fight against? Market descriptions - it makes sure we play the game in our home field.

Phase 2 (Concept generation) – ideas begin to appear, and the purpose of evaluation changes. The initial review is if this idea is worth screening, the goal is to avoid the big loser/ sure loser, and tries to spot the potential big winners. Evaluation techniques are the PIC, immediate judgmental response, preliminary market analyses, and concept testing.

Phase 3 (Concept/ project evaluation) – the decision on whether to send the concept into full-scale development - full screen, should we try to develop it. The evaluation techniques are checklists, profile sheet, and scoring models.

Phase 4 (Development) – in traduces the part of the process where the parallel or simultaneous technical and marketing activities are done. Have we got what we want? Is this part ready? Is this system clear for use? Have we developed it? If not, what should we try? A protocol check tells whether we are ready to develop a product for serious field testing. There are also prototype tests, concept tests, and product use tests.

Phase 5 (Launch) – the technical efforts yield a product that evaluators say meets Customers’ request. Whether the firm has proven itself able to make and market the item on commercial sale – usually done by market testing. Evaluation techniques include: speculative sale, simulated test market, informal selling, control sale, test marketing, and rollout.

The Cumulative Expenditure Curve

The new product evaluation system flows with the development of the product. An early expenditures curve represents the product development in technical fields (pharmaceuticals, optics, and CPUs) where R&D is the big part of the cost package, while marketing cost is small. For an average curve, a gradually upward-sloping curve represents the accumulation of costs/ expenditures on a typical new product project from its beginning to its full launch. The late expenditures curve represents customer packaged goods company where technical expenditures may be small, but huge TV ads are needed at introduction.

The risk/ payoff matrix

At any single evaluation point in the new product process, the new product faced four situations (4 cells matrix): two broad outcomes (success or failure) and two decisions options (move on or kill the project). If the firm is to stop the project where it is going to succeed, a winner is discarded and it is much worse. On the other hand, if the project is to continue when it is going to fail, a loser is continued to the next evaluation point. But throwing out a winner is very costly as the profits from a winning product are bound to be much greater than all of the development costs combined. The exception is the opportunity cost – when good candidates wait in the wings, the losses of dropping a winner are much less because the money diverted will likely go to another winner.

There are 4 generic risk strategies:

a) Avoidance – eliminate the risky project altogether, though an opportunity cost is incurred.

b) Mitigation – reduce the risk to an acceptable, threshold level, through redesigning the product to include more backup systems or increasing product reliability.

c) Transfer – move the responsibility to another firm (joint venture or subcontractor).

d) Acceptance – develops a contingency plan or deal with the risks as they come up.

The decay curve

The risk matrix leads to the idea of a decay curve. It depicts the percentage of any firm’s new product concepts that survive through the development period. A firm usually wants to kill off all possible losers early, and spend time developing only those proposals worthy of marketing. The curve is partly a plan and partly a result and the two should synchronize. It helps the manager see the need for thinking through the stream of development costs and the risk/ payoff matrix.

Planning the evaluation system

1) Everything is tentative – we usually assume everything is tentative: form can be changed and so can costs, packaging, positioning, service contracts, the marketing date, the reactions of government regulators and Customers attitudes. Firms are finding ways to avoid commitment by transferring risk: by having another supplier produce the product for a while before a facilities commitment, or by negotiating a tentative license, or by asking probable customers to join a consortium to ensure the volume needed to build the facility. However, financial analysis should be done as early as possible to avoid wasting $ on poor projects. Another tentative matter is the marketing date (marketing actually begins very early in the development process).

2) Potholes – product developers should have the ability to anticipate major difficulties, the potholes of product innovation. They can be costly when we fail to see them coming in time to slow down or steer around them. We should carefully scan for the really damaging problems and keep in mind when we decide what evaluating we will do. Campbell’s key strengths are manufacturing cost and whether customers think the product tastes good. Example of potholes can be a quick entry by a price-cutter (in case where there is no patent protection or other barriers to competitive entry) or customer might be unwilling to take the time to learn to use complex new products, or uncertainty regarding the FDA approval for pharmaceutical products.

3) The people dimension – product developers also have to remember they are dealing with people, and people cause problems. An idea may have little support outside R&D (fragile and easy to kill). An evaluation system should contain early testing that is supportive. Concept testing is sometimes called concept development to reinforce the idea of helping the item, not just killing it off. There is also personal risk – risk to jobs, promotions, bonuses, and etc. The evaluation system should be supportive of people and offer the reassurance.

4) Surrogates – the timing of factual info does not often match our need for it. We look for surrogate questions to give us pieces of info that can substitute for what we want to learn but cannot. Examples are: Did they keep the prototype product we gave? (Instead of will they prefer it?), does it match our manufacturing skill? (Instead of will cost be effective?), did it do well in field testing? (Will it sell?). Only when we know our final cost and the competitor’s cost can we answer the original question. But the surrogates helped tell us whether we were headed for trouble.

The A-T-A-R model (awareness, trial, availability, and repeat)

The last tool used for designing an evaluation system for new project is based on how we forecast sales and profit on a new item. The calculation is much like a pro forma income statement. The model is taken from diffusion of innovation: for a person to become buyer of innovation, there must 1st be awareness that it exists, there must be a decision to try, then the person must find the item available, and there must be the type of happiness with it that leads to adoption and repeat usage. We use the formula to calculate all the way to profit, and so we include target market size (potential adopters), units purchased by each adopter, and the economics of the operation. The model came from customer products marketing and can be applied to all types of new products including industrial and services. In this chapter it is shown to be used early in concept evaluation as a rough forecasting tool (providing early sales and profit forecast based on estimates specific to the new product) – however, it is also used in more detailed sales forecasting model.

Profits = buying units x percent aware x percent trial x percent availability x percent repeat x annual units bought x (revenue per unit – costs per unit)

Profits = units sold x profit per unit

Two things are important about this model’s sales and profit forecasts.

1) Each factor is subject to estimation (in every development phase we are trying to sharpen our ability to make the estimates)

2) An inadequate profit forecast can be improved only by changing one of the factors

Awareness: we want to know if the buying unit has been sufficiently informed to stimulate further investigation and consideration of trial.

Trial: we might imagine an in-store situation where customer puts on the headphones and see if the product is satisfactory. Vicarious trial is where a person/ firm who did try something shares results with someone who cannot try it. We want two things to happen in a trial: the buying unit went to some expense to get the trial supply (if there was no cost, then we cannot be sure there was evaluation of the product message and interest created), and the buying unit used the new item enough to have a basis for deciding whether it is any good.

Availability: we want to know whether the buyer can easily get the new product if a decision is made to try it (Percentage of those outlets and distributors).

Repeat: means the trial was successful and the buying unit was pleased.