Innovation and Product Development

Have you ever wanted to go surfing but couldn't find a body of water with decent waves? You no longer have a problem: the PowerSki Jetboard makes its own waves. This innovative product combines the ease of waterskiing with the excitement of surfing. A high-tech surfboard with a forty-five-horsepower, forty-five-pound watercraft engine, the PowerSki Jetboard has the power of a small motorcycle. Experienced surfers use it to get to the top of rising ocean waves, but if you're just a weekend water-sports enthusiast, you can get your adrenaline going by skimming across the surface of a local lake at forty miles an hour. All you have to do is submerge the tail of the board, slide across on your belly, and stand up (with the help of a flexible pole). To innocent bystanders, you'll look like a very fast water-skier without a boat.

To see the PowerSki Jetboard in action, visit the company's Web site at http://www.powerski.com. Watch the streaming videos that demonstrate what the Jetboard can do.

Where do product ideas like the PowerSki Jetboard come from? How do people create products that meet customer needs? How are ideas developed and turned into actual products? How do you forecast demand for a product? How do you protect your product ideas? These are some of the questions that we'll address in this chapter.

 This text was adapted by Saylor Academy under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensor.

LEARNING OBJECTIVES

1. Define product.
2. Describe the four major categories of product developments: new-to-the-market, new-to-the-company, improvement of existing product, and extension of product line.

Basically, a product is something that can be marketed to customers because it provides them with a benefit and satisfies a need. It can be a physical good, such as the PowerSki Jetboard, or a service, such as a haircut or a taxi ride. The distinction between goods and services isn't always clear-cut. Say, for example, that a company hires a professional to provide an in-house executive training program on "netiquette" (e-mail etiquette). Off the top of our heads, most of us would say that the company is buying a service. What if the program is offered online? We'd probably still argue that the product is a service. But what if the company buys training materials that the trainer furnishes on DVD? Is the customer still buying a service? Probably not: we'd have to say that when it buys the DVD, the company is buying a tangible good.

In this case, the product that satisfies the customer's need has both a tangible component (the training materials on DVD) and an intangible component (the educational activities performed by the seller). Not surprisingly, many products have both tangible and intangible components. If, for example, you buy a Hewlett-Packard computer, you get not only the computer (a tangible good) but certain promises to answer any technical questions that you might have and certain guarantees to fix your computer if it breaks within a specified time period (intangible services).

New product developments can be grouped into four major categories: new-to-the-company, improvement of existing product, extension of product line, and new-to-the-market.

For examples of the first three types of new product developments, we'll take a look at Just Born. The company is known for its famous "Marshmallow Peeps," and consequently its management is very interested in marshmallows. It conducted research that revealed that families use marshmallows in lots of ways, including crafts and decorating. This led Just Born to develop an Easter decorating kit that used Peeps marshmallows. It was such a hit that the company followed by creating decorating kits for Halloween and the Christmas season. Because similar products are made by other companies, the decorating kits are not "new to the market" but are "new to the company". Now, let's look at another product development involving Just Born's also famous Mike & Ike's. The marketing people at Just Born discovered that teenagers prefer to buy candies that come in pouches (which fit into their pants pockets) rather than in small boxes. In response, the company reduced the piece size, added some new ingredients, and put the Mike & Ike's in pouches. This "improvement in an existing product" resulted in a 20 percent annual sales jump for Mike & Ike's. Our last look at Just Born demonstrates an approach used by the company to "extend its existing product line". Most of us like chocolate and most of us also like marshmallow, so how about putting them together? This is just what Just Born did – the company extended its Peeps product line to include "Peeps in a chocolate egg". Consumers loved the combination, and its success prompted the company to extend its product line again and launch a chocolate crispy version for Easter.

The PowerSki Jetboard is a "new-to-the-market product". Before it was invented, no comparable product existed. Launching a new-to-the-market product is very risky, and only about 10 percent of products created fall into this category. On a positive note, introducing a new product to the market can be very profitable, because the product often enjoys a temporary monopolistic position.

Inventors of new-to-the-market products often form entrepreneurial start-ups to refine their product idea and bring it to market. This was the path taken by Bob Montgomery, inventor of the PowerSki Jetboard. As is typical of entrepreneurial start-ups, the company that Montgomery founded has these characteristics:

• It's characterized by innovative products and/or practices. Before the PowerSki Jetboard was invented, no comparable product existed.
• Its goals include profitability and growth. Because the patented Jetboard enjoys a temporary monopolistic position, PowerSki potentially could be very profitable.
• It focuses on new opportunities. Bob Montgomery dreamed of creating the first motorized surfboard. This dream began when he and a few of his surfer friends (all around age twelve) missed a wave because it was too far down the beach for them to catch. He imagined that if he was on a motorized surfboard (instead of an ordinary one that you had to paddle), he would have been able to catch that wave. His dream became the mission of his company: "PowerSki International Corp. was founded to deliver the patented PowerSki Jetboard, the world's only motorized surfboard, and its engine technology to the world market. It's PowerSki's goal to bring the experience of surfing to everyone on lakes, rivers, seas, and the ocean. 'Now everybody has an ocean, and can ride an endless wave'".
• Its owners are willing to take risks. Anybody who starts any business is taking a risk of some kind. The key to entrepreneurial risk is related to the idea of innovation: as Woody Allen once put it, "If you're not failing every now and again, it's a sign you're not doing anything very innovative".

As Montgomery learned, the introduction of an innovative product to the market is more unpredictable, and thus more risky, than the introduction of a market-tested product. Starting up a store to sell an improved version of an existing surfboard entails one level of risk; starting up a business to market the first motorized surfboard entails quite another. Even though the introduction of new-to-the-market products are more risky, some of this risk can be avoided. What if, for example, Montgomery had brought the Jetboard to market only to discover that many of the buyers in his target market – water-sports enthusiasts – couldn't easily maneuver the Jetboard? We could then say that he took an unnecessarily risky step in bringing his product to market, but we could also say that he simply attempted to market his product without adequate information. Surely a little research would have alerted Montgomery to the probable consequences of his decision to go to market when he did and with his product in its current state of development.

A couple of final words, therefore, about introducing an entirely new product to the market. First, this type of product introduction is about carefully calculated risks, not unnecessary risks. Second, though little is certain in the entrepreneurial world, most decision making can be improved with input from one or both of two sources:

1. Information gathered from research
2. Knowledge gained from personal experience

Again, you can't be certain about any results, but remember that uncertainty reflects merely the lack of complete knowledge or information; thus, the more knowledge and information that you can bring to bear on a situation, the less uncertain – and the less risky – the decision becomes. In short, always do your homework, and if you're new to entrepreneurship or to your market, make it a point to work with people who know from experience what they're talking about.

• A product is something that can be marketed to customers because it provides them with a benefit and satisfies a need. Products can be goods or services or a combination of both.
• A "new-to-the-company product" is a good or a service that is new to the company but has been sold by a competitor in the past – for example, Peeps marshmallow Easter decorating kits.
• An "improvement in an existing product" is an enhancement of a product already on the market – for example, a change of ingredients and packaging for Mike & Ike's.
• An "extension to an existing product line" is a new product developed as a variation of an already existing product – for example, Peeps chocolate eggs.
• A "new-to-the-market product" is a good or a service that has not been available to consumers or manufacturers in the past – for example, the PowerSki Jetboard.
• Four characteristics of the entrepreneurial start-up are:

1. It's characterized by innovative products and/or practices.
2. Its goals include profitability and growth.
3. It focuses on new opportunities.
4. Its owners are willing to take risks.

• Entrepreneurship is about carefully calculated risks, not unnecessary risks. Most entrepreneurial decision making can be improved with input from one or both of two sources:

1. Information gathered from research
2. Knowledge gained from personal experience

(AACSB) Analysis

Identify a good or a service for each of the following product development categories: new-to-the-market, new-to-the-company, improvement of existing product, and extension of product line. To come up with the products, you might visit a grocery store or a mall. Don't use the Just Born examples presented in the chapter.

LEARNING OBJECTIVE

1. Explain where product ideas come from.

For some people, coming up with a great product idea is a gratifying adventure. For most, however, it's a daunting task. The key to coming up with a product idea is identifying something that customers want – or, perhaps more important, filling an unmet customer need. In coming up with a product idea, ask not "what do I want to sell?" but rather "what does the customer want to buy?" With this piece of advice in mind, let's get back to the task of coming up with a product idea. Nobel Prize–winning chemist Linus Pauling suggested that "the best way to have a good idea is to have lots of ideas," and though this notion might seem a little whimsical at first, it actually makes a lot of sense, especially if you're trying to be innovative in the entrepreneurial sense. Every year, for example, companies launch about thirty thousand new food, beverage, and beauty products, and up to 90 percent fail within a year". You might need ten good ideas just to have one that stands a chance.

So where do these ideas come from? Product ideas can originate from almost anywhere. How many times have you looked at a product that just hit the market and said, "I could have thought of that"? Just about anybody can come up with a product idea; basically, you just need a little imagination. Success is more likely to result from a truly remarkable product – something that grabs the attention of consumers. Entrepreneur and marketing consultant Seth Godin refers to truly remarkable products as "purple cows". He came up with the term while driving through the countryside one day. As he drove along, his interest was attracted by the hundreds of cows dotting the countryside. After a while, however, he started to ignore the cows because looking at them had become tedious. For one thing, they were all brown, and it occurred to him that a glimpse of a purple cow would be worth writing home about. People would tend to remember a purple cow; in fact, they might even want one.

Who thinks up "purple cow" ideas? Where do the truly remarkable business ideas come from? As we pointed out in an earlier chapter, entrepreneurs and small business owners are a rich source of new product ideas (according to the Small Business Administration, 55 percent of all new product innovations come from small businesses). Take Dean Kamen, inventor of the Segway Human Transporter, a battery-operated vehicle that responds to the rider's movements: lean forward and you can go straight ahead at 12.5 miles per hour; to stop, just tilt backward. This revolutionary product is only one of Kamen's many remarkable business ideas. He invented his first product – a wearable infusion pump for administering chemotherapy and other drugs – while he was still a college undergraduate. Jacob Dunnack is also getting an early entrepreneurial start. At age six, Jacob became frustrated one day when he took his baseball bat to his grandmother's house but forgot to take some baseballs as well. His solution? A hollow baseball bat that holds baseballs. Dunnack's invention, now called the JD Batball, was quickly developed and sold in stores such as Toys "R" Us.

Why do so many entrepreneurs and small businesspeople come up with so many purple cows? For one thing, entrepreneurs are often creative people; moreover, they're often willing to take risks. This is certainly true of Bob Montgomery, inventor of the PowerSki Jetboard (which undoubtedly qualifies as a purple cow). With more than twenty years' experience in the water-sports industry and considerable knowledge of the personal-watercraft market, Montgomery finally decided to follow his long-cherished dream of creating an entirely new and conceptually different product – one that would offer users ease of operations, high performance, speed, and quality. His creative efforts have earned him the prestigious Popular Science "Best of What's New" award".

To remain competitive, medium and large organizations alike must also identify product development opportunities. Many companies actively solicit product ideas from people inside the organization, including marketing, sales, research, and manufacturing personnel, and some even establish internal "entrepreneurial" units. Others seek product ideas from outside the organization by talking to customers and paying attention to what the competition is doing. In addition to looking out for new product ideas, most companies constantly seek out ways to make incremental improvements in existing products by adding features that will broaden their consumer appeal. As you can see from Figure 10.2 "Sales from New Products", the market leaders in most industries are the firms that are most successful at developing new products.

Figure 10.2 Sales from New Products

A novel approach to generating new-to-the-world product ideas is hiring "creativity" consultants. One of the best is Doug Hall, who's been called "America's Number 1 Idea Guru". At a Cincinnati idea factory called Eureka!Ranch, Hall and other members of his consulting firm specialize in helping corporate executives get their creative juices flowing. Hall's job is getting people to invent products that make a real difference to consumers, and his strategies are designed to help corporate clients become more innovative – to jump-start their brains. As Hall puts it, "You have to swing to hit home runs". Eureka!Ranch's client list includes Disney, Kellogg, Johnson & Johnson, and Procter & Gamble, as well as a number of budding entrepreneurs. Hall boasts that the average home uses eighteen goods or services that the Ranch helped shape, and if he's right, you yourself have probably benefited from one of the company's idea-generating sessions".

• The majority of product ideas come from entrepreneurs and small business owners, though medium and large organizations also must identify product-development opportunities in order to remain competitive.
• Firms seek product ideas from people inside the organization, including those in marketing, sales, research, and manufacturing, as well as from customers and others outside the organization.

(AACSB) Analysis

The "Strange New Products" Web site brags that it displays the "weirdest, funniest, stupidest, and [most] ingenious new products entering the marketplace". This seems to be an accurate statement. Visit the site (http://www.strangenewproducts.com) and do the following:

1. Pick your favorite new product.
2. Describe the idea.
3. Explain how the product works.
4. Indicate whether you believe the product fills an unmet need. Explain why or why not.
5. Rate the product's likelihood of success on a scale from 1 (extremely unlikely) to 10 (very likely). Explain your rating.

LEARNING OBJECTIVE

1. Describe the process of developing a product that meets customer needs.

Like PowerSki, every organization – whether it produces goods or provides services – sees Job 1 as furnishing customers with quality products. The success of a business depends on its ability to identify the unmet needs of consumers and to develop products that meet those needs at a low cost. In other words, effective product development results in goods and services that can be sold at a profit. In addition, it results in high-quality products that not only satisfy consumer needs but also can be developed in a timely, cost-efficient manner. Accomplishing these goals entails a collaborative effort by individuals from all areas of an organization: operations management (including representatives from engineering, design, and manufacturing), marketing, accounting, and finance. In fact, companies increasingly assign representatives from various functional areas who work together as a project team throughout the product development processes. This approach allows individuals with varied backgrounds and experience to provide input as the product is being developed.

Not surprisingly, developing profitable products is difficult, and the success rate is low. On average, for every successful product, a company has twelve failures. At this rate, the firms on the Fortune 1000 list waste over $60 billion a year in research and development. There are several reasons why product development is such a risky proposition:

• Trade-offs. You might, for instance, be able to make your jogging shoes lighter than your competitors', but if you do, they probably won't wear as well. They could be of higher quality, but that will make them more costly (they might price themselves out of the market).
• Time pressure. Developing a product can require hundreds of decisions that must be made quickly and with imperfect information.
• Economics. Because developing a product requires a lot of time and money, there's always pressure to make sure that the project not only results in a successful product but also gets it to market at the most opportune time. Failure to be first to market with an otherwise desirable new product can cost a company a great deal of money.

Even so, organizations continue to dedicate immense resources to developing new products. Your supermarket, for example, can choose from about one hundred thousand items to carry on its shelves – including twenty thousand new products every year. Unfortunately, the typical supermarket can stock only thirty thousand products.

Video Clip

Even the mighty Coca-Cola has had its share of failures – New Coke, anyone?

The product development process is a series of activities by which a product idea is transformed into a final product. It can be broken down into the seven steps summarized in Figure 10.6 "The Product Development Process".

Figure 10.6 The Product Development Process

If you're starting your first business, you might have only one product idea. But existing organizations often have several ideas for new products, as well as improvements to existing ones. Where do they come from? They can come from individuals within the organization or from outside sources, such as customers. Typically, various ideas are reviewed and evaluated by a team of individuals, who identify the most promising ideas for development. They may rely on a variety of criteria: Does the proposed product fill an unmet need of our customers? Will enough people buy our product to make it commercially successful? Do we have the resources and expertise to make it?

From the selected product idea, the team generates an initial product concept that describes what the product might look like and how it might work. Members talk both with other people in the organization and with potential buyers to identify customer needs and the benefits that consumers will get from the product. They study the industry in which the product will be sold and investigate competing products. They brainstorm various product designs – that is, the specifications for how the product is to be made, what it's to look like, and what performance standards it's to meet.

Based on information gathered through this process, the team will revise the product concept, probably pinpointing several alternative models. Then they'll go back to potential customers and get their feedback on both the basic concept and the various alternatives. Based on this feedback, the team will decide what the product will look like, how it will work, and what features it will have.

The team then decides how the product will be made, what components it will require, and how it will be assembled. It will decide whether the product should be made in-house or outsourced to other companies. For products to be made in-house, the team determines where parts will be obtained. During this phase, team members are involved in design work to ensure that the product will be appealing, safe, and easy to use and maintain.

As a rule, there's more than one way to make any product, and some methods are more expensive than others. During the next phase, therefore, the team focuses its attention on making a high-quality product at the lowest possible cost, working to minimize the number of parts and simplify the components. The goal is to build both quality and efficiency into the manufacturing process.

A prototype is a physical model of the product. In the next phase, prototypes are produced and tested to make sure that the product meets the customer needs that it's supposed to. The team usually begins with a preliminary prototype from which, based on feedback from potential customers, a more sophisticated model will then be developed. The process of building and testing prototypes will continue until the team feels comfortable that it has fashioned the best possible product. The final prototype will be extensively tested by customers to identify any changes that need to be made before the finished product is introduced.

During the production ramp-up stage, employees are trained in manufacturing and assembly processes. Products turned out during this phase are carefully inspected for residual flaws. Samples are often demonstrated or given to potential customers for testing and feedback.

In the final stage, the firm starts ongoing production and makes the product available for widespread distribution.

• The success of a business depends on its ability to identify the unmet needs of consumers and to develop products that meet those needs at a reasonable cost.
• Accomplishing these goals requires a collaborative effort by individuals from all areas of the organization: operations management (including representatives from engineering, design, and manufacturing), marketing, accounting, and finance.
• Representatives from these various functional areas often work together as project teams throughout the product development process, which consists of a series of activities that transform a product idea into a final product.
• This process can be broken down into seven steps:

1. Evaluate opportunities and select the best product mix
2. Get feedback to refine the product concept that describes what the product might look like and how it might work
3. Make sure that the product performs and appeals to consumers
4. Design with manufacturing in mind to build both quality and efficiency into the manufacturing process
5. Build and test prototypes, or physical models of the product
6. Run market tests and enter the ramp-up stage during which employees are trained in the production process
7. Launch the product

(AACSB) Analysis

Use your imagination to come up with a hypothetical product idea. Now, identify the steps you'd take to design, develop, and bring your product to market.