new product development (NPD)

Definition:
The development of a new product is seen as a sequential process normally containing six distinct phases. While some models contain additional sub-phases and may employ slightly different terminology, the most widely accepted sequence proposed by Booz-Allen & Hamilton Inc, based on their experience with several hundred companies, is: exploration, screening, business analysis, development, testing, commercialization. Like the PRODUCT LIFE CYCLE CONCEPT, the new product development model is of greatest value when regarded as a framework or structure to guide one's own approach. Clearly no single, simple process model can allow for all the complications and problems likely to be encountered by the firm which sets out to manage new product development, nor is such a model appropriate to many radical innovations or to situations where technology 'push' is dominant. That said, however, all phases are recommended and are usually found to be present in case histories of NPD. Hence a brief review of each will be helpful. The exploration phase, sometimes termed 'idea generation', may be structured or serendipitous. A structured procedure for new product ideas may rest upon continuous market research into consumer reactions both to one's own product and to those of one's competitors in order to give early warning of failing interest or dissatisfaction or, more positively. to suggest areas for improvement which will enhance the product's standing with its target audience. Monitoring competitive activity has assumed increasing importance in recent years with the growing popularity of what is termed 'the strategy of the fast second' whereby firms depend more on their ability to copy or improve upon a new product and cash in on the market as it moves into the growth phase than on being the first to market with a new product. The Japanese are past masters of this strategy, and are imitative innovators of the first order across almost all classes of goods, depending upon an enhanced product, competitive prices and excellent distribution and after-sales service to ensure a dominant position in almost all the world's growth markets. Significantly, the Japanese have been responsible for no major technological innovations themselves. Unstructured idea generation tends to be more typical of firms with a single product or small range of products experiencing a decline in their current profitability - that is, the firm does not have a formal new product development function but operates on an ad hoc basis. Brainstorming is a frequently used technique in these circumstances in which the second phase of screening or sifting the ideas assumes particular importance. An unstructured approach is also often associated with serendipity when an idea for a new product occurs by chance - as a by-product of research into something else, for example, or as the result of an approach by a prospective user asking if you could make something to meet a specific need. Once the firm has generated a portfolio of ideas for new product, it is essential that these be 'screened' to ensure that only the most promising are subjected to thorough analysis, if for no other reason than that the further one proceeds with any given idea the greater the expense involved. Screening is an essentially subjective procedure in which managers use their knowledge and experience to weed out the obvious non-starters. Beyond doubt, managers are most confident when applying their knowledge of internal constraints and will eliminate many ideas as being inconsistent with the firm's product policies and objectives, with the existing skills and resources and so on. In the same way, ideas which are incompatible with the firm's existing markets and its knowledge of its current users and customers are likely to be screened out at this phase as the firm seeks to build upon its existing strengths. Given a short-list of 'possible' ideas, the next step is to subject these to a more formal analysis - a task which will be greatly improved if an explicit check-list is developed, setting out the criteria and their relative importance one to another. In general, this evaluation should assess each of the ideas in terms of its technology and its 'fit' with the production system, its marketability and its competitiveness, and finally in terms of the financial implications of proceeding with it further. Assuming that evaluation indicates that development of the product appears feasible, that forecasted sales and budgeted costs promise a satisfactory return on investment, and that the company is satisfied it can gain access to the target market, then the next phase in the process is technical development. At this juncture, the objective is to establish if it is physically possible to produce an object with the desired performance characteristics within the cost constraints indicated by the forecast demand schedule. Usually this phase is the longest in the whole process, and it is vitally important that, throughout development, the innovator should continue critically to observe events and changes in the proposed target markets. In addition to updating the product concept to reflect changes in the market, the development phase should also provide for testing the product under real world usage conditions to ensure that it will deliver the promised satisfactions. The more complex the product and the more radical the behavioural change required of the end user, the more important this phase becomes. Indeed, with many capital, material and consumer durable innovations, the development phase frequently continues well into the market launch stage on the grounds that deficiencies and defects in the final product will only become apparent once it is exposed to a broad spectrum of usage situations. With complex products, the development phase may well proceed in parallel with physical and market testing, but in other cases, the test phase may be a discrete activity in its own right. Obviously testing is a risk reduction strategy as the firm's commitment is limited and a final go/no-go decision can be deferred pending the test results. With a major and complex new product, marketing on a small scale to iron out the bugs has much to commend it, but, with less sophisticated products, test marketing can give the game away to one's competitors and allow them to counter your full-scale launch with a strong competitive reaction. Indeed, with many consumer goods, test marketing can be a complete waste of effort as competitors create abnormal trading conditions in the test area so that little or no reliance can be placed on the results. The final phase of the NPD process is commercialization when the product is launched in the market, thus initiating its life cycle. Commercialization increases the firm's financial commitment by several orders of magnitude. Capacity must be installed to cater for the anticipated demand; inventory must be built up to ensure that supplies can be made available to the distribution channel; intensive selling in must take place to ensure widespread availability at the point of sale or to canvass orders from prospective buyers; maintenance and servicing facilities may be necessary and a large promotional investment will be needed to create awareness of the new product's existence. Given the importance of this phase, one might reasonably expect discussions of it to dominate texts dealing with the subject, but it only requires a cursory examination to reveal that this stage rarely receives equal treatment with the preceding phases and attracts comparatively little attention.

Cross-References:
[product life cycle (PLC) concept]

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