Page 343 - Introduction to Business

CHAPTER 9 Developing the Product and Pricing Mixes 317

because it is not known if the product will be successful. The follow-the-leader option
allows companies to face reduced risks because they can wait to see if the new prod-
uct will be successful. Revenues and profits obtained, however, may be lower because
the first-in firm has the market to itself for some time. Management capabilities need
to be considered. First-mover companies need to have skilled R&D operations, while
follow-the-leader firms need to be adept at production (to lower the cost of the prod-
uct and its price to the market) and marketing (to create demand in the market).
Chrysler tended to bring out new products in bunches instead of spreading
them out over a number of years, causing industry analysts to worry about new
8
product dry spells. This failure suggests another basic philosophical principle for
developing new products: They need to be developed on a continuous basis so that
there are not lengthy periods with little or no revenues or profits coming in.
Developing new products is a time-consuming process. Some products can take
two or even five years to get to the market. Many companies are trying to shorten
the process because market tastes may change, other firms will have a better
chance to bring out their new products, and important deadlines may not be met.
On the other hand, companies must guard against rushing the development
process, so that the product’s quality is not jeopardized.
Companies need to realize that developing new products is a costly venture. At
one extreme, it has been estimated that it costs between $1 billion and $2 billion to
bring out a new automobile model. Firms should be wary of skimping on develop-
ment expenditures so that the likelihood that the product will fail is not increased,
but should be sure that each dollar expended is thoroughly justified.
A number of departments are involved in developing new products. Marketing,
research and development, manufacturing, packaging, and finance usually have
some new product responsibilities. Thus, some means must be in place to coordi-
nate all of these activities.
Top management needs to support the new product process. They should com-
municate effectively the importance of new products to all areas of the firm and help
to set objectives for them and the strategies for achieving the objectives, and set rea-
sonable deadlines. Top executives, however, should not be involved on a day-to-day
basis with the new product development process, as this may be viewed as putting
too much pressure on the scientists and engineers working on the new products.
Companies should understand that not all of their new products will be suc-
cessful; there will be failures because a firm may not know what competitors are
doing, information about the market may be inaccurate, the market’s tastes may
change, the economy may go into a recession, and so on. Some high-profile, much-
ballyhooed new products surprised their companies when they failed. Examples
include the Ford Edsel, RCA videodisk camera, Eastman Kodak’s disk camera,
Polaroid’s X-70 instamatic camera, and New Coke. Invariably, the reason for prod-
ucts failing is that they did not fulfill a need or desire in the market. However, the
fear of failing does not keep firms from developing new-to-world products that are
highly risky but, if successful, can generate huge profits for years.
The rate at which new products fail is debatable. Failure rates from 20 to 98 per-
cent have been reported, depending on the types of products and industries stud-
ied. As mentioned above, some failures are acceptable. However, there are severe
downsides when the failure rate gets excessive. The company’s reputation suffers.
Valuable and scarce resources are poorly allocated and have to be reallocated. Cus-
tomers who did like the product may begin purchasing from a competitor. Rev-
enues and profits will decline.
Like the rate of new product failure, what constitutes new product failure is not
always agreed on. Does a product fail if it does not reach a certain level of profit or

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