New Product Development and Forecasting Challenges

Very few, if any, companies can continue to survive without introducing products or services (hereafter referred to as new products), as they are the engine of organic sales and profit growth. The alternative way to grow a business is through acquisition, which is not always an option due to company size, philosophy, financial resources, or a combination of factors. Regardless of whether a company is growing organically or through acquisition, increased sales come from some combination of more products and/ or more customers. In this article we will discuss the Product Development strategy, one of four basic ways (product development, market development, diversification, and market penetration) that a company can increase its sales and profits. (See Table 1) Product Development involves introducing products to an existing customer base, while Market Penetration means that existing products are sold to customers or customer segments. Market Development is typically the way to increase sales and the easiest to forecast accurately - sell more existing products to the existing customer base. Note that Market Development is of limited use for durable goods and other things that customers only buy once. That is, once they buy the product, they do not need it again for a very long time. The last box at the upper right of the table, Diversification, is the least common situation: Selling products to customers. Studies show that product introductions are good for companies in many ways. Companies that have more successful product introductions or more sales coming from products tend to exhibit the following characteristics: * They have positive short-term and longterm impact on revenue, profit, and stock market value. * The impact of products on their stock market value increases over time. * They have less need to focus on promotional incentives, thereby increasing profit margins. KEY SUCCESS FACTORS OF NEW PRODUCTS Even though thousands of products are introduced every year, more of these fail than succeed! In one industry, consumer packaged goods (fast-moving consumer goods - FMCG), only about 15% of items introduced since 2000 are still on the retail shelf two years later. In addition, the success rate has been steadily declining over time; about 45% of CPG/ FMCG products were successful in the 1970s using the same definition. So what key success factors need to be in place to increase the odds that a product will not fail? These factors can be split into two groups: those that can be controlled by the company and those that are external to it. (See Table 2) In terms of the internal success factors, a product must be a good fit with the company from a variety of standpoints: Customer expertise, brand image, distribution channels, production expertise, etc. The ability of a product to be patented can provide a competitive advantage for several years and ensure product success. If, on the other hand, competitors can easily copy the product, then it is less likely to be successful for the company that initially introduced it. It should be obvious that companies with a proactive approach to products will be more successful than companies that react and introduce products only after the competition does. When a company has an explicitly stated goal for growth from products, that goal tends to be met and those products tend to be more successful. A classic example of this is 3M, which states a specific portion of revenue that needs to come from products introduced within the last few years. If innovation just happens, it is less likely to be successful. The internal organization of a company and how different functions interact with each other throughout the product development process have a big impact on the success of products. The more communication and involvement there arc from all relevant business functions (R&D, Marketing, Sales, Operations, Logistics, Finance, and Executive Management), the more successful the products tend to be. …