The process described above will most likely lead to new products that fall into one of three types: (i) those that do not push the performance frontier beyond currently achievable attribute levels but find unoccupied space, (ii) those that offer higher levels of a given dimension than currently offered by any of the alternatives, and (iii) those that identify entirely new dimensions or product features to include. These new product opportunities are depicted in Fig. 3.1. For simplicity, the figure only depicts two attributes (labeled ‘a’ and
‘b’) and two pre-existing firms (labeled ‘1’ and ‘2’). Dashed lines indicate new market offering opportunities.
i. Locating in Unoccupied Space: Given the alternatives currently in the marketplace, a firm may find it optimal to develop and launch a product that lies within the bounds set by the maximal level of each of the non-price attributes (see the Unoccupied Space in Fig. 3.1). More formally, define the maximal level on a given non-price attribute k offered by any of the n currently available alternatives as:
xkmax= Max xjk nj=1 (4)
9 See Choi et al. (1990), Choi and DeSarbo (1993), and Anderson et al. (1989) for existence conditions.
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Dimension/Attribute b Dimension/Attribute a
Firm 1
Firm 2
New dimension or attribute
Unoccupied space
Figure 3.1
Competitive market structure and new product opportunities.
A new product profile in this case will lie in the interior of the region defined by the intersection of lines originating from the maximum level on any attribute (see Fig. 3.2). Note that there can be two possibilities here. A new product concept may be placed in a region that is entirely dominated by at least one of the alternatives (as the shaded area in Fig. 3.2) or in an area that is not dominated by any of the existing alternatives.
If there are acute dis-economies of scope in R&D or production, firms may find it more suitable to look for new product or re-positioning opportunities on a restricted curve connecting the existing alternatives (see the dotted line connecting the current offerings of firms 1 and 2 in Fig. 3.2). Said differently, when offering more of one attribute makes it increasingly difficult to offer the existing levels on other attributes, this cost-to-improvement trade-off may limit the feasible positions to consider to an ‘effective frontier.’ The effective frontier defines a subset of the
Handbook of New Product Development Management
Dominated
Dimension/Attribute b Dimension/Attribute a
Firm 1
Firm 2
Dominate
Effective frontier
Figure 3.2
Dominated and non-dominated options when preference for each attribute is monotonic.
full range determined by the maximal level on each attribute of currently offered alternatives. New R&D capabilities or increased efficiency in production may shift the curve out and increase the possibilities.10
There are several reasons why a firm might end up choosing an interior position in the unoccupied space region. First, from a cost standpoint, both the variable costs and the R&D costs should be well understood in this region and involve relatively known manufacturing and development skills. As long as a firm positions on or to the left of the effective frontier, the production and development costs involved should be manageable.
Moreover, positioning strictly in the interior of the effective frontier is likely to result in lower costs. If enough consumers exist that are relatively price sensitive, then the savings on the variable costs cf and Cf in Eqs (2) and (3), respectively, may merit such a new product positioning. In such a case, the focal firm may be able to price low enough (yet still earn enough margin due to the lower costs) to differentiate itself. For this positioning therefore, it is imperative to have a realistic assumption regarding how rivals will react through price changes.
10 The curve need not be strictly convex as in Fig. 3.2; but the point is that it will originate from alternatives with maximal attribute levels and be interior to the dashed lines connecting them (the intersection of the dashed lines offers maximal level on both dimensions within a single product). The discussion here on an effective frontier bears a connection to work in manufacturing dealing with trade-offs in the nature of the technology and operations strategies available and how complementary actions of the firm may move the frontier outward or change its shape (see Clark, 1996).
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Second, in the unoccupied space consumers will have strong famil-iarity with the range of attribute levels being considered. Hence, the measurement of consumer preferences from a representative sample is likely to be reliable (Step 2 described earlier). Market uncertainty will thus be low. Depending on the distribution of demand, there may exist profitable interior locations because they are more favorable to a big enough set of consumers.
Another related reason to position a new product in the unoccupied space has to do with the nature of heterogeneity in consumer preferences.
If there are enough consumers whose preferences are not monotonically increasing or decreasing in all attributes (i.e., more of an attribute is not always better or worse), there may exist profitable areas in the product and price space in which enough consumers find the new product closer to their ideal point.
ii. Pushing the Envelope through Attribute Improvement: Another opportu-nity that can arise from the process is for a new product to locate (or reposition) so that one or more of the attributes are improved beyond the maximal level in the existing offerings. Said differently, there is at least one attribute k’ along which the new product by the focal firm (indexed f ) will satisfy:
xfk> Max xjk nj=1
The realm of such new product locations is depicted in Fig. 3.1 by the directions of the dashed arrows emanating from each of the offerings by firms 1 and 2. This product development direction typically requires undertaking more market and technical uncertainty than with a position-ing into unoccupied space (as outlined previously in option (i)). From a demand perspective, in conducting Step 2 of the framework for iden-tifying the optimal location (i.e., defining and estimating a preference model), it is advisable to include levels that are well outside the range of existing offerings (e.g., in the conjoint study). Otherwise, merely extra-polating using demand parameters estimated based on existing offerings may result in misleading predictions. That said, since consumers have never encountered the new levels being tested, their responses may be prone to error (both over-reaction and under-reaction can be observed in practice), resulting in a non-negligible degree of market uncertainty.
From a cost perspective, it is important to have a handle on how an improvement along a certain attribute level increases variable and R&D costs. In some cases the increase will be roughly linear, in other cases it may be convex (i.e., a unit improvement in the attribute level becomes increasingly costly). Moreover, there may be negative interaction effects.
Specifically, to maintain a given level on other attributes, a huge cost will have to be incurred to improve certain attributes (e.g., a unit improvement
Handbook of New Product Development Management
in the processing speed of a microprocessor may require other compo-nents to be addressed to keep heat level constant). Hence, a firm would most likely consider only a small set of attributes to improve upon at any one time. In this context, Ofek and Srinivasan (2002) develop a cost-benefit metric that takes into account the competitive landscape and rank orders the relevant attributes according to the profits they would generate if improved (one at a time). The approach transforms individual-level data, as from a standard conjoint study, into an aggregate market mea-sure and yields insights into which consumers are most sensitive to an improvement.11
iii. Pre-empting a New Attribute/Dimension: Early in the process of deciding where to position a new product, a firm determines the attributes or dimensions relevant for consumer choice (Step 1, described earlier).
Beyond mapping the set of attributes and features that are present in current offerings, a firm may also scout for new dimensions or features that have been ignored. These new dimensions may have become relevant due to new available technologies, developments in related categories, or shifts in consumer tastes. The need to look for new dimensions (or dimensions that were previously thought to be unimportant) may be more acute as more firms compete in the market. In such cases, there are no profitable locations in the unoccupied space and attribute improvement would need to be very substantial to result in healthy profits. In Fig. 3.1, this is depicted as a new dimension in the product space.
To identify such dimensions, a firm would need to approach the market with an eye toward unarticulated or latent needs (Narver et al., 2000) or towards the needs of emerging segments (Govindarajan and Kopalle, 2004). Moreover, a firm may want to track the behaviors of lead users (Von Hippel, 1986) or individuals that are at the forefront of new cultural, social, or technological trends to see whether they are seeking new benefits relative to mainstream customers using currently available products.12In terms of then trying to gauge the demand for a product profile that includes such a new feature or attribute, one needs to exercise care. For example, if still using conjoint analysis so that trade-offs with existing attributes can be ascertained, the new dimension may
11 When the analysis is conducted for an existing brand seeking to reposition by improving one of its attributes, it turns out that the most responsive consumers are not the ones currently very inclined to buy the brand; but rather those that are indifferent between buying the focal firm’s current product and all the remaining alternatives in the competitive set.
12 The use of such approaches is becoming more and more prevalent, as evidenced by a number of recently established third-party providers that offer such services. For example, Tremor is a marketing service firm that ‘ is made up of over a quarter of a million influential teens from across the U.S. Our members help develop product ideas and marketing programs that teens want to talk about’ (www.tremor.com).
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require the researcher to present prototypes, pictorials or demos that illustrate the manner by which the new dimension is part of the product and how it can be used (Green and Srinivasan, 1990). This also poses a challenge in identifying a representative sample that is most appropriate. Contemplating new dimensions, therefore, involves considerable market uncertainty. Several new consumer research techniques have recently emerged in marketing for attempting to reduce such uncertainty (e.g., Hoeffler, 2003).
With respect to technical uncertainty, the answer is qualified. In some cases, incorporating a new feature or capability into an existing device is fairly straightforward (e.g., if it is already offered in products from a different category), while in other cases it can be difficult and challenging (because it is entirely new to the world). Often there is no obvious or single way to translate the newly identified need into an actionable engineering product specification.
Indeed, because of the market uncertainty and difficulty in gauging demand for a new benefit on the one hand, and the difficulty in selecting or evaluating the technical approach to use in development on the other, firms may find it useful to iteratively involve customers in the development cycle. In a ‘probe and learn’ approach (Lynn et al., 1996), the firm sequentially experiments with various, often immature, versions of an innovation that offers a new benefit.
The key is to learn from each probing what exact form the new benefit should take in the final product, how to trade-it off with other attributes, and which customers are most relevant. Though the process can be expensive and time consuming, the more discontinuous the benefit and the more potential it has for creating a new category, or completely taking over an existing category, the more advantageous this approach becomes. At the very extreme, due to the inherent problems of getting consumers to articulate new benefits they desire, a form of using ‘customers as innovators’ (Thomke, 2002) may be applicable. In such cases, the firm supplies end users with a flexible toolkit and lets them experiment to create new products.
Despite the greater uncertainties involved (at least from the consumer adop-tion standpoint), there can be huge advantages to posiadop-tioning along a new dimension. The firm can brand itself in relation to the new dimension; thereby creating a first mover advantage around being the initial firm to significantly offer the benefit (Lieberman and Montgomery, 1988). Such a strategy may be particularly attractive for new entrants to a market. Existing firms have likely built equities around the ability to deliver reliable performance on the established attributes (which can be accommodated in the formulation of (1) by assuming that each alternative also has a utility component related to brand equity).13Hence, providing a new dimension may help overcome a disadvan-tage with respect to existing equities along the established product dimensions.
13 See, for example, Park and Srinivasan (1994) and references therein.
Handbook of New Product Development Management