Having made the point that, from a marketing perspective, innovation encompasses more than just product innovation, new products are still of central strategic importance. Companies need new products for a large variety of reasons, such as to maintain technological leadership, to enter new markets, to pre-empt competi-tion, to defend market share or to capitalize on their distribution strengths.50 Regardless of where (geographically) and how (internally vs. externally) the new product development process takes place, it usually involves the following steps:
(1) idea generation; (2) initial screening; (3) business analysis; (4) development;
(5) market testing; and (6) commercialization.
5.4.3.1 Idea Generation
A report from Pricewaterhouse Coopers indicated that almost half of new developments originate from customers, suppliers, or market intelligence, while 29 % come from employees, 11 % from specialists, 5 % from competitors and merely 9 % from research and development.51 In the light of these figures, it becomes obvious that firms cannot solely rely on their internal research and development centers, but need to reach out to other stakeholders in order to source ideas. Today, new technology serves as a useful mediator in this idea sourcing process. In fact, there has been a shift from company-centric value creation to more customer involvement. In the traditional view, company and customer were assigned two distinct roles, namely those of the producer and consumer. In the new view, consumers voluntarily engage in the production process, and the firm and
49Ambos and Schlegelmilch (2010).
50Wong (1993).
51Kuo-Ming Chu and Chan (2009).
the customer thus co-create value. In that sense, companies should no longer design products alone, but benefit from the new role consumers are assuming.52
McKinsey Quarterly reports that especially in the high-tech industry, the involvement of customers in the idea-creation process is common, while in other industries, such as financial services and manufacturing, the customer focus is directed to screening ideas and testing concepts.53
Companies can also source ideas from users with special expertise, so-called lead users. A lead user may be a Formula One driver for a car manufacturer, a hacker for a software firm, or a fashion reporter for a clothing designer. Lead users differ from normal users in the sense of being ahead of market trends. They could be companies, organizations, or individuals. Research has shown that many break-through innovations have been developed by lead users rather than internal stakeholders.
5.4.3.2 Initial Screening
Once a firm has a number of ideas to select from, it needs to separate ideas which have potential from those that are incapable of meeting the company’s objectives.
In other words, in the screening process, the firm needs to eliminate poor ideas or ideas that are incompatible with the company. To accomplish this task, many firms have a dedicated new-product committee. In some cases, companies such as Starbucks also invite customers to give their opinions on new product ideas on their corporate websites.54
5.4.3.3 Business Analysis
After an idea has been screened, it needs to be tested for compatibility with the market. This involves sales, cost and profit projections, as well as setting criteria for potential success or failure of the new product in different markets. The business analysis should also focus on potential risks, such as changes in the business and competitive environment that may negatively affect the introduction of the new product.
5.4.3.4 Development
At this stage, a physical version of the product concept is developed. When the prototypes are ready, they need to be tested. In a global context, this involves more than making sure that the product performs well from a technological, ecological or safety point of view. Companies also need to ensure colors, shapes, numbers, etc.
that are associated with the new product do not have any unwanted associations in different parts of the world.
52Prahalad and Ramaswamy (2004).
53Bughin et al. (2007).
54My Starbucks Idea (n.d.).
5.4.3.5 Market Testing
Instead of directly rolling out a product in every market, companies frequently choose to test a new product in a selected market. Coca-Cola first tested Coca-Cola Bla¯K in France; BMW first tested its concept stores in Australia; KFC piloted its breakfast menu in Singapore.55Testing global products in certain markets is thus nothing unusual. Sometimes, countries also serve as a proxy for greater regions.
Thailand is often a test market for Asia, while Brazil is regularly used as a proxy for Latin America.56
Several advantages can be derived from test-markets. Given that the selected market is a reliable proxy, the test is likely to deliver fairly accurate projections of the market share, sales volume, and penetration of the new product. In countries with available household scanning panels, firms can additionally get insights into likely trial, repeat purchase, and usage rates.
At the same time, testing can be misleading. The market chosen may not reliably predict the results of the final rollout. There are also a number of ventures that used little formal research: Vanguard, Southwest Airlines, McDonald’s, and Nike in their early days, apparently solely relied on entrepreneurial hunches rather than sophisticated research, as did the founders of Google and Starbucks.57In addition, testing is time-consuming and costly. Firms should consider the opportunity costs associated with the potential lost sales the company incurs during the test market period. A test also alerts competition and gives them time to obstruct or pre-empt a product launch. Still, research points out that almost two out of three new products fail after their launch, drawing attention to the importance of thorough market testing.58The need for testing is further underpinned by a recent statistic revealing that more than 80 % of the best performing innovators regularly tested and validated consumer preferences during the product development process. Among the bottom performers, only 43 % did so.59
5.4.3.6 Commercialization
If a product has business potential, it moves from the testing to commercialization phase. Global product managers may choose from a number of strategies on how to bring the innovation to the market. Two common approaches differ in terms of timing and are often referred to assprinklers and waterfalls.
In the sprinkler approach, the product is introduced in all relevant countries at the same time. If truly successful, this approach exploits the widest possible scale.
In case of competitive threats, it also aims for maximal market share, optimally pre-empting competition. The waterfall approach, in contrast, implies launching the product successively in different countries. A company may, for instance, initially
55Kotabe and Helsen (2011).
56Czinkota and Ronkainen (2004).
57Hartley and Claycomb (2014).
58Morner (1977).
59Gordon et al. (2011).
introduce the innovation to its home market and then expand step-by-step to other markets. This strategy involves lower initial investment, as inventory, sales force, and advertising is merely aligned to a limited scale. Accordingly, the risk is lower and revenues from one market can ideally be re-invested in another one, resulting in lower pressure on cash flows.