Development:

Product Design

The NPD Process

Fuzzy Front End

Phase 1:
Opportunity Identification and Selection

Phase 2:
Concept Generation/ Ideation

Phase 3:
Concept Evaluation & Screening

Phase 4:
Development

Phase 5:
Testing & Launch

What Is Design?

Has been defined as the synthesis of technology and human needs into manufacturable products. In practice, design can mean many things, ranging from styling to ergonomics to setting final product specifications. Design has been successfully used in a variety of ways to help achieve new product objectives. One thing it is not: prettying up a product that is about to manufactured!

Aesthetic Evaluations of Consumer Products

Balance Movement Rhythm Contrast Emphasis Pattern Unity

Contributions of Design to the New Products Process

Range of Leading Design Applications

Purpose of Design
Aesthetics Ergonomics Function Manufacturability Servicing Disassembly

Item Being Designed

Goods Services Architecture Graphic arts Offices Packages

Assessment Factors for an Industrial Design

Consumer Response to Product Form (Adapted from Bloch 1995)

Psychological Responses to Product Form Product Form
Cognitive Evaluations Categorization
Beliefs

Behavioral Responses

Aesthetic Evaluations

What is Product Form?

Objective Physical Properties of a Product

Form Structure Texture Color

Psychological Responses to Consumer Products

Context

Category Membership Functionality

What happens in the absence of context?

Design communicates, but does it do so effectively?

How does the design and its context influence:

What Does the Design Tell You?

What Does the Design Tell You?

New Product Development

Sales Forecasting & Financial Analysis

Estimating Sales Potential

Sales Potential Estimation

Often used to interpret concept test results

The Concept Statement

Sales Potential Estimation

Often used from concept test results

Assumes awareness and availability Translating Intent into sales potential:

Develop the norms carefully for a specific market and for specific launch practices Examples:

Services: 45% chance that the definitely would buys actually will buy; 15% for the probably wills Consumer Packaged Goods: 70-80% chance that the definites will buy; 33% chance for the probably wills

Sales Potential Estimation

Sales Potential Estimation

Translating Intent into Sales Potential

Example: Aerosol Hand Cleaner

After examining norms for comparable existing products, you determine that: 90% of the definites 40% of the probables 10% of the mights 0% of the probably nots and definitely nots will actually purchase the product

Apply those %age to Concept Test results:

Sales Potential Estimation

Translating Intent into Sales Potential

Apply those %age to Concept Test results:

90% of the definites (5% of sample) = .045 40% of the probables (36%) = .144 10% of the mights (33%) = .033 0% of the last 2 categories = .000

Sum them to determine the %age who would actually buy: .045+.144+.033= .22 Thus, 22% of sample population would buy
(remember: this % is conditioned on awareness & availability)

From Potential to Forecast

With Sales Potential Estimates:

To remove the conditions of awareness and availability, multiply by the appropriate percentages: If 60% of the sample will be aware (via advertising, etc.) and the product will be available in 80% of the outlets, then: (.22) X (.60) X (.80) = .11 11% of the sample is likely to buy

Sales Forecasts

With Sales Potential Estimates A-T-A-R Models

Best used with incremental innovations Based on diffusion theory:

Awareness, Trial, Availability, Repeat

ATAR

An A-T-A-R Model of Innovation Diffusion

Profits = Units Sold x Profit Per Unit

Figure 8.5

Units Sold = Number of buying units x % aware of product x % who would try product if they can get it x % to whom product is available x % of triers who become repeat purchasers x Number of units repeaters buy in a year Profit Per Unit = Revenue per unit - cost per unit

The A-T-A-R Model: Definitions

Figure 8.6

Buying Unit: Purchase point (person or department/buying center). Aware: Has heard about the new product with some characteristic that differentiates it. Available: If the buyer wants to try the product, the effort to find it will be successful (expressed as a percentage). Trial: Usually means a purchase or consumption of the product. Repeat: The product is bought at least once more, or (for durables) recommended to others.

A-T-A-R Model Application

10 million x 40% x 20% x 70% x 20% x $50 Number of owners of Walkman-like CD players Percent awareness after one year Percent of "aware" owners who will try product Percent availability at electronics retailers Percent of triers who will buy a second unit Price per unit minus trade margins and discounts ($100) minus unit cost at the intended volume ($50) = $5,600,000 Profits

Points to Note About A-T-A-R Model

1. Each factor is subject to estimation.
Estimates improve with each step in the development phase.

2. Inadequate profit forecast can be improved by changing factors.

If profit forecast is inadequate, look at each factor and see which can be improved, and at what cost.

Getting the Estimates for A-T-A-R Model

Item Market Units Awareness Trial Availability Repeat Consumption Price/Unit Cost/Unit Market Research XX X X X X X XX X X X X Concept Test X X XX Product Use Test X X X Component Testing X X X X XX X XX XX XX

Figure 8.7

Market Test

xx: Best source for that item. x: Some knowledge gained.

Sales Forecasts

With Sales Potential Estimates Diffusion of Innovations

The Bass Model:

Predicts pattern of trial (doesnt include repeat purchases) at the category level Works for all types of products, and can be used with discontinuous innovations

Bass Model Forecast of Product Diffusion

Figure 11.4

The Bass Model

Estimates s(t) = sales of the product class at some future time t:

s(t) = pm + [q-p] Y(t) - (q/m) [Y(t)]2
Where p = the coefficient of innovation [Average value=.04] q = the coefficient of imitation [Average value =.30] m= the total number of potential buyers Y(t) = the total number of purchases by time t

The Bass Model

Important Feature

Once p and q have been estimated, you can determine the time required to hit peak sales (t*) and the peak sales level at that time (s*):
t* = (1/(p+q)) ln (q/p) s* = (m)(p+q)2/4q

Financial Analysis

Financial Analysis

How Sophisticated?

Depends on the quality/reliability of the data and the stage youre in Simple cost/benefit analysis or Sanity Check as 3M uses:

Early Stages:

attractiveness index = (sales X margin X (life).5 ) / cost sales= likely sales for typical year once launched margin = likely margin (in percentage terms) life = expected life of the product in years (sq root discounts
future)

cost = cost of getting to market (dev., launch, cap.ex.)

Financial Analysis: Later Stages

Payback and Break-Even Times

Cycle Time Payback Period Break-Even Time (BET) = Cycle Time + Payback Pd.

Financial Analysis: Later Stages

Payback and Break-Even Times

Financial Analysis: Later Stages

Payback and Break-Even Times Discounted Cash Flows (DCF, NPV, or IRR)

The most rigorous analysis for new products:

year-by-year cash flow projections discounted to the present the discounted cash flows are summed if the sum of the dcfs > initial outlays, the project passes

The Dark Side of NPV (for NPD)

Unfairly penalizes certain projects by ignoring the Go/Kill options along the way
(option values not accounted for in traditional NPV)

Financial Analysis: Later Stages

Payback and Break-Even Times Discounted Cash Flows (DCF, NPV, or IRR) Options Pricing Theory (OPT)

Recognizes that management can kill a project after an incremental investment is made At each phase of the NPD process, management is effectively buying an option on the project These options cost considerably less than the full cost of the project -- so they are effective in reducing risk Kodak uses a decision tree and uses OPT to compute the Expected Commercial Value (ECV) of a given project

Using OPT to find the ECV

Pcs
Technical Success Launch $C Yes $ECV Development $D No Technical Failure Yes

Commercial Success $PVI

Pts

No

Commercial Failure

KEY:
Pts = Prob of tech success Pcs= Prob of comm success $ECV = Expected commercial value $D = Development costs remaining $C = Commercialization/launch costs $PVI = Present value of future earnings

Using OPT to find the ECV

ECV = [ [(PVI * Pcs) - C] * Pts] - D
KEY:
Pts = Prob of tech success Pcs= Prob of comm success $ECV = Expected commercial value $D = Development costs remaining $C = Commercialization/launch costs $PVI = Present value of future earnings

NPV vs. OPT: An Example

Income stream, PVI (present valued) Commercialization costs (launch & captial) Development costs Probability of commercial success Probability of technical success Overall probability of success $40 million $ 5 million $ 5 million 50% 50% 25%

TRADITIONAL NPV (no probabilities): 40 - 5 - 5 = 30 Decision = Go NPV with probabilities: (.25 X 30) - (.75 X 10) = 0 ECV or OPT: { [(40 x .5) - 5] * .5} - 5 = 2.5 Decision = Kill Decision = Go