NEW PRODUCT DESIGN/NEW SERVICE DESIGN (NPD/NSD)

Application: New Offers, Innovation, Revenue Sources, risk management

The Concept

Marketers need to create new products and new services to offer to their customers and must create the competence to commercialize or “monetize” (to use a dreadful jargon word) them. Unfortunately a large number of new products simply fail. One source estimates a failure rate of 40% across industrial and consumer markets, a staggering 95% failure of new consumer products in the United States; and that around 90% of all new European product introductions fail within the first two years (see “Managing new product development for strategic competitive advantage” by D. Jain in Iacobucci, D. (ed.), Kellogg on Marketing, 2001).

NPD (new product design) or NSD (new service design) is the managerial process intended to obviate this failure record and minimize lost investment. It is a method of turning ideas and insights into viable offers. One of the business world’s most extensively studied fields of work, it is essentially the mechanism by which companies harness creativity and innovation for commercial advantage. The thinking and activities involved in this have most often been represented by a process (represented in Figure N.1). Although, as with so many management concepts, the steps in this process ought not to be proscriptive; they are just a way to structure thinking and marshal resources.

Figure N.1: A typical NPD/NSD process

The activity of NPD or NSD is often controlled by a sub-committee of the organization’s leadership because, done properly, serious investment is involved. The controlling group is given a budget to sponsor potential new offers. Marketers and other executives are given responsibility for each new idea and asked to undertake certain logical steps and return at defined points in the process (normally called “gates”).

It is generally accepted that the factors which contribute to the success of new product design include:

• senior management involvement and control;
• a clear and managed new product design process;
• superiority over existing products;
• investment in understanding the market;
• the proficiency of marketing operations;
• the degree of business/project fit;
• effective interaction between R&D and marketing;
• a supportive management environment;
• effective project management.

These factors are now widely recognized. As a result, many companies in many sectors have in place clear and formalized new product creation processes, portfolio management techniques, and dedicated product managers.

Marketers ought to be closely involved in this process. In fact, in some companies, it is the responsibility of the marketing function. They should establish criteria by which the new offers that are created are considered to be effective. The measurements put in place by top management give signals to the organization as to what is important and what gets priority. If the creation of new offers is important to a company appropriate success measures really ought to be created. They might include:

• sales performance;
• ease of market access;
• speed of market acceptance;
• competitive performance;
• revenue growth;
• cost performance;
• “other booster” (i.e. how it affects other sales and costs).

History, Context, Criticism, and Development

The proactive creation of new products has been established practice for many years in a number of different businesses selling physical products. Leading organizations in markets where new product innovation is a critical success factor, like consumer products, have highly sophisticated processes, which are managed at a senior level in the firm. As a result, NPD processes and concepts are well established and known to provide demonstrable value. Research has shown, for example, that a new product design process in manufacturing reduces risk of failure; also that successful innovation is both costly and risky but an NPD process reduces these costs.

In 1991 Canada’s Ulrike de Brentani (de Brentani, U., 1991) conducted research designed to apply the “conceptual and research paradigms that have evolved from studies of new manufactured goods to services”. He concluded that the strategic issues facing service organizations were similar to those for product companies. While NPD technologies and the detailed steps in the process may vary, the underlying notions behind their use do not. In fact, many leading service organizations now use a formal innovation process; as the Interoute case study demonstrates. They also create as many good ideas as possible and then reduce the number of ideas by careful screening to ensure that only those with the best chances of success get launched. This occurs most commonly in companies that create and industrialize consumer services because the nature of their business demands careful process design and technology deployment.

As a general rule, those services that are high-volume, low-margin, and easily reproducible can more easily be developed using a rigorous development plan than those that are highly customized (like consultancy or other professional services). American Express and Barclay’s Bank, for instance, have sophisticated processes with strict controls over development “gates”; while at the other end of the scale, even the venerable British law firm, Allen & Overy (which specializes in highly customized advice) has an “innovation committee”, (see the case study under the innovation entry) which reports to its leadership team on programmes to capture and exploit creativity. It has successfully sponsored the launch of a series of IT-based services that, at the most sophisticated level, automate a number of their clients’ processes.

Voices and Further Reading

• Kotler, P., “Competitive strategies for new product marketing over the life cycle”. Management Science, December 1965.
• “An Increasing number of companies are turning to new product development … In doing this they are substituting one danger ridden course for another. Studies seem to indicate that more new products fail than succeed. Each phase in the management of innovation process (search, screening, profit analysis, product development, test marketing and commercialisation) requires a ‘go, no go’ decision …” Kotler, ibid.
• Aaby, N. and Discenza, R., “Strategic marketing and new product development”. Journal of Business and Industrial Marketing, 1993.
• Levitt, T., “Production-line approach to service”. Harvard Business Review, September–October 1972.
• Raymond, M.A. and Ellis, B., “Customers, management and resources: keys to new consumer product and service success”. Journal of Product and Brand Management, 1993.
• Trott, P., Innovation Management and New Product Development. Prentice Hall, 2008.
• “The organizational activities undertaken by the company as it embarks on the actual process of new product development have been represented by numerous different models. These have attempted to capture the key activities involved in the process, from idea to commercialization of the product. The representation of these tasks has changed significantly over the past 30 years … Virtually all those actually involved with the development of new products dismiss such simple linear models as not being a true representation of reality. More recent research suggests that the process needs to be viewed as a simultaneous and concurrent process with cross-functional interaction.” Trott, ibid.
• Middleton, V.T.C., “Product marketing – goods and services compared”. Quarterly Review of Marketing, Summer 1983.
• Cooper, R.G. and Edgett, S.J., Product Development for the Service Sector. Perseus Books, 1999.
• Berentani, U. de, Success Factors in Developing New Business Services, 1991.
• G. Lynn Shostack, “How to design a service”, European Journal of Marketing, 1982.
• G. Lynn Shostack, “Designing services that deliver”, Harvard Business Review, January–February 1984.
• Easingwood, C.J., “New product development for service companies”, Journal of Product Innovation Management, 1986.
• Hollins, W., “Design in the service sector”, Managing Service Quality, March 1993.
• Anderson, J.C. and Narus, J.A., “Capturing the value of supplementary services”. Harvard Business Review, January–February 1995.
• Brentani, U. de, “The new product process in financial services: strategy for success”. International Journal of Bank Marketing, 1993.
• Brentani, U. de, “Success factors in developing new business services”. European Journal of Marketing, 1991,
• Ozment, J. and Morash, E., “The augmented service offering for perceived and actual service quality”. Journal of the Academy of Marketing Science, 1994.
• Cooke, P.N., “Value added strategies in marketing”. International Journal of Physical Distribution and Logistics Management, May 1995.
• Quinn, J.B., Doorley, T.L., and Paquette, P.C., “Beyond products: services-based strategy”. Harvard Business Review, March–April 1990.
• Jain, D., “Managing new product development for strategic competitive advantage” in Iacobucci, D. (ed.), Kellogg on Marketing, 2001.
• Holman, R., Kaas, H., and Keeling, D., “The future of product development”. McKinsey Quarterly, 3, 2003.

Things You Might Like to Consider

Interoute Grows through Customizing Its Core Service

Interoute is a fast growing international, communications network which offers “business-class voice and data services at an economy price”. Its products and services include: bandwidth, virtual private networks, high speed internet access and transit, managed hosting, communications services, and media streaming. Founded only in the 1990s and privately owned it has 57,000 kilometres of fibre and fifty-nine data centres. It operates in twenty-four countries and ninety cities. The firm’s service was, initially, as a niche player in the international telecommunications market. The fact that it has customers that are serious players in that market (Sprint, BT, AT&T, Deutsche Telecom, and China Telecom) demonstrates the quality of its service, technology, and reputation.

It started as a basic “bearer” network offering network capacity to other suppliers. This it regarded as a “wholesale” business because other telecommunication suppliers bought extra network capacity. Yet, although it was successful and respected, the leadership of the firm were dissatisfied with remaining a commodity infrastructure service. They set a ten-year strategy to reposition the services of the firm. They started offering “DIY” technology to telecommunications experts but have climbed through “collocation” and “hosting” to “application management”. The long-term vision of the firm is to be a player in the emerging “cloud computing” marketplace, where computing applications will be provided as services which are remotely sourced in internationally hosted data centres. In order to do this, the company had to learn the skill of crafting its core service to different customers; to improve perceived value.

The company has deliberately set out to move from a generic infrastructure service to a higher value, tailored communications service. It identified buyers in individual companies who were either chief finance officers or chief technology officers. It then worked through the products, features, and benefits that would appeal to each person in each organization and tailored its offer to each company. The results were dramatic. Between the period 2004 to 2008, there was a compound average growth rate of 67% and “EBITDA” quadrupled. Over the same period, the percentage of its customers who were “corporate” grew from 8% to 51%. The company has penetrated the corporate sector very effectively by re-configuring its basic, core service to different corporate buyers. It has customers in the public sector (e.g. the European Union), financial services (ING and Morgan Stanley), services (Hilton, Yahoo), retail (WE and Chopard), and manufacturing (Ford and Siemens).

The respected industry observer, Gartner, recognized the effectiveness of the firm’s strategy when it said:

Interoute is pursuing a focused strategy based on extensive infrastructure ownership. It has been expanding its footprint principally through acquisition of long distance and metropolitan fibre assets, such as CECom covering central European countries. Principally a provider of wholesale services to other operators, Interoute also offers a growing range of services to enterprises including MPLS VPNs, internet access, Ethernet, and bandwidth services.

Tony Rogers, Corporate product marketing manager, says:

The customisation of our core service to different customer groups has been one of the main components in our success. We are now formalising this into a more structured NSD process upon which we can create viable and robust services. We also see this as a tool to create added value services for different customer segments.

The process, illustrated below, starts with idea generation similar to many others. It then, though, undertakes a “quick impact analysis” of the ideas, to prioritize those which might move quickly into the market. The process then moves through similar “gates” to other NSD processes, undertaking research, and constructing business cases at the appropriate time.

As the firm has grown from a fairly small start-up with a small firm ethos, this more structured approach has become necessary. Rogers says:

People have seen the effectiveness of this more thoughtful approach and now understand that, as we grow and take on more significant corporate customers, we have to be more thorough and structured. If not, quality might not be so good and money might be wasted on mistakes. We have, though, tried to preserve the small company entrepreneurial spirit which made our services distinctive in the first place.

Interoute’s combined network assets now represent one of the largest and most advanced voice and data networks in Europe, and are still growing fast thanks to the tailored strategy. It is now regarded as the operator of Europe’s “largest next-generation network”. In June 2009 the company won a business innovation award at the Global Telecoms Business Awards, for innovation in the International Service Delivery category. The award was for its “Ground to Cloud” service delivery platform. This gives its customers the ability to take basic fibre services and add their own management layer or buy fully managed services including Interoute’s monitoring and reporting tools. In giving the award, the organizers said:

For those enterprises looking to a partner to take on the management of their critical IT infrastructure Interoute’s cloud approach to services removes the complexity of building, managing and changing their infrastructure.