In this chapter, we focus on the more specific issue of developing new products and services. We begin by introducing the most common processes for development, the stage-gate and development funnel. We then review the generic factors that influence product and service success and failure. The central part of this chapter looks at how the market and technological context influence the process of development and commercialization, for example, how the development of radical is different from more common line extensions. Finally, we explore the similarities and differences between developing new products and services. In the most advanced service economies such as the United States and the United Kingdom, services create up to three-quarters of the wealth and 85% of employment, and yet most of what we know about managing innovation comes from research and experience in manufactured products.

10.1 Processes for New Product Development

We discussed the broader organizational factors to support innovation in Chapter 3, but here we explore the more specific needs of new product and service development. Successful product and service development require much more than the application of a set of tools and techniques, and in addition requires an appropriate organization to support innovation and an explicit process to manage development. In this section, we examine the critical role of an organization, and the various options available in the case of new product and service development. The purpose of this section is not, however, to provide a more general overview of the theory and practice of organizational behavior and development, and we assume that you are familiar with the basics of this field.

One of the key challenges facing the organization of new product and process development is that most organizations have not evolved or been designed to do this, but are structured for a different purpose, usually to serve some operational need. In most organizations, new product or service development is a rather unusual and infrequent requirement, so the first decision is what sort of team to put together to do this.

Essentially the choice is between functional teams, cross-functional project teams, or some form of matrix between the two. For example, the team might be within a single function or department such as research, marketing, or design. Alternatively, a special cross-functional team might be established, including representative from many (but not all) functional groups. In a matrix organization, a dedicated team is not formed, but rather members remain in their functional or departmental groups, but are designated to a project group. Studies of new product development suggest four main types of team structure:

1. Functional structure – a traditional hierarchical structure where communication between functional areas is largely handled by function managers and according to standard and codified procedures.
2. Lightweight product manager structure – again a traditional hierarchical structure but where a project manager provides an overarching coordinating structure to the inter-functional work.
3. Heavyweight product manager structure – essentially a matrix structure led by a product (project) manager with extensive influence over the functional personnel involved but also in strategic directions of the contributing areas critical to the project. By its nature, this structure carries considerable organizational authority.
4. Project execution teams – A full-time project team where functional staff leave their areas to work on the project, under the project leader direction.

Project management structure is strongly correlated with product success, and of the available options the functional structures are the weakest. Associated with these different structures are different roles for team members and particularly for project managers. For example, the “heavyweight project manager” has to play several different roles, which include extensive interpreting and communication between functions and players. Similarly, team members have multiple responsibilities. This implies the need for considerable efforts at team building and development, for example, to equip the team with the skills to explore problems, to resolve the inevitable conflicts that will emerge during the project, and to manage relationships inside and outside the project. Research Note 10.1 reviews the effectiveness of cross-functional teams for different types of development projects.

The process of new product or service development – moving from idea through to successful products, services, or processes – is a gradual process of reducing uncertainty through a series of problem-solving stages, moving through the phases of scanning and selecting and into implementation – linking market- and technology-related streams along the way.

At the outset anything is possible, but increasing commitment of resources during the life of the project makes it increasingly difficult to change the direction. Managing new product or service development is a fine balancing act, between the costs of continuing with projects, which may not eventually succeed (and which represent opportunity costs in terms of other possibilities) – and the danger of closing down too soon and eliminating potentially fruitful options. With shorter life cycles and demand for greater product variety, pressure is also placed upon the development process to work with a wider portfolio of new product opportunities and to manage the risks associated with progressing more projects through development to launch.

These decisions can be made on an ad hoc basis, but experience and research suggest some form of structured development system, with clear decision points and agreed rules on which to base go/no-go decisions, is a more effective approach. Attention needs to focus on reconfiguring internal mechanisms for integrating and optimizing the process such as concurrent engineering, cross-functional working, advanced tools, early involvement, and so on. To deal with this attention has focused on systematic screening, monitoring, and progression frameworks such as Cooper’s “stage-gate” approach, as shown in Figure 10.1 [1].

As Cooper suggests, successful product development needs to operate some form of structured, staging process. As projects move through the development process, there are a number of discrete stages, each with different decision criteria or “gates,” which they must pass. Many variations to this basic idea exist (e.g., “fuzzy gates”), but the important point is to ensure that there is a structure in place that reviews both technical and marketing data at each stage. A common variation is the “development funnel,” which takes into account the reduction in uncertainty as the process progresses, and the influence of real resource constraints, as illustrated by Figure 10.2.

There are numerous other models in the literature, incorporating various stages ranging from 3 to 13. Such models are essentially linear and unidirectional, beginning with concept development and ending with commercialization.

Models of this type suggest a simple, linear process of development and elimination. However, in practice, the development of new products and services is inherently a complex and iterative process, and this makes it difficult to model for practical purposes. For ease of discussion and analysis, we will adopt a simplified four-stage model, which we believe is sufficient to discriminate between the various factors that must be managed at different stages [2]:

1. Concept generation – identifying the opportunities for new products and services.
2. Project assessment and selection – screening and choosing projects that satisfy certain criteria.
3. Product development – translating the selected concepts into a physical product (we’ll discuss services later).
4. Product commercialization – testing, launching, and marketing the new product.

10.2 Factors Influencing Product Success or Failure

There have been more than 200 studies that have investigated the factors affecting the success of new products. Most have adopted a “matched-pair” methodology in which similar new products are examined, but one is much less successful than the other [4]. This allows us to discriminate between good and poor practice and helps to control for other background factors. Table 10.1 summarizes some of the main research on the topic of product success and failure.

These studies have differed in emphasis and sometimes contradicted each other, but despite differences in samples and methodologies, it is possible to identify some consensus of what the best criteria for success are:

• Product advantage Product superiority in the eyes of the customer, real differential advantage, high performance-to-cost ratio, delivering unique benefits to users – appear to be the primary factor separating winners and losers. Customer perception is the key.
• Market knowledge The homework is vital: better predevelopment preparation including initial screening, preliminary market assessment, preliminary technical appraisal, detailed market studies, and business/financial analysis. Customer and user needs assessment and understanding are critical. Competitive analysis is also an important part of the market analysis.
• Clear product definition This includes defining target markets, clear concept definition and benefits to be delivered, clear positioning strategy, a list of product requirements, features and attributes, or use of a priority criteria list agreed before development begins.
• Risk assessment Market-based, technological, manufacturing and design sources of risk to the development project must be assessed, and plans made to address them. Risk assessments must be built into the business and feasibility studies so they are appropriately addressed with respect to the market and the firms’ capabilities.
• Project organization The use of cross-functional, multidisciplinary teams carrying responsibility for the project from beginning to end.
• Project resources Sufficient financial and material resources and human skills must be available; the firm must possess the management and technological skills to design and develop the new product.
• Proficiency of execution Quality of technological and production activities and all precommercialization business analyses and test marketing; detailed market studies underpin new product success.
• Top management support From concept through to launch, management must be able to create an atmosphere of trust, coordination, and control; key individuals or champions often play a critical role during the innovation process. Research Note 10.4 explores the contributions of top management support in new product development.

These factors have all been found to contribute to new product success and should therefore form the basis of any formal process for new product development. Note from this list, and the factors illustrated in Figures 10.3 and 10.4, that successful new product and service development require not only the management of a blend of product or service characteristics, such as product focus, superiority, and advantage, but also wider organizational issues, such as project resources, execution, and leadership. Managing only one of these key contributions is unlikely to result in consistent success.

The organizational issues appear to dominate in the case of more radical product or service offerings. This is probably because it is much more difficult in such cases to specify, in advance, the product or service characteristics in any detail, and instead managers have to rely more on getting the organization right and influencing the direction of development. Research Note 10.5 summarizes the factors that influence the success of new product development.

When we have asked managers to describe how radical products and services are developed, the answers include the mysterious and intuitive, and many highlight the importance of luck, accident, and serendipity. Of course, there are examples of radical technologies or products that have begun life by chance, like the discovery of penicillin, but Pasteur’s advice applies: “luck favours the prepared mind.”

Gary Lynn and Richard Reilly have tried to identify in a systematic way the most common factors that contribute to successful product development, focusing on what they call “blockbuster” products – more radical and successful than most new products. Over 10 years they studied more than 700 teams and nearly 50 detailed cases of some of the most successful products ever developed and compared and contrasted these organizations with less successful counterparts. They identify five key practices that contribute to the successful development of “blockbuster” products [30]:

• Commitment of senior management.
• Clear and stable vision.
• Improvisation.
• Information exchange.
• Collaboration under pressure.

All five practices operate as a system, and blockbuster development teams must adopt all five practices. Size of the organization did not seem to matter; neither did the type of product.

10.3 Influence of Technology and Markets on Commercialization

So far, we have described a generic process for new product development, and factors which we know affect success and failure. However, the type of innovation also influences the best way to develop and commercialize an innovation.

The innovation literature has long debated the relative merits of “market pull” versus “technology push” for explaining the success (or failure) of new products and services. The usual truce or compromise is to agree on a “coupling model,” whereby technological possibilities are coupled with market opportunities. However, this view is too simplistic. More than 40 years of research, case studies, surveys, and econometric analysis are clear. In some cases, clear market needs are unmet because of technological limitations (e.g., the elusive goal of a cure for cancer); but in other cases, technological possibilities have no immediate or obvious commercial application and anticipate or even create new markets. For example, lasers (“light amplification by the stimulated emission of radiation,” if you ever wondered) were for many years simply a useful instrument in scientific experiments, initially used in various military applications, with mixed success, but later formed the basis of almost all optical recording and transmission of data, from broadband to DVD. In this section, we try to provide an understanding of the influences the market and technological context has on new product and service development.

Marketing focuses on the needs of the customer, and therefore should begin with an analysis of customer requirements and attempt to create value by providing products and services that satisfy those requirements. The conventional marketing mix is the set of variables that are to a large extent controllable by the company, normally referred to as the “four Ps”: product, price, place, and promotion. All four factors allow some scope for innovation: product innovation results in new or improved products and services and may change the basis of competition; product innovation allows some scope for premium pricing, and process innovation may result in price leadership; innovations in logistics may affect how a product or service is made available to customers, including distribution channels and nature of sales points; innovations in media provide new opportunities for promotion.

However, we need to distinguish between strategic marketing – that is whether or not to enter a new market – and tactical marketing, which is concerned mainly with the problem of differentiating existing products and services, and extensions to such products. There is a growing body of research that suggests that factors that contribute to new product success are not universal, but are contingent upon a range of technological and market characteristics. A study of 110 development projects found that complexity, novelty, and whether the project was for hardware or software development affected the factors that contributed to success [31]. Research Note 10.7 examines the effect of product novelty on performance.

Our own research confirms that different managerial processes, structures, and tools are appropriate for routine and novel development projects (see Table 10.2). For example, in terms of frequency of use, the most common methods used for high novelty projects are segmentation, prototyping, market experimentation, and industry experts, whereas for the less novel projects the most common methods are partnering customers, trend extrapolation, and segmentation. The use of market experimentation and industry experts might be expected where market requirements or technologies are uncertain, but the common use of segmentation for such projects is harder to justify. However, in terms of usefulness, there are statistically significant differences in the ratings for segmentation, prototyping, industry experts, market surveys, and latent needs analysis. Segmentation is the only method more effective for routine development projects, and prototyping, industry experts, focus groups, and latent needs analysis are all more effective for novel development projects. For example, IDEO, the global design and development consultancy, finds conventional market research methods insufficient and sometimes misleading for new products and services, and instead favors the use of direct observation and prototyping.

Clearly then, many of the standard marketing tools and techniques are of limited utility for the development and commercialization of novel or complex new products or services. A number of weaknesses can be identified:

• Identifying and evaluating novel product characteristics Marketing tools such as conjoint analysis have been developed for variations of existing products or product extensions, and therefore are of little use for identifying and developing novel products or applications.
• Identifying and evaluating new markets or businesses Marketing techniques such as segmentation are most applicable to relatively mature, well-understood products and markets, and are of limited use in emerging, ill-defined markets.
• Promoting the purchase and use of novel products and services The traditional distinction between consumer and business marketing is based on the characteristics of the customers or users, but the characteristics of the innovation and the relationship between developers and users are more important in the case of novel and complex products and services.

Table 10.2 shows the influence of product novelty on the effectiveness of tools used for product development.

Therefore, before applying the standard marketing techniques, we must have a clear idea of the maturity of the technologies and markets. Figure 10.5 presents a simple two-by-two matrix, with technological maturity as one dimension, and market maturity as the other. Each quadrant raises different issues and will demand different techniques for development and commercialization:

• Differentiated Both the technologies and markets are mature, and most innovations consist of the improved use of existing technologies to meet a known customer need. Products and services are differentiated on the basis of packaging, pricing, and support. For example, see Case Study 10.1 on IDEO.
• Architectural Existing technologies are applied or combined to create novel products or services, or new applications. Competition is based on serving specific market niches and on close relations with customers. Innovation typically originates or is in collaboration with potential users.
• Technological Novel technologies are developed that satisfy known customer needs. Such products and services compete on the basis of performance, rather than price or quality. Innovation is mainly driven by developers.
• Complex Both technologies and markets are novel, and coevolve. In this case, there is no clearly defined use of a new technology, but over time developers’ work with lead users to create new applications. The development of multimedia products and services is a recent example of such a coevolution of technologies and markets.

Assessing the maturity of a market is particularly difficult, mainly due to the problem of defining the boundaries of a market. The real rate of growth of a market provides a good estimate of the stage in the product life cycle and, by inference, the maturity of the market. In general, high rates of market growth are associated with high R&D costs, high marketing costs, rising investment in capacity, and high product margins (see Figure 10.6). At the firm level, there is a significant correlation between expenditure on R&D, number of new product launches, and financial measures of performance such as value added and market to book value [32]. Generally, profitability declines as a market matures as the scope for product and service differentiation reduces, and competition shifts toward price.

10.4 Differentiating Products

Here we are concerned with the specific issue of how to differentiate a product from competing offerings where technologies and markets are relatively stable. It is in these circumstances that the standard tools and techniques of marketing are most useful. We assume that the reader is familiar with the basics of marketing, so here we shall focus on product differentiation by quality and other attributes.

Differentiation measures the degree to which competitors differ from one another in a specific market. Markets in which there is little differentiation and no significant difference in the relative quality of competitors are characterized by low profitability, whereas differentiation on the basis of relative quality or other product characteristics is a strong predictor of high profitability in any market conditions. Where a firm achieves a combination of high differentiation and high perceived relative quality, the return on investment is typically twice that of nondifferentiated products. Analysis of the Strategic Planning Institute’s database of more than 3000 business units helps us to identify the profit impact of market strategy (PIMS) [33]:

• High relative quality is associated with a high return on sales One reason for this is that businesses with higher relative quality are able to demand higher prices than their competitors. Moreover, higher quality may also help reduce costs by limiting waste and improving processes. As a result, companies may benefit from both higher prices and lower costs than competitors, thereby increasing profit margins.
• Good value is associated with increased market share Plotting relative quality against relative price provides a measure of relative value: high quality at a high price represents average value, but high quality at a low price represents good value. Products representing poor value tend to lose market share, but those offering good value gain market share.
• Product differentiation is associated with profitability Differentiation is defined in terms of how competitors differ from each other within a particular product segment. It can be measured by asking customers to rank the individual attributes of competing products and to weight the attributes. Customer weighting of attributes is likely to differ from that of the technical or marketing functions.

Analysis of the PIMS data reveals a more detailed picture of the relationships between innovation, value, and market performance (see Figure 10.7). Process innovation helps to improve relative quality and to reduce costs, thereby improving the relative value of the product. Product innovation also affects product quality, but has a greater effect on reputation and value. Together, innovation, relative value, and reputation drive growth in market share. For example, there is an almost linear relationship between product innovation and market growth: businesses with low levels of product innovation – that is having less than 1% of products introduced in the last three years – experience an average real annual market growth of less than 1%; whereas businesses with high levels – that is having around 8% of products introduced in the past three years – experience real annual market growth of around 8% [34]. The compound effect of such differences in real growth can have a significant impact on relative market share over a relatively short period of time. However, in consumer markets maintaining high levels of new product introduction is necessary, but not sufficient. In addition, reputation, or brand image, must be established and maintained, as without it consumers are less likely to sample new product offerings whatever the value or innovativeness. Witness the rapid and consistent growth of Samsung and decline of Nokia in the mobile phone market (see Case Study 10.2).

Quality function deployment (QFD) is a useful technique for translating customer requirements into development needs and encourages communication between engineering, production, and marketing. Unlike most other tools of quality management, QFD is used to identify opportunities for product improvement or differentiation, rather than to solve problems. Customer-required characteristics are translated or “deployed” by means of a matrix into language that engineers can understand (see Figure 10.8). The construction of a relationship matrix – also known as “the house of quality” – requires a significant amount of technical and market research. Great emphasis must be made on gathering market and user data in order to identify potential design trade-offs and to achieve the most appropriate balance between cost, quality, and performance.

The construction of a QFD matrix involves the following steps [35]:

1. Identify customer requirements, primary and secondary, and any major dislikes.
2. Rank requirements according to importance.
3. Translate requirements into measurable characteristics.
4. Establish the relationship between the customer requirements and technical product characteristics and estimate the strength of the relationship.
5. Choose appropriate units of measurement and determine target values based on customer requirements and competitor benchmarks.

Symbols are used to show the relationship between customer requirements and technical specifications and weights attached to illustrate the strength of the relationship. Horizontal rows with no relationship symbol indicate that the existing design is incomplete. Conversely, vertical columns with no relationship symbol indicate that an existing design feature is redundant as it is not valued by the customer. In addition, comparisons with competing products, or benchmarks, can be included. This is important because relative quality is more relevant than absolute quality: customer expectations are likely to be shaped by what else is available, rather than some ideal.

In some cases, potential users may have latent needs or requirements that they cannot articulate. In such cases, three types of user needs can be identified: “must be’s,” “one-dimensionals,” and attractive features or “delighters [36].” Must be’s are those features that must exist before a potential customer will consider a product or service. For example, in the case of an executive car, it must be relatively large and expensive. One-dimensionals are the more quantifiable features that allow direct comparison between competing products – for example, in the case of an executive car, the acceleration and braking performance. Finally, the delighters are the most subtle means of differentiation. The inclusion of such features delights the target customers, even if they do not explicitly demand them. For example, delighters in the case of an executive car might include self-parking or other parking aids. Such features are rarely demanded by customers or identified by regular market research. However, indirect questioning can be used to help identify latent requirements.

QFD was originally developed in Japan and is claimed to have helped Toyota to reduce its development time and costs by 40%. More recently, many leading American firms have adopted QFD, including AT&T, Digital, and Ford, but results have been mixed: only around a quarter of projects have resulted in any quantifiable benefit [37]. In contrast, there has been relatively little application of QFD by European firms. This is not the result of ignorance, but rather a recognition of the practical problems of implementing QFD.

Clearly, QFD requires the compilation of a lot of marketing and technical data, and more importantly the close cooperation of the development and marketing functions. Indeed, the process of constructing the relationship matrix provides a structured way of getting people from development and marketing to communicate, and therefore is as valuable as any more quantifiable outputs. However, where relations between the technical and marketing groups are a problem, which is too often the case, the use of QFD may be premature.

10.5 Building Architectural Products

Architectural products consist of novel combinations of existing technologies that serve new markets or applications. In such cases, the critical issue is to identify or create new market segments.

Market share is associated with profitability: on average, market leaders earn three times the rate of return of businesses ranked fifth or less [38]. Therefore, the goal is to segment a market into a sufficiently small and isolated segment, which can be dominated and defended. This allows the product and distribution channels to be closely matched to the needs of a specific group of customers.

Market or buyer segmentation is simply the process of identifying groups of customers with sufficiently similar purchasing behavior so that they can be targeted and treated in a similar way. This is important because different groups are likely to have different needs. By definition, the needs of customers in the same segment will be highly homogeneous. In formal statistical terms, the objective of segmentation is to maximize across-group variance and to minimize within-group variance.

In practice, segmentation is conducted by analyzing customers’ buying behavior and then using factor analysis to identify the most significant variables influencing behavior – descriptive segmentation – and then using cluster analysis to create distinct segments that help identify unmet customer needs – prescriptive segmentation. The principle of segmentation applies to both consumer and business markets, but the process and basis of segmentation are different in each case.

10.6 Commercializing Technological Products

Technological products are characterized by the application of new technologies in existing products or relatively mature markets. In such cases, the key issue is to identify existing applications where the technology has a cost or performance advantage.

The traditional literature on industrial marketing has a bias toward relatively low-technology products and has failed largely to take into account the nature of high-technology products and their markets.

The first and most critical distinction to make is between a technology and a product [43]. Technologists are typically concerned with developing devices, whereas potential customers buy products, which marketing must create from the devices. Developing a product is much more costly and difficult than developing a device. Devices that do not function or are difficult to manufacture are relatively easy to identify and correct compared to an incomplete product offering. A product may fail or be difficult to sell due to poor logistics and branding, or difficult to use because insufficient attention has been paid to customer training or support. As a result, attempting to differentiate a product on the basis of its functionality or the performance of component devices can be expensive and futile.

For example, a personal computer (PC) is a product consisting of a large number of devices or subsystems, including the basic hardware and accessories, operating system, application programs, languages, documentation, customer training, maintenance and support, advertising and brand development. For example, a development in microprocessor technology, such as RISC (reduced instruction set computing), may improve the product performance in certain circumstances, but may be undermined by more significant factors such as lack of support for developers of software and therefore a shortage of suitable application software.

In the case of high-technology products, it is not sufficient to carry out a simple technical comparison of the performance of technological alternatives, and conventional market segmentation is unlikely to reveal opportunities for substituting a new technology in existing applications. It is necessary to identify why a potential customer might look for an alternative to the existing solution. It may be because of lower costs, superior performance, greater reliability, or simply fashion. In such cases, there are two stages to identify potential applications and target customers: technical and behavioral [44].

Statistical analysis of existing customers is unlikely to be of much use because of the level of detail required. Typically, technical segmentation begins with a small group of potential users being interviewed to identify differences and similarities in their requirements. The aim is to identify a range of specific potential uses or applications. Next, a behavioral segmentation is carried out to find three or four groups of customers with similar situations and behavior. Finally, the technical and behavioral segments are combined to define specific groups of target customer and markets that can then be evaluated commercially (see Figure 10.9). Clayton Christensen and Michael Raynor make a similar point in their book, The Innovator’s Solution, and argue that conventional segmentation of markets by product attributes or user types cannot identify potentially disruptive innovations, as demonstrated in Case Study 10.6.

Several features are unique to the marketing of high-technology products and affect buying behavior [45]:

• Buyers’ perceptions of differences in technology affect buying behavior. In general, where buyers believe technologies to be similar, they are likely to search for longer than when they believe there to be significant differences between technologies.
• Buyers’ perceptions of the rate of change of the technology affect buying behavior. In general, where buyers believe that the rate of technological change is high, they put a lot of effort in the search for alternatives, but search for a shorter time. In noncritical areas, a buyer may postpone a purchase.
• Organizational buyers may have strong relationships with their suppliers, which increases switching costs. In general, the higher the supplier-related switching costs, the lower the search effort, but the higher the compatibility-related switching costs and the greater the search effort.

View 10.1 discusses how complex projects are assessed and developed in the oil industry.

10.7 Implementing Complex Products

Complex products or systems are a special case in marketing because neither the technology nor markets are well defined or understood. As a result, technology and markets coevolve over time, as developers and potential users interact. Note that technological complexity does not necessarily imply market complexity, or vice versa. For example, the development of a passenger aircraft is complex in a technological sense, but the market is well defined, and potential customers are easy to identify. We are concerned here with cases where both technologies and markets are complex – for example, telecommunications, multimedia, and pharmaceuticals.

The traditional distinction between consumer and industrial marketing in terms of the nature of users, rather than the products and services themselves, is therefore unhelpful. For example, a new industrial product or process may be relatively simple, whereas a new consumer product may be complex. The commercialization process for complex products has certain characteristics common to consumer and business markets [46]:

• Products are likely to consist of a large number of interacting components and subsystems, which complicates development and marketing.
• The technical knowledge of customers is likely to be greater, but there is a burden on developers to educate potential users. This requires close links between developers and users.
• Adoption is likely to involve a long-term commitment, and therefore the cost of failure to perform is likely to be high.
• The buying process is often lengthy, and adoption may lag years behind availability and receipt of the initial information.

Links Between Developers and Users

The development and adoption process for complex products, processes, and services is particularly difficult. The benefits to potential users may be difficult to identify and value, and because there are likely to be few direct substitutes available the market may not be able to provide any benchmarks. The choice of suppliers is likely to be limited, more an oligopolistic market than a truly competitive one. In the absence of direct competition, price is less important than other factors such as reputation, performance and service, and support.

Innovation research has long emphasized the importance of “understanding user needs” when developing new products [48], but in the special case of complex products and services potential users may not be aware of, or may be unable to articulate, their needs. In such cases, it is not sufficient simply to understand or even to satisfy existing customers, but rather it is necessary to lead existing customers and identify potential new customers. Conventional market research techniques are of little use, and there will be a greater burden on developers to “educate” potential users. Hamel and Prahalad refer to this process as expeditionary marketing [49]. The main issue is how to learn as quickly as possible through experimentation with real products and customers, and thereby anticipate future requirements and preempt potential competitors.

The relationship between developers and users will change throughout the development and adoption process, as shown in Figure 10.10. Three distinct processes need to be managed, each demanding different linkages: development, adoption, and interfacing. The process of diffusion and adoption was examined in Chapter 9. However, relatively little guidance is available for managing the interface between the developers and adopters of an innovation.

The interface process can be thought of as consisting of two flows: information flows and resource flows [50]. Developers and adopters will negotiate the inflows and outflows of both information and resources. Therefore, developers should recognize that resources committed to development and resources committed to aiding adoption should not be viewed as independent or “ring-fenced.” Both contribute to the successful commercialization of complex products, processes, and services. Developers should also identify and manage the balance and direction of information and resource flows at different stages of the process of development and adoption. For example, at early stages, managing information inflows may be most important, but at later stages, managing outflows of information and resources may be critical. In addition, learning will require the management of knowledge flows, involving the exchange or secondment of appropriate staff.

Two dimensions help determine the most appropriate relationship between developers and users: the range of different applications for an innovation; and the number of potential users of each application [51]:

• Few applications and few users In this case, direct face-to-face negotiation regarding the technology design and use is possible.
• Few applications, but many users This is the classic marketing case, which demands careful segmentation, but little interaction with users.
• Many applications, but few users In this case, there are multiple stakeholders among the user groups, with separate and possibly conflicting needs. This requires skills to avoid optimization of the technology for one group at the expense of others. The core functionality of the technology must be separated and protected and custom interfaces developed for the different user groups.
• Many applications and different users In this case, developers must work with multiple archetypes of users, and therefore aim for the most generic market possible, customized for no one group.

In general, where there are relatively few potential users, as is usually the case with complex products for business customers, customers are likely to demand that developers have the capability to solve their problems, and be able to transfer the solution to them. However, customer expectations vary by sector and nationality. For example, firms in the paper and pulp industry do not expect suppliers to have strong problem-solving capabilities, but do require solutions to be adapted to their specific needs. Conversely, firms in the speciality steel industry demand suppliers to possess strong problem-solving capabilities. Overall, German and Swedish customers expect suppliers to have problem solving and adaptation capabilities, but British, French, and Italian customers appear to be less demanding [52].

10.8 Service Innovation

Employment trends in all the so-called advanced countries indicate a move away from manufacturing, construction, mining, and agriculture, toward a range of services, including retail, finance, transportation, communication, entertainment, professional, and public services. This trend is in part because manufacturing has become so efficient and highly automated, and therefore, generates proportionately less employment; and partly because many services are characterized by high levels of customer contact and are reproduced locally, and are therefore often labor-intensive. In the most advanced service economies such as the United States and the United Kingdom, services create up to three-quarters of the wealth and 85% of employment, and yet we know relatively little about managing innovation in this sector. The critical role of services, in the broadest sense, has long been recognized, but service innovation is still not well understood.

Innovation in services is much more than the application of information technology (IT). In fact, the disappointing returns to IT investments in services have resulted in a widespread debate about its causes and potential solutions – the so-called “productivity paradox” in services. Frequently service innovations, which make significant differences to the ways customers use and perceive the service delivered, will not only demand major investments in process innovation and technology by service providers but also demand investment in skills and methods of working to change the business model, as well as major marketing changes. Estimates vary, but returns on investment on IT alone are around 15%, with a typical lag of two to three years, when productivity often falls, but when combined with changes in organization and management these returns increase to around 25% [54].

In the service sector, the impact of innovation on growth is generally positive and consistent, with the possible exception of financial services. The pattern across retail and wholesale distribution, transport and communication services, and the broad range of business services is particularly strong, as shown in Figure 10.11.

Most research and management prescriptions have been based on the experience of manufacturing and high-technology sectors. Most simply assume that such practices are equally applicable to managing innovation in services, but some researchers argue that services are fundamentally different. There is a clear need to distinguish what, if any, of what we know about managing innovation in manufacturing is applicable to services, what must be adapted, and what is distinct and different.

We will argue that generic good practices do exist, which apply to both the development of manufactured and service offerings, but that these must be adapted to different contexts, specifically the scale and complexity, degree of customization of the offerings, and the uncertainty of the technological and market environments. It is critical to match the configuration of management and organization of development to the specific technology and market environment.

The service sector includes a very wide range and a great of diversity of different activities and businesses, ranging from individual consultants and shopkeepers to huge multinational finance firms and critical nonprofit public and third-sector organizations such as government, health, and education. Therefore, great care needs to be taken when making any generalization about the service sectors. We will introduce some ways of understanding and analyzing the sector later, but it is possible to identify some fundamental differences between manufacturing and service operations:

• Tangibility. Goods tend to be tangible, whereas services are mostly intangible, even though you can usually see or feel the results.
• Perceptions of performance and quality are more important in services, in particular, the difference between expectations and perceived performance. Customers are likely to regard a service as being good if it exceeds their expectations. Perceptions of service quality are affected by:
  • tangible aspects – appearance of facilities, equipment, and staff
  • responsiveness – prompt service and willingness to help
  • competence – the ability to perform the service dependably
  • assurance – knowledge and courtesy of staff and ability to convey trust and confidence
  • empathy – provision of caring, individual attention.
• Simultaneity. The lag between production and consumption of goods and services is different. Most goods are produced well in advance of consumption, to allow for distribution, storage, and sales. In contrast, many services are produced and almost immediately consumed. This creates problems of quality management and capacity planning. It is harder to identify or correct errors in services and more difficult to match supply and demand.
• Storage. Services cannot usually be stored, for example, a seat on an airline, although some, such as utilities, have some potential for storage. The inability to hold stocks of services can create problems matching supply and demand – capacity management. These can be dealt with in a number of ways. Pricing can be used to help smooth fluctuations in demand, for example by providing discounts at off-peak times. Where possible, additional capacity can be provided at peak times by employing part-time workers or outsourcing. In the worst cases, customers can simply be forced to wait for the services, by queuing.
• Customer contact. Most customers have low or no contact with the operations which produce goods. Many services demand high levels of contact between the operations and ultimate customer, although the level and timing of such contact varies. For example, medical treatment may require constant or frequent contact, but financial services only sporadic contact.
• Location. Because of the contact with customers and near simultaneous production and consumption of services, the location of service operations is often more important than for operations that produce goods. For example, restaurants, retail operations, and entertainment services all favor proximity to customers. Conversely, manufactured goods are often produced and consumed in very different locations. For these reasons, the markets for manufactured goods also tend to be more competitive and global, whereas many personal and business services are local and less competitive. For example, only around 10% of services in the advanced economies are traded internationally.

These service characteristics should be taken into account when designing and managing the organization and processes for new service development, as some of the findings from research on new product development will have to be adapted or may not apply at all. Also, because of the diversity of service operations, we need also to tailor the organization and management to different types of service context.

In practice, most operations produce some combination of goods and services. It is possible to position any operation on a spectrum from “pure” products or goods through to “pure” services. For example, a restaurant or retail operation both have tangible goods on offer, but in most cases, the service provided is at least equally important. Conversely, most manufacturers now offer some after-sales service and support to customers.

However, the distinction between goods and services remains important because the differences in their characteristics demand a different approach to management and organization. It is perhaps better to think of any business or operation as offering a bundle of benefits, some of which will be tangible, some not, and from this decide the appropriate mix of products and services to be produced.

The service sector includes a wide range of very different operations, including low-skilled personal services such as cleaners, higher skilled personal services such as tradesmen, business services such as lawyers and bankers, and mass consumer services such as transportation, telecommunications, and public administration. Critical dimensions that can be used to segment services include labor intensity of the operations, that is the ratio of labor costs to equipment costs, and the degree of customization or interaction with customers [55].

To identify common characteristics of service innovators, we have examined over 100 service businesses from the PIMS database and separated out those which have the highest sustained new service content in their revenue, as shown in Table 10.3.

Not surprisingly, high innovators spend more on R&D, to change both what they deliver to customers and how they deliver it. In addition, they have often experienced technological change and invested in fixed assets to do so. They usually take less than a year to bring new service concepts to market. Competition is also an important factor. The highest innovating firms are more than likely to have experienced entry into their markets by a significant new competitor. They are also much more likely to compete in open markets where international trade – both imports and exports – plays an important role.

The data also indicate that focus is an important discriminating factor between high and low service innovators. First, those businesses with the highest level of new service content tend to avoid overcomplicating their customer base. They are usually firms for which fewer key customer segments account for a higher proportion of their total revenue. This suggests that customer complexity can be a barrier to effective innovation in service businesses. This “focus” service strategy is well demonstrated by the rise of “no frills” air services in the United States and Europe since the mid-1990s, such as Southwest, Ryanair, and EasyJet. Second, it seems that focus in the procurement and service delivery process is also an aid to stronger innovation performance. High innovators tend to focus their purchases on fewer, larger suppliers, and are less vertically integrated – and therefore focused on fewer internal processes within the overall value chain.

However, persuading customers to buy new services at a premium can be difficult. Most of our “innovation winners” operate with a policy of parity pricing of using their service advantage to go for growth, rather than to exploit it for maximum immediate profits. They grow real sales significantly faster, they grow share of their target markets faster than their direct competitors, and noninnovators generally, and in addition they increase their returns on capital employed and assets.

Research Note 10.9 identifies four different types of service innovation organizations. Each appears to have evolved or acquired sufficient good practices to be viable at least in niche markets. The client project orientated reduces time to market and improves service delivery by focusing on customer requirements and project management; the mechanistic customization reduces costs by setting standards and through the involvement of suppliers and customers; the hybrid knowledge sharing provides a combination of innovation and efficiency by promoting team work and knowledge sharing; and the integrated innovative raises innovation and quality by means of cross-functional groups supported by groupware and other tools and technology, but this increased coordination raises the time and cost of service development.

Examination of the actual measures suggests that each of the four organizational configurations provides several common elements, including:

• organizational mode of bringing people together
• control mechanisms, either impersonal (standards, documentation, common software) or interpersonal (collocated teams)
• shared knowledge and/or technical information base
• external linkages, for example, customers and/or partners/suppliers.

In terms of performance, innovation and quality appear to be improved by cross-functional teams and sharing information, raised by involvement with customers and suppliers, and by encouraging collaboration in teams. Service delivery is improved by customer focus and project management and by knowledge sharing and collaboration in teams. Time to market is reduced by knowledge sharing and collaboration and customer focus and project organization, but cross-functional teams can prolong the process. Costs are reduced by setting standards for projects and products and by involvement of customers and suppliers, but can be increased by using cross-functional teams. Although individual practices can make a significant contribution to performance, it is clear that it is the coherent combination of practices and their interaction that creates superior performance in specific contexts, as shown in Figure 10.12.

Summary

There is a vast amount of management research on the subject of new product and service development, and we are now pretty certain what works and what does not. There are no guarantees that following the suggestions in this chapter will produce a blockbuster product, service or business, but if these elements are not managed well, your chances of success will be much lower. This is not supposed to discourage experimentation and calculated risk-taking, but rather to provide a foundation for evidence-based practice. Research suggests that a range of factors affect the success of a potential new product or service:

• Some factors are product-specific, for example, product advantage, clear target market, and attention to predevelopment activities.
• Other factors are more about the organizational context and process, for example, senior management support, formal process, and use of external knowledge.
• A formal process for new product and service development should consist of distinct stages, such as concept development, business case, product development, pilot and commercialization, separated by distinct decision points or gates, which have clear criteria such as product fit, product advantages, and so on.
• Different stages of the process demand different criteria and different tools and methods. Useful tools and methods at the concept stage include segmentation, experimentation, focus groups, and customer-partnering; and at the development stage, useful tools include prototyping, design for production, and QFD.
• Services and products are different in a number of ways, especially intangibility and perceived benefits, so will demand the adaptation of the standard models and prescriptions for new product development.

Further Reading

The classic texts on new product development are those by Robert Cooper, for example, Winning at New Products (Basic Books, fourth edition, 2011), or Cooper, R.G. (2000) Doing it right: Winning with new products. Ivey Business Journal, 64(6), 1–7, or anything by Kim Clark and Steven Wheelwright, such as Wheelwright, S.C. and K. B. Clark, Creating project plans to focus product development, Harvard Business Review, September–October, 1997, or their book Revolutionizing Product Development (Free Press, 1992). Paul Trott provides a good review of research in his text Innovation Management and New Product Development (FT Prentice Hall, fifth edition, 2012), but for a more concise review of the research see Panne, van der, G., Beers, C. van, Kleinknecht, A., Success and failure of innovation: a literature review, International Journal of Innovation Management, 2003. 7(3), 309–38. A useful and practical handbook is The PDMA Handbook of New Product Development, edited by Kenneth Kahn (Wiley, third edition, 2013), which is particularly strong on process and tools. Fiona Schweitzer and Joe Tidd provide a review of methods to engage customers and users in the innovation process in Innovation Heroes: Understanding customers as valuable resources for innovating. World Scientific Press, London, 2018.

For more focused studies of new service development, see the recent article: Berry, L.L. et al. (2006) Creating new markets through service innovation, MIT Sloan Management Review, 47, 2. More comprehensive overviews of service innovation are provided by Ian Miles in the Special Issue on innovation in services, International Journal of Innovation Management, December, 2000, or in the books by Tidd and Hull: Service Innovation: Organizational Responses to Technological Opportunities and Market Imperatives (Imperial College Press, London, 2003); and Normann: Service Management – Strategy and Leadership in Service Business (John Wiley & Sons, Ltd, third edition, 2001). Recent comprehensive handbooks on service development, both of which we have contributed to, are: F. Djellal and C. Gallouj (editors), The Handbook of Innovation and Services (Edward Elgar, 2010), and Gavriel Salvendy and Waldemar Karwowski (eds.), Introduction to Service Engineering (Wiley, 2010). On the more specialist topic of creating value from technology and services, try Marketing Technology as a Service: Proven Techniques That Create Value, by Laurie Young and Bev Burgess (Wiley, 2010) and Frank Hull and Chris Storey’s Total Value Development (Imperial College Press, 2016).

There are few texts which focus exclusively on how to apply conventional marketing tools and techniques to innovative new products and processes, but the best attempts to date are the chapter on “Securing the future” in Gary Hamel and C. K. Prahalad’s Competing for the Future (Harvard Business School Press, 1994) and the chapter on “Learning from the market” in Dorothy Leonard-Barton’s Wellsprings of Knowledge (Harvard Business School Press, 1995). Dawn Iacobucci has edited an excellent compilation of current theory and practice of business-to-business and other relationship-based marketing in Networks in Marketing (Sage, 1996), much of which is relevant to the development and marketing of complex products and services. It also provides a sound introduction to the more general subject of networks, which was discussed in Chapter 6. We discuss the special case of complex product systems in a special issue of Research Policy, 29, 2000, and in The Business of Systems Integration, edited by Andrea Prencipe, Andy Davies and Mike Hobday (Oxford University Press, 2003).

A number of US texts cover the related but more narrow issue of marketing high-technology products, including William Davidow’s Marketing High Technology (Free Press, 1986) and Essentials of Marketing High Technology by William Shanklin and John Ryans, Jr (Lexington, 1987). The former is written by a practicing engineer/marketing manager, and therefore is strong on practical advice, and the latter is written by two academics, and provides a more coherent framework for analysis. Vijay Jolly’s Commercializing New Technologies (Harvard Business School Press, 1998) provides a process model based on the experiences of leading firms such as 3M and Sony, which consists of five sub-processes or stages, but the framework is biased toward mass consumer markets. Geoffrey Moore has produced a series of useful guides based on the experience of technology-based firms, beginning with Crossing the Chasm: Marketing and Selling Technology Products to Mainstream Customers (Third edition, HarperCollins, 2014).

Case Studies

Additional case studies are available on the companion website, including:

• Bank of Scotland, which explores service development in retail financial services, highlighting its similarity to product development for consumer goods. You can also read about innovation in law firms in which patterns of process innovation are discussed.
• BBC, which picks up on the theme of “hidden innovation” in the creative industries and media – for example, film and TV program development, which is not captured by traditional policy or measures such as R&D or patents.

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