Ffective Organizational Arrangements

Top management is ultimately accountable for the success of new products. New-product development requires senior management to define business domains, product categories, and specific criteria. For example, the Gould Corporation established the following acceptance criteria:

■ The product can be introduced within five years.

■ The product has a market potential of at least $50 million and a 15 percent growth rate.

■ The product would provide at least 30 percent return on sales and 40 percent on investment.

■ The product would achieve technical or market leadership.

B DGE ING FO NE P ODC DE ELOPMEN

Senior management must decide how much to budget for new-product development. R&D outcomes are so uncertain that it is difficult to use normal investment criteria. Some companies solve this problem by financing as many projects as possible, hoping to achieve a few winners. Other companies set their budget by applying a conventional percentage of sales figures or by spending what the competition spends. Still other companies decide how many successful new products they need and work backward to estimate the required investment. Developing

The U.S. company best known for its commitment to new-product research and New Market development is Minneapolis-based 3M Company: Offerings m ■ 3M Minnesota Mining and Manufacturing (3M) fosters a culture of innovation and improvisation that was evident at its very beginnings: In 1906 the directors were faced with a failed mining operation, but they ended up making sandpaper out of the grit and wastage. Today 3M makes more than 60,000 products, including sandpaper, adhesives, computer diskettes, contact lenses, and Post-it notes. Each year 3M launches scores of new products. This $15 billion company's immodest goal is to have each of its divisions generate at least 30 percent of sales from products less than four years on the market.7

■ 3M encourages everyone, not just engineers, to become "product champions." The company's 15 percent rule allows all employees to spend up to 15 percent of their time working on projects of personal interest. Products such as Post-it notes, masking tape, and 3M's microreplication technology grew from 15 percent-rule activities.

■ Each promising new idea is assigned to a multidisciplinary venture team headed by an "executive champion."

■ 3M expects some failures and learns from them. Its slogan is "You have to kiss a lot of frogs to find a prince."

■ 3M hands out its Golden Step awards each year to the venture teams whose new product earned more than $2 million in U.S. sales or $4 million in worldwide sales within three years of its commercial introduction.

Table 2.1 shows how a company might calculate the cost of new-product development. The new-products manager at a large consumer packaged-goods company reviewed the results of 64 new-product ideas. Only one in four ideas, or 16, passed the screening stage. It cost $1,000 to review each idea at this stage. Half of these ideas, or eight, survived the concept-testing stage, at a cost of $20,000 each. Half of these, or four, survived the product-development stage, at a cost of $200,000 each. Half of these, or two, did well in the test market, at a cost of $500,000 each. When these two ideas were launched, at a cost of $5 million each, only one was highly successful. Thus the one successful idea had cost the company $5,721,000 to develop. In the Developing process, 63 other ideas fell by the wayside. The total cost for developing one successful

Marketing new product was $13,984,400. Unless the company can improve the pass ratios and

Strategies reduce the costs at each stage, it will have to budget nearly $14 million for each suc-

FIGURE

We will now look at the marketing challenges arising at each of the eight stages The New-Product-Development of the development process: idea generation, idea screening, concept development Decision Process and testing, marketing strategy development, business analysis, product development, market testing, and commercialization. A preview of the various steps and decisions in the process is presented in Figure 2-1.

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