Friday, July 25, 2008

Gain Competitive Advantage Through New Product Development

In today’s competitive world, companies do not compete on price or delivery alone. Introduction of new products or new product features has become a main source of competitive advantage. The best example of this strategy is that of Pepsi Co. For decades, Pepsi Cola & Coca Cola battled for supremacy in the cola market, however in 1990’s Pepsi gained market share, improved profitability and became World No. 1 beverage vendor by introducing slew of new products. See: The Pepsi Machine

Similarly, Apple Inc., has repeatedly outwitted competition by introducing radical new products: iMac, iPod, iPhone, iTunes, OS X etc.

In high tech world, companies can hope to survive only if they introduce new products. Old products will rapidly become obsolete & new products becomes the only source of future revenue.

New product development provides an opportunity to change the competitive landscape. New products can help company gain new customers, retain existing customers and increase profitability. In short, new products is the only source of competitive advantage - if executed correctly. And this puts the spot light on the product manager. Product manager’s role in defining the new product: specifications, features, performance, pricing et al, is vital to gain competitive advantage.

Retain existing customer base

Customer’s needs keeps changing with time. In order to retain current customers, business must constantly adapt to meet the changing requirements. For example, if GM were to keep making the same model of the cars as they did in 2000, then today it would be out of business. Companies need to constantly introduce new products to keep the existing customers exited and happy.

Another example of product stagnation & hence losing market share will be that of Motorola. For a long time Motorola made & sold only analog phones - even when the service providers had moved to digital networks. Then came Nokia with sleek digital phones & stole the market share from Motorola in 1998. (see: HOW MOTOROLA LOST ITS WAY Also see:Zombie Businesses: How to Learn from Their Mistakes)

The problem with most SME (Small & Medium enterprises is that they fail to keep up with the market - they have one/few successful products, and the management concentrates on execution & improving operating efficiency for a long period - that they forget to update their products. Eventually competition comes up with a better product and throws the incumbent out of business. For example Design Acceleration Inc. Had a great software - "Signalscan", over a period of time other competitors emerged - forcing Design Acceleration Inc. to merge with Cadence Design systems.

In India, Nirma a Gujarat based consumer and industrial products company once dominated the washing detergent market with its "Nirma" brand washing Powder. But the company failed to introduce new products - and depended solely on the flagship product for sales. Consequently its market share has plummeted and the brand has lost its relevance to most consumers.

Cannibalize yourself

Best way to retain the current market share is to attack your existing products with newer & improved products. The new products must be aimed at customers of existing products and at similar products (from competitors). Cannibalizing existing products is a surest way to retain market share, remain fresh & current in the market place - and win some market share from competition (if they do not offer exciting new products to match)

Today, cannibalizing existing products is a standard practice at all the foutune-500 firms. The best examples can be seen in Computer industry & Auto industry - where companies routinely introduce new products that replace their existing ( & even best selling) products.

On the contrary, few firms have resisted this trend of cannibalizing current product lines - and have protected their products from changes. Cocoa Cola, Dove Soap, Nevea Creame, Budweiser, Chivas Regal, Old Spice after shave etc. Are good examples of products that have been protected. These products have not changed - but the marketing of these products are always renewed to keep these products fresh in people’s minds. Companies try out newer advertisements, new packaging forms etc. to inject a sense of freshness into these "classic" products. However, one must be prudent enough to introduce derivative products for each of these "Classic" products to defend from competitive products. For example, Budweiser introduced "Bud Lite" to protect the main brand from "low-carb" competitors.

Leapfrog the competition

In most markets, everyone knows who the competition is - and they know its history, its behavior, its pricing and usage. Knowing the product so well will also reveal its venerability, thus allowing competition to introduce a better product. The same logic can be applied in the reverse. I.e. Introduce a product that is way ahead of what the competition already has in the market.

The new product should be so much advanced that it will take years for the competition to catch-up. In the mean time, the new product would have become the new market leader.

Apple Inc. is the best example of this "leapfrogging strategy. Every time when Apple was written off as dead in computer industry, Apple springs a surprise - that takes everyone by storm and builds a strong market position. First it was with iMac - a colorful integrated computer which was so innovative that every school kid in the US wanted one.

Apple did the same with iPod. Apple was not the first company to introduce a mobile MP3 player - there were several others, but then Apple came up with a new & exciting player that took the market by storm and soon became a market leader - and in the process displaced even SONY’s Walkman. Today - SONY is still smarting from its defeat on the mobile music player business - and still does not have a product that can really compete with Apple. (Incedently, SONY also implemented the leapfrog strategy with its original "walkman", Trinitron & Playstation)

Apple repeated this strategy with stunning success - with iPhone. By introducing a radical new product which was years ahead of the competition, Apple became the market leader in the Smart phone market - ahead of Nokia, Palm, & Blackberry.

Leapfrogging the competition is not an easy strategy to pull off. It requires deep innovation capability, deep pockets to invest in R&D & finally investors should have the "guts" to take the risk.

Meet the latent demand

Customers who use your current product will always have newer needs, and often wish that the current product could do more than what it does today. This is a latent demand for a newer product - which can be effectively be exploited by product improvements. For example, when MP3 players become popular, customers of Nokia wanted to listen to MP3 songs on their cell phones. Nokia responded accordingly - and today MP3 players is a default feature in most of Nokia phones. Similarly, Nokia also added camera, video players, email, file manager and a host of other features to their cell phones via new product introductions. By doing so, Nokia was able to retain its dominant position - and even gain market share for business phones from Blackberry & PALM with its E-series phones (E50, E51, E61, E65, E90 etc.)

Raise the bar

One can raise new barriers to entry through new product development. Companies such as Intel, Cisco, Microsoft, Toyota, Honda etc., constantly keep releasing new products at regular intervals - so that competition cannot catch-up and this also discourages new entrants into the market. The new products raise the performance/quality standards with every new release.

This strategy requires companies to have a well defined product road map and deep engineering capability that allows them to introduce new products are regular intervals - which keeps raising the performance/quality continuously, so that competition cannot keep up with the pace of technological improvements and lose out.

For example in the world of automobiles, Toyota has been making steady improvements to its hybrid cars so that GM, Ford, & Chrysler cannot really compete with Toyota when it comes to fuel efficiency. Similarly, Intel has raised the performance of its "Pentium" & "Centrino" processors through successive new products and today AMD is struggling & losing money - as it falls behind technology development.

Pre-empt competition by raising customer expectations

Companies can make pre-announcement of new products with new features - so that it attracts the customers and in turn make them wait eagerly for the new product to be released - instead of buying the product that is readily available in the market today. This strategy will help protect the market share at times when the competition has a slight edge in the market place.
For example, Apple recently announced iPhone 3G phone which supports corporate email, but it was not available immediately - but in the interim period, made people wait eagerly for the new iPhone - instead of buying a Blackberry.

Similarly, Boeing did a pre-announcement of its "Dreamliner - 777" which had state-of-the-art design, major fuel economy improvements & promised very long flying ranges. This pre-announcement from Boeing made customers place early orders & wait. Thus taking away customers from its arch rival - Airbus Industries.

Raising customer expectations will work only if the company can deliver. If company raises expectations and does not deliver, then it will see reversal of fortunes.

Closing thoughts

New product development is a surest way to retain & gain market share. Successful product companies have a history of introducing new products at regular intervals; they have a well defined product road map; deep engineering capability; innovation and R&D capability.
If you are not introducing new products at regular intervals, then its almost certain that your competition can eat your lunch.


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Rahul Shetty said...

please check the definition of cannibalization. you are defining it in the wrong sense. according to your explanation it is Brand proliferation

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