Product Categories in NPD (Part 3 of 3)

Concluding a three-part series on the elements of innovation strategy in new product development (NPD), we will address the role of product categories in innovation projects in this post. Earlier posts described the strategic components of markets and technology in NPD.

The NPD Process

New product development includes the transformation of a nascent idea into a commercial product or service through a series of logical steps. These stages, or phases, of work are designed to minimize risk while optimizing the overall set of active innovation projects to deliver the most value to the firm. Because of the structure of the NPD process, a project can be halted at any of the gates, or decision points, throughout the duration of the project. Each stage of work is thus evaluated for completeness and its plan for the next stage of work is validated against a pre-determined set of criteria in order for a project to pass a gate.

A typical NPD process will include five stages and four gates with a lessons learned review conducted after the product is commercialized.

Stage 1 – Opportunity Identification
Stage 2 – Concept Generation
Stage 3 – Concept Evaluation
Stage 4 – Technical Development
Stage 5 – Commercialization
Post-Launch Review

Gate pass criteria focus on a number of items related to the company’s business and innovation goals. For example, gate criteria may include market attractiveness, technical feasibility, brand or category expansion, risk, quality, and capabilities growth along with specific revenue targets. In essence, each project is evaluated for strategic alignment especially by weighing a new product project’s market, technology, and product category expectations.

Markets and Technology in NPD

In part one of this series, Markets in NPD, we addressed customer involvement and market assessments necessary for a successful NPD project. Next, in Technology in NPD, we learned various testing and scaling required to convert an idea into a salable product or service.

In each case, specific activities are required to validate the markets and technologies of a new product or service as it advances through the stages of the NPD process. At each stage of work, both markets and technologies will be evaluated at a larger scale and against acceptable management criteria.

Product Categories

Strategically, a firm must address all project to fits with customer needs and industry trend. Product categories help to frame development work by matching industry growth models with target customer needs. Senior management is responsible for defining the innovation strategy in terms of markets and technologies as well as product categories.

For instance, a company that manufactures and sells personal care products may take a strategic decision to not participate in the men’s hair care product segment. The company may have special capabilities and customer relationships for women’s and children’s shampoos. Focusing on one or two core product categories can differentiate the firm’s products and can lead to higher quality ideas in the pipeline. Stage 1 of the NPD process, therefore, focuses on product category definitions.

Stage 1 – Opportunity Identification

During the fuzzy front end of the NPD process, senior management focuses on translating the innovation strategy into workable implementation plans at the operational level. A key output of Stage 1 is the product innovation charter (PIC). This document defines the purpose and characteristics of an NPD project and links it to the overall business and innovation strategies. Definitions of the target market, foundational technology, and product categories are all included in the PIC.

Product category definition should include what is and what is not the goal of the company. Too often, firms attempt to serve the needs of all customers, which is both impractical and infeasible. By clearly defining brands and types of products or services that the firm plans to enhance through implementation of a specific strategy, the company will be more successful with innovation.

It is especially important during strategic alignment exercises to detail in what product categories the firm will participate and which ones it will not. Clear, well-defined category and brand boundaries will improve the time-to-market of a new product development effort as well as to reduce the impact of potential scope creep during project execution.

Stage 2 – Concept Generation

Activities in Stage 2 are generally associated with divergent thinking. NPD teams will generate as many ideas as possible to solve the customers’ problems identified in Stage 1. Many of the ideas will not be practical yet nuggets and seeds of comprehensive concepts can be found for creative and radical innovations.

A firm’s brands are normally intangible assets, yet can be very, very valuable to success in the marketplace with a new product. Procter & Gamble maintains several “billion-dollar brands,” for example. It is not a trivial decision to add the title of “Tide,” “Downy,” or “Febreze” to a product. Brand reputation can be enhanced with a high quality, customer-driven new product. However, brand reputation can be irrevocably damaged through the launch of a product that fails to deliver acceptable quality or benefits.

A product category definition in Stage 2, then, is to include the new product in an existing brand or to differentiate it from competitor offerings. Another option, to protect the primary brand, is to launch a new product in its own category with plans to later assimilate it into the primary brand. For example, the Edsel was launched as an independent brand. This decision turned out to be the right one, as the Edsel failed in the marketplace but the Ford brand was protected from the low quality product.

Stage 3 – Concept Evaluation

During Stage 3, Concept Evaluation, the many ideas and concepts generated in Stage 2 are evaluated for strategic fit and customer interest. While the marketing effort is focused on concept testing, appropriate product categories are also identified in Stage 3. For new products, the most common brand categories are value-priced, mass market, and luxury.

Products are often designed and developed around a core technology. Addition of features, or stripping off some features, can make the core product more appealing to a luxury or value-priced market, respectively. Many customers are not willing to pay for features they will not use while other end-users may not purchase a product that is priced too high to cover production costs of a feature-heavy product.

Take, for example, the common office binder. A standard notebook sold for the mass market is a three-ring style with a clear front window to insert a cover page identifying the contents of the notebook. A standard binder may have a selling price of $3 at a big box office supply store. Yet many applications and customers, such as college students taking notes or a homeowner storing receipts, do not require the cover insert page or pockets inside the binder. Stripping off these features will appeal to a value-priced market segment and a lower end notebook may cost only $2.50 at a common office supply store.

Finally, however, slick annual meeting presentations and high-end corporate sales materials may require a D-ring binder as well as dividers and multiple insert pockets inside both the front and back covers. The high-end binder may be priced at $4 each at the same big box office supply store. Small changes in the feature set thus allows a core product to span several categories with one brand or multiple brands aligned with specific market segments.

Stage 4 – Technical Development

Pricing information will be an outcome of Stage 3 work, though the main goal is to understand customer needs and brand positioning. Often concept tests (Stage 3) will query a potential customer’s interest in a product based on its form, technology, and function. A typical follow-up question probes a price range or surcharge that customers would find acceptable for the new product.

Sensitivity analysis for pricing is a key activity to lock in the brand category in Stage 4. The product’s merits will be weighed against competition in several market segments and global industries. It is important for the product development team to test local product categories but account for regional differences during the technology development stage.

Manufacturing facilities can be designed, built, or acquired to incorporate flexibility in the feature set or regional tastes. These variations will establish the production expenses. Positioning of the product in different categories will allow pricing schemes to be evaluated against the manufacturing cost to find the most profitable market segments and categories for the new product.

Stage 5 – Commercialization

Launching the new product in the most attractive market segment will often establish the product category for the product’s life cycle. Stage 5 activities involve testing the new product with its marketing plan. Product categories, branding, and market positioning will validate work done in earlier stages.

Commercialization of a new product should establish the product category even if it is a new use or new market. For example, the initial launch of the iPhone established a new category of smartphone devices. The iPhone was priced as a luxury item and offered through exclusive outlets. As with Xerox and Kleenex, the iPhone name is quickly becoming synonymous with an entire product category.

Product Categories in NPD

A good innovation strategy will coordinate market and technology development during the activities of the NPD process. An excellent NPD strategy will also identify, evaluate, and verify product categories during design and development work. Category and brand efforts should start with definitions in Stage 1 and Stage 2. The fuzzy front end of the NPD process will conclude in Stage 3 with identification of a product concept for delivery to value-priced, mass market, and luxury consumers.

Later stage development work will verify and validate pricing schemes for profit within each identified market segment and product category. Finally, commercialization focuses on the product itself as it is successfully launched into a variety of local, regional, and global markets.

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