Link to the student activity: Why Firms Introduce New Products
Note: This is a FREE solution – which is provided for instructors’ review when considering a GITM Membership.
Suggested Solutions/Teaching Approach
1 = Review the above list of examples. Identify a range of factors/drivers that influence firms to introduce new offerings.
Let’s start by reviewing the list provided in the activity, as follows:
A firm that has been the number two in the market for the past few years now plans an aggressive growth strategy in order to become the market leader in the industry. = MARKET LEADER OBJECTIVES and STRATEGY – internally driven
As the cigarette industry is faced with a stagnant market with little prospect of growth, many cigarette firms are now looking to diversify into new types of products. = GROWTH OBJECTIVES – existing product lines in the decline of the product lifecycle – externally driven
An insurance firm purchases a major computer system that will enable them to introduce many new products that their previous IT system was unable to support. = Access to NEW TECHNOLOGY/RESOURCE
McDonald’s originally introduced its breakfast category, because its restaurants were empty until around 11am. = UNDERUTILIZED ASSET/CAPACITY/RESOURCE
A new CEO starts, who has ambitious plans for the firm – he states that the firm should be able to double its profits over the next three years. = New CORPORATE CULTURE = driving enhance growth objectives – internally driven
As some major supermarkets become very dominant in their markets, they often expand into other retailing formats. = Continued GROWTH OBJECTIVES – externally driven
As we can see from the above list, the drivers for new product development can be summarized as:
- the external marketing environment – competitors, the stage of the product lifecycle, and other environmental challenges and opportunities
- the internal marketing environment – driving strategy and objectives and competitive posture
- opportunities/limitations relating to resources and access to technology and the ability to compete in the marketplace
In addition to the above list, we could also add our own ideas, such as:
- To match competitor offerings
- To fill product gaps in our product line – such as price points or quality levels
- To introduce products to enter new markets or segments
- To introduce products for cross-selling purposes, to increase the strength of our customer relationships
- For positioning purposes – to have products that support our image or a required repositioning
- To add a variety and excitement to our product lines
- To improve relationships with suppliers and retailers, if required
- To fragment the market (creating multiple mini segments) to meet more needs and to block competitors
- To tap into consumer trends or enter the introduction stage of the product lifecycle
- To meet changing customer needs
- To meet societal expectations – such as green products and other environmental issues
2 = Which factors, from your list, do you think are the main driving factors?
Students need to identify the most common and the strongest drivers of new products. That is, what makes a company to decide that it definitely needs to bring one or more new products to the marketplace?
From the above lists, the most common and strongest drivers would most likely be:
- Limited growth from existing product lines – as they are in the maturity or early decline stage of the product lifecycle – creating the requirement to introduce new products for growth
- Continuing to deliver growth for the company, in line with its internal goals and its preferred competitive position
- Matching and defending against competitor actions, especially if we are in a market share battle
- Adding products to support our growth into new markets and segments
- Introducing new products for our existing customer base = to build relationships and enable more cross-selling
- For variety and brand excitement purposes, particularly for food, beverage, and entertainment products
- To adapt to changing customer needs or to tap into customer trends
As we can see from this list, new products will assist us to adapt and stay current in the marketplace (marketing environment), as well as meeting growth and strategy expectation from inside the company/firm.
3 = How important do you think new products are to a firm?
Hopefully your students will identify that you products are absolutely critical to businesses for their long-term success. As we can see from Q2 above, in order for us to remain relevant and competitive in the marketplace, we need to involve our product lines over time.
While there are companies that have long-term products, such as Coca-Cola, they continue to be innovative and introduce a range of new products – and run 1,000’s for product variations across the globe. Another similar example is McDonald’s – while they have had the Big Mac for many decades – they continue to introduce new products and have short term seasonal products as well.
Teaching note: Potentially a way of addressing this question with students is to consider some well-known companies and ask what would happen if they did NOT introduce new product at all. If this was to happen, then we would expect that eventually:
- all/most of their product lines would be in the decline stage of the product lifecycle
- they would be perceived as dated an old-fashioned
- their products would rely on older technology
- competitors will surpass them with more modern and reliable products
- there relationships retailers and suppliers would gradually erode
- they would miss key consumer trends and opportunities
- IN SUMMARY: their sales, profitability, brand damage, and competitive position would decrease to the point where they would no longer be financially viable in the marketplace
Therefore = new products are a critical component for any long-term successful business.
4 = Would there be factors that influence firms NOT to consider new products? What could some of these factors be?
There would be situations, most likely short term, where a business would choose NOT to introduce new products. This would be relatively rare, and would probably be the situation for a short period of time. Some of these situations could include:
- They are a key player in a high-growth market (a star in the BCG matrix) and all their money and efforts are dedicated to the existing product line
- They are under current financial stress without capacity to invest any new products – perhaps in the GFC or the early stages of COVID?
- They are experiencing tremendous success through market development, which is delivering substantial growth and profitability
- They are only going substantial infrastructure change – such as new manufacturing of IT systems – and do not need the distraction of new products
- They are a relatively new business and are in the process of building their customer base for the first time
- They are preparing the business for a merger or acquisition or an IPO = implementing an exit strategy?
- They are experiencing strong growth through market penetration – perhaps innovative advertising or positive word-of-mouth, which is driving substantial profit improvements anyway
- They are a monopoly = such as the local zoo or airport, without substantial competitor challenges
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