How To Build A Strong Launch-Pad

Is launching new products harder or easier today than it was 10 or 20 years ago? Ask this of a brand manager in a large consumer goods company and almost certainly the response will be "harder".

As for the reasons why - the usual suspects emerge: intensified competition; consumers who are both more value conscious and less brand loyal; dwindling product life cycles; and increasingly powerful retailers.

The consensus seems to be that most new products in most markets will fall by the wayside. In some industries, such as software in the 1980s, the failure rate can be as high as 90 per cent.

 

The problem is compounded by the increasing pressure to innovate, partly because of fast-changing consumer tastes and behaviour and partly because of the possibilities created by enhanced or novel technologies.

If market conditions are tough for established organisations, how much more difficult the environment must be for the new venture, especially the start-up. Well, yes and no.

Compared with existing businesses, the typical new venture has fewer resources of every kind, fragile or embryonic networks, and a need to build trust and credibility among customers and suppliers. It carries more inherent risks.

Yet it also possesses intangible assets that do not appear on the balance sheet. Speed, or the ability to adapt rapidly, and a capacity for flexibility are two of the more important ones. A management that is hungry is a third asset. And not being burdened by the weight of corporate history may well be a fourth.

The management of risk

One of the principles of Mastering Enterprise is the management of risk. How exactly to get into business is frequently one of the key areas of uncertainty in most new ventures. To highlight the options faced by a new venture, it is worth examining how large businesses have traditionally managed risks associated with entry into new markets or launching new products.

For big business, geographical expansion typically followed a pattern: first, importing agencies were used; then, as demand was established, a subsidiary was created or purchased. The overseas businesses would expand through the transfer of product and process technology from the parent, as and when the market was ready.

New product introduction, or entry into new market sectors, also followed clear guidelines. Large consumer companies were interested in products with mass market potential not niche items. The planning, testing and introduction cycle was an extensive one, supported through qualitative and quantitative market research with the decision to launch normally dependent on a successful "test market", from which national market performance could be predicted.

Finally, if the project was sanctioned, large resources in terms of advertising, salesforce and marketing support were committed to minimise the risk of failure.

Not surprisingly, the time between product concept and full-scale launch could be measured in many months if not years. This was acceptable in a stable environment of steadily rising, predictable consumer demand in which all participants played by the same rules - a description that fits the quarter century that followed the second world war.

Today, relatively few markets (in the developed world at least) conform to that description. Markets that are growing are frequently turbulent and hard to forecast. Those markets that are static - such as mature commodity sectors, like soap powder or mass cosmetics - may contain pockets of niche activity but are generally a battleground for a few dominant competitors.

The rules have changed

The upshot is that big business has had to rethink radically its approach to innovation and new product launches. Extended periods of commercialisation, where an innovation is handed from research to development to marketing, like a baton in a relay race, are just too long. In too many markets the window of opportunity is lost. Yet trying to compress that time to market can create its own risks, as Unilever's recent experience with Omo Power (Persil in the UK) shows.

Second, firepower is no guarantee of victory. IBM's PC Jr and Kodak's Disk Camera are just two examples of failed new product launches supported by hundreds of millions of dollars.

The value chain and opportunity

In turbulent times, market risk is closely tied to the dynamics of the supply or value chain. Within any industry there is a sequence of transactions between the raw materials producers and the final consumers. This may be complex, as with most manufacturing activities, or it may be simple, as is generally the case with services.

To succeed, the new venture must create value for which a customer is prepared to pay. In each stage of the chain, value is added, the profitability and relative power within the chain varying for each participant. The market entry decision is closely related to the new ventures position within the value chain.

In dynamic markets opportunity can be seen as the outcome of changes within the value chain or the capacity to create change within the value chain.

Consider two examples. First, the grocery sector.

In the UK 30 years ago creating and sustaining a national grocery brand meant conforming to a certain set of criteria. The manufacturer had to be able to deliver to thousands of small retailers and to handle the associated invoicing and account management. It also had to create and support national advertising campaigns backed by point of sale promotions or neighbourhood coupon drops.

Large companies tackled the problem by integrating their activities right along the value or supply chain: from agreeing long-term contracts with suppliers, to running fleets of trucks and delivery vans and maintaining a national network of regional and local delivery depots.

Smaller organisations used intermediaries, such as wholesalers and brokers, which could achieve economies of scale through aggregating product lines and breaking bulk further down the supply chain.

Fast forward to the 1990s. Today, a small grocery producer can achieve nationwide penetration through supplying a single big retail account.Delivery can be contracted out and is usually restricted to a handful of large drops each week at the customers central warehouses. Building brands through million pound advertising campaigns is not an issue since the retailer is marketing the product under its own label (see Figures 1 and 2 for examples of changing value/supply chains).

This transformation has taken place because of the change in the balance of power between the manufacturer and the retailer in the UK and as the grocery trade has concentrated into the hands of the multiples. Established branded-goods producers see themselves under threat and point to diminishing consumer choice.

But the other side of the equation is that opportunities have been created for hundreds of new suppliers to gain entry into the market because the value chain has been transformed.

The second example illustrates how enterprising new businesses create market opportunities using the potential created by shifting social behaviour.

Mail order has its roots in the 19th century. In the UK, it primarily provided the poorer classes with cheap credit for clothing. Up until the late 1980s mail order expenditure by the wealthier ABC1 socio-economic groups remained disproportionately tiny. Then something happened. The middle classes became comfortable with the idea of buying from a catalogue.

Large US companies, such as Land's End and LL Bean, began to operate in the UK. Traditional catalogue specialists moved up-market and new ventures, such as Cotton Traders, Racing Green and Boden, rapidly carved niches for themselves. This change in social attitudes had lowered the barriers to entry: such companies could get into retailing without tying up their working capital in a high-street presence.

They were assisted by low-cost computerised databases and widespread adoption of the credit card. In the late 1990s we shall see more and more new ventures move into direct marketing or shopping from home via the electronic equivalent of the print catalogue, the Internet web-site.

Risk sharing versus market access

The value chain and risk management can be usefully brought together as a two-dimensional framework in which to view market entry strategy. Given that each new venture occupies a position somewhere in a value chain, a choice has to be made as to how much of the marketing risk the new venture assumes, and how much is shared by other participants in the chain.

For all ventures there is a spectrum of risk sharing. At one end are businesses, such as biotechnology laboratories whose discoveries are normally licensed to large pharmaceutical houses for downstream exploitation in new drugs. Like an author, this kind of company lives on a royalty income generated by its intellectual property while the risk of taking the discovery to market is very largely borne by the counter-party.

At the other end of the spectrum are organisations that sell direct to the market, who position themselves in the final section of the value chain, such as catalogue retailers. Between the two extremes lies a huge variety of risk-sharing arrangements, covering agencies, wholesaling, franchising and so on.

The second dimension is access to the market, which also runs along a spectrum from the immediate relationship with the end customer enjoyed by the direct sales company to the very remote connection of the biotechnologist.

As Figure 3 shows, there is typically an inverse relationship between a high degree of risk sharing and market access. Note that we are not talking here of absolute risk: if the essence of an opportunity is a company's capacity to react swiftly to customer demand, as in the fashion business, assuming the entire marketing risk may well be less risky than laying off that risk via a counter-party through whom contact with the customer is filtered. Conversely, if a direct line to the ultimate buyer is of no importance in the business concept, selling direct is unlikely to make much sense.

Equally, we are describing entry strategies rather than the long-term shape a business assumes. It is hard to envisage how an organisation could employ business format franchising (for example, instant printing) as a means of getting into business since the concept has to be tested and made to work before it can be replicated.

Prototyping and flexibility

Selecting the appropriate risk-sharing arrangement is a strategic decision. Marketing risk can also be managed operationally by considering how a new venture is brought to market.

There is a very important element of good innovation practice that the new venture should focus on, namely prototyping. The term comes from large engineering projects, but can be applied to all sorts of new ventures. A restaurant business can be prototyped - that is in a format acknowledged (by the management at least) as provisional, to be modified in response to market reaction. So can a service.

This concept is valuable because:

* Prototyping is a means of containing risk through limiting the commitment of resources. This is especially critical in markets of great uncertainty, such as high-technology sectors, where customer demand or market potential cannot be known or even guestimated before entry.

* Prototyping allows the new venture to test the robustness of the product or service concept, often through giving target customers access before the launch. This is common practice in the software industry, where new software is routinely tested by selected customers (who benefit from privileged access) before full release.

One of the UK's premier health and fitness clubs adapted this approach. While the club was still being built local residents were invited to tour the site. They were shown the plans for the final design and invited to comment, with the result that several suggestions were incorporated. The club also acquired a useful database of prospective members.

* Prototyping fosters flexibility and responsiveness to customers. Some new ventures start with the advantage of an advance order book. The first wave of customers may represent its core clientele in the medium and even long term. The first product or service may constitute the main business activity. Equally, neither condition may apply, and within a short time the business may be looking for new customers and new products if it is to grow.

* In many new venture environments conventional market research methods may not apply. The costs alone of a professional research agency are often prohibitive. But an even greater obstacle may lie in the product/service concept. Where demand is latent (or believed to be latent), the only way to prove it exists is to test the market by offering an early version of the concept in the full knowledge that it may change as a result of customer exposure.

Incremental commercialisation

Hand-in-hand with prototyping goes incremental commercialisation. Traditional modes of innovation are based on a clear separation between development and launch - at a certain point development was frozen and the finished product entered the market.

Clearly, in a manufacturing business (unless it is making bespoke products) a time is reached when mass production to a specification must start. However, even the established approach to new product development includes an element of incremental commercialisation in the form of test markets. This allows a company to modify the product either in its physical form or in the way in which it is marketed before a full launch.

For many new ventures, attempting to keep development and launch as distinct processes is inappropriate. For one thing, in line with the rest of the economy, most new ventures today will be service-based at least as much as product-based.

Marketing doctrine states that the way to sell a service is to make it, as much as possible, into a product. But the beauty of a service-based business is the speed and flexibility with which it can be modified in response to the market. At the point of entering the market, the new venture needs to exploit that inherent advantage and avoid undue rigidity in advance of feedback from customers.