Chapter 5

What is new product development

strategy?
Product development strategy is a subset of corporate
strategy, and basically all product strategies focus on new
product development strategy. It sets the direction for new
products by establishing goals and through funding
decisions. The aim of product development strategy is to
gain competitive advantage by placing product offerings in
the best possible position to drive business goals such as
sales growth, revenue, or profits.

New product development strategy is the means to

mitigate risk in developing a product concept, to improve
the fit between products and markets, to overhaul a
product line, and to increase the sales of existing products
by enhancing it (with an emphasis on novelty). Although
market research and marketing strategy are necessary in
most cases, there are other inputs to business strategy to
convert it to a fully formed product strategy - such as your
brand, your platforms, your technology, etc. Product
development strategy enables product organizations to
create a stream of innovative offerings that disrupt the
competition and delight customers.

Here are five examples of a product development

strategy:

1. Innovate new product / service areas outside your core

product
2. Clarify your intention via innovator, follower, or low
cost participant
3. Establish your product portfolio consistent with risk
tolerance and market position
4. Tie your corporate vision, to product strategy, and
then to budgets (yearly)
5. Implement right governance, funding, and process for
setting new product strategy
Figure: Product development strategy links vision to product development

Product development strategy

examples (Technology)
Amazon product development strategy

Amazon is an example of a customer-oriented approach to

product development strategy. Their product strategy is
focused entirely around customer needs. Amazon likes to
work backwards from the target market. They write the
press release for the product first, and hone it until its
language is simple enough for anyone to understand. The
press release has no technical jargon about technologies or
UIs. They then work backward from the press release to the
product. This is a product development strategy that
focuses on Amazon’s internal process, in engaging with
customers to create a specific product that meets an
identified need.

Apple product development strategy

Apple is an example of a platform/derivative strategy that

connects their top level strategy to their product
development process. The tech giant tends to be product-
driven. Apple creates products and then finds the market
for them later. Steve Jobs famously suggested that
customers do not always know what they want. Apple bets
that customers will pay a premium for superb products and
tends to focus on optimizing existing offerings. It relies on
brand loyalty and is happy to allow competitors to control
the market in lower-priced products that compete with
Apple’s.

Google product development strategy

Google’s new product development strategies tends to be
technology driven. Google bets on technology “to solve a
big problem in a big way.” This is a market oriented
approach since Google favors growing the market for
everyone, which serves Google as the market leader.
Google also optimizes for growth, not for revenue. Google’s
product development strategy takes the long view; it is
typical of a company that has been a consistent market
leader.

Microsoft product development strategy

Microsoft is an Exemplar of product innovation strategy

carried out through partnerships. “Our industry does not
respect tradition – it only respects innovation,” said
Microsoft CEO Satya Nadella. The maturing tech giant
began its strategic transformation in 2014. It conceded the
smartphone market to its rivals and invested in AI and
Cloud. It created an AI division with thousands of engineers
and scientists. It also dropped its aggressive ways and
began to emphasize partnerships. It embraced open-source
software, becoming the leading open source code
contributor by 2017. Microsoft is now unique in offering a
discrete product unlike Google, Twitter, and Facebook
where user data is the product.

Netflix product development strategy

Netflix has a Profit and margin driven strategy to

maximize adoption and retention. Netflix is the largest
streaming service in the world. Netflix’s core offer is a
subscription including unlimited access to content. Its
product strategy emphasizes margin growth. Monthly
retention is a key metric. It has increasingly focused on
providing high quality original content to pin eyeballs to
screens. Netflix relies on a strong, trustable brand
promising “movie enjoyment made easy.” Its strong brand,
ease of use, and personalization are difficult for
competitors to duplicate.

Product development strategy

examples (Consumer)
Coca-cola product development strategy

Coca-Cola has a strategy that is all about the voice of the

customer. “If we embrace where the consumer is going,
our brands will thrive, and our system will continue to
grow. This is Our Way Forward,” said then Coke President
and COO James Quincey in 2017. Coca-Cola has become
focused entirely on consumers and what they want
from beverages. As consumer tastes change, for example
toward options with less sugar, Coke is moving with them.
In recent years Coke have rolled out new products in
response to consumer demand from juices to coconut
water, to organic tea. Consumers want beverages with
benefits. Some call for smaller, more convenient packages
than the classic Coke can. Coke will continue to listen to
the voice of the customer and respond.

IKEA product development strategy

IKEA has a strategy to focus on low cost at a consistent

level of quality. The high volume of interchangeable parts
requires an extensive, worldwide supply chain. Initially the
company leased out equipment to suppliers and provided
training to ensure quality. Later, as it became an
international brand, it re-organized its supply chain to
manage the large volume and geographic dispersion of its
suppliers. With its core competency in supply chain
management, Ikea can pursue a product differentiation
strategy offering furnishings for any home. Ikea also has a
commitment to sustainable design principles. Its product
strategy relies on smart design driven by its unmatched
supply chain.

Kellogg product development strategy

Kellogg has a strategy of divest and acquire. Kellogg may

have to divest its most cherished cereal brands in order to
move into a future that serves consumer’s better. Kellogg’s
iconic brands like Corn Flakes, Frosted Flakes, and Froot
Loops were the Boomer’s favorite breakfast growing up.
But times have changed and the market for cereal is
declining as more consumers avoid sugar and carbs.
Kellogg has taken a strategy of acquisition and
divestment. It sold off its Keebler and Famous Amos
cookies brands, while acquiring brands like RXBAR which
are more health-aware.

Product development growth strategy

types
There are many approaches to product development
strategies that focus on different dimensions of the new
product process (including what to do with existing
products) and the product development organization. Most
often product development strategy is driven by three
categories of market position:

1. Premium, innovative and differentiated products with

Highly Price/High Value (Apple iPhone Pro)
2. Competitively priced products that differentiate on
minor factors including pricing itself (Crest
Toothpaste)
3. Low cost products where often the quality is good
enough (Kirkland, Costco’s house brand)
The first category above will have the highest product
development or R&D expenses - typically in the range of
10-20%, the competitively priced strategy is in the 5-10%
range, and the low cost category requires less engineering
and R&D spends are below 5% of sales. Tech product
development strategies are expensive, where software
companies typically run in the 10-25% of sales spent on
development and testing. This is also true of companies
that focus on new product introductions. Note that the
company’s risk tolerance may come into play here, and
often it is advantageous to think a of product portfolio
management approach.

Product development strategies either augment those

positions or enable them by focusing on time to market;
on a calculation of technology and market risk; on a strong
platform that spins-off families of products; or on customer
insights and internal procedures to produce the best
existing solution.

Time-based approach

One approach to product development strategy

emphasizes when your new product offering enters the
market. In this approach, entrants compete on time to
market. Either a company is an innovator, that creates a
brand new product category, it is a rapid follower in that
rapid commercialization is the goal, or it lags behind as a
“me too” product.

These three product strategies are often described as:

 First to market
 Fast Follower
 Laggard
The research favors the view that companies that are first
to market reap the rewards. There is a strong correlation
between innovation and long term success in creating new
products. One technique that is commonly used to shorten
time to market is an escalation process.

Market-oriented approach

Another common approach to formulate your product

development strategies is around the dimensions of the
target market, or target audience (marketing strategy
focussed). Often this takes the form of a relative emphasis
on technological or market innovation. Either a new
product development represents a technological
innovation within an existing market; it finds new market
applications for existing products; or it opens up an
entirely new market.

Research on a market-oriented approach yielded five

different types of product development strategies:

 Innovators that use their existing resources to create

new technologies that they sell within existing
markets.
 Investors in technology, mainly through acquisition
or partnerships with other entities (for example with a
university research center).
 Searchers for new markets take existing products
and try to find applications for them in new markets.
For example, a company that designs games might
sell a game-like app that helps HR test new applicants.
 Business As Usual companies continue to push out
already existing products to current markets and
attempt to compete on price, margins, or distribution.
 Middle of the Road companies are happy to take an
incremental approach with low or moderate innovation
 in products and markets, and stick more with
modifying existing products.

Platform-based Approach

According to David Robertson and Karl Ulrich, a

platform is “the collection of assets that are shared by a
set of products.” A platform then spawns families of
derivatives. These families have a relationship to one
another with respect to cost, performance, quality, or
feature density.

For example, in the computer business 15 inch laptops

might constitute a family within a platform of laptops of
various sizes. The variants within a family might appear at
various price points, with different feature sets, such as
amount of memory, hard disk size, CPU speed, and
graphics capability.

A platform approach to product development strategy

represents a way of optimizing innovation. Usually, the
platform is the result of many years of research and
development, and codifies all the efforts resulting from one
or more innovative concepts. A platform’s greatest benefit
is that it maximizes the revenue and business impact of an
invention by spreading across different new product
offerings. Oftentimes this is best illustrated by showing the
relationships between platforms and derivatives in a
product roadmap.

When you leverage the significant design work embodied in

a platform, your subsequent product variants will require
much less engineering time – and less calendar time – to
bring to market. Innovation processes become much more
efficient by leveraging the know how from existing
products. This also allows you to enter a new target market
efficiently by creating a derivative of a product family.

Platform approach to product development strategy yields product families

Customer-oriented approach: Design Thinking

Another approach is to focus on the company’s internal

process for producing valuable innovations that delight
customers as a core part of your product development
strategies and break away from existing products. The
customers’ needs come first in this approach. In this
Design Thinking approach to new product creation,
companies invest in a deep understanding of the customer.
They then convert information derived from customers into
successful products in the market, through a set of
consistent steps.

This approach sees the creation of winning new products

as the result of an information processing procedure that
includes:

 Product concept generation based on customer

insights
 Product planning
  Product engineering
 Manufacturing (or launch) engineering

This approach does not concentrate on what competitors

are doing as much as on what customers require. This
approach is more customer facing and often it is part of an
Agile Product Development process. It puts the onus on
an internal process to deliver for customers. This
methodology can apply to existing products too.

What’s the difference between

corporate strategies and product
development strategies?
Product development strategy flows from corporate
strategy. It is corporate strategy applied to the product
development process.

A yearly strategic planning process for new products is a

small facet of your company’s overall strategic plan. The
larger strategic plan provides a “north star” that directs
and deploys the totality of capital and assets within the
company. The management of product concepts is a small
but crucial part of this yearly strategic process.

Product development strategy connects to corporate

strategy in every possible way: from the technology hub of
your company; to core, augmented, and transformational
products; to distribution channels, geographic
segmentation, etc. It is very helpful for a given cross
functional team to see how their efforts fit into the larger
picture, too.
How Much Do Companies Spend on
Research and Development?
A portion of product development strategy relates to
budgeting and expenditures. How much of an investment
should companies make in new product development? How
much should they invest in a new product idea? What is
the right mix of investments across your product portfolio?
How should this investment mix change, based on the risk
tolerance and maturity of the company? Should a
company continue to invest in existing products or their
existing target market?

Typically, investments in new product development are

grouped together according to the amount of risk assumed.
For example, a company might organize its projects as
follows:

 Core products
 Adjacent products
 Transformational products

According to research, a stable company in a mature

industry might allocate 70% for core projects, 20% for
adjacent projects, and 10% for transformational products.
This is a relatively low-risk approach.

A tech startup might allocate less than one half of its

development investment in core or existing products since
the company does not have a large established target
market and is willing to absorb greater risk in creating a
new product. A startup might have 40% invested in the
core, 40% in adjacent, and 20% in transformational
initiatives. In all cases, you need to align with your product
development process.
Tailor the ideal investment profile to your company’s type,
its maturity, and its appetite for risk. Your company’s
investments in product development should fit your risk
profile and your product development process.

What are typical R&D as a percent of

sales figures?
R&D spending varies by industry. The site Idea to Value
found that in 2018, Tech companies accounted for 31.3%
of the world’s reported R&D spend; Pharma and Biotech
spent 18.7% of those R&D dollars, while companies making
Automobiles and components, spent 16.8%. Together,
these three industries spent more than two-thirds of the
world’s combined reported R&D budgets.

The Pharma and Biotech sector tops all other companies

with respect to R&D as a percent of sales, since many are
completely dedicated to research. In many cases, the R&D
spends of pharma start-ups far exceed their revenue. The
top 100 spenders on R&D as a percent of sales, are small,
niche companies in tech, pharma, and biotech. Large
Pharma giants such as Bristol-Myers Squibb (28.65%),
Merck (25.44%), and Eli Lilly (23.09%) are recognizable
names in the second one hundred of the top 1000 R&D
spenders.

The biggest spenders on R&D in actual dollars were

Amazon ($22.62b) and Alphabet Corp., Google's parent
company ($16.225bn). Apple spent the eighth most in R&D
dollars ($11.581bn), but ranked 565th among the world’s
top 1000 R&D spenders with respect to R&D spending as a
percentage of sales, at just five percent. Google parent
Alphabet ranked 258th out of the top 1000 companies with
respect to R&D as a percent of sales (14.64%), while
Amazon (12.72%) ranked 302nd on the list, despite having
the highest overall R&D spending.

Among the top 25 investors in R&D worldwide in 2018:

 On average, Pharma/Biotech companies invested

about 17% of their annual revenue on R&D
 Tech companies invested about 15% in R&D
 Companies in the Auto industry invested about 5% of
sales in R&D

How Do You Succeed with Make-Or-

Buy Decisions?
One of the persistent questions in product development
strategy for companies as they scale is how much they
should depend on organic technology development vs. an
M&A strategy. Another way to ask the question: when it
comes to new technologies how much should a company
make vs. buy? Should they use their existing development
team or go outside for development? Or even invest further
in a line of existing products. These questions and more
are often part of a product development consulting
engagement.

Make/Buy decisions involve many factors but the main

dimensions under consideration are the strategic value of
the technology in question and the cost of producing it. In
the matrix below, the X axis represents the cost of the
investment required in the new technology, while the Y
axis represents the degree of strategic value to the
company. About strategic investment ask: Is the
technology you’re trying to make or buy vital to your
company’s core product and future success? Rate its
strategic value as low, medium or high.

This yields a matrix with four quadrants as follows, with the

default decision for technologies in each:
View fullsize

Make/buy decision-making matrix weighs cost against the strategic value of the

technology

 High strategic value; high cost -- Make

 High strategic value; low cost -- Weigh Cost/Benefit
 Low strategic value, high cost -- Defer or Judgment
Call
 Low strategic value, low cost -- Buy
This matrix, a simplified version of models created by BCG
and GE-McKinsey, is a place to begin. There are many
considerations that go into a make/buy decisions but the
most important factors come down to strategic value of the
technology, and the cost of developing it in-house with
your development team.

Often these kinds of decisions are made with the

operations (or manufacturing) organizations and may be
part of your New Product Introduction (NPI) process
which applies a manufacturing point to new product
development.
How To Develop A Product
Development Strategy
Whatever product development strategy a company
chooses, it will need to execute it. How do you develop and
execute a new product strategy?

A viable product development strategy begins with:

 A vision: a broad statement of where you’d like your

company to be (3-5-year horizon)
 A strategic plan for product development : steps
you intend to take to achieve that vision (2-3-year
horizon)
 Product and technology roadmaps , project priority
lists and budgets, connected to specific programs that
realize the strategy

A strategic product planning process links together the

company’s vision, usually encompassing a three-to-five-
year time horizon, with the strategic steps, over a one-to-
two-year horizon, required to realize that vision.

It then connects the strategy to product and technology

roadmaps – representations that allow decision-makers to
see the progression of products and technologies, and their
changing relationships over time. These roadmaps then
need to connect to the yearly budgeting process that
prioritizes future products, and provides them with the
resources they need in their early stages.

If your company does not have a clear way of guiding

product concepts into, then the first step is to take your
existing annual budgeting process and business analysis
process and determine how planning for product innovation
fits into it. The strategic product planning process comes
after you formulate the overall strategic plan for the year,
but before you complete the budgeting.

Two yearly systems for the strategy process

To improve the planning and execution of a product

development strategy, we advocate two systems :

 A yearly, systematic portfolio planning process, tied to

budgeting
 A monthly and ongoing portfolio management process
for:
o a) selecting emerging product concepts, aligned
with the company’s strategy and
o b) prioritizing and initiating work on new product
concepts.

Two linked systems for product development: a yearly strategic process and an agile

portfolio process
The outputs from the yearly process become the inputs for
an ongoing system that manages products to completion
and launches them into the marketplace. Successful
companies take control of their future by creating a tight
link between their strategic direction and their product
concepts. What is at stake is the future of the company’s
product portfolio. Often this process includes decisions to
stop producing existing products to free up development
and support resources.

The two processes are linked but distinct. Strategy without

ongoing management is ineffective; while managing
product concepts without adequate strategy and planning
is often aimless and counterproductive. The system we
advocate, with two related processes, supports planning
with execution and increases the reliability of developing
new products.

Consistent steps for managing the front end, in addition to

the yearly plan, helps to maintain focus on the tasks
necessary to launch the projects that will best realize your
strategy, without being overwhelmed by other strategic
initiatives contained in a comprehensive strategic plan
(capital structure, infrastructure, M&A, marketing
initiatives, etc.).

Having both a yearly strategic product planning cycle and

an ongoing front-end management process is effective
because product innovation and competitive threats can
and do emerge at any time. The two systems together
steer your company’s intent, while also providing a real
time approach to manage investments, ensuring readiness
for development.

Managing the Front End of Development

The aim of a strategic product planning process is to

realize the best and most innovative products in a way that
aligns with the vision and overall strategic plan. Executing
a product development strategy also means having an
ongoing process to manage the front end of
development .

We urge companies to think of their early stage product

concepts, however vague or aspirational, as an asset, as a
product portfolio managed like a portfolio of capital
investments. The assets in the product portfolio represent
an as-yet unrealized potential. This is a simple but
important shift in mental models.

Many ideas in the portfolio of early stage concepts are

worth little or nothing to your company, for example they
might not address your target market and often come out
of causal brainstorming (and create a life of their own).
Others might be the next iPhone or Amazon, ready to
disrupt markets , open new categories, and earn
enormous revenues. How can your company manage these
vague concepts to leverage the best, weed out the rest,
and develop the winners into viable products in a
competitive marketplace?

Many companies maintain that the front end cannot have

specific milestones and deliverables. We disagree. Just as
projects within the product development pipeline have
gates, reviews and timelines, you can manage the front
end of development in a similar fashion.

An orderly front-end management process uses rational

decision-making to select the right projects or right product
idea to load into the pipeline - and this is commonly found
in companies that execute on their product development
strategies. Though it can start with idea generation, it can’t
be completed until you have verified the product-market fit
with focus groups or customer interviews. This validation
step is very important. It has milestones and budgets that
are the measure of progress because approved budgets
unlock new projects. Product discovery techniques can
help teams translate strategy into action.

A front end management process for product development strategy

To bring order to the front end of development, first create
two decision points that help to:

 Manage orderly starting points for projects that arise

from the planning process or are new ideas congruent
with that plan
 Staff projects properly with the right resources
 Ensure that the projects will address the key issues
that impede fast and predictable development
 Show meaningful commercial potential
Define the placement of these decision points. Select two
points in time to review projects at a high level.

 First Review (move from Pre-Discovery to Product

Discovery): ensures that the product idea is worthy of
forming a cross functional team and outlines the steps
to test the hypothesis – this phase is complete when
the effort transitions from one individual to a small
team, typically 10-15% of the way down the path
 Second Review (move from Product Discovery into
Development): ensures that the team demonstrates
feasibility, defines the broad parameters of the
product offering, and addresses risk. This phase
should ensure that the team is ready to enter
development, that they grasp the major risks, and that
the team is within a quarter or two of entering the
formal development pipeline.

A front-end product innovation system also includes a

related set of deliverables that proposed programs
(products, technologies, and investigations) must pass
through in order to ensure that the team has considered
both the risks and the proposed program’s alignment with
strategy.

These deliverables in the Product Discovery phase may

include:

 First Review/Approval: The leadership team reviews

the proposed opportunity for strategic fit and approves
or denies requests for further investment
 Market Assessment: Validates and documents the
under-served market need
 Commercial Feasibility Assessment: Describes the
target segments, target customers and documents the
commercial potential
  Technology Assessment: Summarizes proposed
technologies, missing elements, critical partners, and
known technical risks
 Second Review/Approval: The leadership team reviews
the request to enter the product process and approves
or denies requests for further investment

Other documents might include:

 Business Case : Includes relevant estimates for

market share, conversion rates, click through rates,
activation rates, consumables trail, cannibalization,
ASPs, NPV, IRR, payback period, gross profit, and
operating profit. Also, may include an explanation of
the business risks.
 Business models: New products may require new
ways to think about business models such as a shift
towards SAAS and recurring annual revenue models..
 Business Assessment: Verifies commercial and, where
applicable, regulatory readiness and might include
prototyping to get better feedback
 Early Phase Report: Provides evaluation of
technological feasibility, manufacturability and costs
 Updated Portfolio Roadmaps: Prioritizes newly
approved projects

New Product Development Process (NPD)

The new product development process is the bridge

between strategy and execution. Although many believe
that this is primarily product design, it also includes
business factors that shape the product definition (before
product design) such as product life cycle profitability (over
the whole product lifetime). While NPD tends to focus on
the current product under development, but also should
include the impact on similar products in the product line
(this is internal cannibalization) as part of the product
definition.

The New Product Development activities are often lead by

product management or individual product managers who
guide the product team along with project management.

The foregoing list of deliverables show that a team may

perform a great deal of detailed work on a product idea
before a project enters the NPD process. Their purpose is
to ensure that the very best and most innovative concepts
fill that pipeline, and that these concepts have the greatest
chance to deliver their expected value on a predetermined
schedule.

The most striking product innovations are the result of

both strategic planning and the careful nurturing of
innovative product ideas. And yet many organizations not
only fail to have systematic tools or processes for dealing
with both aspects of their future product portfolio – many
insist that it is impossible to have any such system.
A complete product development strategy links a vision to a strategy that drives

budgets, priorities, roadmaps, and investments, realized through a consistent

development process

Conclusion: Five Tips for a Successful

Product Development Strategy
Too long, didn’t read? Here are your five takeaways about
product development strategy:
Tip #1: Innovate away from your core product. Consider
the total user and customer experience and find a way to
be innovative that has nothing to do with the core product,
but produces an ancillary benefit. For example, Fedex beat
UPS not because of planes, trains, and trucks. It was
package tracking that put them over the edge. You can
dominate markets on the augmented product and not only
on the core product.

Tip #2: Find applications for existing products in new

markets. For example, a gaming company might find a use
for its platform by creating a game-based app that HR
departments could use in screening applicants. Think of
products that could succeed in adjacent markets.

Tip #3: Tie your corporate vision, to product strategy, and

then to budgets. Create clean lines of sight between
strategy, budgets, technologies, and products. Use road
maps to show the route you will take to execute your
product development strategy.

Tip #4: Managing a product portfolio requires a yearly

process tied to R&D spending and budgeting, and an
ongoing, day-to-day process, where an empowered team
can push projects ahead until they are fully funded and
supported.

Tip #5: Nurturing new product ideas, and loading the

pipeline with successful new products needs the right
governance, funding, and a proven process for vetting,
selecting, and executing product development projects.

Source:

https://www.tcgen.com/product-development-strategy