Successful new style product developers are breaking the existing rules and introducing their own. Axel Johne explains.
The motion reads: "This company holds that product development is essential to our corporate survival." Will all those in favour of the motion please show. Of course it's carried - there's no room for argument. However when we talk about product development, we do mean successful product development, don't we? We're not anxious to go pouring money into duds.
But before going further, how do we know whether a new development is a positive success or a comparative dud? The simple - traditional - method of assessment is to measure performance against some internal yardstick, such as a pre-determined rate of return. Yet the traditional way can be misleading. Internal criteria generally lay down what must be achieved financially: they are usually less concerned with what might be achieved in market terms. A return which is higher than the stipulated minimum does not necessarily imply outstanding success in the market. The traditional approach is flawed, because it rewards what's safe, not what's stretching.
One of the distinguishing characteristics of what we shall call "new style" product development is that success (or failure) is calculated in market terms. Market success is usually quite easy to measure - but not always. Pilkington's famous float glass innovation, for example, opened up a whole range of market opportunities - although not all at once. However such technology-led successes are fairly rare.
Most product development takes place within the parameters of existing markets. More often than not, new style product development involves close examination of an existing market, to see how it can be served more competitively, with products that are better - although not necessarily revolutionary. By adopting this approach, it is nevertheless possible to radically reshape the market.
Successful new style product developers do this by changing the nature of the conflict. They break existing rules, and introduce new ones which work in their favour. While other players compete according to established rules, new style product developers set out to win by employing novel tactics. They change from slog-it-out combat, and engage in new forms of competitive warfare.
Canon's entry into the copier market is a classic case in point. The Japanese company carried out a thorough analysis of the office products market in Europe and America, then designed a range of copiers that were (at the time) cheaper, and more reliable than those of Xerox. On account of their simplicity Canon copiers could be distributed through office products retailers, thus sidestepping the competition's powerful direct salesforce. Xerox, which had previously controlled the dry copier market, lost massive market share, and it was Canon which dominated the newly developed sector.
The example shows what can be done by taking a completely fresh look at an existing market. Canon's success was not simply the result of technology. It was based on a recognition that the strength of Xerox on the sales front might also be a source of weakness, making possible the creation of a new market segment. The fact that Canon and Xerox are both manufacturing companies was incidental, for the approach is readily adaptable to other types of product and market.
The motor insurer Direct Line, a wholly-owned subsidiary of the Royal Bank of Scotland, was set up in 1985. A novel feature is the way that it communicates with customers. Direct Line was one of the first motor insurance businesses to cut out the traditional broker middleman and appeal directly to customers, using telesales techniques. In its first five years of operation it collected 300,000 new policyholders. Over the same period, established insurance companies, observing traditional rules of competition, were pleased if they increased their client base by 5% a year.
Or take the phenomenon of mountain bikes. While mountain bikes are in certain respects superior to others, these technical features were not in themselves sufficient to explain their instant popularity. What allowed American suppliers such as Cannondale, Trek and Marin to open up the market was their earlier realisation that bikes designed for a new kind of recreational role - off-road as well as on-road - would command wide appeal in an age of joggers and trekkers. Raleigh, the established UK manufacturer, failed to act upon the signs. It was therefore slow in coming out with its own product at a time when reputations were being made. The new market segment duly became dominated by US and Far Eastern suppliers.
All these cases illustrate the essential feature of new style product development: that it is market driven. Many markets are today changing faster than ever before. It is a matter of strategic choice whether a business is content to react to change, or whether it attempts to initiate change. Overall, it's virtually certain that most product development will continue to be of the step-by-step variety, if only because the majority of managers feel comfortable with the traditional approach. But new style product development will be the route favoured by companies which want to exploit opportunities to the full.
New style product developers recognise that it's possible for a supplier to shape the nature of demand. They know that, in order to influence the market, they must track and analyse every trend. The approach therefore offers greatest potential to large companies which have the required resources and whose innovation is in need of constant stimulation. Unfortunately, in relatively few big UK companies has responsibility for innovation been devolved upon people who are in close touch with the market.
The situation is quite different among leading Japanese companies such as Sony, Canon, Toyota, NEC, Honda and Toshiba. In these businesses teams of specialists are engaged in studying markets in the minutest detail. The information is then fed back to see how corporate strengths can best be harnessed to the requirements of product development. Japanese companies have sometimes been able to wipe out whole industries in competitor countries, by skilfully changing the rules of engagement in their own favour. The process has often involved turning carefully targeted markets into niches, in which the Japanese call the shots.
New style product development is not for the super cautious: the outcome is almost bound to be less predictable than in the case of conventional product development. But the new style not only holds out rich rewards to the successful, it can also allow businesses to grow into world-class players, sometimes very rapidly. In order to achieve this kind of success, however, a business will almost certainly need to adopt some of the organisational features and ways or working that are characteristic of past winners.
For example, market championing - spotting and developing market opportunities - is greatly preferred to product championing. The market champion considers issues like: How fast, and in which ways, is the market growing? In what new ways can it - or parts of it - be made to grow more profitably? It's the job of a market champion to work out how the target market should be attacked. Don Duncan, divisional director of planning at Du Pont, explains the approach: "Historically, we invented things and then reflected on what the new compounds might be used for. What we do now is focus efforts towards specific market needs, and especially markets in which we can exert some influence. It's an enormous step for this proud technological giant to accept that technology will no longer win all the battles for us."
Much the same approach can be found in other sectors. Increasingly, at 3M, market managers steer product development in the divisions, not product managers as was traditionally the case. The change of focus concentrates attention on how to win over existing suppliers. In parts of Bowater it's the same story. According to Geoff Nicholls, managing director of a new Bowater packaging division: "Our approach is fundamentally different (from the majority). I notice this when I meet my competitors at trade association meetings. They are obviously switched into a different mind set from us. They see the market growing very slowly, but then they are looking for steady growth from traditional product lines."
The importance of the market champion role is increasingly recognised in big groups that have restructured themselves. In companies as varied as ICI, BA, BP, BT, Daimler-Benz, BMW and Siemens traditional functional structures are giving way to organisational frameworks that focus on opportunities. Within these, it is the market champion's job to identify targets and orchestrate the inputs needed for success.
Companies that have embraced this concept - which focus on opportunities rather than inputs - have swept aside whole tiers of management. The bureaucratic hierarchy has been supplemented by networking, enabling individuals to work together informally often across great distances. The great operational advantage is that, as opportunities are identified, the business can shape itself into whatever form is needed for swift, effective action.
Far from accepting networking as a new design which has to be imprinted on all parts of the business, enlightened companies use networks of differing shapes and forms for the achievement of specific objectives. The best known example is the self-managing team set up to tackle some major task or opportunity. The original IBM PC was the outcome of such a network. Working full-time, outside the normal corporate bureaucracy, it not only developed a successful product but did so in record time.
In many successful companies, leaders of self-managing teams know they stand a good chance of being chosen to manage any ventures that might be created as a result of their efforts. Not surprisingly, these professionals are highly motivated. They are content to work hard, and long hours, because their own aspirations are perfectly matched with those of the businesses that employ them. This alignment of aspirations is another characteristic of new style product development.
In these businesses skills matter more than position in the hierarchy. This doesn't mean that there are no rivalries, or that conflict is suppressed. On the contrary, it is sometimes artifically stimulated. For example, "shoot-outs" may be arranged deliberately, by asking competing teams to come up with solutions quickly on the understanding that the best will be chosen.
In a few large, cumbersome, established businesses, new style product development has been a spark which helped to bring about corporate renewal. The approach, however, can be adopted by any company which sees a need to compete more effectively. Implementation requires just two support mechanisms. First, top management must understand the concept and its implications. Second, there has to be effective teamwork in order to get things done quickly.
There are perfectly good reasons why many top managements may not want to throw their weight behind such far reaching change. For example, British and American public companies have to report their results at short intervals, which naturally makes them nervous about sizeable development expenditures. It's doubtful whether new style product development is suited to companies which have to observe very short time horizons. They are seldom able to delegate responsibility for business development, because only a few projects can normally be funded at one time. Sometimes, too, differences of class and culture get in the way of the teamworking that is essential if developments are to be carried through quickly.
New style product development carries no guarantee of higher profitability. But it undoubtedly provides a useful framework for identifying and exploiting growth opportunities. It allows companies to infiltrate markets from unexpected quarters; occasionally to overwhelm conventional players in a remarkably short period of time. Thus the European camera industry was swamped by Japanese electronics manufacturers. The Swiss watch industry very nearly suffered the same fate. Britain's financial services sector is even now under attack from retailers offering credit, insurance and related "products" in ways that put the customer's convenience first. Therefore it behoves all businesses, even though they lack the means or will to engage in new style product development, to be alive to this approach. After all, they might soon come under attack themselves.
Axel Johne is professor of marketing at City University Business School.