new product development – The OM Blog by Heizer, Render, & Munson

OM in the News: Apple’s “Goldilocks” Product Strategy

Apple this year released 5 new iPhone models, the most in the device’s history. Apple started in 2007 with one iPhone but soon established a “good-better-best” strategy, where budget and premium products flank “Goldilocks” options.

For years, the company did this by keeping older models around at slashed prices, writes The Wall Street Journal (Dec. 7, 2020). But recently, it has introduced more new options at various price tiers. This year’s lineup ranged from the $399 late-adopter-targeted iPhone SE to the feature-packed $1,099 iPhone 12 Pro Max—with a “just right” iPhone 12 in the middle. The company also gave Apple Watch shoppers 3 tiers of options for the first time.

While it may be more confusing for consumers to navigate the price and quality differences between the models, this kind of price ladder is strategic and ubiquitous—from airliner cabins to gas pumps.

The trick with offering multiple versions of a product is to offer enough to help people identify their own strike price but not enough to overwhelm them. “Apple is best at this,” said one industry expert, “creating variation between models in the number of camera lenses and the different levels of storage capacity. The ‘good’ option gives firms the opportunity to keep customers within the brand, for those who face economic pressure to downsize their lifestyle.”

The WSJ article also looked at a $275 bread-baking appliance sold by Williams-Sonoma. When the retailer added a second model, similar to the first but larger and more expensive at $429, sales of the cheaper model doubled. Peloton employed a similar strategy with its new 2-tiered bike offering. When the company released a new stationary Bike+ for $2,495—with a bigger screen and more powerful software—it marked its original bike down to $1,895, from $2,245. Covid-19 has led to an explosion of demand for connected bikes as gyms closed–and Peloton’s sales jumped 172% compared with last year.

Classroom discussion questions:

In Chapter 5, we discuss product life cycles (see p.164-5). Where do the Apple 6 Plus, 8 Plus, 11, and 12 Pro fall?
Why does Apple launch new products so frequently?

OM in the News: IKEA’s New Product Development and “Open Sourcing”

“IKEA is making it easier for people to hack its furniture,” writes The Wall Street Journal (Jan. 30, 2017). The Swedish retailer plans a 2018 roll out of its first “open source” sofa—a piece of furniture designed to be easily customized to fit a space, or change functions entirely over time. It is called Delaktig, Swedish for “being part of something.” Delaktig’s design will allow third-party designers to create complementary products that can attach to the sofa or modify its use.

The move is a further embrace of a long inspired online community of “hackers” who share ideas for how to modify IKEA products. They have fashioned wall hangers from IKEA’s wooden bed slats, turned dressers into desks and raised IKEA beds using its kitchen cabinets and drawers.

IKEA didn’t encourage the tinkering, but nor did it actively discourage the trend. A niche industry has now grown up making everything from sofa covers to decorative table legs fitted just for IKEA’s particularly shaped furniture. Sweden-based Bemz AB, for instance, makes covers for IKEA sofas, footstools, headboards and armchairs. They can sell for more than the furniture itself. Prettypegs AB makes decorative furniture legs for IKEA beds, tables and stools.

IKEA said Delaktig was inspired by Apple, which helped create today’s app universe by allowing developers to create them for the iPhone. The company is also taking a page from the car industry, building a common, resilient platform upon which to create different models.

Classroom discussion questions:

How would you describe IKEA’s product strategy (see Chapter 5)?
What are the advantages and disadvantages of open sourcing?

OM in the News: One Week, 3,000 New Products

Separating winners from flops is the challenge facing Quirky, the 5-year-old New York-based invention-facilitating company. Quirky culls entrepreneurs’ ideas, taking those that seem most promising from development to manufacturing to distribution. In an effort to speed products to market in 120 days or less, it draws on an online community of nearly 900,000 Quirky “community members” for input. Roughly 3,000 ideas for new products arrive in its online inbox each week, reports The Wall Street Journal (July 3, 2014).

And each week Quirky’s staff whittles down this stream of new ideas into a dozen or so top picks that are scrutinized and voted on during a raucous event known as “Eval,” open to employees and the online community. Typically, 3-5 ideas get the green light to move into development. At that point, engineers and designers, working out a vast red brick warehouse in New York, turn sketches into marketable products, tapping the online community for suggestions about design, product names and price points.

Of the more than 206,000 ideas submitted since 2009, just 500, or 0.2%, have made it into development, and 132 to market. Inventors receive 4% of revenue, with an additional 6% split among members of the broader community who suggest product features, vote on tag lines or contribute expertise in areas such as electric engineering, material science and product safety. The product managers weed out the ideas they think could face heavy competition, or major technical challenges as well as those with no ready retail partner, before forwarding their top 10 picks, which are winnowed further for Eval.

Classroom discussion questions:

1. What is Quirky’s product development strategy? (See pages 157-8 in Chapter 5)

2. Does Quirky follow the product development stages in Figure 5.1 on page 161?

OM in the News: The Challenge of Fixing a Boeing 787

Designing a new product such as the Boeing 787 is a huge undertaking, as discussed in Chapter 5, “The Design of Services and Goods.” The thin plastic skin on the 787 Dreamliner, writes The New York Times (July 30, 2013), “is an engineering marvel, a mix of carbon fibers and epoxy molded into large barrel-shaped sections that are then baked at up to 350 degrees in giant ovens.” But while airlines love how this lightweight concoction saves fuel, the recent fire on a Ethiopian Air 787 in London provides the first test of how much more difficult and costly it will be to repair serious damage than on older aluminum planes. Each day a jet remains grounded costs an airline tens of thousands of dollars.

The cause of the fire, a pinched wire on an emergency transmitter, was fairly mundane. But the high temperatures weakened the supports in a 10-foot stretch at the top of the rear fuselage and seared the paint on the top of the skin, causing the most extensive damage yet to one of the new 787s. Boeing will have to cut out the damaged areas and bolt a large patch, made of overlapping panels of composite materials, onto the plane. It will also need to install new composite supports and shore up the structural integrity of the plane. If the damage were more extreme, Boeing could remove the entire 23-foot-long barrel containing most of the jet’s rear fuselage and snap in another one.

The use of composite materials on planes has grown steadily over the last 4 decades. Only 1% of the weight of Boeing’s 747 jumbo jet came from composite parts when it was introduced in 1969. That increased to 11% by 1995 on the 777, which has an all-composite tail section. Composites now account for half of the 787’s weight, which, together with more efficient engines, cut fuel consumption by 20%.

Discussion questions:

1. What design issues did Boeing face in creating this plane? (Refer to the Global Company Profile that opens Chapter 2).

2. Why did Boeing make extensive use of composites?

OM in the News: Innovation is a Messy Business

In Chapter 5, Design of Goods and Services, we talk about how new products are the heart of a great company. 3M, for example, introduces a new product every day! But The Wall Street Journal (Jan. 24, 2013) headline warns: Innovation is a Messy Business. Writes the Journal, “Aviation innovation is especially risky because the stakes are so high. A crashed laptop might lose data, but a crashed plane kills people.” Unlike 3M products, entirely new jetliners get developed only about once a decade, costing billions of dollars.

Nine years ago, Boeing decided to take the biggest leap in airliner technology in a generation and develop the 787 Dreamliner. Boeing promised it would burn less fuel while flying farther and offering more passenger comfort than existing models. The 787 also showed Boeing’s “commitment to innovation.” Airlines, eager to save money and woo fliers, ordered a record numbers of Dreamliners.

We in academia have made “innovation” a buzzword for competing in the global economy. Boeing’s experience offers a reminder that innovation—for all its value—doesn’t come as easily as a catchphrase. It can get messy. Boeing, an icon of ingenuity, has reshaped travel over the past half-century with bold technological leaps such as the 747 jumbo jet. But the 747 first nearly bankrupted the company due to technical problems. Boeing’s backers say the Dreamliner will prove just as revolutionary.

The 787’s problems again show the traumas that innovation can bring. Boeing said the plane would leapfrog advanced technologies at Airbus. It would rely more on electricity to run its systems than existing planes, which used hydraulic and pneumatic power. To convince wary airline executives that carbon-fiber body material was strong, Boeing sales teams carried samples and hammers, letting airline executives whack the composite with all their might. Airlines signed on, knowing the risk.

Discussion questions:

1. What are the main operations problems facing the 787?

2. Why did Boeing risk introducing such a radically different plane?

OM in the News: WSJ’s Technology Innovation Awards for 2012

My favorite issue of The Wall Street Journal (Oct.16, 2012) is the one that announces the technology innovation awards for the year: Treatment for tuberculosis in India; A thermostat that programs itself; A lifting device that could help cut workplace injuries; A tsunami barrier that automatically deploys when destructive waves approach; A sports headphone that sends sound waves through your cheek bones, and does not block out important background noises. Here are the 3 top winners out of 536 applications.

Printechnologics is the Gold winner for its Touchcode technology which enables publishers, consumer-product companies, event promoters and others to include invisible codes on printed items that can be read instantly on any device with a touch screen. The codes can link to videos, games, recipes or just about any other online feature; a concert ticket printed with Touchcode could take you to a clip of the performer singing, for instance. A user only needs to place the printed item on the screen of a tablet or smartphone and the invisible code immediately connects to the online content.

Pure Storage Inc. won the Silver award for a data-storage system that uses flash memory instead of disk drives to hold information in corporate data centers. FlashArray storage systems sell for roughly the same as comparable disk storage, while delivering 10 times faster speeds, taking up one-tenth the space and using one-tenth the energy. That means companies can run complicated data-analytics programs more quickly and on larger databases than is possible with disk storage systems.

The bronze winner is Vidacare Corp. whose OnControl Bone Marrow System eases that pain of a bone-marrow biopsy. OnControl bores like a household drill into the space inside the bone. When the device reaches the correct point in the bone for the sample, changes in resistance and how the motor sounds offer cues for the doctors. It’s faster, less painful, and more precise.

Good OM Reading : Pfizer–The Inside Story of Revenge, Betrayal, and Power

Fortune’s cover story (Aug.15, 2011) is a wonderfully written article about a dysfunctional pharmaceutical giant, Pfizer, and the palace coup that removed CEO Jeff Kindler last December. The inside view (from 42 interviews over a 4-month period) of a $68 billion company that produced such blockbusters drugs as Lipitor and Viagra is movie material. Once a Wall Street darling and corporate icon, Pfizer has tumbled into disarray, with its stock price sagging from $49 down to $18 today and its pipeline dried up. What went wrong and how is this an OM topic?

First, there is the management issue. “Its managers descended into behavior that would do Machiavelli proud. There was the ex-CEO who wouldn’t relinquish his power. There was the HR chief who divided the staff rather than uniting it. There was Kindler himself who agonized over decisions even as he second-guessed everyone else’s actions”, writes Fortune.

The real OM story, though, is R&D and new product development (Ch.5), which is the lifeline of every drug company.With 3 of its biggest drugs about to lose patent protection and face generic competition (Lipitor alone brought in a staggering $12 billion/year and loses its exclusive rights this year), investors wanted to know what Pfizer was going to do to replace them. Its immense R&D budget of $9.4 billion last year produced two major hopes. Both ended in disaster. A cholesterol drug, torcetrapib, cost $890 million to develop and produce. A late trial revealed it increased death rates over control groups– and the drug was killed 2 days later. Exubra, an insulin system, cost a $2.8 billion write-off when unhappy customers bought only $12 million of the product.

With the business model failing, the R&D budget cut to $7 billion, Pfizer laid off 1,600 researchers at its Groton ,CT, flagship site, fired CEO Kindler and the HR VP (with massive severance packages, of course). The big pharm industry is one that requires excellent management, and I think you will be interested in reading about what happens without it.

OM in the News: When New Medical Products Fail

In Chapter 5, we discuss both the importance of new products in a firm’s success (see Fig. 5.2) and the product development system (Fig. 5.3). One industry whose lifeblood is new and improved products is medicine– where high product demand and the need to gain a competitive edge results in a constant churning of new drugs, devices, and procedures. But the promise of innovation can also prove a trap, according to The New York Times (June 25, 2011), a situation now playing out with dire consequences for 10,000’s of people who received artificial hips in the last decade. “I don’t understand it, but there is a phenomenon in the U.S., for the latest and the greatest”, says a Swedish orthopedic surgeon.

The issue is metal-on-metal hip implants, designed by device makers as a supposedly major advance over a 50 year-old previous design that used metal and plastic. The older, relatively simple model consists of a metal “ball” that replaces the thigh bone, while a plastic “cup” serves as an artificial hip socket. This device is highly effective, with a 95% success rate a decade after surgery.

“The vast majority of the innovations with respect to orthopedics over the past 2 decades have not resulted in improved patient outcomes”, says one UC prof. But companies began promoting the new implants as “the next big step”. Patients, intrigued by ads featuring celebrity athletes doing strenuous physical activities, also wanted the metal-on-metal devices. All- metal implants now account for a 1/3 of the 250,000 hip replacements in the U.S..

Unfortunately FDA simulations to test the new product were based on idealized conditions, not real-world wear and tear. Now, debris from the grinding of the metal parts is causing crippling tissue and muscle damage, and even neurological problems. Of the half-million all-metal implants inserted, there is a likelihood that tens of thousands of patients will require painful replacements.

Discussion questions:

1. Why are metal implants failing at a high rate?

2. What other major drugs and medical products have imploded shortly after introduction?

OM in the News: The Nintendo Product Life Cycle Game

This week, Nintendo launched its first all-new machine in 5 years, a hand-held player with a 3-D display that doesn’t require the user to wear glasses. The company has dreamed for 15 years of 3-D game systems, but two previous attempts (the Family Computer 3-D System in 1985 the Virtual Boy System in 1993) required glasses or goggles and were both embarrassing flops.

With the game world gravitating towards the use of sophisticated apps on cell phones (LEGO Harry Potter costs $4.99 on an iPhone), The Wall Street Journal (Mar. 2,2011) reports Nintendo is facing the classic product life-cycle curve on its most popular products, its DS and Wii game players. The DS came out in 2004 and the Wii in 2006. Demand for both peaked in 2009 and sales of games for them are on the decline as well. The goal is for the 3-D player (called the 3DS) to restart the life cycles for both machine and games.

The 3DS is a clamshell device, about the size of a passport when closed and 8/10 of an inch thick. The first units went on sale in Japan this week for $299, with more than 90% of the first 400,000 units shipped to retailers sold in 2 days. It will soon arrive in the US and Europe.

The only catch: Nintendo is warning that children 6 and under should not play the games, as it could have a negative effect on their eyesight development. The 3DS delivers separate images to the left and right eyes. The device is very sophisticated and even includes a 3-D digital camera.

Discussion questions:

1. Why is this project critical to Nintendo?

2. In a SWOT analysis (Ch.2), what are the weaknesses and threats?

3. Do students believe this is the “next wave”?

OM in the News: New Products Drive Profits at 3M

I love reading The Wall Street Journal from cover-to-cover every day. Where else can you find an article on the importance of sandpaper and a quote from the 3M CEO, “Why can’t abrasives be sexy?” (Nov.1,2010)

I share this with you because the real gist of the article is not just how 3M spent three years trying to improve one of basic products, sandpaper (they did it by using new technology to make every grain on the material the exact same size and shape). Rather, the article ties directly to Figure 5.2 in our chapter called Design of Goods and Services.

For any company to be successful, a substantial portion of its sales must come from products less than 5 years old. We give examples of Disney and Cisco as industry leaders, with almost 50% of sales from new services or goods. 3M falls just under this, expecting 30% of its sales to come from products introduced in the last 5 years. This places it in what we call the “top third”.

CEO George Buckley believes his firm’s edge is due to spending 5-6% of sales on R&D, even during the recession. On average, US manufacturers spent 3.4% of sales on R&D in 2008.

What other “sexy” products is 3M pursuing? Its masking tape, an old standby, now comes with an edge lock that keeps paint from seeping under the tape, which could spoil the straight line. 3M knows it must keep those improvements coming to stay in the top third.

Discussion questions:

1. Discuss the success rate for introducing new products in the marketplace.

2. What other approach is 3M taking to boost sales?

3. Where do new product ideas come from?