To respond to low-cost global competitors, American manufacturers will spend $191 billion on research and development this year, fighting product commoditization with product innovation. Yet for every Apple iPod, Chrysler 300 car and Motorola RAZR cellphone, most of their new products will hit the market with a thud. As a result, manufacturers will waste huge R&D and marketing expenditures as customers shun their products.
It's getting harder for U.S. manufacturers to deal with the poor returns on product innovation. To improve their odds, manufacturers must get far better at predicting the demand and response side of product innovation -- rigorously determining before they commit any dollars to pursuing a new-product concept how many customers will buy a new product and at what price. This is in addition to getting better at the supply side of innovation, which as we explained in our previous article is about assessing whether a new product is technically and economically feasible and how to produce it.
From our experience, the inability of many manufacturers to reliably predict demand for new-product concepts is a primary factor in the abysmal new-product success rate -- one out of 3,000 ideas becoming a marketplace success, according to one researcher's estimate. Most new products fail because marketers and product developers grossly misunderstood how many customers truly needed the product, what they truly needed and what features of a new product they would pay for.
Where do companies go wrong in projecting the demand for a new product? By listening to "the voice of the customer." To be sure, focus groups, surveys, "anthropological studies" and other market research approaches generate voluminous data about what customers supposedly want. Fifteen years ago, before the Web became a global communications medium, how many consumers would have told you they'd like to purchase and receive music from the Internet or hold online auctions? "Voice of the customer" research sheds no light on new-product ideas that are without precedent.
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To illustrate this notion, consider the main parameters of value of hybrid gas-electric automobiles, which will account for 1% of U.S. new-car sales this year. While hybrids are hot because of this year's surge in gasoline prices, hybrids don't deliver on their main parameter of value -- the money you save from reducing gasoline consumption. An analysis by Bankrate, a provider of financial information to consumers, found that even if gasoline cost $2.50 a gallon, it would take nearly eight years for a Honda Civic Hybrid to recoup its $2,390 premium over a gasoline-engine version. Even if gas were $5 a gallon, it would take about four years to recover the hybrid's extra cost. So financially, hybrids are a wash. Market forecasters predicting that the hybrids of today will account for half or more of the car market in the future are grossly overestimating the demand for this innovation. (See Note 1.)
Nonetheless, by relying more on batteries and less on combustion engines as a power source, hybrids are moving in the right direction. A power source for automobiles that is far less expensive for consumers than the gas and hybrid engines of today will generate enormous demand because it will produce a significant shift in a main parameter of value. Companies like Nippon Chemi-Con are working on such power sources. This year, the manufacturer of capacitors and our firm announced a new energy storage device with the potential to generate much greater power and have a longer working life than batteries or capacitors. The device would also be able to recover energy generated by braking, which would further reduce the cost of automobile ownership. Devices like these - if they can deliver breakthroughs in main parameters of value such as cost reduction and strong performance (e.g., good acceleration) -- could take major shares of today's $30 billion global battery market. Of course, this figure doesn't include future sales of batteries that replace power devices like gasoline engines.
For whatever new-product concepts they are considering, executives running manufacturing companies must rigorously analyze whether their ideas truly drive customer value to a whole new level. The companies that do this well will dramatically improve their odds and returns on product innovation.
Note 1: There is, however, a segment of a market for which environmental impact is one of the main parameters of value. For this segment of the market, an environmentally clean car like a hybrid car will create a strong demand.
Jim Sims is chairman and CEO and Sam Kogan is president of GEN3 Partners Inc. (www.gen3.com), a product innovation consulting firm.
