Sensing the Market to thrive in New Product Development

Jesus Mascareno
Imran Mohyuddin
1. Introduction

Innovation has been an important issue in contemporary business, it allows companies to

differentiate from competitors, renew the product portfolio and in today’s changing
environment it has become a strong tool to cope with those changes. Researchers have pointed
out the importance of excelling in such process, for instance Stalk (1988) mentions that firms,
the most successful ones, know how to keep moving and always stay on the cutting edge. Also
Ho and Chen (2007) pointed the fact that some firms’ survival depends on their ability to
manage new product launches. In fact in 2004, the average percent of firm’s total sales
attributable to new products developed within the last three years is about 33%. The relevance
of innovation is also found in Forrester Research’s Report on New Product Development 2006
which reveals that 90% of CEOs feel that new product innovation is very or extremely important
to growth.

Despite the great benefits provided by innovation not all companies can have access them, this
is derived from the fact that in fast-paced, globally competitive environments, consumer needs,
technological opportunities, and competitor activity are constantly in a state of flux.(Teece;
2007. This constantly moving environment affects the new product development process of
firms, in fact product failure is a latent problem for many companies. Authors like Karayaka and
Kobu (1994) mention that product failure ranges between 37% and 80%. While Crawford (1977)
gathered information from different sources and found that in new drugs the rate of failure was
approximately of 60%, in the new consumer goods the rate was of 57%, in the new products
category the arte was of 90%, while the lowest rate was in the new industrial goods with a rate
of 30%. Despite the range of the rates and discrepancies of the authors the fact is that the
switch to exploration still represents a challenge for firms.

From the success rate the problem doesn’t seem promising as well, since according to a Booz
Allen’s study, firms have increased their innovation success rate from one successful product
against 58 ideas in 1968, to one successful product from as few as 7 ideas by 1981 (Sarin and
Kapur; 1990).

This paper seeks to advance insight into how firms can detect preventive indicators of failure
for new products and if the first steps towards a model can be drawn in order to reap
innovation’s benefits. The paper is divided as follows, first we will explore possible hypothesis
of which activities firms are failing in new product development and what the outcomes of such
low performance will position the firms. Second two new product development failures are
analyzed in order to understand the reason behind it. Third the findings will be compared
against the hypothesis in order to see if they were accurate. Finally we will conclude by
stressing the importance of deepen the studies in sensing capabilities in order to develop a
market indicator tool.

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 Sensing the Market to thrive in New Product Development
Jesus Mascareno
Imran Mohyuddin
2. Hypotheses

Sensing Capabilities

This paper focuses in the identifying indicators of new trends, opportunities and threats during
the product development process that could help firms to launch successful new products.
There are some emerging marketplace trajectories that are easy to recognize. In
microelectronics this might include miniaturization, greater chip density, and compression and
digitization in information and communication technology. However, most emerging
trajectories are hard to discern (Teece; 2007).

The group of activities a firm performs to identify oportunities, interpret new developments
and take actions from it, it is what Teece (2007) calls sensing capabilities, also stressing that
sensing capabilities are process within the company. Day (1994) reinforces the link between
firm’s decisions and the market by mentioning that the failure to anticipate a change in
competitive forces or customer requirements results from a deficient market-sensing capability
or inadequate links to key customers.

Market sensing activities are made possible by an organization’s internal capabilities to

understand, process and use this information (Heusnikvel et al.; Kok et al., 2003). Cravens,
Piercy and Prentice (2000) taking a more market oriented approach described market sensing
when referring to the importance of identifying potential shifts in customer preferences. Trends
such as changing life styles, population shifts, and other demographics often forecast critical
transitions in consumer markets. Changes in business-to-business markets may be signaled by
actions of industry leaders, changes in business designs, and other initiatives. In order to track
these trends, executives should employ market-sensing processes to identify and respond to
these market changes. Cravens, Piercy and Prentice (2000)

In order to better understand the market trajectories a firm must traduce the market sensing
process into activities so they can develop successful products aligned to these trajectories. In
accordance with Teece (2007) sensing (and shaping) new opportunities, is very much a
scanning, creation, learning, and interpretive activity. Investment in research and related
activities is usually a necessary complement to this activity. This activity not only involves
investment in research activity and the probing and reprobing of customer needs and
technological possibilities; it also involves understanding latent demand, the structural
evolution of industries and markets, and likely supplier and competitor responses.

Cravens, Piercy and Prentice (2000) presents a more intern view of the process by positioning
the sensing capabilities in the culture of the company when they wrote “There is mounting
evidence indicating that a company which builds a market-driven culture and effective
processes for collecting, sharing, interpreting information, and making decisions will be more
effective in creating a future vision about the market and competitive space. Companies that
achieve superior performance also display characteristics of constant learning and innovation
that continually refine market sensing and the vision of the future”. Harreld, O’Really and
Tushman (2007) in their study on IBM’s recovery after a major crisis found that the path the

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 Sensing the Market to thrive in New Product Development
Jesus Mascareno
Imran Mohyuddin
company followed was to link their strategy to the customers by developing a “market
“ma insight”.
Market insight according to them iitt is the connection of knowing with great accuracy what the
opportunities are with the ability to do the things necessary to accomplish them.

The market sensing described below can be summarized in detectin

detecting, filtering
ing, implementing,
and calibrating.
ing. These activities implemented systemically within a firm could increase the
capability of identifying new trends, opportunities, and threats in the stage of new product
development.
Hypothesis 1:
Main reasons for new
ew product development failures are directly related to firm’s
low performance in executing their sensing capabilities: detecting, filtering,
implementing and calibrating
calibrating.

Market Position

As we have seen a there is a cause

cause-effect relationship between the sensing capabilities and the
market position a firm could obtain. This means a firm with a high sensitivity of the market
could find itself in a better
ter position to have a successful new product than others
other that do not do
so. Firms that failed to performrm their sensing capabilities therefore will eventually
ntually lose ground
and have no connection with the market. In order to better exemplify we have developed a
hypothetical market connection matrix in which the vertical line represents the continuum
between prestige and functionality
nctionality and the horizontal line represents the continuum between
the price ranges.

The disconnection of the market can happen when a firm launch a product that couldn’t keep
up with the fast changing environment and it is viewed by the market as a commodity (firm A,
see figure 1) and the second case is when a new product has no market since it is seen by the
market as an unnecessary luxury (firm B, see figure 1).

Figure 1. Market connection matrix.

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 Sensing the Market to thrive in New Product Development
Jesus Mascareno
Imran Mohyuddin
Hypothesis 2:

If a firm don not perform properly their sensing capabilities its new product
development attempts will be positioned either beyond the market spectrum
where no customers can follow, on the contrary if a firm innovates to a lower
degree than the market trends, then these firms will find it selves behind the
market expectations.

3. New Product Failures Analysis

It is widely assumed that any business entity can learn more from the failures as to the
successful endeavors. According to Stead and Smallman (March, 1999), that what organizations
should seek from exploring their behaviors before and during crises is termed as `generative
learning'. Through this approach organizations expand their capability by finding new ways to in
business and opportunities. Also McGrath, 1999, suggested that people seek success and avoid
failure, and those efforts can introduce errors in learning and interpretation processes.
Paradoxically, such errors often make failure more likely or more expensive than it need have
been. In related industries while developing strategy or products, historical failures can help to
devise successful strategy or winning product.

In new product failures it is often easier to pinpoint why a failure has occurred than to explain a
success, making failure analysis a powerful mechanism for resolving uncertainty (Sitkin, 1992).
Therefore, in this paper a number of product failures in its development stage have been
explored (see table1), from this list of failures the Betamax and New Coke have been selected
among the rest of the products to be analyzed in depth, this derived of the fact that sufficient
information and data to analyze both failures was found in academic research.

Product Company
Betamax JVC
The Edsel Ford
DeLorean DMC
Lisa PC Apple
Atari 2600 Atari
The Newton Apple
Arch Deluxe McDonalds
SSA Computer Systems Paradyne
New Coke The Coca Cola Company
Table 1. Product Failures

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 Sensing the Market to thrive in New Product Development
Jesus Mascareno
Imran Mohyuddin

The Betamax
In the mid 70´s the first commercial home VCR (Video Cassette Recorder) appeared in the
market and from its appearance, the VCR surpassed color television to become the largest
single consumer electronics product in terms of sales by the early 1980s (Cusumano, Mylonadi
and Rosenbloom; 1992). Soon three models become the dominants in the VCR market, Beta
from Sony, Phillips V-2000 and JVC’s VHS model.

Among the main competitors Beta was the first compact, inexpensive, reliable, and easy-to-use
VCR; soon this product it accounted for the majority of VCR production and enjoyed steadily
increasing sales (Cusumano, Mylonadi and Rosenbloom; 1992). Beta had several advantages
over the other two main competitors, it had better product quality and it had a strong brand
position. Sony apparently believed that the superior picture quality of its Beta technology,
together with its strong position in the consumer electronics industry, meant that Beta would
eventually dominate the marketplace (Besen and Farrell; 1994).

However Sony did not have the sufficient production capability to address the mass market, so
they look for possible partners to solve this issue. First, Sony demonstrated the Betamax to
representatives of RCA, an American video pioneer. At the same time, Sony began talking to
JVC and Matsushita, its partners, about "joint development" of a home video format. However
Sony did not manage these relationships well. When it approached the other firms, Sony had
already begun tooling up for the Betamax, signaling to prospective partners a commitment to
proceed with mass production irrespective of their support. This made Sony less flexible,
because altering the design of its machine would require expensive changes in manufacturing
equipment (Cusumano, Mylonadi and Rosenbloom; 1992).

The discussions with RCA accomplished one of Sony's objectives by persuading RCA to kill its
own VCR development program, but they also brought to light the most vulnerable aspect of
the initial Beta design, its limited playing time. RCA had given two hundred of its own VCRs to
U.S. customers in a market test and concluded that a minimum two-hour playing time was
necessary for commercial success. When Sony demonstrated the Betamax to Matsushita and
JVC, Matsushita also questioned the adequacy of a one-hour playing time (Cusumano, Mylonadi
and Rosenbloom; 1992).

Sony managers eventually realized that they were not in a strong bargaining position and
decided to modify the Betamax for two-hour recordings. But this was already late, since JVC
already started to commercialize a VCR with two hours length and they also convince
Matsushita and RCA to use their VHS technology. JVC’s VHS became the market standard in the
VCR industry leaving eventually Sony without any possibility to match its product success and
by 1985 this product was not anymore in the market.

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 Sensing the Market to thrive in New Product Development
Jesus Mascareno
Imran Mohyuddin
The New Coke

In April 1985, management of Coca-Cola, decided to change its flavor of its flagship brand. The
reason to reformulate Coca-Cola was the rivalry between Coca-Cola and its traditional runner-
up in market Pepsi Cola. Pepsi’s consumer research discovered in blind taste test that a
majority of consumers preferred the taste of Pepsi over that of Coke (Schindler, 1992). This test
revealed that majority of loyal Coke drinkers preferred Pepsi during the tests. Pepsi decided to
communicate those findings through advertisement using media coverage. Consequently, the
campaign lead to significant decline in market share of Coca-Cola and steady decline.

To manage current situation the management of Coca-Cola decided to start a research on the
possibility of reformulating Coca-Cola to respond perceptions about consumer tastes. However,
by 1984 the researchers had arrived at a new formula for Coke which in blind taste test beat
Pepsi by as much as six to eight percentage points. When the coca cola company decided to
replace its flagship product with a new cola drink, the new flavor had outscored all its
competition, including victory over the traditional coca cola flavor by margin of 2 to 1 (Leven
and Levine, 1996). At overall, management of Coca-Cola believed that they are following the
best approach with thoroughly conducted market research. Furthermore, during April, 1985
Coke announced the reformulation through a press conference.

The initial response from consumers was positive and reported from distribution centers that
the sales of Coke are much higher than expected. However, on the other hand there was
intense media coverage of consumers who did not like the new Coke and had some reservation
about the product change. This resulted into old Coke loyalists sponsored protest rallies and
boycotts and received widespread media attention. According to Kotler (1994) that
reformulating venerable brands is risky and noted that there are reasons why companies may
prefer to make alterations without announcements—for example, the risk of buyers rejecting
the “improvement” claim or of losing customers who prefer the former version. After the
couple of months of launch of new Coke management of Coca-Cola started realizing that
customer dissatisfaction with reformulation is increasing.

In July, 1985 Company decided to respond to public pressure and bring back the old Coke
formula with name of Coca-Cola Classic. Consequently the results showed that the sales of
Coca-Cola Classic were started more than then new Coke. According to Nazlin (1999) that a
food company is required to further develop both areas; product development and market
orientation, in order to achieve a positional advantage in the food market. Consumers were
found to reject the new product because they were more comfortable with the image of the
original cola drink and even felt threatened by the introduction of the New Coke.

Pepsi in the overall market had increased, mostly due to the continued success of Diet Coke and
introduction of Cherry Coke (Schindler, 1992). There was a clear question raised during that
time which one is the flagship brand of Coca-Cola now. The response to this question from
management was, the company had adopted a megabrand strategy in which some promotion
expenditure were directed at enhancing the image of the company’s entire line of cola drinks
(Schindler, 1992).

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 Sensing the Market to thrive in New Product Development
Jesus Mascareno
Imran Mohyuddin
During the following years the market share of Coca-Cola steadily declined, when they finally
decided to go back to the original formula, Coke already had lost significant market share and
for Pepsi they had increased sales and market share. By 1990, the company started to test new
Coke with the name of Coke II to cover market image of Coca-Cola. In the market, indirect
emotional factors, such as memories associated with expected taste, were more important
than itself. Moreover, buying was different from tests because Coca-Cola was so confident in its
research that they made old coke unavailable (Leven and Levine, 1996).

4. Findings

Hypothesis 1
In the Betamax case, Sony failed to perform an accurate identification of the customer’s needs
because Sony assumed that users were more concerned with image quality than they were
with the number of hours that could be recorded on a single tape. (detecting)

The Coke reformulation attempt was a dramatic example how consumer awareness of the
reactions of other consumers can play a critical role in the success or failure of a new or altered
product (Schindler, 1992). The Coke decided to respond Pepsi’s new offerings with enough
sufficient research on consumer behavior. But they overlooked the anticipated response of
consumers who already have using Pepsi’s brand by doing this they failed to perform correctly
their filtering activities. There was lack of exploratory research within individual and groups
prior to the launch of New Coke. (Filtering)

Another important finding in New Coke case was that Coca-Cola Company was altering its star
product which still had a growing strong brand image among consumers. This lack of sensing
capability leads them to filter the wrong information, implement and calibrate a strategy that
was miss interpreted from the beginning.

As a result of our findings we found that the hypothesis 1 probed to be in the right direction,
The reasons behind the failure of Sony´s Betamax are directly related to firm’s low performance
in executing their sensing capabilities, specifically in detecting and filtering information.

Hypothesis 2:
As we seen below in the Betamax case, Sony felt that people would be willing to pay more for
this quality, so the price of the Beta VCRs and tapes were set slightly higher than those of their
VHS competitors (Dennis and Bryan A. Reinicke, 2004). This lack of market sensing lead the
product to a position of higher functionality and also to a higher price position, both were
higher than market expected, reason why it completely failed.

Sony apparently believed that the superior picture quality of its Beta technology, together with
its strong position in the consumer electronics industry, meant that Beta would eventually
dominate the marketplace. These high confidences in the product characteristics lead Sony to
overlook the necessity to sense the market from their possible supplier’s perspective. As a
result, Sony apparently saw less need than did JVC to encourage other firms to employ its

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 Sensing the Market to thrive in New Product Development
Jesus Mascareno
Imran Mohyuddin
technology, assuming that it would eventually reap the benefits of a Betamax standard. In
particular, Sony sought to monopolize further product development, while JVC did not, which
discouraged other manufacturers from adopting the Betamax standard.

In the New Coke case the company failed to understand their product life cycle and did not
allow the market to mature. They launched a redesigned product while the growth of the
product was still developing. It is very important for an organization having a high brand image
among consumers to beware of tampering with their core brand and a brand which has high
demand in market. If there is an extreme requirement of change in product, then major
changes in product should not be introduced after discarding the existing product(Day, 1981).

In matching the hypothesis 2 with the cases’ results we found only in one of the two cases
evidence that corroborates that Sony’s failures in the sensing activities lead it into a position
beyond the market spectrum where no customers can follow: customers preferred a cheaper
and lower quality product (VHS) over the Betamax. Therefore this hypothesis could not be
sustained and further studies need to be done to probe the market connection matrix and its
different positions.

5. Conclusion

As we have discussed at the beginning of the present paper innovation presents a portfolio of
opportunities for companies, nevertheless successful product development presents strong
difficulties for firms. Evidence was presented to relate the new product development success
with the sensing capabilities a firm performs. Since there is evidence indicating that a company
which builds a market sensing culture can achieve superior performance and also display
characteristics of constant learning and innovation that continually refine market sensing and
the vision of the future (Cravens, Piercy and Prentice; 2000).

The findings in the cases sustained the relationship between new product development failures
and firm’s low performance in executing their sensing activities. Therefore high performance in
such activities should be nurtured across firms specially in those with a innovation oriented
strategy. The main objective of performing them should be to obtain indicators of market
trajectories, trends, opportunities and threats could be found in these activities. Results
obtained from these sensing activities therefore are critical inputs for the new product
development process. There is no previous research that focuses in identifying such market
indicators in a comprehensive model therefore we want to stress the need to carry further
studies in the sensing activities, this in order to identify the key market indicators and develop a
holistic market indicator model that allows firms to:

1. Receive accurate information of which direction there new product development

projects should focus.
2. Identify when it is the right time to innovate.
3. Measure the level of innovation a product must follow in a specific point in time.

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 Sensing the Market to thrive in New Product Development
Jesus Mascareno
Imran Mohyuddin
Study limitations

The present study was not applied in a sufficient number of products so we could clearly
identify a pattern in the failures behavior. The study could have been complemented with
information on technology push products which were launched successfully without matching
the market needs. This is build around the idea that not always the market knows what is the
right for it and even though they know what they want it does not assures it will be bought by
the market.

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 Sensing the Market to thrive in New Product Development
Jesus Mascareno
Imran Mohyuddin
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 Sensing the Market to thrive in New Product Development
Jesus Mascareno
Imran Mohyuddin
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