Research Background and Motives

Chapter 1 Introduction

1.1 Research Background and Motives 

During 20^th century, plenty of new products have emerged in the world. What we named “new products” is that they solve human problems by unexpected new

technologies. Humans need time to learn new products and get used to them. In other words, humans have to change their behavior from a familiar one to a new one. In the past two decades, human living are transforming immensely as the continuing

progress of technology. Different necessaries which are based on information, Internet, digitization and communication technology appeared around human surroundings such as MP3 player, cell phone and notebook. Recently, the prevailing iPod even becomes a new lifestyle. Besides, the innovative Tivo breaks the limitation that we have to follow the TV schedule to wait for what we want to see. We can choose programs we like any time. Tivo helps people arrange their leisure time conveniently.

Thus, to past consumer, accompanying the pace of digitization and the improving technology, there emerged unimaginable new products which can change human living custom. In this article, we discuss not only new products but innovations.

An innovation is an idea, practice, or object perceived as new by an individual or other unit of adoption (Rogers, 1962). In Tellis’s opinion, innovation, the process of bringing new products and services to market, is one of the most important issues in business research (Tellis, 2006). And if an adoption of an innovation by an individual or other unit of an adoption can diffuse quickly, we call the innovation is success. So far, there is a great deal of articles researching all aspects of diffusion of innovations

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within forty years.

However, nowadays, these kinds of innovating applications are getting mature, there are few breakthroughs invented in the global market. What we have is the “Next Generation”. Engineers are devoting to develop new products which are based on old products to pursue growth. For example, wireless communication is advancing from 2G to 3G to wimax and operating system is progressing from Windows XP to Vista.

That is to say, there are nearly no genuine “new products” today. Therefore, the main purpose of this article is trying to contribute to develop a model to discuss the

relationship between “New generations” and the old ones because that the

competition and replacement relationship are more important in the future. On the other hand, not every innovation can be adopted successfully by consumer. Although the information we received is almost how an innovation succeeded, how fast a product diffused, the truth is that there were large number of products failed or cannot be popularized by the masses behind the successful ones, such as the failure of the UltimateTV of Microsoft. Consequently, one of the purposes of this article is to discuss the diffusion relationship among those products which substitute each other.

These kinds of products include its own multiple generations, meaning that 3G can capture the market of 2G, and opponent’s products. The importance of researching diffusion relationship is that corporations usually invest a lot on new technologies and new products. In order to make a precise decision to avoid wasting money on

launching new products, production and inventory, estimating the growth of new generation and the decline of old generation accurately becomes a crucial issue to managers.

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The same as previous articles, this article narrows the rage of the definition of new products to consumer durables. The feature of consumer durables is that consumer won’t repurchase within short time and purchase one unit at a time. Under this condition, we can analyze the diffusion behavior of targeted products. In regard to previous knowledge, we’ll discuss particularly in the review.

The theory of adoption and diffusion of new ideas and new products by a social system has been discussed at length by Rogers (Bass, 1969). Early 1960,

understanding how a new product succeed became a popular issue. Rogers, a master of communication studies, first published the book “diffusion of innovations＂, explaining why some good ideas and products are able to become popular and spread quickly while the others can’t. The writing has been affecting many fields widely, including marketing, economics, anthropology, sociology and so on, especially in communications and technology adoption studies. As the publishing of diffusion of innovations, there sprang up a lot of articles exploiting the concept to research the issue of new products in the new product area of marketing.

During the development of knowledge on new products within the forty years, the main directions on which new product area focus can be categorized into five groups：

1.1.1 Methods of enhancing new product development processes

The papers here consider that firms face a challenge in deploying the “voice of the customer” in the R&D, engineering and manufacturing stages of product development.

The articles deal with how a firm uses what customer eager to proceeds innovation.

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The advantage lies not only on rising revenue but increasing the probability of adoption. Griffin and Hauser (1993) focused on identifying, structuring, and

prioritizing customers needs, illustrating how a product-development team might use the voice of the customer to create a successful new product. In addition to answering how to identify customers’ needs, they illustrated how customers’ needs cbe arrayed into a hierarchy of primary, secondary, and tertiary needs, so that ultimately

customers＇ preferences can be measured and compared. This article only discusses how an organization coordinates efficiently.

Shocker and Srinivasan (1979) highlighted the emergence of a new, proactive research model – multi attribute research – which investigates the structure of customer decisions with respect to the market offerings of a firm and its competitors.

In order to predict customer behavior in a wide range of future environments, they focus on developing an understanding of customer decision, so that they can forecast customers＇ move even in the absence of data.

More recently, Nowlis and Simonson (1996) investigated the factors that moderate the impact of a new feature on brand choice. They proposed two principles: multi attribute diminishing sensitivity and performance uncertainty. They demonstrated that how new features affect market share and sales volume depends on the preexisting characteristics of the products to which those new features are added.

The accomplishment of this field lies on forwarding diffusion of new products by designing new product features accurately. Nonetheless, this field cannot assist companies to manage the growth and decline of their launched multiple generation

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products.

1.1.2 Preproduction testing and evaluation of new product designs

Pretest is an important procedure to observe the reactions of customers. It can decide whether a new product is launched or which part need to be adjusted. This field investigates how a new product be evaluated and tested before the investment for production is made. Here includes research on beta testing procedures, pretest market models, prelaunch forecasting methods, information acceleration, and test market methods.

Silk and Urban (1978) introduced ASSESSOR which is a set of measurement procedures and models. It is able to estimate the sales potential of a new packaged good before test marketing, thereby assisting companies to save the costs from the high failure rate of new packaged goods in test markets. Afterward Urban and Katz (1983) published a validation of the ASSESSOR model. Their results suggested that the ASSESSOR pretest market system did well in predicting test market shares.

Recently, Urban, Weinberg, and Hauser (1996) showed how to forecast consumer reaction to a real new product. Their approach made use of a multimedia

virtual-buying environment that simulated future situations and experiences, making it possible to determine whether the new product would be viable at target launch date.

This area is able to help the decision of launching a new product or not. However, it is useless to help manage a launched product.

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1.1.3 Methods of forecasting the adoption and growth of new products

Bass (1969) proposed a masterpiece which has been influencing new product field tremendously, named Bass model. Bass model allows us for calculating the sales peak and the timing of the sales peak by data from earlier stage. It can also help depict the successive increases in the number of adopters and predict the continued diffusion process. Bass model improved our understanding of the structural, estimation, and conceptual assumptions underlying diffusion models of new product adoption. Many researches cited Bass model and used it to develop revised models which are added other important variables like price and advertisement. Mahajan, Muller, and Bass (1990) provided a detailed review which categorized new product research into five areas: basic diffusion models, coefficient estimation considerations, flexible diffusion models, refinements and extensions, and use of diffusion models. They identified a number of research issues within these five areas that could be help make more effective, realistic and practical diffusion models

Robertson and Gatignon (1986) pointed out that previous researches only focused on individual level rather than on organizational level. They therefore presented an alternative paradigm based on organizational adoption and competitive behavior instead of individual adoption.

Norton and Bass (1987) further proposed an improved model to solve the multiple generation issue on high-technology products. The launch of new generations of high-technology products will capture the market of earlier generations, including its own earlier types and its competitors. Besides, multiple generation products became

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important due to the common situation that new technologies were applied in old applications instead of creating a new application, resulting in new generations

competed with old generations rather than finding a new market. Thus, managers have to consider the impact of the launch of a new generation particularly to calculate the accurate purchases of earlier generations and the new generation and to avoid destructive competition on the growth of its earlier generations. The model that Norton and Bass developed includes diffusion effect and substitution effect, based on Bass diffusion model (1969). Norton and Bass also demonstrated the forecasting properties of their model.

By the end of the 1980s, there existed abundant conceptual diffusion researches which surveyed different coefficients, providing enough data for meta-analysis.

Sultan, Farley, and Lehmann (1990) made empirical generalizations from a

meta-analysis of more than 200 sets of coefficients. Their results suggested that the diffusion process is affected more by such factors like word of mouth than by innate innovativeness of consumers. Furthermore, they also indicated that the coefficient of innovation is fairly stable under a wide variety of conditions but the coefficient of imitation varies widely with the innovation type, the estimation procedure, and the presence of other coefficients.

More recently, Golder and Tellis (1997) proposed the existence of takeoff point which is characterized by a dramatic increase in sales, advancing our understanding of the growth of innovation. They investigated the data of “really new＂ household consumer durables and found that the takeoff tends to appear as an elbow-shaped discontinuity in the sales curve. Consequently, they further addressed the essential

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issues that how much time does a new product need to reach the takeoff. Their work gave managers an understanding which can help observe whether a new product diffuses successfully or not.

1.1.4 Market entry and defense strategies

Hauser, Tellis, and Griffin (2006) reviewed researches on innovation and classified these researches into five fields. They spend two fields on reviewing market entry strategies, which included technological revolution, strategies for entry, and portfolio management, and reviewing defending against market entry strategies, which

included the rewards of entrants and strategies of defense. The research stream here addressed whether, when, and how a firm should innovate or should defend against innovation by competitors.

Ofek and Sarvary (2003) suggested that R&D competence can encourage a leader to invest in order to obtain technology leadership, while the presence of reputation effects can encourage a leader to reduce the investment on R&D, resulting in alternating leadership between a duopoly of firms.

A number of early papers supported the statement that entering a market first will have long-term advantages. On the other hand, Golder and Tellis (1993) used different methodology to reexamine the rewards to pioneers and argued that even if there is a pioneering advantage, later entrants are often able to conquer it. Shankar, Carpenter, and Krishnamurthi (1998) also showed that an innovative late mover can grow faster than the pioneer, slow the pioneer’s diffusion and reduce the effectiveness

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of the pioneer’s marketing spending. Besides, innovative late movers are advantaged in that their diffusion can hurt the sales of other brands, but their sales are not affected by competitors’ diffusion. In contrast, non-innovative late movers have smaller potential markets, lower repeat rates, and less marketing effectiveness than a pioneer.

1.1.5 Contextual and structural drivers of innovation

Chandy and Tellis (2000) examined whether new entrants are more likely to introduce radical innovation. They found that prior to World War Ⅱ, small firms and new

entrants were more likely to introduce radical innovations. However, the pattern reversed after the war.