Editor’s note: Douglas E. Malcom is the chief analyst at Market Directions, a Kansas City, Mo., research firm. Susan Spaulding is founder and president of Market Directions.

Hey you! Out of the GENE POOL! This slogan seen on bumper stickers and t-shirts may give us a good laugh, but increasingly it may also give us pause as an apt warning about doing business in the Information Age.

As the Industrial Age rapidly morphs into an information era, businesses must learn to operate within a new set of boundaries if they want to survive, much less prosper. No longer can businesses operate under the old rules of mass production, segmented pricing and a static organizational structure. Marketing in the third millennium requires a new perspective that emphasizes customer interactions and product innovation.

The connectivity of the information economy is rapidly changing relationships between buyer and seller, product and service, and employers and employees. As a result, doing business in the Internet economy demands even greater attention to fundamental marketing principles and strategic planning that incorporates virtual buying spaces. Companies that do not give enough credence to the new business rules or that underestimate the effects of e-commerce will likely find themselves dying a slow and painful death.

Competition in the Information Age: survival of the innovator

The lifeblood of an organization is innovation, and it must be the pervading spirit of all functional areas and levels within the organization. Those companies that make innovation a priority and operate with intimate knowledge of their customers will stand a much better chance of meeting their customers’ needs in the Information Age of business.

Successful innovation needs to be the center of business strategy with marketing, capital investments, manufacturing, and research and development expenditures allocated around innovation rather than being dealt with as an extension of any one these areas. As Kucsmarski (1999) notes, “Innovation is not one more thing to get done. Instead, it should be viewed as a way of life - a new way of thinking, managing and feeling.” Companies that make innovation a component of their corporate identity and place it in the center of their overall strategy are best positioned to be leaders in product development (Barrier, 1994).

Integrating a philosophy of innovation into all facets of the company, including product development systems and processes, does not happen overnight, and equally its rewards are largely long-term. The holistic innovation perspective brings with it a kind of optimism and future-orientation that is very motivating and provides a sense of hope in down times. As such, employees are more likely to give proper attention and respect to new product development rather than view it as a stepping stone to an established brand with big advertising budgets and a high company profile. This perspective also brings into view the extent to which internal systems are in step with customers’ attitudes.

Innovate for a proactive market presence

As Peppers and Rogers have pointed out, the markets of the future will be won one customer at a time. This kind of customer appreciation and knowledge will aid companies in creating new products by anticipating what their customers will want rather than reacting to a need in the market. Successful product development hinges upon both intimate customer knowledge and a real commitment to innovation.

Often companies only do enough research and development to match an important competitor. Or, they do only enough market research to tell which way the wind is blowing. Companies truly committed to advancing their ongoing product development strategy in the Information Age need to meet customer needs by anticipating them rather than reacting to an obvious market void.

Product development typically occurs through the expansion of an established line of products or through the growth of entirely novel product concepts. The first form of product development is a kind of commercial mutation where an existing product is reformed, refitted or adapted in some way to offer consumers enhanced benefits. The second, higher order type of product development is innovation resulting in benefits that are new to the market.

While continually updating products is a necessary function and often the predecessor of innovation, product adaptation will never outweigh innovation in strategic importance. Innovation, unlike adaptation, creates or protects competitive advantage for a company, thereby offering greater long-term success.

Adaptation: extending the successful line

Often, keeping pace in a market can be achieved through the continued growth and development of products related to an existing line that has a pattern of success in a category. However, the key is not to create a “missing link” by extending the product into areas where customers do not make a connection to the brand.

In the past decade, there has been considerable impetus behind product development that stresses product platforms and families. This perspective focuses on the successive enlargement of a base product concept in order to cast a wider net for consumers. The kind of product family management that works best systematically produces new offerings based on customers’ needs, and originates from a planned family of differentiated products that have a common set of design rules and brand identity. The end result is a steady flow of value-evident products from the same brand or company, carrying with each the mark of that brand and the full force of its unique equity.

This perspective also helps ensure that products possessing tenuous ties to the parent product concept die in the ideation or testing stage of development rather than in market. If customers cannot make a clear connection to the central identity of the line and understand the product’s unique position in the line, they are unlikely to fully support the product.

Case study: MindStorms

MindStorms’ 1998 launch of build-it-yourself robot kits in the toy market should be considered a model approach to product adaptation for the ways in which it moved beyond an original concept and captured new market segments. MindStorms, a Danish subsidiary of Lego, Inc., successfully extended the idea of the classic plastic construction sets into robot kits that appealed to both children and adults by transporting the simple idea of Legos construction into the realm of hobbyist robotics.

MindStorms released a line of design-your-own robot kits in the fall of 1998 to a great deal of acclaim and financial success in the toy and, as it turned out, hobby industry. Building from the concept of Lego’s plastic building bricks, the robot kits could be quite sophisticated, appealing to kids of all ages, more specifically those aged 12 to 50.

Lego interlocking plastic building bricks are a classic toy that has remained popular in its current form for nearly 50 years. The company has made a few changes to the theme, such as complete kits for constructing miniature cars, ships, bridges and castles that lock with the building blocks. MindStorms is a high-tech version that builds on a history of product originality and moves the line into the 21st century.

The build-it-yourself robot kits, which retailed for between $100 and $200, combined Lego blocks with infrared light sensors and specialized computer software that allowed the user to control the creation from a home computer. The kit came with patterns and directions for both the blocks and the software. However, older buyers and tech-savvy kids could customize both.

During the product development phase of MindStorms, Lego marketers felt they had a new offering with potentially broad appeal to kids, teens and adults. They set out testing all the possible markets and found that while the core customer was children 12 to 18 years of age, an adult customer base existed in the 25 to 40 range, ultimately comprising about 40 percent of MindStorms’ users. Most of the adults registered on the Legomindstorms.com Web site were found to be in their 20s, but some were over 50.

The wide age range of MindStorms’ enthusiastic customer base represented a marketing coup for Lego, which had revenues in 1998 of $1.2 billion, and serves as a prime example of a successful product adaptation. The robot kits showed how a company can successfully work from a base set of design rules and brand spirit and find positive revenue streams from untapped market segments

Innovation: the key for strategic growth

Industry data suggest that as many as four out of five new product offerings will fail. With those odds, a hastily conceived and poorly tested product is doomed. However, launching a new product does not have to be a roll of the dice. Whether early on in product conceptualization or later in product testing, effective research can help companies bring their strongest, most attractive offering to market.

Some degree of industry analysis or competitive intelligence should be performed to inform the initial product development planning process. Industry analysis can be used to help define product positioning, set product development parameters and confirm company or brand image prior to initiating development. Companies gain useful insights into their markets and can, for example, avoid a market scenario where competition is very strong and there are few opportunities for differentiation.

Another fundamental element of successful product development involves the proper focus on viable concepts early in the process and effective modeling and measurement prior to launch (Gruenwald, 1992). Both qualitative and quantitative research methods can be brought to bear on product development problems for companies seeking strategic direction to their product development needs.

Qualitative methods

Methods in the qualitative arena are typically used early in the research process with an in-depth exploration of topics and a relatively small number of interviews. Product development often begins with ideation and concept development.

  • Ideation: When a company needs to look into the future and investigate new products, an ideation or brainstorming session is planned. The session is usually a daylong event and involves an internal group, however customers or other constituents can be integrated who have a definitive interest in the outcome. Using different ideation exercises, new products are generated. Using strategic parameters the ideas are honed to a short list and prioritize.
  • Concept development: A concept is generally comprised of a key visual and a short, factual description of the product or service. The concept is presented to a group of people, usually in a focus group environment. Typically, the group is asked to identify benefits associated with the product and prioritize which are most important to them.

Quantitative methods

Quantitative techniques are commonly used to help configure and/or optimize a product according to the preferences of consumers, as well as assess product appeal or potential. Broad market measurement often is done to learn whether there is a void in the competitive space that requires a product with novel features and benefits. Product screening, product configuration and testing are some of the most widely used qualitative research methodologies.

  • Product concept screening. Many companies seeking to fill an identified market need begin by sorting out the concepts that consumers believe meet their needs best. Assessing market potential at the concept stage is a critical juncture in product development. Pursue the wrong product and the financial effects can be devastating.

Best practices in concept screening utilize forms of multivariate analysis such as multiple regression or structural modeling to predict those product concepts with the most market potential. These techniques involve the prediction of preference across a number of products, typically including some volumetric-like scoring to give managers some information about revenue potential as well.

  • Product configuration. Often, a company has a general idea for a new product but is unsure about what features are most important to consumers. Advanced research methods such as conjoint analysis and discrete choice modeling help companies determine the value of different product features and benefits such as color, shape, packaging and price.

Conjoint studies give the company information on the relative impact of each feature level of their potential product or service, as well as how each combines to affect purchase intent. Discrete choice studies do this as well as provide information on potential market share and any interactions between variables such as brand and price.

  • Product testing. Product testing is perhaps the single most valuable market research tool because it provides direct consumer insight that helps identify product superiority and competitive advantage. Product advantage helps fortify brand share and company image, and often commands premium pricing in the category.

The most widely used techniques for product testing are monadic, sequential monadic, paired comparison and proto-monadic. In monadic tests, each consumer evaluates one and only one product. Sequential monadic designs have each respondent assess two or three products, where each is taken one at a time and evaluated before moving on to evaluate a second, and so on. Paired comparison designs have consumers use two products simultaneously and then evaluate which is superior. Proto-monadic tests are a blend of monadic testing and paired comparison testing, where the consumer begins with a monadic test after which a paired comparison test follows.

Case study: Palm, Inc.

In some cases, market research can also lead to product innovation in the form of acquiring other product benefits that give a company a competitive advantage. The success of the Palm Pilot is a prime example of innovation through product acquisition which created an entirely new category of digital handheld computing devices.

In 1996, Palm, Inc. launched a line of handheld electronic organizers, the Palm 1000 and the Palm 5000, aimed at business professionals as an alternative to spiral bound, paper organizers. The introduction of these devices pioneered the electronic organizer category and led the way toward even bigger things.

With its acquisition of Smartcode Technologie in February 1999, Palm added advanced wireless communications capabilities to the Palm OS platform to address the market for mobile information appliances, such as cellular telephones, messaging devices, data communicators and smart phones. As such, it has positioned itself to be the leader not of electronic pocket organizers but of digital handheld computing devices.

Originally established in 1992, the innovative company caught the attention of U.S. Robotics, which acquired the then-small company in 1995 and in turn became a subsidiary of 3com when that company acquired U.S. Robotics in 1997.

Palm has continued to grow with acquisitions that allow it further penetration into the emerging electronic pocket computing and communications market. According to IDC figures for 2001, Palm is the leading global provider of handheld computers, with a 42 percent share of the worldwide personal handheld device market, and a 60 percent share of the worldwide handheld operating systems market.

Nearly 200,000 registered developers and others are committed to enhancing the platform and its offerings through a community of Palm OS licensees. This community of developers has created more than 13,000 software applications and more than 100 add-on devices since 1997. At the close of 2001, Palm’s annual revenue was $1.56 billion, up 47 percent from the $1.06 billion reported in 2000, and the company held nearly $514 million in cash.

Palm devices are growing increasingly pervasive as information management becomes ever more mobile and as the global workforce has an ever greater demand for portable personal computing and communications devices. Palm’s innovative spirit has paved the way in a new product category, and the company is the market leader in what has proven to be a nearly ubiquitous component in modern business culture globally in less than half a decade.

More than goals

In the Information Age economy, innovation and adaptation need to be more than just goals mentioned at the annual company meeting. They need to be identity statements for those companies who seek product and brand superiority in increasingly complex and competitive markets.

Companies must acknowledge that product innovation does not occur by happenstance or by accident — it rises from internal processes operating within an evolved environment. Those companies with the best results in product development are thinking clearly and strategically about how to gain a competitive edge with their products in the marketplace.

Additional reading

Barrier, Michael. (1994). “Innovation as a Way of Life,” Nation’s Business, 82 (7), 18-25.

Bishop, Bill (1998). Strategic Marketing for the Digital Age, Chicago: NTC Business Books.

Davis, Stan and Meyer, Christopher (1998). Blur: The Speed of Change in the Connected Economy. Reading, Mass.: Perseus Books.

Gleick, James (1999). Faster: The Acceleration of Just About Everything, New York: Pantheon.

Gruenwald, George (1992). New Product Development: Responding to Market Demand (2nd ed.), Chicago: NTC Business Books.

Heskett, James, Sasser, W. Earl, and Schlesinger, Leonard (1997). Service Profit Chain: How Leading Companies Link Profit and Growth to Loyalty, Satisfaction, and Value, New York: Free Press.

Johnson, Spencer (1998). Who Moved My Cheese?, New York: Putnam.

Kucsmarski, Thomas (1996). Innovation: Leadership Strategies for the Competitive Edge, Chicago: NTC Business Books.

Meyer, M.H. and Lehnerd, A. (1997). The Power of Product Platforms, New York: The Free Press.

Peppers, Don and Rogers, Martha (1993). The One to One Future: Building Relationships One Customer at a Time. New York: Currency Doubleday.

Utterback, J. (1994). Mastering the Dynamics of Innovation, Boston: Harvard Business School Press.