New Product Development In A Slow Economy - Case Study Example

«Product Development in the New Economy: The Aviation Industry Experience» There are several reasons why companies in the aviation industry should introduce new products to the market in today’s economy. From the perspective of the dominant players or the biggest firms, there is one fundamental rationale – to address threats. Kwapong (2005) stressed that: first, if large companies do not attack their own brands someone else will; then, monopolists only innovate to prevent competition; and, finally, a significant percentage (up to 30 percent) of a large firm’s profit come from new products. (p. 155) On the other hand, smaller organizations will benefit from new product development in the sense that there is always the expectation of positive returns because no matter what, gains would always outweigh the risks. Otherwise, in the worst-case scenario, smaller firms have more capability of managing downsides. Background: New Economy The economy is a main influence in the developments of new products for the aviation industry as with other enterprises in other sectors. The fact is that economic cycles – the economic movements such as the ebb and flow of the economy both domestic and globally - affect the profitability and the revenue a company. For example, in the event of an economic decline, sales would be adversely affected as well as the manufacture of products. Not only are products sold in fewer quantities but they are also being built at a higher cost. These variables may vary in degrees and combination but the point is that the economic landscape – both positive and negative - is directly linked to product development – its initiation, processes and outcomes. Back in the 1970s, the aviation industry experienced robust growth. In 1978, when it reached its peak, the general aviation aircraft fleet increased from 131,743 to 211,045 and that the production hit a high of 17,811 aircraft while new products are built such as the Piper Cherookee, Tomahawk, Cessna 150 and 152, Beech Sierra and Sundowner, among others. (Wensveen 2007, p. 114) After this period, however, the aviation industry experienced consistent slump due to the rise in fuel prices, airspace congestion as well as issues pertaining to product liability. The situation has gotten worse that in 1994, the American Congress was so alarmed prompting it to pass the General Aviation Revitalization Act (GARA). With some exceptions, documented Wensveen, “GARA imposed an 18-year statute of repose, limiting product liability for aircraft having fewer than 20 passenger seats not engaged in scheduled passenger-carrying operations.” (p. 117) This development has increased the optimism on the industry and has spurred the development of new products and services. For example, Cessna decided to resume the production of single engine aircraft while the general aviation aircraft shipments posted a significant increase ending a 17-year drought. By 2000, the rosy picture painted previously has been augmented by the emergence of the new economy. There was a continuation of the favorable policy environment and, in addition, economic changes as affected by information technology, increased global trade, labor market flexibility, stability-oriented economic management and corporate reengineering, have paved the way for better prospects. (Bannock, Davis and Trott 2003, p. 246) However, a significant aberration occurred in 2001, which precipitated the economic recession – the September 11, 2001 terrorist attack. These unexpected events, including the financial downturn that happened recently in the US, as well as the increase in costs related to fuel and liability, have recreated many challenges to the aviation industry. It is within this environment wherein product development must work around in order to sustain profitability for organizations belonging to the aviation organization. Case Study: Product Development and Competition in the US Airline Industry If one examines the strategies of big airline carriers in the US, the strategy seems focused on the principle of “yield management” technique, which is actually a combination of strategies aiming to better allocate limited and highly perishable resources in the highly segmented consumers. According to Cento (2008), “the goal of yield management is to maximize the operating revenue in such a complex market environment.” (p. 33) Many policy-makers in the industry believe that such strategy is appropriate because of uncertainty in the air travel demand. Cento explained this by highlighting how it is characterized by high fluctuations, market heterogeneity as well as uncertainty about the traveler’s departure date or the ultimate destination of the journey. (p. 33) This is, or instance, demonstrated in product differentiation. In order to address the highly diverse market, airline companies segment the quality of products/services being offered by adding an extra service to a product. Say, the basic transport may be bundled with in-flight services like food and entertainment and fast check-in and so forth. Then, it can also be adopted in the area of pricing. In yield management, prices discriminate passengers as illustrated in the following graph: Fig. 1: Pricing in yield management (Cento, p. 35) Unfortunately, yield management does not seem to be working. The trend in the airline industry, particularly among the big carriers, is peppered by low customer satisfaction and low revenue problems. However, an interesting development also emerges out of this scenario. Today, there are still profitable airlines but, surprisingly, these are not within the ranks of the big players. The most successful currently, for instance, are JetBlue and Southwest, smaller outfits that have rejected the traditional approaches in airline management. The Financial Times reported that these companies maintain low-cost operations and have fundamentally diverged from the yield management strategy and instead adopts simpler and more transparent pricing. (cited in Kwapong, p. 154) Aviation Industry Product Development in the New Economy In the event of recession or an economic slowdown in a country or a region, the impact is adverse not only on the consumer buying power but also in the ability of companies to raise capital and meet its potential debts and so they could opt to stop new product development initiatives in order to protect them from financial exposure. However, according to Groucutt, Leadley and Forsyth (2004) this strategy may be understandable but the prudence may only provide temporary respite and entirely disadvantageous in the long-run. The reason for this is simple: When the country or region emerges from recession, companies that have been able to invest in some product development might be able to capture market share for competitors who did not. (p. 271) In addition to this, the recession during the 1970s also did not prevent the aviation boom from happening. And so with these factors in mind, one can understand the soundness of developing new products today in the new economy. Otherwise, it will increasingly become difficult to get new business as customers go elsewhere when products become outdated. It is important for the product development process to be streamlined and deliver results at the soonest possible time. Taking too long developing new products could mean unreliability, escalating costs, missed commitments among other variables that would eventually lead to losing business and competitive edge. The Process An excellent methodology in developing new product was developed by Eric von Hippel (2005), which emphasizes on collaborative development and the commercialization of technology. This approach is consisted of five fundamental steps: 1) the specification of a product or market segment; 2) the identification of relevant trends that affect this segment; 3) the identification of lead users in relation to such trends; 4) the development of new products by combined efforts of the developers and lead users; and, 5) the testing of the product. There are other variations or differing models. One of the most prominent of these is that developed by Souder and Sherman (1994), which also suggested a number of steps including: idea generation, concept development, market definition; then, the implementation activities that include actual product development and manufacturing, the launch of the product and the provision for its service and follow-on. (p. 9) The number of proposed product development methodologies share some commonalities, which include the intensive investigation of the customers. The development of a product as a result of an intensive study of the requirement of the customers may be demonstrated in the correlation matrix found below (Fig. 2). The result of the processes and analysis of this matrix (which concerns the development of a new engineering product) can lead to the appropriate product design that is characterized by a number of tradeoffs. In this example, Rafinejad (2007) stressed that “often in developing a product, design engineers find out that some of the engineering requirements are in conflict with others” and that “the calculated relative weight of the design parameters helps the designers to prioritize them and to resolve conflicts.” (p. 80) Fig. 2: The Correlation of the Weighted Customer Requirements to Engineering Parameters of a Product (Rafinejad, p. 81) Following von Hippel’s lead user methodology, General Electric managed to achieve profitability by transforming itself from equipment provider to solution provider. This case study has been documented by Rafinejad: Setting: During the 1980s the so-called “Jet Engine War” raged among industry players – GE Aircraft Engines, Pratt & Whitney (P&W) and Rolls Royce (RR). The business condition of these three major suppliers has been diminished because of the aggressive jet engine price competition. The fact is that the products of these three companies are not differentiated that is why the price became the primary variable that determined the customers’ decision-making process. Solution: GE thought long and hard to edge out competition and change the rules of the game. They came up with the so-called “power-by-the-hour” solutions to the airlines. Here they defined the engine as a power device that keeps an aircraft in flight but, more importantly, they introduced new products by way of new value proposition. This value proposition required the assumption of: 1) the responsibility for the maintenance of the engines through the offering of spare part management; 2) component refurbishment; and, 3) complete engine overhaul and maintenance services. Outcome: The new strategy changed the landscape and produced tremendous results in a short time. GE Aircraft Engines emerged as the winner, providing power-by-the-hour solutions for GE engines and for P&W and RR engines. In 2001, total business for GE climbed to $5 billion, while P&W business trailed at $1 billion and RR revenue even less. The aftermarket service sector contributed 40% of the total revenue at GE Aircraft engines and almost 100% of the profits. An additional benefit of the new strategy was stabilization of profitability at GE Aircraft engines – by becoming less susceptible to the cyclic nature of the aircraft business. (p. 79) There are lots of lessons that can be learned from the GE Aircraft Engines’ experience. Foremost of this is the proof that a strategic methodology of product development can lead to innovation and competitive advantage. The market segmentation, which is a prominent feature of von Hippel’s model, was pivotal in the introduction of new products and services that eventually propelled GE Aircraft Engines ahead of the competition. Characteristics of the Successful Process In order for the new product development process to be effective, there are important factors that must be considered. The first is the market research. This aspect in product development is crucial because it allows the identification of the market and the product as well as their characteristics. If this part is not thoroughly undertaken, then the product or service being developed would not succeed. Then, there is also the streamlining of the process. The drastic reduction of the time that a new product is developed and introduced to the market is crucial because, as Oosterwal (2010) maintained, when the process takes so long, the product would no longer be accepted as anticipated because the identified market has already changed, resulting in poor sales and dismal return of investments. (p. 5) This area is also related to another factor that contributes to the success of the process – timing. The idea is that there should an alignment between the process attempts with the timing signals that are received from the market. Kmetovics (1992) explained that this would allow organizations to outline points of reference that would help in preventing the initiation of the process too late or that it can “force an architectural revision in the new product idea that could speed the product development process.” (p. 75) The simple streamlining of the process is not enough because such variable must be attuned to the requirements of the customers. Certainly, releasing a product too late can be damaging but this is also true in the event that a product is developed and released too early in the market. Furthermore, the investigation of the market can also enable the product development team to build relationships with all the stakeholders in the process. The customers, for instance, must be integrated to all stages of the process in order for the development to capitalize fully the market opportunities and solve problems that are related to it. There is also the issue of structure. There are instances when due to an organization’s rush for definition of the product development process, it overlooks the need for structure or the structure adopted is inappropriate. This is dangerous because without it, the process will be vague, exposing it from risk of aimlessly going on and, wasting money, time and effort. McGrath (1996) argued that structure product development process strikes a balance between discipline and creativity and that “a well-thought-out process doesn’t hinder creativity; it allows development teams to focus on the real issue – developing the product itself – not on reinventing the development process each time.” (p. 68) The best way to achieve structure is to adopt a hierarchical model in the development process. Here, phases, steps, tasks and activities are structured in such a way that the coherently amble on towards the specific developmental goals. This is not to say, however, that the product development structure is rigid. To illustrate: An engineer involved in the development can do away with the traditional workflow systems. He would have, in his disposal, alternative methodologies and strategies that would allow him better performance in his initiatives. Such strategies, however, are not just selected out of the blue. These are predetermined and prescribed in consideration bottlenecks and disturbances that may occur during the development process. The “structured” is present because the choices being made available to users in order for them to navigate freely and effectively in the dynamic environmental conditions are strategic and well-thought-out methodologies. With respect to the new economy, there is no doubt that the economic landscape and the market is rapidly changing. This requires a continuous and on-going product development process. This factor is the reason why it must be flexible in order to be able to respond to the tumultuous shifts and movements of its environment and its target market. There are two important elements to this flexibility: first is that the process should be capable to cope with unexpected events and the intensity of the prevailing trends and their changes; and, second, the process must be able to cope with the requirements of having to produce different types of new product projects. Generally, explained Thomas (1993), “the greater the resource available, the greater the opportunity for flexibility.” (p. 122) With this in mind, one can say that flexibility can be achieved through the adequate commitment from the organization in terms of funds, time, people as well as other resources. Otherwise, the process may be compromised since it would stretch itself too far in areas needing to be addressed in the events of changes, bottlenecks or significant shifts in conditions. Conclusion The product development process in the new economy is significant for a number of reasons. First is that it must work within an economic environment that is constantly and rapidly changing. For instance, within the period of the developmental process, am economic recession could strike and within the same period or before the development is finished; the downturn could already have passed. Secondly, new variables in the economy came into play: globalization, increased integration of the global market, new labor trends, information technology, new policy environments, and so forth. These elements require modified strategies that allows for flexible, integrative and cooperative product development process. Otherwise, it would suffer from failure. All in all, the product development process should be undertaken with the use of a number of methods or a combination of these specifically aimed at successfully and efficiently finishing the process. The company also has to look further from its past experiences to determine which works and which does not work. Whatever and however the case is, there is a requirement for the support of the management and the organization especially considering the fact that there are multiple disciplines and diverse groups and people involved and have to work as a team. The allocation of resources is crucial in this aspect. It is clear, hence, that commitment helps organizations to develop products and services that satisfy the needs as well as take advantage of the opportunities presented by the new economy. References Bannock, G., Davis, E. and Trott, P. (2003). Dictionary of business. Princeton, NJ: Bloomberg Press. Cento, A. (2008). The Airline Industry: Challenges in the 21st Century. Berlin: Springer. Groucutt, J., Leadley P. and Forsyth, P. (2004). Marketing: essential principles, new realities. London: Kogan Page Publishers. Kmetovicz, R. (1992). New product development: design and analysis. Hoboken, NJ: Wiley-IEEE. Kwapong, O. (2005). MBA Concepts and Frameworks - Tools for Working Professionals. Songhai. McGrath, M. (1996). Setting the PACE in product development: a guide to Product And Cycle-time Excellence. Burlington, MA: Butterworth-Heinemann. Oosterwal, D. (2010). The lean machine: how Harley-Davidson drove top-line growth and profitability with revolutionary lean product development. New York: AMACOM Div. American Management Association. Rafinejad, D. (2007). Innovation, Product Development and Commercialization: Case Studies and Key Practices for Market Leadership. Fort Lauderdale, FL: J. Ross Publishing. Souder, W. and Sherman, D. (1994). Managing new technology development. McGraw-Hill Professional. Thomas, R. (1993). New product development: managing and forecasting for strategic success. John Wiley and Sons. von Hippel, E. (2005). Democratizing innovation. Cambridge: MIT Press. Wensveen, J.G. (2007). Air transportation: a management perspective. Burlington, VT: Ashgate Publishing, Ltd. Read More