The Hindu Business Line : Russian Roulette

Although a high failure rate of new products is accepted as an occupational hazard, the costs are enormous. Apart from costing companies a great deal of money, they affect the morale of the workforce.

ANY analysis of new product development (NPD) will assure you of one comforting fact: the only certainty is the lack of certainty. Most of your projects will fail, and you will have no idea which those will be.

This is sometimes romantically compared to Russian Roulette (one bullet, five empty chambers), but even this analogy isn't quite apt. With Russian Roulette, you have the certainty of there being at least one shot in six; when you look at NPD success rates, those odds actually look pretty good.

International statistics on new product failures are rather depressing. One survey, which explored the factors of success in NPD, indicated that though more companies are committed to improving their new product processes and results than ever before, 93 per cent of the new product efforts fail. The survey indicated that only 16 per cent of the new products, for which the companies invested resources (financial, human and other), make it to the market. Of these, only 43 per cent meet their major business objectives, resulting in a cumulative 7 per cent success rate. The marketers participating in this survey were from a diverse range of sectors — food, beverage, household, pharmaceutical and other consumer-driven industries

Three main reasons were cited by the managers, in the global survey, as contributing to NPD failure. The first was the lack of competitive point-of-difference — in other words, they were churning out me-too products, lacking differentiation. The second reason was the lack of strategic focus on addressing consumer needs, resulting in a faulty perception of the potential of a marketing concept or a technology — a cure in search of a disease, if you will. And the third factor was that while pre-market research indicated a persuasive promise, the consumers were not so supportive when the product hit the market.

This was not an Indian survey; I am not aware of a similar study done across pan-Indian companies. And yet, when I compare the results of this study with my own findings culled from an analysis of the NPD performance of different brand-led companies in India, I find a striking similarity in the factors identified by Indian managers as being responsible for NPD failure. Obviously, this is a global problem, and the issues cut across sector or country in their applicability.

A poor hit rate in NPD success is often accepted by industry as an occupational hazard. It is seen as a long-odds game, and often compared to venture capital success, where 10 ideas will get bankrolled, with the built-in expectation that nine of them will flop. The tenth is expected to be such an outstanding success that it makes up for the losses on all the nine.

The cost of this approach is prohibitively high. One marketing manager recently gave me his estimate that the cost of a bombed launch in his company could be upward of Rs 20 crore, when you've factored in the developmental cost, advertising and media costs, cost of stock returns. But to reduce the cost of NPD failure to mere numbers is to ignore the qualitative ramifications. Successive flops result in a pessimistic sales team and a trade force that takes a naturally jaundiced view of the next launch from the same stable. The negative impact on stock performance is obvious. Not to mention opportunity cost — all those crores that funded the flops could have helped improve the current profit engines.

How about the impact on morale? If less than 10 per cent of ideas get through to success, what does this mean to those who shepherded the other 90 per cent to failure? Few organisations really practise failure tolerance — and even if they did, few red-blooded marketing managers would be able to nonchalantly write off damp squibs and product flops as a long-odds game. How many organisations put their star managers in charge of innovation? Often, the company's future growth is entrusted to a mid-level manager who juggles this responsibility with other functional responsibilities and is treated much like a part-time nursery attendant. Over time, these managers develop risk-averse approaches to growth and innovation.

Definitely, something needs to be done to improve the hit rate of new product development.

The good news is that the odds can be improved. International NPD research indicates that the "best" new product development companies have an amazing 80 per cent success rate. These "best" companies get almost 50 per cent of their sales and 50 per cent of their profits from new products launched within the last five years. These are companies that have embedded planned innovation into their NPD process.

Planned innovation begins with the understanding that innovation encompasses far more than the fuzzy front end of creativity and brainstorming. It entails an honest introspection into your NPD success. It demands clarity regarding the kind of customer you wish to focus on, the ability to question, and alter traditional policies, such as the required hurdle metric for return. The resultant insights will lead to new products of enduring value, ensuring consumer acceptance and enabling breakaway growth for your company.

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