Strategy

“Delivering superior customer value requires differentiation, which requires deep understanding of clients’ latent needs”

Mc Nally et al., 2007

A firm’s strategy is about how it achieves a sustainable competitive advantage and the means deployed to reach such advantage.

In its product portfolio, it is of the utmost importance that the firm insures a fit between its products, strategy and long-term goals.

Strategy and resource allocation must be intimately connected.

Net Present Value

The goal of NPV is to maximize the total economic value of the portfolio subject to resource constraint. If there is no such constraint the criterion would be which project has positive NPV.

NPV advantages:

·         It considers the time value of money

·         Projects that are years away from launch are penalized

·         Projects that are halfway through development are favored all other things being equal

·         The method considers immediate resources requirements

 NPV drawbacks:

·         The method relies only on financial analysis

·         The method assumes only financial goals

Resource estimates are inaccurate. Project teams have difficulty to make reliable estimates

New Product Launch

A 4-step process that is applied both for extensions of existing product lines (not innovation, but rejuvenation) as well as for genuine innovations.

Phase 1: Qualitative sounding

A market research articulated around an unfinished product and specifically designed for the consumers to enrich the content. The following techniques might be used:

-          Mood boards

-          Image projections

-          Blank packaging – name only

-          No name, packaging only

Usually carried out on a target group of 50 to 100 people. Consumers are stimulated to provide as much feedback / feelings and potential upgrade to the product.

Extensive use of verbatims: to figure out a first sketch of communication strategy / story telling as well as product and image improvement potential.

Such process is conducted locally in a few “typical markets”. Feedback is centralized with a Paris-based product development team.

Initiatives may come from the head office or from local branches. As our informant put it:

“In l’Oreal’s culture, marketers at all level of the organization, and all premises are stimulated to make things move. Ideas are generated on a continuous basis.”

Phase 2: Quantitative study

Any product entering phase 2 will generate costs to the tune of 10 times more than phase 1’s related costs. Therefore, whether a product makes it the phase 2 is a strategic decision.  

-          R&D was consulted on the feasibility

-          Manufacturing has provided insight on the Cost of good sold pertaining to such products. Such costs are bearable

-          The production tools currently available can deal with mass production of such product

In phase 2, market research firms are recruited to conduct a thorough analysis (circa 1000 people sample) of product feedback and purchase intention. As a result, the product may still evolve, depending on customer feedback.

Such research leads to results to purchase intentions vis-à-vis a statistical norm for the sector. Such norm is calibrated on a much larger sample, stemming from a database that is constantly enriched by the market research firm.

When the candidate product shows below –norm result, the product idea is abandoned. When the candidate product’s quantitative results are at the norm, normally the experiment would not be pursued, unless this product represents a reasonable substitute to a slow-mover product of L’Oreal’s spectrum (“dog”).

When the product is beyond the norm, normally the product enters phase 3.

Phase 3: Global feedback

All l’Oreal local office around the world (at the exception of such offices where the head office or local management decides not to pursue for local reasons – such as regulation, lack of appetite, barriers to entry) are requested to conduct a local market appetite assessment.

Local marketers normally have a thorough understanding of their local market.  Therefore, in some instances, previous similar product experience, locally internal available data and internal salespeople feedback are considered sufficient to size the opportunity.

Sizing the opportunity means to determine a product’s potential in terms of units over a particular horizon.

Some local markets are considered as good trendsetting benchmarks. Therefore, market research is very often conducted locally in such markets.

At the end of phase 3, all local offices grant their local finance people the numbers necessary to size of the opportunity in monetary terms.

Phase 4: Go / No Go decision based on NPV calculations

Local finance people use all assumptions provided my marketers to calculate the NPV of the investment and future cash flows.

Such NPV is then communicated to the head office, who in turn, sums up all numbers communicated by the local units, brings in the cost of development, manufacturing, transportation and overheads.

The final decision to launch the product is based on such comprehensive calculation.

Expected Commercial Value

ECV=[(PV*Pcs-C)*Pts]-D

Pts: Probability of technical success

Pcs: Probability of Commercial Success

D: development costs

C: commercialization (launch) costs

PV: Net present value of project’s future earnings- cost – development – capital

This method seeks to max the expected value subject to certain budget constraints. ECV overcomes some of the NPV weaknesses:

ECV Advantages:

•     It does not consider sunk costs
•     It recognizes constraint resources and attempts to max the value of the portfolio in light of this constraint
•    It yields the maximum value portfolio
•    It considers risks and probabilities both commercial and technical

ECV Disadvantages:

Probability estimates are, by enlarge, unreliable: “pulling out numbers out of the air”

The method does not look at the balance of the portfolio between high and low risk projects or across markets and technologies.

Cooper on Product Innovation

Bibliography

Midgley, David, F., Innovation and New Product Marketing, Croom Helm ltd., London, UK, 1977.

Eckles, Robert, W., Business Marketing Management, Marketing of Business Products and Services, University of Houston – Downtown, Prentice-Hall, Englewood, NJ, USA, 1990.

Cooper, Robert, G., Edgett, Scott, J., and Kleinschmidt, Elko, J., Portfolio Management for new Products, 2^nd edition, Perseus Publishing Services, Cambridge, MA, USA, 2001.

Cooper, Robert, G., Edgett, Scott, J., and Kleinschmidt, Elko, J., Portfolio Management for new Products – Practices and performance, Journal of Product Innovation Management, 1999; 16: 333–351.

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Cooper, Robert, G., Edgett, Scott, J., and Kleinschmidt, Elko, J., Portfolio management in new product development: Lessons from the leaders—I, Research Technology Management; Sep/Oct 1997; 40, 5; ProQuest Central

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Chailan, C. , From an aggregate to a brand network: a study of the brand portfolio at L’Oreal; Journal of Marketing Management, Vol. 26, Nos. 1–2, February 2010, 74–89.

Ways to achieve Strategic Alignment

Ways of achieving strategic alignment:

•       Top – Down approach: Resource allocation is based on the company’s vision and specific goals.

•      Bottom up approach: Strategic criteria are built into the project selection tools and thus strategic fit is achieved simply by incorporating strategic criteria into the Go/Kill and prioritisation methods.

•        Top- Down and Bottom – Up approaches combined

Irrespective of the approach used, the following elements should be addressed:

·       Set Product Goals: E.g. percentage of revenue derived from new products the previous years. Percentage of profits to come from new products. Percentage of growth either revenue or profits

·       Analyze the market and the competition: PEST and competition analysis

·       Assess your market place: Identify customer latent needs, industry drivers, etc. Use of Porter’s 5 Forces (Porter)

·       Assess you company’s strengths and weaknesses: SWOT

·       Marketing and Sales

·       Product Technology

·       Operations or production capabilities and technology