How To: Grow a Product-Based Business
Jim McManus's advice is to know what you're good at
If I were a CEO with a single-product base," says Jim McManus, "I'd . . ."
Wait a minute. This fellow McManus may be chairman of a company, but what's he know about single-product bases? His business, Marketing Corporation of America (MCA), in Westport, Conn., owns companies that develop real estate, run restaurants, deal venture capital, and operate the largest commuter airline in the Northeast -- among other things. MCA's revenues in 1989? About $200 million.
A single-product base? Not MCA. But chief among MCA's businesses is helping other companies develop and introduce their own new services and products. In fact, that was MCA's original line of business when McManus started the company in 1971, after a stint as a brand manager for Procter & Gamble. Now, he has working for him some of the smartest, most experienced market-development people we've met -- people like General Foods veteran John Luther, who heads business-development consulting at MCA. Typically, MCA helps blue-chip companies -- which don't like their names used in contexts like this -- think about their new products.
So, as McManus was saying, ". . . I'd want to understand exactly what I'm good at compared with the companies I want to compete with. What assets do I have that are leveragable, that give me a considerable competitive advantage?" In other words, MCA's founder was saying, there are lots of questions CEOs need to ask themselves before they can start making lists of new-product possibilities.
The experts at MCA believe that a new product or service has to be thought of as the next step along the path leading your company toward whatever it is going to become -- your vision.
What? You don't have a vision? It's not something that the business schools typically teach.
"After the '60s," says John Luther, "lots of new-product development was done by the numbers. It became process oriented. People forgot to take into account the internal strengths of their companies and the value of their trademarks, forgot to consider where their customers' needs were and what their consumers wanted. They never stopped to say, 'Here's where I am, and here's where the competition is.' We're not talking about product strategy, but about business vision: this is what I want my company to stand for in this world."
Vision: Debbi Fields (Mrs. Fields Inc.) had one; David Liederman (David's Cookies) did not. Vision doesn't guarantee success: Don Burr (People Express Airlines) had one, but not the ability to execute it.
STRATEGY VS. VISION
Before deciding how to get there, decide where to go. Most CEOs, says Luther, have a strategic objective, but not a vision. The two aren't the same. A strategic objective could be: to increase muffin sales by 100% a year for the next three years. The vision, in contrast, would be: to be the quality baked-goods purveyor to urban commuters and take-out customers by assuring timely delivery of fresh products using only quality ingredients.
A vision, Luther adds, gets to the how to's: how are you going to link internal strengths with external opportunities? Vision says: "I'm going to get from here to there, and here's how I'll do it."
Nobody Develops New Products
At MCA, they don't like to call it new-product development. That's too narrow, says McManus. They prefer instead to talk of managing markets. It's a more inclusive label. It just means understanding your own strengths and weaknesses and matching them up with market opportunities. Here are the steps that market management entails:
* Conduct an internal analysis. What skills, assets, and capabilities do you have that competitors can't easily take away from you? They might include your location, sales force, training program, trademark, or distribution technology. Let's say you're Ballard Medical Products Inc., in Midvale, Utah, and it's your sales force, which is highly skilled at selling to hospitals. Then you would . . .
* Conduct an external analysis. What do consumers need? Where are people not as satisfied as they could be? Could a product be made easier to use or work better? Could you get it to consumers faster? Ballard finds that there's a rising concern about the health risks involved in treating AIDS patients in hospitals, dental offices, and in ambulances.
* Merge and purge the internal and external analyses to cre-ate a portfolio of new-product ideas. Ballard decides that there's a need for protective masks, rubber gloves, and eye shields, all of which it can manufacture.
* Check those ideas against your business vision to see which of them logically fits and in what sequence. Ballard's vision is to create a company with a broad line of disposable products for hospital use. That's what its sales force knows how to sell. They forgo the dental and ambulance product possibilities for the time being and concentrate on the market they know best.
* Now, put together a team of people with all the skills required to pursue the rest of the new-product development process. If it's in a very small company that's just two or three people, fine. But no matter how large or small the team, be sure that the leader, or champion, has enough authority to command his troops and the business vision.
Know your own strength. An internal analysis doesn't have to be a big deal involving task forces and consultants. It can consist of sitting down with the door shut and the phone off for an hour, but an internal analysis should be systematic. Examine each stage of the product flow in your company. It begins with R&D, then moves to engineering, manufacturing, distribution, sales, and marketing. What special advantages do you have over your competitors? Take the same kind of look at your company's business functions: finance, legal, MIS, personnel, and the like. Where are you clearly better than the competition?
If Au Bon Pain Co., the Boston-based bakery chain, were to perform an internal analysis, Luther says, it would discover that its chief advantage is its superior distribution system. "Now Au Bon Pain can ask itself, what other products could it put through that system? Specialty meats? Produce? If I were My Own Meals Inc. [a producer of microwavable children's meals], I'd see my manufacturing flexibility as an asset and decide maybe I could produce a Kid's Meal of the Month, something big food companies, with theirrigid production schedules, could never do."
What's It Worth, to Whom?
The unique thing about a trademark, McManus says, is that it's the only asset a competitor can't take away from you. Nobody else can call her cookies Mrs. Fields or their popcorn Smartfood, to name just two once-small companies that from the start have built on their trademarks.
Trademarks, of course, don't have to be national or even regional to be valuable. Mrs. Miller's makes great muffins in Boston, and its trademark will be no less valuable in Boston if the company never sells a crumb outside the Route 128 perimeter.
But to leverage a trademark -- locally, regionally, nationally, or internationally -- you have to understand what it's worth and why. "You can't assume you know that," McManus says. Focus groups are one good way to find out, he suggests. They'll help you learn the trademark's product attributes and what benefits are connoted.
TESTING PRODUCT CONCEPTS
Don't Do It Like the Big Boys
Before you commit your company to making a product or providing a service you've dreamed up, you'll want to conduct a reality check with consumers. A big company, says Luther, would run consumer focus groups for a qualitative test of the concept -- a "feel." Then it would develop marketing hypotheses and conduct quantitative research to test them and get a statistically accurate fix on each one. The cost? Two hundred thousand dollars or more. But, Luther suggests, you needn't spend that. "Just do the focus groups. If you do four to eight focus groups in at least two geographic areas, for half the cost of the full-blown study you can get 80% of the answers."
By doing your focus groups in two waves in two markets, Luther adds, you can learn from one to the next. "Maybe R&D could cook up prototypes for the second wave."
Can't afford eight focus groups? Then do just two, says McManus, which will at least rule out disasters.
And if you can't afford that, have a party and let your neighbors try it out. Think of other groups: schools, offices, clubs. Friends and family aren't reliable here. Get anyone else to try it, but try to be sure they won't hesitate to say if they don't like it.
The Old Thinking . . .
The old idea of selecting a small city -- Peoria, say -- and test marketing your product there before introducing it more widely doesn't work anymore, insist Luther and McManus. "It's yesterday's newspaper," McManus says. How come?
* Test marketing presupposes that a national market exists for the product or service, which isn't necessarily true.
* It further presupposes that the national market is homogeneous -- certainly not true.
* Companies have learned how to screw up competitors' tests. For instance, they can flood the test market with their own product just before you test yours.
. . . and the New
Once the product is ready to go, the best way to test it is just to go into business. Start regionally, McManus suggests. It's how most smaller companies introduce a product anyway. Tom's of Maine Inc., a small manufacturer of personal-care products, follows a city-by-city marketing strategy on its way to becoming a national brand. That keeps its mistakes, if any, on a manageable scale. Ben & Jerry's Homemade Inc. started selling ice cream in Vermont. A regional introduction costs no more than running a full-scale test, and the risk is no greater -- provided you've left yourself a way out.
Will It Travel?
Companies are finding that trademarks can be extended not only within product categories -- Tide powder and liquid -- but across categories, too. "For instance," says McManus, "Neutrogena was a tiny company with a narrow market niche, but it had built a widely known trademark despite its small size. The equity in that trademark is a benefit equity: safe and gentle. Neutrogena is growing because it has found that what works in skin care will work in shampoo and conditioner, too."
But, he warns, you have to be careful not to generalize here. Cadillac couldn't step down to a small car, the Cimarron. Chevrolet can't upgrade its nameplate to an expensive one.
In general, the MCA experts say, trademarks can travel two ways. You can apply an established trademark to A, a new product that delivers the same benefits to a new market. That's what Neutrogena did. Or, a trademark can travel to C, a new product that delivers new benefits to the same market. That's Tom's of Maine expanding its toothpaste line by adding a baking powder product. But don't try to move the trademark to B, a product trying to deliver new benefits to a new market, in a single step. -- Tom Richman
"You test market by getting into the business. There's nothing theoretical about it." -- John Luther
Two Don'ts and a Do. Don't introduce a new product unless it has proprietary competitive advantages. If it doesn't, says McManus, it won't succeed. Lipton had nothing on Celestial Seasonings Inc. when it came to marketing herbal teas.
Do be simple and candid in your packaging and in your description to the trade. If you can't be, the product probably isn't very good.
Don't bet the ranch. Coleco Industries Inc. did with the Cabbage Patch Kids. Always hold some assets in reserve.
"People work to develop new products without thinking about the business they're building. If you don't know what's next, you'll have to keep on asking yourself, 'What business am I in?' " -- John Luther
Before Thinking New Product, Check This List Your company is doing OK, your first product is a hit, and now it's time to start thinking about what's next. Don't even think about what your next product or service should be, says McManus, until you've satisfied the following checklist:
* Do you know what business you're in now?
* Do you know what business you want to be in five years down the road?
* Have you got the right people to develop a new product? Fast-track trainees and boneyard veterans can't do it for you. They've got the process down but lack the imagination and energy.
* Can you put together a multidisciplinary team -- that is, a group of people with all the skills required to manage this project?
* Have you done your trademark benefit equity analysis -- figured out what it's worth to whom?
* Have you granted your product-development team permission to fail in order to learn?
"Young, inexperienced M.B.A.s are dangerous as hell, because they're only process driven. They don't know or appreciate the feel of the cloth." -- John Luther, M.B.A., Harvard Business School, 1963
Why Not to Worry About Confidentiality Before you can decide whether to bring out a new product or offer a new service, you'll want to talk to the potential users and consumers and to the distributors or retailers as well.
"Sure," says Luther, "there's a chance that one of them is going to tip off your competition. But if your product is that vulnerable, maybe you shouldn't be doing it."
A Way Out Of course you think the idea will work . . . but what if it doesn't? "Always, always," McManus urges, "have at least one way out." If the competition nails you or you don't get the distribution, or the consumer doesn't buy, you need to know how you're going to extricate yourself from your new-product blunder. It could be as simple as cutting all spending on the product and dumping the whole inventory.
How to Avoid Good Ideas That Fail If you don't add enough proprietary value to your new product, you'll have a big problem -- what McManus and Luther call a marketing success and a business failure. If there's no proprietary barrier to a competitor entering the market with a product that's just as good or better than yours, you'll quickly be competing on price. You could have a marketing success -- people will buy it -- but you'll have a business failure if you can't sell it at a profit.
That's why, McManus and Luther say, you must do both the internal and the external analyses. "It isn't just what the market wants, but what you can do better than anyone else that will decide whether you make money from a product."