Entering the Thai ‘Ready- to-Drink’ Coffee Market

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‘Entering the Thai Ready-to-Drink Coffee Market’

Master Thesis

Department of Marketing

April 2008

Simon Bunt

S1271032

Author S.A. Bunt Rooseveltlaan 103-1 1079 AH Amsterdam Supervisor

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EXECUTIVE SUMMARY

In the coffee division of Company X in Thailand, the ready-to-drink coffee market is seen as an opportunity to create growth. On this six billion Baht market (134,5 million Euros), two market players Birdy (Ajinomoto) and Nescafe (Nestle) are key players with a total market share of over 97 percent. Grabbing a small share on this large market would imply gaining large returns but is also a big challenge when competing with players with strong financial and distribution power. According to theory, to increase success in product development it is necessary to take different external market aspects into consideration. This includes information on the market, consumers, competition and environment. Theory also states that, together with knowledge on internal capabilities, business opportunities should be identified that lead to the formulation of strategic options and a positioning strategy for the new product: in the case for Company X, a new ready-to-drink coffee beverage. This way, a product should be developed with an advantage over existing market players while making use of differentiating critical tactics. The factors found in theory leading to new product success have been tested on two successful and two unsuccessful products on this market. A positive significant relationship was found between new product success and a clear product advantage, the use of critical tactics and external information matching internal capabilities of the firm. These aspects are essential to create a sustainable competitive advantage in the mind of the target market. The general question statement for the research is as followed:

‘How should Company X anticipate on external information from the market in relation to the capabilities of the organization to find business opportunities, create a clear product advantage and make use of critical tactics for the development of a new cold-coffee product on the Thai ready-to-drink coffee market?’

The ready-to-drink coffee market is a low-entry market on which more than forty players are active, of which only a few with significant importance. Analyzing two successful players on one hand and two unsuccessful players on the other have confirmed certain factors leading to success in the conceptual model and led to insight on potential key qualifying factors for the market. These factors are product awareness during market-entry, brand heritage in coffee for credibility, a coffee taste which matches the market benchmarks and a pricing strategy which is approximately on par with the market standard. For this last factor consumers accept a slight increase of three baht for a premium brand to total the market price to 16 Baht (approximately 40 Euro cents).

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__________________________________________________________________ such as Bangkok. However, this might not be feasible due to the high costs on this low margin market.

On a market in which key players are very strong in the open trade and convenience stores are winning ground at its expense, it is interesting for Company X to enter urban regions. This also matches the Company X brand image and target group well.

Consumers are increasingly demanding higher quality products, which may lead to potential opportunities for a new product development. A coffee product, either hot or cold, should always have refreshing- and enjoyment benefits. However, the product is mainly consumed for the functional energy-boosting effect. For a product in which room to differentiate in attributes is lacking, adding a natural energy-boosting ingredient to enforce this functionality could be an interesting option to consider. Entering with an espresso variant also matches the new risen consumer demands well and should be explored further.

The sustainability of the competitive advantage of the previous propositions is not certain. For this reason, the search for additional unique product attributes should be continued. Only relying on the addition of a natural energy-boosting ingredient and an espresso variant, as a unique selling proposition is a big risk. Other market players or new entrants can easily copy the propositions. The fact that a competitor on the market (Super) has introduced a ready-to-drink coffee product with a natural energy-boosting ingredient on the Malaysian market emphasizes this and poses a major threat if introduced on the Thai market. If this competitive advantage can be found, all other conditions to win a share on the market for a new Company X ready-to-drink coffee product are present.

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PREFACE

For this thesis, a small five months was spent as an intern at Company X in Thailand. A period during which I could experience being part of the coffee marketing team in developing a new consumer product. I had been granted the responsibility and freedom to manage all matters concerning this new product development: from meetings with glass-and artwork companies, to organizing focus group research and coffee testing sessions. Finally, I had the chance to realize activities I first only had read about in my university textbooks. The fact that I could use my marketing knowledge in the analysis of information to make decisions was a great experience. The role of different types of research in this initial stage of the product development had my particular interest during this period of time.

In this preface I would like to take the opportunity to thank a number of people in making this possible. First of all, I would like to give a special word of thanks to the general manager of Company X in Thailand. The fact that I have been given the chance to do an outstanding internship in the company my father has done good work for means a great deal to me. He would have been very proud of this fact. I will surely take her advice of not always taking the easy way in making choices in life, but putting extra effort in those that seem right. The choice of letting me do this internship was not taking the easy way, thank you very much for this!

Of course I would like to thank the entire staff members within Company X in Thailand, both for their assistance and their friendship during my stay. A special word of thanks goes to Khun Pam and Khun Kit for the patience and assistance during the entire stay and Joke and Ting for helping me and being good friends (not only during working time!).

Furthermore, I would like to thank my uncle, Jan Bunt for the many hours spent helping me along the whole process of the thesis, especially at times when I needed a rescue line in Thailand and to Jan Dijkstra, for sharing his insights from many years of experience in another FMCG company.

Finally, I would like to thank Erjen van Nierop for his useful insights and help during the writing process and his patience due to the length of the process.

Simon Bunt

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CHAPTER 1: COMPANY X THAILAND

1.1 Background

More than 20 years ago Company X launched a coffee product on the Thai market. It positioned itself in the hot instant coffee market under the brand name X. Company X, has built up a very strong brand heritage in Europe and had to prove itself on the new Asian market.

After a long struggle in trying to compete with the strong rival Nescafe on the Thai coffee market, and a steady three to four percent market share, the opportunity was seized to introduce the successful ‘Y’ product. This product under the name ‘Y’ is also referred to as 3-in-1 coffee. Besides coffee, it contains sugar and milk in a prefabricated sachet serving. The introduction of a Y line five years ago has led to a strong increase of market share for Company X by grabbing share from the main competition on the market.

1.1.1 Company X Thailand

Two decades ago, the total coffee category only consisted of the ‘pure soluble segment’ on which very few players were active. During the first fifteen years, the market share of Company X was consistent at about three to four percent and it was very difficult for Company X to grow. In this period, the coffee market evolved and the variants grew: not only was there a pure soluble segment, but a ‘ready-to-drink’ cold coffee- and a mixed coffee segment were also born. The situation led to change for Company X.

About five years ago, a big shift took place within the product portfolio of Company X in Thailand. The mixed coffee segment was a rapidly growing market and Company X decided to react to this trend by launching a new product: ‘Y’. First an ordinary Y product, followed by the ‘YY’ one year later. After the introduction of coffee in the ‘Y’, Market share increased and the Y line started playing a prominent role within the coffee portfolio. The entrance on the Y coffee market strengthened the Company X brand with a strong marketing campaign and was enhanced by the green color cue. Company X was pioneer in the fact that it attached this green color to espresso coffee.

In the current brand portfolio of Company X a distinction can be made into two different product types. On one hand the pure soluble coffee product, which is made up of four different variants and on the other hand the mixed segment, which also currently consists of four variants. The two groups can be presented as followed:

I. Pure Soluble, which consists of the following variants: Company X Select

Company X Espresso Company X Royal Gold Company X Duo Roast II. Mixed Coffee, which consists of:

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__________________________________________________________________ Company X also produces unbranded coffee for other coffee market players. This high quality coffee is mainly for the ready-to-drink cold coffee division of Birdy (Ajinomoto), for which Company X supplies approximately 50 percent of the coffee.

When put into a matrix with the market growth and market share, the following table can be presented for the current Company X coffee products.

Portfolio Matrix of Company X

Mixed segment/

A new ‘RTD*’ coffee product?? Roast & Ground /

Pure Soluble

Figure 1.1 Portfolio-matrix Company X * ‘RTD’ = ‘Ready-to-Drink’ cold coffee

Even though the market share of the ‘mixed-coffee’ for Company X is fairly low (at 3.3% in 2007) and it has been placed in the matrix as a question mark, it can be seen as the cash cow for the coffee products for Company X. With a growth rate of 74% between 2006 and 2007 and the large size of the market (1/3 of the total Thai coffee market), it generates a large cash flow (3.64 million Euro).

In a normal situation, profits from cash cow(s) (high market share, low market growth) and star(s) (high market share and high market growth) are an important indication for the financial space to invest into new products (Carels (1990:24)). In the situation of Company X, financial resources are available to invest in new product development for a cold coffee product. This financial space exists for Company X through external finance from regional headquarters, which see the new market as an interesting opportunity to invest into. Financial resources are therefore not fully reliant on the other products of Company X in her brand portfolio and do not form a constraint for a new product development.

In general, consumers perceive Company X as a specialist coffee manufacturer, with high quality coffee. It is seen as a coffee product that is mostly for the premium segment (higher social economic class) and therefore has a premium pricing of its products. Company X products are experienced as a fairly expensive, an image that is created by of the fact that the brand is from abroad and the expensive glass packaging for its pure soluble coffee line. This is quite strange considering the fact that the price is actually almost equal to the large player on the market, Nescafe. Thai consumers see Company X as a coffee for people who really know the real coffee taste and drink it for a moment of enjoyment.

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Business strategy and coffee marketing strategy

Company X is a global manufacturer and marketer of high-quality, brand name products for consumers throughout the world. When looking at the business of Company X Thailand, several world-class brands are being sold. Company X builds and maintains leadership positions through continuous innovation and responsiveness and has a quality focus. It leads an outside-in perspective, in which the environment is the primary driver for strategy formulation.

For the coffee division of Company X Thailand, it can be said that the ‘Y’ products of Company X have a leading position in the company. The mixed products have led to a 100 percent increase of market share for Company X on the coffee market over the past five years and can therefore rightly be named the current ‘flagship-product’ of the coffee division.

The coffee marketing strategy of Company X (Thailand) stated by the marketing team is formulated as followed:

‘To grow as fast as possible in the mixed-segment and strengthen the premium position in the pure-soluble segment.’

New product development is not explicitly mentioned in this marketing strategy, but plays a very important role in a fast moving consumer goods company like Company X. To maintain leadership positions, innovation and responsiveness should take place. New product development is seen as an important way to fuel growth.

Company X Thailand has a very good track record for new product development and is often seen as a pilot market for new products in the South East Asian region. The organization has its own manufacturing unit, research and development department and an experienced marketing team for the product development process. It can thus be seen that the company has the organizational capabilities to develop new products.

1.1.2 The total Thai coffee market

Different sources of information show different figures as to how large the Thai coffee market is. This makes it difficult to know exact figures of the market, but the following AC Nielsen figures give good insight in how the market is built up. To be consistent, AC Nielsen Company figures will be the leading information for this paper. The figures for this market are presented in the following table.

Pure Soluble Mixed R &G* Ready-to-drink Million Baht

(Share)

3,765 (25.6%) 4,865 (33.15%) 45 (0.31%) 5,925 (40.89%)

Million Euro ** 85.45 110.44 1.02 134.50

Figure 1.2 Company X figures (AC Nielsen Coffee Market February 2007)

* R&G: Roast and Ground coffee ** 1 Euro = 44.09 THB

100 THB = 2.27 Euro (per June 2007)

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__________________________________________________________________ the pure soluble segment and the mixed coffee segment. The roast and ground coffee has a very small share on the market at one-third of a percent. Thai coffee consumers do not have a roast and ground coffee culture; the hot segment mainly consists of instant coffee. The main reason for this is that Thai consumers find it difficult to prepare roast and ground coffee with a good consistent taste and prefer the ease of preparation of instant coffee.

To give insight in the current activities of Company X on the Thai coffee market, the shares of the market and Company X are given (AC Nielsen, Coffee Market February 2007).

Total instant coffee January 06 100 January 07 100 % Change Total Market Pure Soluble

Pure Soluble regular Pure Soluble premium Mixed Coffee

Company X

Pure Soluble

Company X Select + Espresso

Company X Premium

Mixed Coffee

Figure 1.3 Coffee market figures (AC Nielsen: Coffee Market February 2007) The past year has shown a strong positive growth in the total instant coffee market, which has been fueled by the mixed coffee segment. Company X growth in the instant coffee market in 2007 is larger than the coffee market growth. This is especially the case for the mixed coffee segment, which is the main driver for Company X with a growth.

1.2. Business opportunity: the ‘ready-to-drink’ coffee market

Company X Thailand is a company that continuously seeks business opportunities to grow by creating new products in her brand portfolio. This also accounts for the coffee division of the company in Thailand, in which many different products have been developed and introduced.

The new challenge is the ready-to-drink coffee market, which is seen as a large opportunity. This packaged cold coffee is a coffee product that can be drunk immediately, as it does not need any further preparation before consumption. The beverage usually comes in a can, which is the market standard material for the product. However, some brands are starting to experiment with new packaging materials such as PET. Many Thais drink the product on the way to work as a daily habit and purchase the drink in supermarket or local mom ‘n pop shops (for more information on these shops, appendix C). The drink is kept in refrigerators to keep the product chilled.

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__________________________________________________________________ strong brand equity (of a premium, high quality brand), to the new ready-to-drink coffee segment. Leveraging the Company X brand equity into a compatible product extension as the cold coffee market could strengthen the brand on the total coffee market (Hem (2003)). Synergy can be created in its marketing, distribution and brand recognition and identity (Aaker (2005:251)).

Financial resources are available for the development of a new product within the coffee segment and the organization has organizational capabilities to develop independently. Besides a manufacturing division, Company X Thailand has a research and development department and a skilled marketing team with experience in new product development.

1.2.1 Structure of the paper

In this paper a closer look will be taken into the new product development process and key factors leading to a successful launch. Factors showing a positive relationship with new product success are derived from theory and tested on the ready-to-drink coffee market. This way, these factors can be taken into consideration to recommend on the development and launch of a new Company X product in this segment. The chances of success for a possible new product launch will hereby be increased.

The structure of this paper is as followed: in the next chapter the problem statement will be presented, containing the research questions and sub questions. Chapter 3 contains the theoretical fundament of this paper. The embedding of the research in scientific literature is done and concludes with a theoretical framework, in which the significant factors leading to new product success are visualized. Hypotheses are formulated to test certain significant relations found in literature on the Thai ‘ready-to-drink’ coffee market.

In chapter 4 the research design for the conducted research is presented. This section starts with the analysis of the situation upon arrival, followed by a summary of Company X key capabilities and weaknesses. The chapter concludes with the design of the relevant external analysis.

Chapter 5 contains findings on the external market that are relevant for decision making for a possible new ‘ready-to-drink’ product by Company X. Market information, consumer insights and a trend analysis are taken into consideration. In chapter 6 the hypotheses are tested on two successful and two unsuccessful cases on the ‘ready-to-drink’ coffee market.

Chapter 7 is about the decision making for a new Company X ‘ready-to-drink’ coffee product. In this chapter different strategic outputs will be derived and options are proposed.

Chapter 8 concludes with a recommendation for Company X. The limitations of the paper and a general reflection are also presented.

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CHAPTER 2 THE PROBLEM

2.1 Problem background

In new product development it is very important to take in consideration all the facets of the market to be able to come to well-founded decision-making during new product development (Aaker (2005), Langerak (2004)). Making a confrontation between information on the market together with knowledge on capabilities of the organization forms the basis in this and will increase the chance of new product success. This is explained further in the theoretical embedding in chapter three.

The research conducted for this paper is important for two reasons. First of all, the research has practical relevancy for the management of Company X Thailand. Information on the external aspects and the recommendations given for product development decision-making and strategy can be useful for the management of Company X. Risk of the launch of the product will be minimized and the chances of success increased. The second reason is the theoretical insight that is obtained through this research, which can have implications for scientific literature. With this research, the role of different aspects in new product development success is examined and placed in a theoretical framework. By testing the factors leading to new product success derived from theory on the RTD coffee market, certain relationships are confirmed and strengthened.

In short, it can be said that the research conducted for this paper has both practical relevance for Company X Thailand and theoretical relevance for scientific literature.

The following chapter consists of the problem statement. To do this, first the research goal and main research question is formulated, followed by the different sub questions that underlie the main research question.

2.2 Problem statement

2.2.1 Research goal

Company X leads a strategy based in innovativeness and responsiveness. The organization needs to know which factors are crucial in order to be successful in new product development. It should be oriented externally towards the market, customers and competitors and the market’s environment. This way, market-driven strategies sensitive to consumers can be developed (Aaker (2005: 198)). The main goal of the research is to find whether there is a business opportunity for an RTD coffee product by Company X, and formulate strategy during the new product development process. This way, the introduction of a new product on the RTD market by Company X has an increased chance of becoming a success and poses a smaller financial risk for Company X Thailand.

2.2.2 Research questions

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__________________________________________________________________ Main research question

‘How should Company X anticipate on external information from the market in relation to the capabilities of the organization to find business opportunities, create a clear product advantage and make use of critical tactics for the development of a new cold-coffee product on the Thai ready-to-drink coffee market?’

• External (market) information: Information on consumers, competition and trends on the market.

• Business opportunities: A trend or event that could lead to a significant upward change in sales and profit given the appropriate strategic response that is relevant for a particular (Aaker (2005:21)).

• Product advantage: Superiority and/or differentiation of a product over competitive offerings (Henard (2001)).

• Critical tactics: Marketing-mix tactics such as advertising and distribution (Di Benedetto (1999)).

• Organizational capabilities: Competencies in business processes (Aaker (2005:149)).

• New product development process: The different steps taken in the development of a product, from initial idea, until the moment the actual launch has been round off.

• Ready-to-drink coffee market: The Thai packaged cold coffee market. In this paper the ready-to-drink coffee is referred to as the RTD coffee and the market considered is the Thai market.

In order to answer the main research questions, several other questions are to be answered first. Therefore, the main research question is split up into several sub questions. After every research question a link is made to a section or chapter in this paper, in which the sub question is answered. The following sub-questions have been formulated.

Sub question 1

‘Which factors from theory are known to have a significant effect on new product development success?’

- What does the new product development process look like? - What is a market orientation and strategic marketing? - Which external aspects affect new product success? - Which internal aspects affect new product success?

This sub question will be answered in the theoretical embedding in chapter 3. Sub question 2

‘What do successful and unsuccessful market players in the RTD coffee segment offer?’

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__________________________________________________________________ - What are the strengths and weaknesses of the main players on the RTD

coffee market?

- Did successful players on the RTD coffee market make good use of the factors (sub question 3) leading to new product success?

- Did unsuccessful players on the RTD market neglect the factors (sub question 3) leading to new product success?

- Which player(s) could form a potential significant player on the RTD coffee market in the future and to which consequences could this lead? This sub question will be answered in paragraph 5.2

Sub question 3

‘What does the environment of the RTD market look like and which trends can be derived from this?’

- Which macro-economical trends and developments are relevant for the RTD coffee market?

- Which technological developments are relevant for the development of an innovative RTD coffee drink?

- Which demographic trends and developments can be signaled in Thailand? - What are characterizations of the Thai culture, which could have

implications on beverage consumption?

- Which current or potential government developments could be relevant in RTD coffee product development decision-making?

This sub question will be answered in paragraph 5.3. Sub question 4

‘Which business opportunities and strategic options can be presented to Company

X for the development of a new RTD product and what recommendations can be

given along with this?’

- What is the general business strategy and marketing strategy for Company X coffee in Thailand?

- What are the critical qualifying factors on the RTD coffee market?

- Which business opportunities leading to product advantage and critical tactics can be derived from the opportunities and threats on the RTD coffee market?

- Which strategic options for product advantage and critical tactics are possible for the launch of a new Company X RTD coffee product?

- What recommendations can be given for the choice of the ‘best’ strategic option for the development and launch of a new Company X RTD coffee product?

This sub question will be answered in chapter 5 and 7.

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CHAPTER 3: THEORETICAL EMBEDDING

3.1 Theoretical fundament

Introduction

For many organizations, new product development is an important way to fuel company growth. For this reason new products are launched each year.

The success rate of new product launch however, is low and differs between organizations. An important reason for this is the availability of the right market information at the right time. Market potential, meeting customer needs and product advantage have a strong impact on new product performance. They show the importance of widespread information on the market in order to be successful in product development (Henard (2001)). Organizations however, must also realize that conducting extensive research to obtain this information is a process that costs a lot of time and money. Therefore, it is very important to know exactly which information should be obtained when to be as efficient and effective as possible during the different development phases. But besides these financial resources, the new project should fit with the existing product portfolio and company strategy. Only then is an organization able to make well-founded decisions.

To get insight in the information needed to guide the product through the development process and factors leading to new product success, a theoretical background is presented in this chapter. The following question for the theoretical study has been formulated:

‘Which aspects have a significant effect in new product development success?’

This chapter contains two sections. The first section starts by discussing new product development in general. The importance of new products for an organization, along with the different steps of the development process is covered here. To do this, different perspectives on the topic are referred to. Next, the concepts of market-orientation and strategic marketing are discussed, which are crucial in complex markets. In the third paragraph external and internal aspects that have a significant relationship with new product success is covered. The fourth part of this section discusses the role of the obtained information in strategic positioning and formulation of the best strategy for a new product. In the second section, a theoretical framework showing the different relations is presented along with a conclusion of the chapter. Both the role of (external) market information and the internal capabilities of an organization are incorporated in the conceptualization. This knowledge is projected on the actual research for the development process of a ready-to-drink coffee product on the Thai market.

3.1.1 New product development

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__________________________________________________________________ actual renewal or innovation that fulfills a certain (unmet) need or can solve a problem a consumer is facing (Carels (1990:8)).

Even though the success rate is low, many companies (especially fast-moving-consumer-good companies) launch new products each year. The main reason for this is the complexity and competitiveness of today’s markets. Technologies and markets are changing rapidly and consumer demands are increasing (Osteras (2006), Panagiotou (2003)). If companies are too slow in bringing a new product to the market, they have an increased risk of being taken over by faster moving competitors. So, to be competitive, firms must be innovative and continuously develop new products (Lynn (1999), Holman (2004)).

In order to reduce risks and increase the chance of success, a company needs to go through an extensive process before introducing a new product on the marketplace (Nijssen (1995)). Several critical determinants for success should be considered in this regard. A clear project vision, together with a good plan to get there are the most important in this respect (Lynn (1999)). But what is the right ‘plan to get there’? In other words, what is the right process for new product development? Academics do not fully agree on this subject, but in general it can be seen that there are two perspectives on how the process should take place. On one hand the structured view, which is a rigid step-by-step approach and on the other hand the unstructured view in which a more dynamic approach is propagated. In the latter the emphasis has been placed on the fact that the phases are best performed simultaneously, and not necessarily one after the other as in the structured view. According to the article of Grzonka (2002), the process of new product development can be seen as a project with different phases each ending at a critical gate. These mark an important review point in which the decision has to be made to either end or continue the project. It can thus be seen as a view that is step-by-step with a linear time-framed order. According to their model, there are six critical phases that have to be passed to successfully launch a new product. Another model also representing the step-wise structure is a model by Carels (Carels (1990:20)). In general, this model corresponds closely to the one by Grzonka, with the main difference that the development process ends with the actual launch, and not with the evaluation and monitoring after it has been placed on the market.

Grzonka _Carels Nijssen

Idea generation Analysis Idea generation

Concept Creation Concept development and testing

Feasibility Business analysis

Development (Product and process)

Development Product development Market testing

Implementation Introduction Commercialization

Post launch evaluation

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__________________________________________________________________ short summary of what is called ‘the traditional view’ of product development process is also incorporated to give an overview of the structured approach. A contrasting perspective on new product development is one in which a more dynamic and information-based process is supported. In figure 3.2 an example is given of dynamic decision making in a simplified development process. According to this view, transforming a rigid process into a more dynamic one will quicken the pace of development and improve a product’s odds of success (Holman (2004)). Companies are not stuck with predefined project timelines and formalized process steps so that the quality, timing and flow of information in the development process are improved. Gates are

reached when certain criteria (information thresholds) are met, not when a given amount of time has passed. This leads to a more effective creation of successful products, in less time and with fewer resources. The reduction of time can be seen as the result of simultaneously performing the overlapping phases of the ‘traditional perspective’ and the elimination of delay between different process steps. This delay can either be when the information threshold has been met, while the fixed decision gate is at a later point in time or when the fixed decision gate has come, while there is still an information gap. This information gap will lead to an increased risk of extra work downstream and market results that

disappoint (Nijssen (1995), Holman (2004)). Figure 3.2 Dynamic NPD-Process Even though the development process of the two approaches differs greatly in practice, the broad outlines of the phases are similar (compare figure 3.1 and 3.2). A short explanation of the different ‘steps’ is given for the most common model. In the first phase, the idea generation phase, the business opportunity is defined. Different ideas are generated and certain ideas are selected. The selected ideas are then translated into a product concept: the concept phase. Feasibility is the third phase, in which the concept and market potential are confirmed. A product design specification should also be agreed upon here. In the development phase, both the product and the process are developed. A complete design of the product and manufacturing process is the main target. In the implementation phase, the actual product is launched. Advertising and promotions should be scheduled. Finally, in the post launch evaluation (after the product has been marketed), two aspects should be considered. The production and product rollout must be optimized and the project should be evaluated. This way the most important learnings can be extracted for both the current- and future projects. As said earlier, this is not the only way the process can be formed, but gives a general outline of the phases of the development process.

3.1.2 Market orientation and strategic marketing

In the current modern economies characterized by ambiguity and complexity, it is crucial for organizations to fully understand the environment in order to formulate strategy, have good decision-making and be able to plan strategically during new product development (Panagiotou (2003)). An outside-in orientation focused on

Dynamic NPD -Process Idea generation

Concept Feasibility / Testing

Development

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__________________________________________________________________ the market is thus essential in the modern business era. Two terms are very relevant is this respect and will be looked upon next: market orientation and strategic marketing.

First of all, a closer look is taken at market orientation. Firms with a strong market orientation prioritize learning about customers, factors that influence customers (competition, economy and socio-cultural trends) and factors that affect the ability to influence and satisfy customers (technology and regulation) (Baker (2005), Longman (2004)). So, a strong market orientation manifests itself through customer focused, market-oriented learning. Langerak (2004) emphasize the necessity of a market-oriented culture, in which the entire organization is geared towards external information gathering. Continuous learning about the environment is the primary goal. In this outside-in perspective, market positioning is crucial, taking the external developments in consideration (De Wit (2002: 330)). The term strategic marketing takes the analysis one step further by incorporating the internal side of the organization. Management has to anticipate on information captured by an external market orientation while also taking into consideration the internal strengths and weaknesses of the organization (Aaker (2005:20), Bijmolt (1996)). This mainly concerns measuring the financial performance and determinants of strategic options of a company (Aaker (2005:113)). Strategic marketing research especially takes place during research for new product development and new product launch (Bijmolt (1996)). In making adjustments between the company and the environment, the aim is to develop a product with a better fit that will create a sustainable competitive advantage against existing products. Knowledge on the capabilities of a firm makes it possible to recognize opportunities when exploring the external market.

In strategic marketing, the organization can be either strength driven or opportunity driven. In what Prahalad and Hamel call the ‘competence based perspective’, superior resources along with imitation barriers create a strategic advantage. Organizations taking an outside-in perspective take the environment as a starting point to find an opportunity for competitive advantage. It is dependent on the organization whether an outside in or an inside-out perspective is preferable (De Wit (2002: 331)).

Brockman (2003) mentions the importance of the effectiveness and efficiency of the gathered internal and external information. According to this article, the success of new product development depends on these two factors. The quality of obtained information (effectiveness) is usually higher when the cost of obtaining information is higher (lower efficiency) (Brockman (2003)). For this reason, it is very important to find the right balance between the effectiveness and efficiency of the obtained information. Knowing when certain types of information are most useful during the product development process is crucial in this respect and is discussed in the following section.

3.1.3 External and internal aspects affecting new product success

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__________________________________________________________________ leading to new product success is taken as the focus. The market share of the players will be leading in this regard in order to measure new product success. The choice of importance of certain types of (external) market research is dependent on specific market and company situations. Besides availability of time, money and risk factors, the timing of information during the product development process is of importance for the effectiveness and efficiency. This timing is relative to customers and competitors and can make the difference between project failure and success. With knowledge of antecedents of timing, the project can become more controllable and thereby enhance the chance of success (Di Benedetto (1999)). This can include channel coordination and trade promotions for instance.

External aspects

Organizations need to assess in which area the need for external information is greatest and which information is already available within the firm, to find the right balance. In this part, the relevance of different types of market information within the product development process is examined. Crucial in this regard is to have clear insight into which aspects have a significant relationship with new product performance success.

The earlier mentioned ambiguity and complexity of markets is the result of fiercer competition and competitor actions, rapidly changing technologies and increased consumer demands. Organizations must cope with a lot of information to keep pace with the market. Those that are able to do this, achieve more success compared to other market players that are not. Several studies confirm this by stating that there is a significant positive relationship between organizations with a culture of market orientation (existence of market knowledge within the organization) and new product success (Adams-Bigelow (2006), Baker (2005), Brockman (2003), Di Benedetto (1999), Henard (2001)). Langerak (2004)). An incomplete analysis of competition, insufficient knowledge on strengths and weaknesses and the fact that a product does not have a clear competitive advantage are three of the main reasons for failure for new products (Carels (1990:20)). According to Langerak (2004), a market-oriented culture enhances organizational performance through higher product advantage over existing market players, better product launch tactics and finally better new product performance once on the market. This significant relation is shown in the following figure.

Figure 3.3 New Product Performance (Langerak, 2004)

The paper reveals that a market-oriented culture enhances product advantage and in turn to new product success. It is interesting to see that the market orientation does not have a direct effect on new product performance, but is an antecedent of the mentioned product advantage and launch tactics.

Market orientation

Product advantage

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__________________________________________________________________ The external research also leads to key qualifying factors and trends on the market, which are essential in order to launch a product. But what kind of information must there exactly be gathered then? Are various sources of information more relevant in certain stages of the new product development than in others? And is this different in the structured than in the dynamic approach of new product development?

Structured new product development process

In the traditional product development approach, it is important to use different market information in the various phases of the development process. Some types of information should be used throughout the entire process and others only during certain phases.

In the first phase (analysis), many types of information must be taken into consideration. In this crucial stage both internal and external information must be used. Organizations should analyze the strengths and weaknesses of the organization as well as analyze elements of the environment.

In the environment, information on the macro environment, microenvironment and competition are most crucial. Information on the macro environment includes demographic-, economic- and socio-cultural developments. The reason for this is that trends in the market can be signaled actively this way (Aaker (2005:90-91)). For the analysis of the microenvironment the chosen target market and the consumer behavior on that market are the prime subjects. Consumer research can lead to the formation of ideas to fulfill an unmet need or solve a problem. Crawford (2007) states that consumer insights should mostly be used in this stage, even though very relevant in others. The use of new approaches to gather consumer insights can help consumer good companies cope with complexity. ‘Cool-hunters’ to identify new trends in the field could be very useful in this respect. The output of the customers uncovers opportunity areas for product development, market segmentation and better competitive analysis. The data is also used to formulate concepts and evaluate the potential of alternative concepts. The business opportunity or market potential, derived from the analysis of the different market aspects, is a key predictor of new product performance (Henard (2001)).

Although information on competition should continuously be gathered throughout the entire project, the information must be more in-depth in the analysis phase. In short, the competitor analysis has several important roles in strategic planning (Canning (2001)):

• To help management understand their competitive advantages and disadvantages relative to competitors;

• To generate understanding of competitors’ past, present (and most importantly) future strategies;

• To provide an informed basis to develop strategies to achieve competitive advantage in the future;

The main output of the analysis is the formulation of the business opportunity and the key success factors. These are conditions that must be met in order to have success in the given market circumstances (Grzonka (2002)).

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__________________________________________________________________ Some aspects within the analysis however, should get more focus for further research in this stage. This is mainly the case for information on consumers and trends on the market. The attitude, behavior and problems consumers face with existing products on the market give useful insights in this regard. Whereas, in the analysis phase the consumer research is mainly exploratory, in the second phase use should be made of a combination of qualitative (exploratory) and quantitative research. Exploratory research should be used to get insight in ‘problems’ consumers face with the current available products on the market and qualitative research for the actual concept creation. This is mainly crucial to get insight into the consumer proposition, technical aspects and product presentation and use. Within the market analysis, new technologies and market trends should be taken into consideration. Customers find it very difficult to define needs they are not aware of. They often only know what they have experienced and do not have knowledge on new technologies and materials, which often leads to me-too products (Ulwick (2002)). For this reason, companies should not only rely on what consumers say, but come up with own solutions by analyzing trends. Consumer insights that do give useful information can be derived by asking consumers about problems they experience with existing products on the market. At the end of this phase, a positioning of the product against products that fulfill the same need should be defined (Carels (1990:109)). Also, the concept and market potential must be confirmed and a product specification should be agreed upon (Grzonka (2002)).

The development phase is the third step in the process: the actual physical development of the product takes place here. Extensive insight in consumers is crucial in this regard. Research must be done on how consumers perceive the performance of the product, what is the right price and which packaging is most appealing to them (Grzonka (2002)). A different approach is one in which consumers have a large role within the product development process itself. In this customer-as-innovators approach, customers are provided with tools so that they can design and develop certain parts of a product on their own. This way, they participate in the design, building of prototypes and testing (feedback) and take the role of external information a step further (Selden (2006)). Incorporating consumers in the development process can greatly increase speed and effectiveness, but is not relevant for all organizations (Thomke (2002)). A market-oriented culture enhances the degree of innovativeness for an organization and leads to new product success (Langerak (2004)). This relationship is created through a higher product advantage, which is the result of this organizational innovativeness.

The final phase of the product development process is the actual introduction on the market (and post-launch monitoring). This phase starts with the drafting of a marketing plan and ends with the actual launch of the product. According to Di Benedetto (1999), during the launch and post-launch phase, responding adequately to customer and competitive reactions, and technical or economical changes is necessary. This makes it possible to adapt both the marketing and production plans throughout these phases on an on-going basis. Last adaptations for the product along with the defining of critical tactics should be done.

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__________________________________________________________________ consumer. In the sense that the launch should be timed relative to direct competition it shows a strong link with critical tactics. Information on competitors and consumers are crucial here.

During the post-launch evaluation (as in the model of Grzonka) consumer analysis can be done in different ways. Analyzing customer satisfaction, penetration, brand recall and in-store research are a few examples of how useful information can be retrieved.

As said earlier, macro economic and competitor information should be scanned throughout the entire process but emphasized more in certain phases of the project. This is dependent on how stable or prone to change the relevant market is.

Dynamic new product development process

In the dynamic product development approach, it is crucial to keep options open longer to be able to respond to changes in the market at later stages of the development process (Holman (2004)). According to this view, changing the process along the way creates competitive advantage over other market players because it creates greater flexibility.

For this reason, market research should take place during the entire process and can be outsourced if needed. The information that is crucial in this regard is information on consumers, competition and macro-economic information (Aaker (2005), Baker (2005), Henard (2001) Bijmolt (1996). It is also critical to have insight in the strengths and weaknesses of the organization.

To summarize, there should not be a distinction of gathering market information in the dynamic approach. Insight on capabilities of the firm, in the sense of its strengths and weaknesses, along with on-going market scanning is crucial during the entire process. This process is presented in the following figure.

Figure 3.4 Information in the dynamic approach

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__________________________________________________________________ According to Brockman (2003), the existence of knowledge is more important in the earlier stages (idea generation, opportunity identification) than in the latter stages such as product commercialization. According to this source, in the latter stages market information is mostly used to persuade top-management of the importance of the project and not necessarily for the actual product development itself. This is a very different perspective, in which political reasoning plays a larger role than functional motives for market research.

After a product has been launched, the gathering of information should not end. It still may not be clear if a product is marketable until after the launch. The evaluation, learning and improving of the product development process should be seen as a continuous, long-term process (Lynn (1999)). Firms that thoroughly test the market product in use, customer feedback and competition after launch have a substantially better chance of success regardless of the measure chosen (Di Benedetto (1999)).

The previous analysis emphasizes the importance of the aspect of timing. This does not only imply the timing of the launch and speed to market, but also the timing of the use of different sources of information during different phases of the development process (Di Benedetto (1999), Grzonka (2002))

Internal aspects

Besides these external influences, several internal aspects, which were already shortly mentioned, have a significant influence in new product success. In this section, a closer look will be taken at these internal aspects that influence new product success in either a direct or indirect manner.

Lynn (1999) uncovered two significant internal factors that increased success rates. These are following a product development process and a clear (long-term) vision by the team. A clear project vision coupled with a plan to get there creates a safe psychological environment that enforces product success in an indirect way. This description corresponds to the structured approach of new product development. The long-term view does not end at the actual launch, but should continue after a product has been put on the market. An organization with a culture that supports continuous learning and growth leads to innovativeness and greater product advantage (Langerak (2004)).

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__________________________________________________________________ According to Adams-Bigelow (2006) soft-resources are another aspect that has a considerable effect on new product development. Resources like climate, culture (for instance the earlier mentioned experience and top management commitment) and risk aversion form the base for how activities are carried out. Henard (2001) emphasizes dedicated (human) resources as being an important driver of new product performance.

In a best practice research conducted by Adams-Bigelow (2006), portfolio management is an important determinant for the capability of an organization. A good fit between the new product and the current portfolio is necessary for new product success. Extensions into similar categories along with the reputation of the original brand are important factors influencing the success of the extension (Hem (2003)). Brand extensions tend to be more readily accepted by consumers when comprising these factors. Strategy is an antecedent for portfolio management and should be valued highly in new product development. This strategy setting should be supported by risk management, which is related to the evaluation of the existing brand portfolio (Gibbs (2006)).

In short, even though the traditional and the dynamic approach have a different perspective on how decision-making during the product development process works, the previous analysis shows that the same internal and external information is relevant. In general it can be seen that during the start off of the project (idea generation or analysis phase) the role of market information as a whole is greatest. In this phase of the process, sometimes referred to as the pre-project phase, the business opportunity must be defined. Internal and external market information on several different aspects should be confronted in order to generate and select useful ideas. Key qualifying factors in order to be competitive on the market should also be formulated.

In the following part of the process, the information need becomes more specific and the role of consumer insights gets a more prominent role. During this time of the process the actual (concept) developments take place. Obviously, support by consumer research is a prime necessity here. Involving consumers in the actual product development could also be fruitful in certain situations. This depends on the type of organization and the amount of time and money available. Macro economic and competitor information should be monitored throughout the entire process, to be fully informed on important trends and relative positioning against existing and potential market players. After the product has been launched, continuous monitoring should make it possible to adapt the marketing and production plans on an on-going basis. This way consumer and competitor information, along with macro trends on the market, lead to a greater chance of new product success.

3.1.4 Strategic positioning and strategy formulation

In this section the strategy development process is presented. This consists of finding a competitive advantage and positioning on the market. The chapter highlights the strategy identification, in which different options or alternatives are derived and finally are implemented.

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__________________________________________________________________ this level requires the integration of functional strategies for a certain product that is intended for a specific group of customers. However, it should support the corporate strategy, which aligns the various business level strategies (de Wit (2002:9)). The best project management organizations have a clear, well-communicated firm strategy that explains how each project supports it (Longman (2004)). They are mostly stated by top management and define the firm’s overall orientation toward new product development efforts and boundaries within which the project should take place. Along with the overall firm strategy, product strategy (nature of the product to be developed) and the market strategy (competitive position of the new product) builds up strategy setting for a new product development process (Hultink (1999), Longman (2004)). The strategy formulation should take place before the actual physical development and is therefore particularly relevant in the idea generation or analysis phases (Hultink (1999)). However, a company should adapt the strategy to new insights in different phases of the process if necessary.

In strategic marketing, the organization can be either strength driven or opportunity driven. In the strength driven perspective, superior resources along with imitation barriers create a strategic advantage. A company with a market orientation however, has an outside-in perspective in which the organization adapts to the environment. Market positioning is crucial in this regard, taking the external developments in consideration (De Wit (1998: 330)). Organizations should formulate strategic outputs from the external analysis. This consists of the trends, key qualifying factors, business opportunities, threats and strategic uncertainties (Aaker (2005)). These give insight into the business opportunities of a company on a specific market and are a starting point for further decision making.

How a company will compete and the attractiveness of an industry, together with a relative positioning on the market should be key outcomes of the analysis. Before embarking on a new project, a company must stand still and think of the following questions (Hooley (2005)).

• What are the organizations products and services? • Who are its customers and markets?

• What is its competitive advantage?

• How will this particular project support the achievement of its strategy? As said, the industry attractiveness and relative positioning should be determined. In the first stage of product development, the opportunity and risk on the market (leading to the market attractiveness) must be identified along with a firm’s capability in the sense of its material, technical, financial and managerial resources (de Wit (2002:91)). Frameworks as the SWOT analysis are very relevant as starting points in this regard (Depperu (2006), Bijmolt (1996)).

The competitive environment plays a crucial role in the strategy formulation. The competitor analysis makes it possible to segment the market and formulate a positioning strategy or cooperative strategy.

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__________________________________________________________________ characteristics (Canning (2001)). The positioning forms the face of business strategy and should match with these customers and differentiate the firm from its competitors (Aaker (2005:215)). For this reason, the competitor’s strengths and weaknesses should be profiled to a gain competitive position (Canning (2001)). This analysis of the fit between these capabilities and opportunities for the selected target market will lead to the derivation of strategic options or business opportunities. They should exploit business strengths and competitor weaknesses and neutralize business weaknesses and competitor strengths (Aaker (2005:124)). The two types of competitive advantage a firm can possess are low cost or differentiation. Together with the scope of activities for which a company wants to achieve them, this leads to the following competitive strategies (Aaker (2005:141-166), De Wit (2002:333)).

• Differentiation strategy • Cost leadership strategy • Focus/cost strategy

• Focus/differentiation strategy

These generic strategies lie at the heart of any strategy and are all fundamental routes to create competitive advantage. Certain elements or combination of elements within the business strategy should create a meaningful advantage compared to existing and future competition (Aaker (2005:142)). These elements should contain connotations (in the mind of consumers) that are not easily reproduced by other players on the market or substituted by other products fulfilling the same need of the consumer. This sustainable competitive advantage is the fundament of a positive performance on the long run (Hooley (2005), de Wit (2002:350)). In order to be successful, two other aspects besides sustainability are crucial when formulating options. These are the relevance (suitability and acceptability according to stakeholders) and feasibility of the value propositions (Aaker (2005:174)). The product has to be relevant to the market that is chosen to compete in and the company must be capable of executing the strategy in an effective way.

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__________________________________________________________________ 3.2 Conceptual framework

Legend

= Positive significant relationships found in literature which are tested on the RTD market and for which hypotheses have been formulated (3.3) = Positive significant relationships found in literature which are not tested

3.2.1 Theoretical framework and explanation

The conceptualization of the previous analysis and relations between information aspects leading to new product success are presented in this section. It gives insight into the way the process should be accomplished and the relationships between the different aspects it is made up of. The main question on which aspects have a significant effect on new product performance can thus be answered on a theoretical basis. All arrows in the model present positive significant relationships according to literature. The conceptual framework shows both dashed and normal arrows. This has been done to clarify the relations that are

NEW

PRODUCT

SUCCES

Internal Capabilities Degree of Innovativenes s Trend Orientation Availability of Resources Product Advantage Critical Tactics Consumer Orientation Competitor Orientation Fit with Strategy

Entering the Thai ‘Ready- to-Drink’ Coffee Market