Thought Leaders
What Segway Learned the Hard Way: Three Pitfalls of New-Category Product Strategy

Like other new-to-the-world products, Segway was designed to take the world by storm. When it was rolled out with great fanfare in early 2002 by Dean Kamen, part genius inventor and part PT Barnum, he projected they would be selling 40,000 units per month by 2002. Total sales for the first 2 years were actually about 5,000. What went wrong?

"New-category products are highly risky but provide firms with opportunities to earn above-average returns," said Karl Ulrich, who teaches new-product development in Wharton's new Strategic R&D Management executive education program. In addition to his academic research on product design and development, Ulrich brings hands-on experience as a member of more than 30 development teams for products and processes, including medical devices, tools, computer peripherals, food products, and sporting goods. He founded a company that manufactures high-performance scooters, bicycles, and other transportation equipment, and he holds 18 patents.

Three Common Pitfalls

From his research and experience, Ulrich has identified three classic mistakes in developing new-category products that have derailed innovations such as Segway:

  1. Overestimating diffusion rates: Developers of new products think that once they develop a better mousetrap, the world will immediately beat a path to their door. In fact, it usually takes quite a while for the world to get there. "Observe an innovation like the cell phone," Ulrich said. "It is introduced in 1985, and if you look at when 10 percent of eventual adopters have a cell phone, it is not until 1990, 5 years later. Even these very fundamental innovative technologies where you can articulate a compelling benefit proposition don't diffuse in the third quarter after launch. Yet business plans often forecast rates that have no historical precedent."

    The Mosaic browser came out in 1991, but most people did not go online until after the mid-1990s. Television was launched in 1945 but didn't "take off" (defined as greater than 3 percent of the target market adopting each year) until 5 years later. For TiVo it was 5 years. And mutual funds took an astounding 56 years to gain traction in the market. One exception: Viagra took off in just 1 year.

    There are factors, identified by Everett Rogers, that affect the rate of adoption: its relative advantage, compatibility, complexity, trialability, and observability. For example, Listerine breath strips are very easy to try and observe and didn't require a big change in routine. Viagra was simple, trialable, and compatible. These products also had clear advantages over alternatives. Segway, in contrast, "would be hard pressed to articulate its relative advantage over other forms of transportation," Ulrich said. It is not compatible with current systems, it is complex, and the cost of trial — launched with a $9,000 pricetag — was a high hurdle. "If you look at that, you'd say that if anything, it would diffuse less rapidly than average," Ulrich said. "You certainly don't forecast that you'll penetrate 20 percent of the market in a few years."

  2. Inappropriate "swinging for the fence": While sometimes you can't cross a chasm in small steps, many new-category products offer opportunities to put together a series of base hits that allow it to achieve gradual success. While Segway might have taken this approach, instead they "placed an $80 million bet that this was going to work and spent all their capital to resolve the problems they knew would accompany success, such as production capacity and regulatory hurdles." In most cases, a more measured approach is warranted. "You want the low-cost, high-information-content questions to come early. Segway blew a ton of money and then ended up doing things they should have done first. There was a lot they could have done early on at a relatively low cost."

    Of course, the high-profile launch helped attract investor money, but it also meant the money went out the door just as quickly. For some firms, once you strike out swinging for the fences, you may not have the resources for a second time at bat. "Sometimes you do have to swing for the fence. If there is an immediate competitive threat, if the market is highly uncertain, and you can't resolve that uncertainty without fielding the product, you may have to swing for it. But you need to ask: Are there actions you can take to reduce uncertainty with small incremental investments?" While Hollywood studios may have to spend $100 million to really find out if their ideas work, television networks often use relatively low-cost pilots to test ideas on a small scale.

  3. Violation of the "what-not-how" principle: Inventors and engineers are sometimes enamored with a great new technology. They start with a core technology and look for the application. For Segway, the technology was a system of two lateral wheels and dynamic stabilization. While this is an impressive technology, the question remained: What advantages did it offer over alternatives. For example, while Segway was rolling out its transporter for thousands of dollars, Wal-Mart sold a similar looking Rad2Go Personal Transporter for just $994. The secret: it used an additional pair of small wheels at the back of the platform, offering stability without the gee-whiz technology.

    "This is a very common pitfall," Ulrich said. "Have you found a match between the technology and the need that creates value, delivers enough benefit to the user that they give you profit margins, and has advantages over competitors? It is not whether your hammer can pound the nail, but whether it can do it better than the competition."

By recognizing and avoiding these pitfalls, developers can reduce the risks and costs of failure. While Segway might have had a smoother and less costly path if it had observed these principles, it is still rolling along in niche markets such as used by city tour guides. The transporter also might have use for entertainment or rental operations focused on fun. Ulrich estimates that there might ultimately be a market in these applications for 10,000 units per year at $1,500, generating about $15 million in annual revenue. While it may not take the world by storm and won't provide a return on the $80 million invested, this should be enough to keep the Segway rolling.

In addition to the three pitfalls, it helps for inventors and developers to have a healthy dose of humility about what they know. After all, they are introducing unproven products into unknown markets. "In developing and launching new-category products, assume you will be wrong about many things, including which market segments will adopt and why," Ulrich said.

Related Courses

    

This month's articles: