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New Product Development at Schwan Food Company Innovation through Communication One of the first things we did arrive

e at a process that would allow us to develop world class products through cross-functional teams.1-Joe Gruber, New Product Development Manager, Schwan Food Company, in April 2003. This patent-pending technology, proprietary crust, triangular shape and nucrowave suspector make it the only retail product of its kind.2-David Rettey, Senior Product Development Technologist, Schwan Food Company, in October 2003. AN EFFORT WELL REWARDED In October 2003, Prepared Foods declared the US-based snack foods company Schwan Food Company (Schwan), as the winner of the 2003 Spirit of Innovation Awards. Schwan was given this award in the retail category for its newly launched products, Red Baron Stuffed Pizza Slices. Another leading industry publication, Stagnitos New Products Magazine too adjudged this product as the best new product of the year. To top all these achievements, the renowned publication, Refrigerated Frozen Foods named Schwan the 2003 Processor of the Year. For the year 2002, Schwan also led the entire US food industry in terms of the maximum increase in the number of new products launched. The company was way ahead of seasoned food giants such as Kraft Foods, Pepsi Co and Unilever. Refer Table 1). Interestingly, it was the only brand among the top nine rank holders then with not popular at the global level. These developments meant a lot to Schwan since it had reportedly been working hard for over two years towards introducing Red Baron Stuffed Pizza Slices. Thanks to these awards and recognitions, the $3 billion, privately-held company established itself firmly as one of the most innovative players in the intensely competitive US frozen foods business. In mid 2003, the company was the worlds largest frozen pizza processor, and in terms of market shares, was next only to the countrys largest food company, Kraft Foods.

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Red Barron Soars with Teamwork, www.foodprocessing.com, April 2003. The Slice of Life, www.preparedfoods.com, October 2003. A susceptor refers to a metallic patch that is attached to microwaveable food packages. Prepared Foods is a US-based business-to-business publication that tracks companies/organizations involved in developing, manufacturing, processing, packaging and marketing of prepared foods. Every year, it sponsors the spirit of innovation awards for the most innovation food products launched in the retail and food service businesses. These awards are highly regarded by players in the foods business (Refer Exhibit I for the criteria on which the competing entries were judged). Another respected publication in the food and beverages industry devoted exclusively to new product related issues, Stagnitos New Products Magazine is a tabloid Published by the US-based Stagnito Communications Inc. The magazine Refrigerated & Frozen Foods is also published by the same company, focusing on the latest developments in the refrigerated and frozen industry.

5. www.schwanfoodcompany.com 6. In addition, Schwan operated over 15 other websites for its various brands, social responsibility initiatives, promotional exercises, customer service and other business services Table1: Top New Product Launching Food Companies in the US

Rank (2002)

Company

Number of New Products Launched 2002 2001 65 114 184 143

% Change 63 32 24 9

6 3 1 2

Schwan General Mill (including Pillsbury) Kraft Foods ConAgra

106 151 228 157

5 7 4 8 9 Source: www.preparedfoods.com

PepsiCo Unilever Nestle USA Kellogg USA (including Keebler) Campbell Soup (Pepperidge Farm)

111 105 137 79 74

106 101 136 83 108

5 4 1 [5] [31]

More importantly many new products introduced by Schwan were reportedly doing well in the US market Red Baron Stuffed Pizza Slices got off to a very good start with customers across the US taking to them in a major way. In an industry where 75% of the new products launched failed, this was indeed appreciable. Industry observers were unanimous in their opinion that Schwan had taken the exercise of new product development to never before heights. Schwan sources too agreed that its customer-centric approach towards developing new product was a unique one in that it involved the entire company as well as the Red Barron brand, had this to say about the product development efforts behind Red Barron Stuffed Pizza Slices. This is the most significant and innovative of Red Barons product to date. The Product is a prime example of long-term strategy and research.

BACKGROUND NOTE

About Schwan Schwan was started as Schwans Home Service (SHS), an ice-cream home delivery business in March 1952 by the Marshall-based (in Minnesota, US) Marvin Schwan (Marvin). The primary motive for starting this venture was to help Marvins family dairy business survive in the wake of unfavorable changes in the regulatory changes in the regulatory set-up. Focused efforts on the part of the family helped SHS grow rapidly. In 1965, Marvin started selling frozen pizza as well from the ice-cream delivery trucks to expand his product portfolio. The frozen business proved to be very successful and Marvin decided to further explore the possibilities in this area. In 1969, SHS acquired a pizza factory in Salina, Kansas and started selling pizzas to retailers as well as to institutional buyers such as schools, universities and hospitals. Over the next three decades, the company grew largely through the acquisitions route. The SHS label marked frozen pizzas under three brand names, Tonys, Freschetta and Red Baron. The Red Baron range was introduced in 1976 as an umbrella brand to offer throughout the day snacking solution to customers. The brand earned the distinction of being one of the first nationally available frozen pizza offerings. As SHS expanded on a regular basis to various parts of the country, leading retail grocery stores across almost all the states in the US began stocking its products. The companys global expansion thrust began in the 1980s as it established, manufacturing and retailing business in the United Kingdom (UK, in 1989), France (in 1996), and Germany (in 1998). According to the companys website, Schwan had expanded as many as 30 countries by the early 21st century. It was the largest frozen food producing company in the US with over 24,000 employees across the globe. Also, it was the market leader in the business of manufacturing and distributing frozen dessert and premium ice-creams. The company dealt in the technology integration and foodservice equipment business as well. President and CEO, M. Lenny. Pippin said, As a company, we have every reason to be proud of our distinguished history of innovation and customer service. The Schwan food company is a leader in every market segment in which we complete today, and we poised to achieve ever greater success. Schwan operated through three primary business units: SHS, Schwans Global Consumer Brands (SGCB) and Schwans food service group (SFSG).SHS operated in the direct- to home food delivery business; SGCB, the retail-grocery division, took care of the premium frozen food business, and SFSG provided value-added frozen food to the food service industry (commercial as well as non-commercial) SHS was the countrys largest direct-to-home food delivery service, offering over 300 frozen food products (Refer Exhibit II for a list of the companys leading brands/products). In addition to ice-cream and pizza, it provided meat, seafood and other desserts. This unit sold its products through a toll-free number and the website www.schwans.com also.

SGCB comprised two divisions: Schwans consumer brands North America (SBNA) and Schwans Europe. SBNA served the North American market with products under five brands- Tony s, Red baron, Freschetta, Pagoda and Larrys. Schwans Europe compromised three companies, Schwans France, Schwans food Gmbh and Schwans consumer brands UK Ltd. This division served the European Union with two brands-Chicago Town and Freschetta. SFSG also had two constituents units: Schwans food service and Schwans Bakery. This unit offered products like pies, desserts, ethnic specialties, pizza, pasta and sandwiches through brands such as Edwards, Mrs. Smiths ,Minh, Coyote Grill and, Heidis Gourmet Desserts. Its consumer base included institutional buyers such as schools, universities, restaurants, chain stores and healthcares facilities. Schwans food service was the division responsible for the food service equipment business. In addition these three core business divisions, schwas had three subsidiaries that operated in various related/unrelated business areas. These were Explore Information Services, Bi-Phase Technologies and Schwans Call Center. Explore Information Services, offered information technology (IT) solutions to automobile insurance underwriters and the government. Bi-Phase was involved in the alternative automotive fuels business. Finally, Schwans call center provided inbound and outbound customer contact services to corporate clients (Refer III for a look at Schwans company structure and its logo). In the early 21st century, the company entered into various strategic alliances to grow. As a result of this initiative, leading brands such as Edwards Fine Foods and Mrs. Smiths Bakeries came under its fold. Schwan became the countrys largest supplier of frozen pizza to schools and the largest frozen Asian specialty foods processor as well. ABOUT RED BARON The frozen pizza business started by Schwan in 1965 had grown cosiderbly byy the nid 1970s, with us customer taking to pizzaas a product category in a major way. Though the product category was still in the nascent stage, the company decided to incre its presence in it. The move to lanuch the Red Baron frozen pizza range in 1976 was apperently in line with decision. It was the first such product that was made nationally available. As the pizza market evolved over the next two decade, Schwan's decision to expand its presence in the frozen market pizza segment proved to be a winningproposition. Though the company sold frozen pizza under three labels ( Red Baron, Tony's and freschetta) The three brands were clearly differentiated in terms of the consumer segment they targeted. While tony's was positioned as a good value brand Freschetta was the upper-premium offering. From the beginning, red Baron was positioned as a family product for busy mothers looking for quality snacks that were priced reasonably. Starting with the Classic 12 Pizza, the range went on to ecompass a wide variety of snacks by the early 21 st century (Refer Table II for product offering under the red Baron label and Exhibit IV for a look at some of these product). The Tagline ' From Morning to night, for every appetite' was used to highlight the Brands suiatbility as a snack solution for every part of the day. It was one of the largest brands in the industry in its category with over 98 million pizzas sold in 2001. though Red Baron and other frozen pizza brands from Schwan were doing reasonably well, the company was aware of the changing dyanamics of the frozen pizza business in the country. Table II: Red Baron- Product Offering Classic 12 pizza Four Cheese, special Deluxe, Sausage & pepperoni, Supreme Sausage, Pepperoni, Hamburger, Canadian Style Bacort (With Natural Juices) and Mexican Style Supreme. Pepperoni, Supreme, four Cheese Meat trio, Sausage and special Deluxe. Four cheese, Special Deluxe Sausage, Pepperoni, Supreme, Meat trio Cheese and Vegetable. Pepperoni Cheese Supreme Pepperoni & sausage.

Pizzeria style pizza Deep Dish singles Deep Dish Mini Pizzas Break Fast Singles

Ham scramble, Sausage Scramble, Bacon Scramble, Western scramble and Suasage gravy.

Pastry Pouches

Ham and cheese pastry Pouches, Philly Steak, Cheese Pastry Pouches Turkey, Chedder & Bacon, Pastry Pouches, and Chicken Broccali & chedder, Pastry Pouches Barbeque Beef Deli Pouches Bacon Cheeseburger Deli Pouches, Chiken Fajita Deli Pouches, Italian Style Meatbali Deli Pouches

Deli Pouches

Deeo Dish Pan Style Four cheese , Meat Trio, Pepperoni and Supreme Pizzas Pizza Pouches Pepperoni Pizza Pouches, supreme Pizza Pouches, Sausage & Pepperoni Pizza Pouches and Meat trio Pizza Pouches.

THE NEED FOR PRODUCT INNOVATION a. The US pizza business had grown at a healthy pace since Its inception in the 1965 ( Refer Exhibit V For information on the pizza business till the 1960s). In 1985 Pizza was rankes as the fifth most popular food in the country. By the late 1990s the industry was growung at 8% per annum with yearly sales of $ 2 Billon. In 1999 pizza becmame the most [popular food in the US. Significantly OF the four broad segment dine-in, take-away, home-delivery and frozen the last was growingat the fastest--- . In fact, frozen pizza was growing the fastest within the entire Us frozen food Industry. ( Refer Table III for information on frozen food industry trend and Table --- coparative look at frozen pizza segment growth) Retail sales of frozen foods in 2001 $ 2.6 billion (up 6.1% from 2000). Frozen food sales in 2001 ($40 billion) were one- third of the total foodservuice sales. Over 96% of restaurant owner planned to use frozen food for their table service operations. For quick service operations, 100% of restaurant owner planned to use frozen food. Development in food technology were expected to make differentiating between frozen and non frozen food (after preparation) extremely difficult in the near future. On an average trip to the supermarket, 94% shoppers sometimes purchased frozen food. Of the total number of shoppers, 30% always bought frozen food. By 2003, the market for frozen appetizers and snacks was expected to increase to $662 million from $411 (1998 figure).

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Table IV : US Frozen food Industry- Cattegorywise Growth(2001) Category Meat/seafood Baked Goods pizza Prepared Foods Ice-cream vegetables Breakfast Foods . The list is not exhaustive The reason behind the fast growth of the frozen pizza segment was the introduction of rising --- technology in the mid 1990's. By the using this technology, it become possible for customer to get resta urant/take away/home-delivary quality pizza at home. Prior to this, the taste of frozen pizza prepared at home was perceptibly ---- to the other categories. After the leading brands adopted this technology Sales (in $ billion) 2.4 1.4 2.47 7.2 4.5 2.9 1.05 %Changes (Over 2000) 13 9 6.4 6.1 5.7 4.3 4.1

customer took to frozen pizza in a big way. Jamie sheffield(sheffield), brand manager for a leading brand, said The advent of rising crust Pizza has expanded the consumer base for pizza in geberal and as those consumer came back to the aisle they got re-educated about what frozen pizza had to offer. By 2001 the frozen pizza segment was beginning to eat into the business of the other these segment most notably the restaurants (refer Table IV for a look at the 2001these of top eight pizza chains in the US and Table V for the segment's performance). That was largly due to factor includinglower prices, product innovations that--- the offering of dinein pizza companies and incresed convenience. The frozen pizza segment was reportedly valued at $2.7 billion for the year, around 10% of the overall $26 million pizza business. The business had grown at a rate of 29.2% between 1995 and 2000. TABLE V : US Pizza Chains- Is The Growth Slowing Down? Chain Name Pizza Hut Domino's Pizza Papa John's Chuck E Cheese's Little Caeser's Pizza Pizza Hut (Mergeoo) Sbarro Round Table Franchise Corp US Pizza Sales (2001 $ in 000s) 5000000 2817000 1747000 630054 1250000 523261 470041 364500 % Change vs 2000 0 6.41 4.67 7.36 -3.85 5.88 1.77 1.99

Table VI : US Packaged* Pizza Business 1990 Sales as % of Tatal Pizza Sales In The US 10.2 2000 11.8 2005 13

*Packaged Pizza includes frozen pizza, Refrigerated pizza and dry-mixes ** Projected figure In 2001, the onslaught of this segment prompted one industry source to comment 2001, the pizza industry felt the effect of cheese that approached $2 a pound skyrocketing gas prices last summer, the fallout from the terrorist attacks an the World trade Centre, not to mention the frozen pizza monster10 .Another reason for the rapid growth towards the early 21 st century was the advent of single- serve pizza {also reffered to as pizza for one (PFO) and hand-helds}. Taking convenience to a greater level, this new product was intended to serve a single person looking for a snack at any time of the day. Thus, unlike the regular pizza where an entire pizza had to be prepared and consumed, single-serve catered to the needs of individuals. Rhonda Jordan, Vice-president (Marketing) of Kraft Foods said' there are opportunities in virtually every segment of frozen pizza, whether it is styaffed crust or rising crusst, but single-serve gets you to different

usage occasions and different demographics than youmight get with large SIZES11. By 2000, single-serves accounted for 95% of the total annual volume for one of the leading brands in the us Celeste. Attracted by the growing popularity of single-serves, most of the players began focusing on this segment. Besides Schwan, the other leading players in the business including Kraft Foods with its DiGiomo, Tombstone, Jack's Pizza and California Pizza Kitchen Brand; Pillsbury,12 with its totino's and Jeno's brands, Aurora foods with us celeste brands, Frozen Specialties Inc with the Mr. P's Fox Delux, G&W and a, few private label brands. Private label brands (from retailers such as Safeway and Krogee aming others) were offered by many players all over the century. Prices ranged from $0.80 (for some private labels) to around $7 (for large-size and premium offering).Competition became very intense with Schwan and Kraft Foods Even becoming involved in a corporate espionage controversy13. Since pricing promotion and distribution innovation were replicated very quickly in the industry, product innovation emerged as the single-largest factor that gave a significant competition advantages to companies. The thrust that Schwan gve to new product decelopment (for Red Baron and the other brands as well) was in line with the above industry trend towards this end, the company set up a $15 million R&D center in Marshall)--- R&D plant support outfits in three other locations. THE RED BARON STYLE OF NEW PRODUCT DEVELOPMENT while it was true that competition made it important for Schwan to focus on developing new offerings, there was another factor that fueled its decision to launch a truly innovative product. The company was quick ti relize that the single-serve 10 pizza power 2002, www.pmq.com ( website of the leading US pizza industry) 11 A singular sensation www.frozenfoodage.com, November 01, 2000 12 part of the US-based food products major General Mills. 13 An ex-kraft food emplyee who joined Schwan as a top-level executive was alleged to have supplied his new company with confidential about the former employer.

Segment lacked a good quality, convenient and universally appealing product. It wanted to fill this gap by leveraging upon its expertise in the frozen pizza business and its manufacturing capabilities. Schwan knew that if it wanted its new product to stand out from among the plethora of brand available in the market, it had to give its customer an attractive value proposition. The company decided to concentrate on making a snack that could be microwaved. This was excepted to be a major innovation since most of the frozen pizza snacks available were not supposed to be prepared using a microwave (the crust remained soft after the pizza was microwaved). Therefore, many leading brands recommended that their product be baked directly in an oven. Also, typical pizzas needed to be baked for 11 minutes to 17 minutes. Sachwan believed that if it could cut down on this time, it would be able to lure a lot of customers. The company begans working on a microwaveable hand- held snack that could be prepared within a shorter time. The management commissioned a team of internal experts to work on this concept under a project that was code-named Projected Razor. This team was the core group that was remains on this project all through the development stage till the products commercialization. In addition, various cross-function teams were also assigned to the project. These included personnel from the following department: process Engineering: PE), product development [PD, a part of the overall research and development (R&D) set up], regulatory affairs, sensory, applied research and culinary. In addition to the above, the manufacturing sales and marketing packaging services and corporate engineering department were also involved in different ways. Interestingly, the company involved a few external parties as well in the team (such as the packaging and equipment suppliers). Reportedly, these were entities of strategic importance with respect of the product development exercise. The reason why all these entities were involved was the schwan wanted all parties concerned in any way with the new product, to work together. Company sources referred to the above exercise as creation of an architecture that facilitated innovation through communication. According to Jo Gruber (Gruber), New Product Development Manager, One of the first things we did was arrive at a process that would

allow us to develop world class product through cross functional teams. Gruber added, From the very beginning, the business strategy is fully communicated to R&D and operations so they can be mindful of the direction we are considering. According to analysts, this (inviting outsiders) showed that the innovation angle was evident from idea conception stage itself. Company source claimed that innovation was a way of life Schwan since it was an integral part of the corporate statement of purpose. The Schwan Food Company will be a strong solid, well-managed, fast growing, exciting, innovative company with high business ethics and an excellent reputation a company that offers great opportunities and a place where people like to work. As per an industry report, Schwan had created a hybrid organization that was guided by the twin forces of innovation and execution excellence. The product development exercise began with a cross functional team sitting together to discuss the product being developed (Schwan referred to this as the exploratory concept stage). All team members from various disciplines were kept abreast of the proceeding and clearly informed of the design criteria. Above all they had clearly earmarked responsibilities vis--vis their deliverables to the project. This ensured that all team members treated optimal resource (time and money) utilization as a priority issue. Joni Klimek, Senior Product Development Technologist said One of the most important function of this team was effective communication bringing people in early building team support..enthusiasm saved us lot of development time .The teams discussions and idea took concrete shape in the form of managing stuffed pizza slices. Therefore, Red Baron developed prototypes (referred to a gold standard prototype by the company this involved translating the prototype into a manufactured product as well. During the above process, Red Baron officials made use of various tools climate the possibility of defect creeping into design. These tools included focus group studies, concept testing, creating what if scenarios and consumer testing At each step the prototype was modified as required to ensure optimal result However as the concept moved to the development stage the team faced a few hurdles and respect to product design. Foremost among these were issues related to the dough for the pizza slices the process flows involved and the toppings. The manufacturing process for the slices involved the following steps: placement of the bottom part of the rolled out dough dispensing the right amount of filling, covering the filling with the upper layer of the dough, cutting the above into the desired shape and finally, adding the toppings Since the design was new for Schwan it had to develop a suitable manufacturing from scratch. The installation of the new high-tech production line was completed in secrecy to prevent the innovative idea from being leaked. The installation was finished in roughly nine months. To add the toppings, the company developed a new substance (food starch) to help the toppings remain in the same place through all the process that the product passed through (that is baking freezing packaging and shipping ). At this stage group stepped in to check whether the products attributes matched the needs of the targeted consumer segment or not. The culinary groups contribution was in term of helping the product meet Schwan pre-determined standard of taste and other related attributes. Product Development Manager Kristie Heis (Heis) Said. the fact that we have culinary help is a tremendous assets to us together we can work hand-in-hand Once this group suggestions were implemented the necessary regulatory affairs group examined the entire exercise to check whether all necessary regulatory guidelines had been complied with Since the approach was customer-entire inputs were taken regularly from the consumer research and marketing people. Each milestone in the project was evalued against the expectation (perceived) of thtuffed e target market. The entire exercise was reportedly co-ordinated through the Marshall-based R&D center. Facilities at this center included a research kitchen a culinary kitchen a lecture kitchen five product-development laboratories senson laboratories, an evaluation and tasting room a focus-group laboratory and general meeting rooms. Talking of the R&D center design as vice president said. It is designed to bring in customer and suppliers to help us work togetheer to develop new product with them All this facilities utilized to the fullest extent possible. Commenting on this Heis said We centralized the operation in culinary, sensory, regulatory process engineering product development and applied research in Marshall Each of those resources available for every project. Each function plays a key role and communication between them is the key to successful product development. Based on research findings the slices were given a vented, triangular sleeve that made it possible for that crust to becom crisp after being put in the microwave. This was a significant technological breakthrough. The choice of fillings was made keeping in hand the most popular pizza toppings. Red Baron Stuffed Pizza Slices were offered in these variants Pepperoni, Five cheese & Tomato, Italian Sausage & Pepperoni Supreme Italian Sausage Pizza with Roasted Red Onions and Garlic Chicken. The packaging was in line with industry norms brightly colored boxes with pienres of the product displayed prominently. The box were priced at $2.99, with each box containingSchwan decided to cover its entire spectrum of retail outlets for seling the pizza slices.

After over two years of exhaustive efforts and an expenditure of $25 million, Red Baron Stuffed Pizza Slices were launched on schedule in October 2002 Schwan sources claimed that this product was the first such since it actually looked like a slice of pizza (due to its triangular shape). At the launch, Eckerman said, Red Baron Stuffed Pizza Slices offer a unique convenient way for families to enjoy their favorite pizza any time even when they are on the run. Though detailed information on the sales performance of Red baron Stuffed pizza Slices was not available in late 2003, media reports indicated that customers had take to the innovative and convenient product in a major way. Some analysts believed that the slices could be a major revenue generator for Schwan in the near future. Meanwhile in November 2003, Schwan revealed plans to double overall sales by 2008. This was to be done on three fronts globalization, product innovation and marketing. The company was to adopt a three pronged approach in this context improving operational efficiency increasing employee involvement and reducing waste, optimizing marketing and product development synergies and leveraging R&D to develop new products. In 2004 SGCB was to expand its presence in Europe to build on Schwan number three position in the frozen pizza business While UK, Germany and france were already covered the latest plan envisaged tapping more countries in the European Union Sachwan was open to the idea of acquisitions as well in order to establish itself strongly in this region. In addition to strengthening the R&D center Schwan employed many culinary chefs to help on the innovation front. The Executive Vice President for SBNA Biil McCormack said Industry leadership and growth is our opportunity for growth as a company. We will achieve that through new product innovation that responds to and anticipates customer demand. The company was expecting SGCB to derive 25% of its revenue in 2003 from newly introduced products. In 2003, other new offerings (Freschetta Bricks Oven Pizza and new variants under brands such as Tonys Larrys and Pagoda) were also generating a lot of interest in the industry. Many talented executives were reported to have joined the company attracted by its track record in term of launching new products. The thrust on marketing involved fine-tuning the existing marketing mix and increasing the advertising expenditure. John Beadle, SGCBs President and COO said We really do want to build up brand equity more than we have ever done before. Commenting on the grand strategy behind these initiatives, Beadle said Our defining goal is that Schwan will become the biggest, the best and strongest provider of frozen-food solutions on the face of the earth Interestingly enough, one of Schwans first steps towards executing the above plan inovloved Red Baron Stuffed Pizza Slices these were to be disturbed to grocery retailers in Canada in 2004. While it was that the product had received many accolades from industry observes the role that it seemed to be playing in the companys evolution in late 2003 was perhaps its biggest achievement till date Question for Discussion: 1. 2. What were the factor that made Schwan focus extensively on innovative product development initiatives? Answer with reference to the companys expertise in the frozen pizza business and the changes taking place in the industry? Explain how Schwan organized the new product development exercise for Red Baron Stuffed Pizza Slices. What hurdles were encountered while moving from the idea develop,ent stage to the concept-strategy formation stage? How were these challenges overcome? Critically analyze the role played by Schwan cross-functional teams in developing Red Baron Stuffed Pizza Slices. In what way did the various teams contribute to the project? In the light of the fact that a majority of the new product fail in the market, how do you thik Schwans efforts would fare? What issues do companies need to keep in mind while developing new products in order to minimize the risk of failure?

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