Chapter 3: Types and Patterns of Innovation

CHAPTER 11 Managing the New Product Development Process

SYNOPSIS OF CHAPTER For the new product development process to be successful, the objectives of maximizing fit with customer requirements, minimizing time-to-market, and controlling development costs must be achieved. This chapter overviews some of the best practices for improving both the effectiveness and efficiency of new product development. First, many firms have succeeded in reducing costs and shortening development time by using a parallel development process instead of a sequential process. Including all functions in the process and anticipating project needs reduces the need for costly and time-consuming iterations. Second, the new product development process can also be improved by involving customers or suppliers in the design process, and by using project champions. Third, firms can utilize tools such as stage-gate processes, quality function deployment, design for manufacturing and CAD/CAM systems. Finally, firms should measure their performance at new product development to identify opportunities for improvement. While the role of new product development teams is also extremely important to the new product development process, the richness and complexity of that discussion warrants covering them in a separate chapter -- the constitution and management of new product development teams is covered in Chapter 12.

TEACHING OBJECTIVES 1. Highlight the three objectives new product development projects must achieve in order to be considered a success: maximize fit with customer objectives, minimize time-to- market, and control development costs. 2. Familiarize students with the strengths and weaknesses of “best practices” used in managing the new product development process. 3. Provide an understanding of the metrics used to evaluate new product effectiveness and innovation performance.

95 LECTURE OUTLINE I. Overview A. While successful new product development is one of the key factors in firm success, the high failure rate for such projects underscores the importance of identifying the most effective process for managing new product development. B. Key objectives of the new product development process are maximizing fit with customer requirements, minimizing cycle time, and controlling development costs. C. The means by which these objectives may be accomplished include adopting parallel development processes, using project champions, involving customers and suppliers in the process, and using tools that may improve the process include a Stage-gate process with Go/Kill decision points, design targets with Quality Function Deployment, Design for Manufacturing and CAD/CAM systems, and assessing process performance. II. Objectives of the New Product Development Process A. Maximizing fit with customer requirements requires knowing which features are most important to customers, what a customer is willing to pay, and how to resolve competing customer desires. 1. Apple’s Newton Message Pad and Philips CD-i are examples of products that were well designed with excellent features, but failed to meet customer expectations. Newton’s size made it untenable as a handheld device and, at twice the price of alternative game systems the CD-i’s cost outweighed the value in customer’s minds. 2. Minimizing development cycle time can afford a firm the opportunity to be first to market with a new product (i.e. better opportunity to build brand loyalty, capture scarce assets, build customer switching costs, and develop complementary goods). A shorter development process is also required to minimize costs (including providing a longer period of time over which to amortize costs). 3. Controlling development costs is also important because even if products are a good fit with customer requirements and are brought to market quickly, if development costs are uncontrolled the firm will have a difficult time recouping its expenses. III. Sequential versus Partly Parallel Development Process A. Prior to the mid-1990’s, most businesses conducted development in a sequential process; with a decision-making “gate” at the end of each step where managers would determine if the process should continue, be revised or stopped. Working this way often resulted in multiple product revisions and lengthy cycle times.

96 B. In a partly parallel development process the development states overlap, both shortening overall cycle and enabling developers to communicate requirements in the next phase. There are some disadvantages, however, to partly parallel processes. If later stages proceed too early, it is possible that the project will have to be reworked if design features are later revealed to be ineffective. IV. Project Champions A. Assigning a senior executive to champion a new product development project can shorten cycle time and ensure that the product attributes match customer requirements by facilitating the allocation of resources to the project and by ensuring proper communication and cooperation among the different functional groups needed on the project. 1. Zantac’s project champion was able to gain approval for a change in the testing process that ultimately enabled Glaxo Holdings to bring the product to market in half the normal time and capture the number one spot for this type of drug. B. Risks of Championing include the loss of objectivity by the project champion that can result in an inability to admit when a project has no future and if the champion occupies a senior level position in the organization others may be reluctant to express their true thoughts regarding the value of the project. To counteract these risks, firms may create the role of “anti-champion” to play devil’s advocate. C. Stephen Markham and Lynda Aiman-Smith identified five myths about product champions. 1. Projects with champions are more likely to be successful in the market. Empirical data indicates projects with champions are just as likely to fail as to succeed in the marketplace. 2. Champions get involved because they are excited about the project, rather than from self interest. Champions are more likely to choose projects that will benefit their own department. 3. Champions are more likely to get involved with radical innovation projects. Incremental projects are championed just as often as radical developments. 4. Champions are more likely to be from high (or low) levels in the organization. Champions are equally likely to come from all levels of the organization. 5. Champions are more likely to be from marketing. Champions may come from many functions.

97 D. It is worth noting to students that while Stephen Markham and Lynda Aiman- Smith observed that champions are equally likely to come from all levels of the organization, many of the advantages arising from using a champion are linked to the champion’s seniority (e.g., access to resources, ability to communicate well with multiple parts of the organization, sustain momentum in the face of resistance, etc.) V. Involving Customers and Suppliers in the Development Process A. Involving customers and suppliers in the development process may ensure that products fulfill customer performance/price requirements, and help control costs while speeding up development. 1. Involving customers often involves beta testing early version of a product by customers to get early feedback. Reliance on “lead users” (i.e. those who often recognize a need in advance of the general market) may more effective and practical than relying on a random sample of users. 2. Involving suppliers can improve the new product development process by sourcing information regarding alternative inputs and by improving coordination between the firm and its suppliers that should result in the timely availability of inputs. Evidence shows firms that involve suppliers produce new products in less time, at lower cost and with higher quality. VI. Tools for Improving New Product Development Process A. The Stage-Gate Processes applies a tough multi-functional review at the end of each stage of the design process to ensure that only those projects demonstrating increasing certainty with regard to success move forward. Prior to moving to the next stage the project must clear a Go/Kill gate at which three components are reviewed: deliverables (i.e. results of the previous stage and inputs for the review), criteria (i.e. questions or metrics used to make Go/Kill decision) and outputs (i.e. results of the gate review process). This is important since risks and costs escalate as a project proceeds.

Show Transparencies 1 & 2

1. Quality Function Deployment or the “House of Quality” was developed in Japan as a comprehensive process for improving communication and coordination between engineering, marketing and manufacturing personnel. The house of quality maps customer requirements and product attributes and provides a common language and framework, through which teams can understand the relationship between product attributes and customer requirements, identify design tradeoffs, highlight the competitive shortcomings of existing products and identify the steps to improve them. Steps in the process are as follows:

98 Show Transparency 3

2. Identify customer requirements. 3. Weight customer requirements in terms of relative importance to the customer. 4. Identify engineering attributes that drive product performance. 5. Enter correlations between the different engineering attributes to assess the degree to which one characteristic may positively or negatively affect another. 6. Complete the body of the matrix, indicating the relationship between an engineering attribute and a customer requirement. 7. Calculate the relative importance of each engineering attribute by multiplying the customer importance rating by the feature’s relationship to an engineering attribute. 8. Evaluate the competition by rating their success in meeting customer requirements. 9. Determine target values for each design requirement by comparing the relative importance ratings (step vi) to the competitor’s score (step vii). 10. Evaluate the new design by assigning a score measuring how well the design meets each customer requirement. B. Design for manufacturing ensures that issues of manufacturability are considered early in the design phase. It is usually done by engineering and manufacturing agreeing on a set of design rules. When the rules are followed, products are easier to manufacture, development cycle time is shortened, costs are reduced and quality increases, all with a concurrent increase in customer satisfaction.

Show Transparency 4

C. Computer Aided Design (CAD)/Computer Aided Manufacturing (CAM) enable engineers to build a “virtual” prototype of a new product that is much less expensive and faster than building actual prototypes. Computer aided manufacturing utilizes machine-controlled processes to increase flexibility and speed.

99 VII. Tools for Measuring New Product Performance A. While the means used to conduct an assessment may vary, many firms use some means of evaluating the new product development process in order to identify which projects met their goals and why, and to benchmark performance against competitors or historical experience. Results of the assessment are used to improve resource allocation, employee compensation and to refine future innovation strategies. B. Multiple measures must be used so the result is not skewed by the vantage point of a particular measurement. Also, it is essential that the assessment be viewed within the context of reasonable expectations for a firm in the same industry, the firm’s strategy and other environmental circumstances. C. New product development process metrics include: 1. What was the average cycle time (time to market)? How did this vary for projects characterized as breakthrough, platform or derivative? 2. What percentage of development projects undertaken within the last five years met all of most of the project deadlines, stayed within budget and resulted in a completed project? D. Overall Innovation Performance measures include: 1. What is the return on innovation (i.e. ratio of firm’s total profits from new products to total expenditures, including R&D, retooling and staffing production facilities, and initial commercialization and marketing)? 2. What percent of projects achieve sales goals? 3. What percent of revenues are generated by products developed within the last five years? 4. What is the firm’s ratio of successful projects to its total project portfolio?

ANSWERS TO OPENING CASE DISCUSSION QUESTIONS 1. What are the strengths and weaknesses of IDEO's approach to product development? IDEO successfully combined the beneficial aspects of an “idea culture” with a structured development process that proved to be very effective in carrying projects through to success. This culture generated tremendous creativity while establishing a structure within which each idea could be evaluated and if appropriate developed into a full product. The structure is beneficial in that it includes appropriate evaluations of the end product at each stage, the value to the user at Phase 0, a beginning manufacturing strategy at Phase 1, etc. IDEO also appears to have excellent systems for encouraging individuals to seek ideas from each other, ensuring more cross-fertilization of ideas, and its practice of early prototyping likely helps identify important design elements very early in the development process. The main weakness is that there is no built-in mechanism to evaluate the project at the end of each stage to determine whether or not the project

100 should move forward. It will also be hard to ensure that IDEOs informal mechanisms for encouraging cooperation and knowledge exchange will continue to work effectively as the company grows.

2. To what degree do you think IDEO's success is based on its size, culture, or development process? It is IDEO’s culture and development process that are the keys to the firm’s success. By instituting a development process that acted as a funnel for the ideas generated, IDEO was able to add structure while maintaining its idea-generating environment. However, most of its processes and controls are informal, suggesting that they are effective in part because of IDEO’s culture and relatively small size. It will be harder to IDEO to sustain its culture and rely on informal processes if the company grows very large.

3. Do you think IDEO's success is sustainable? Why or why not? Much of IDEOs success is path dependent and socially complex: it is tied to the culture of the firm and the complex interaction of creative people. This culture, in turn, attracts talented and creative people that should help to sustain the culture over time. Advantages that are path dependent and socially complex tend to be very difficult for competitors to imitate (see Chapter 6 for more complete discussion of sustainable competitive advantage). However, as mentioned above, IDEO will also have to carefully protect these advantages from eroding as the firm grows.

4. Would IDEO's development process be effective in a firm that manufactured, marketed, and distributed its own products? Students are likely to suggest that IDEO’s development process should be fairly effective for the development division of a firm that manufactures, markets and distributes, though it would require some adjustments. IDEO’s specialty is coming up with very novel solutions (i.e., significant product innovations that may require combining materials in previously unconsidered ways), but may not be as well suited to the demands a firm would typically have for incremental improvements to existing products. While the IDEO process would likely be effective at creating incremental improvements, it might not be efficient. It can be costly to encourage many experiments and to encourage unfettered creativity if it is not needed for a relatively straightforward improvement to an existing product. Thus while the processes at IDEO might be excellent for a firm’s advanced R&D projects, breakthrough projects, or even platform projects, it might be somewhat costly to use it for derivative projects.

101 ANSWERS TO DISCUSSION QUESTIONS 1. What are some of the advantages and disadvantages of a parallel development process? What obstacles might a firm face in attempting to adopt a parallel process? A parallel development process offers the advantages of a shorter, often more cost effective process by avoiding costly and time-consuming iterations between development phases. However, by overlapping stages in the development process there is a risk that investments will have already been made in later stages when the need to change the product design is recognized. At that point, investments in later stages may have to be written off. Furthermore, because of this risk, managers may be reluctant to admit the need for a design change.

2. Consider a group project you have worked on at work or school. Did your group use mostly sequential or parallel processes? Students should provide examples from their own experience. An example that came up previously follows: “In developing a loan disbursement process in a post-conflict emerging market we used a parallel process. While creating the means by which loans would be disbursed we identified the need for additional products (letters of credit) that would be required to carry out the disbursements. Similar to ensuring a product can be manufactured we had to determine the likelihood that the additional products could be put in place in order to support the overall disbursement process.”

3. Are there some industries in which a parallel process would not be possible or effective? A parallel development process would probably not be well suited to an industry in which small product design changes result in large process design changes -- in such instances it might be necessary to have product design completely finished before process design commences. This may be more project-specific than industry-specific. For example, if a firm is contemplating whether to construct a part out of pressed steel or injection molded plastic, such a decision will have drastic implications for the design process used and it would be unlikely to commence process design or manufacturing until product design is finalized. Similarly, if a product design will require regulatory or customer approval (e.g., the development of a military aircraft for a defense contract, or the proposed design of a building, etc.), it may not make sense to commence process design or manufacturing until such approval is secured. Students may come up with other examples.

4. What kinds of people make good project champions? How can a firm ensure that it gets the benefits of championing while minimizing the risks? The characteristics of a good project champion are leadership, persuasiveness (i.e. someone who can be an effective advocate while retaining objectivity) and access to resources. Such a champion should be encouraged, however, to continuously evaluate the potential of a project. For example, rather than tying the champions incentives to the project being completed or having a short cycle time, the champions incentives could be

102 tied to the project’s commercial return minus its development costs, and to the overall success of the corporation, thereby discouraging the executive from pushing a project that has low potential. Another way to minimize the risks of a project champion (the possibility the champion will push to continue a project that is no longer viable, or that the champion is so influential others within the organization are reluctant to speak against the project) is to create a role for an anti-champion, someone whose role it is to constantly question the value of the project.

5. Is the Stage-Gate process consistent with suggestions that firms adopt parallel processes? What impact do you think using Stage-Gate processes would have on development cycle time and development costs? The Stage-Gate process is only partially consistent with parallel processing. Most of the product design and process design stages in the parallel processing model occur within Stage 3 of the Stage-Gate model, indicating that such processes could be concurrent without disrupting the Go/Kill gates in the stage-gate process. However, opportunity identification and concept development in the parallel processing model corresponds to Stage 1 and Stage 2 (respectively) in the Stage-Gate model, suggesting that overlapping these stages would violate the Stage-gate model’s prescription to use a tough Go/Kill gate between these stages. The Stage-gate model imposes a discipline on the new product development process that demands, in part, a sequential process.

6. What are the benefits and costs of involving customers and suppliers in the development process? By bringing customers into the development process, the developers are more likely to stay focused on projects that meet the customer’s needs, resulting in more successful projects. Suppliers provide an additional source of information and ideas, perhaps suggesting an alternative input that can reduce costs or time to market. They can also ensure that any necessary changes are made quickly in order to minimize development time. Any time more individuals are added to a process, the cost of managing everyone increases. In this instance, however, the potential savings is likely to outweigh the costs.