There are two important characteristics of new product development (NPD) that are underappreciated. First, NPD is one of, if not the most complex of all business processes. I speak from experience having managed an R&D organization in a mid-sized analytical instrument manufacturer in addition to previous roles in manufacturing, sales, marketing, and customer support. I have intimate knowledge of every business process and there is no doubt that NPD is the most complex. Second, not only is NPD complex, but it is arguably one of the most important of all business processes. New products are the lifeblood of any company, manufacturing or otherwise. Those who do it well prosper.
The focus of this article is first to describe why NPD is such a complex process. If you accept that argument, then the question becomes: how do we effectively measure the success of such a complicated business process? This article makes that case that how most company’s measure NPD success is flawed and requires a more progressive methodology.
Is there any doubt that NPD is difficult? In a recent Accenture survey (1) of 519 companies across more than 12 industry sectors in France, the U.K., and the U.S., only 18% of executives believe their company’s innovation efforts deliver competitive advantage despite increased spending on innovation. Why is NPD so difficult for so many companies?
There are a multitude of reasons. First, consider the NPD framework proposed in the figure below that illustrates the complexity. It starts with a solid understanding of your customers, the competitive landscape, technological changes impacting your industry, and political and economic factors in the geographic locations you serve. In addition, there may be regulatory and industry standards that you have to consider. These factors define the overall business environment the company operates in. For the company to prosper in its environment, it must have a robust, well-articulated business strategy that is understood by the entire organization. It must have a clear and defined competitive strategy, and finally a culture that supports innovation. The new product development process relies on these in defining new products, allocating resources, and executing projects. There are both process and organization issues associated with developing new products, and both planning and execution activities.
Second, a new product project is a complex series of interdependent tasks. A typical project for a manufactured product that involves for instance several electromechanical subsystems, packaging that involves a significant effort in industrial design, and a substantial embedded and UI software component may consist of hundreds, and possibly many more, of individual tasks. Many of these tasks are dependent on each other, let alone the resource conflicts that can arise across projects. A project might be 99% effective in completing tasks on-time, but just one significant technical problem might set a project back by weeks or months.
A third significant factor is that every project is unique and has to be managed based on the specific risk factors for that project. A company comfortable with incremental innovation may not be prepared for managing a project with significant complexity and unforeseeable uncertainty (unk unks). In many cases management believes “a project is a project is a project”. In other words, they believe that you can drive NPD to a well-documented “algorithm” that you run over and over again and with the same results every time. Of course, that is the focus in every business: to become as efficient as possible. It does not always work that way in NPD! The drive for “efficiency” influences how many companies measure NDP “success” and we will return to that subject in a moment.
Next is the fact that NPD involves every functional group in the business and is a team-based effort. That means there is a significant coordination task across all functional boundaries. For instance, marketing and product management play a key role in defining new products and collaborating with the project team during the project in making decisions and trade-offs that characterize a new product project. Manufacturing, finance, and service organizations play important roles as well. There are many ramifications to the cross-functional nature of NPD. For instance, are all the functional groups rewarded in the same way to ensure that NPD success is a priority?
Finally, NPD requires a high level of senior management engagement and leadership. Again, if you think about the NPD framework described above, you realize that NPD is a key business process. That means the senior manager, whether a president of a business unit, an owner, or whoever is responsible for the overall business success is ultimately responsible for new product success. If NPD is treated strictly as an R&D function, you are doomed to failure over the long run.
So if you accept that NPD is arguably the most complex of all business processes, how do we measure success?
Traditionally, projects are judged using the “triple constraint”. A project is judged successful if it 1) meets its performance targets including quality, product cost, serviceability, and manufacturability, 2) meets the schedule, and 3) meets the project cost target. In reality, you rarely can maximize all three, as one or two will likely take precedence over the others. As mentioned previously, this approach to measure NPD “success” is heavily influenced by how every other business process is measured for efficiency. The problem is that it is focused strictly on the R&D function, and does not account for the fact that NPD is a key business function. For instance, the project may meet the product performance targets, be on time and on budget, and be deemed a “success”, but what if that product does not generate the sales or profit objectives over the medium to longer term? That is not factored into this metric.
A more appropriate measure of success must take into account that NPD is a key business function and involves all functional groups, not just R&D. It should consider not only short term factors, but also the effectiveness over the medium and longer term. A method proposed recently by Shenhar and Dvir (2) is more appropriate. In this method, there are five key factors to consider:
- Project efficiency: This is primarily a measurement of the effectiveness of the project team and project leader and includes whether the project met its schedule and project cost targets.
- Impact on customer: How well does the new product meet customer needs? This measure goes beyond simply a judgment as to whether the new product meets the performance characteristics as defined at the outset of the project, but whether the business defined the new product properly to begin with. Does the new product lead to customer satisfaction, benefits, and loyalty? This can be measured in part by the business results below, but is more subtle. It will likely include feedback from the sales and service organizations, as well as customer surveys to judge how the product is impacting brand loyalty.
- Impact on team: This is typically not considered, but is nonetheless important (3). It relates to how projects affect individuals in terms of job satisfaction, retention and personal growth. While every employee needs a certain amount of pressure to perform at their best, there is a limit. Are the teams constantly under extreme levels of stress that lead to dis-engagement? This might manifest itself in turnover and could be measured with internal survey’s and be part of the performance management system.
- Business results: This is why we develop new products in the first place. Metrics such as margins, return on investment, market share, and meeting revenue and earnings targets over short, medium, and longer term can be considered. A more holistic measurement will be the percent of revenue from new products in any one year that is due to products introduced in the last three to five years. This is a common metric for assessing NPD effectiveness for the business as a whole.
- Preparation for the future: Are the projects benefiting the business from a strategic standpoint? Is new knowledge being created that can be leveraged across other product lines? Are new skill sets being fostered to provide long term competitive advantage? Are new markets being developed that are attractive for future products in the portfolio? Many of these considerations will be built into a robust project portfolio process (4).
In conclusion, this article has made the case that NPD is the most complex business process, but that the measurement of “success” typically used only considers the role of R&D. A more progressive method is proposed that considers other factors and accounts for the fact that NPD is a key business process. The method also recognizes that some measures of success are not apparent at the time the project is complete.
How does your company view NPD? Is it treated solely as an R&D function or a key business process? How do you measure the effectiveness as opposed to the efficiency of the process? Are there other ways to measure success above and beyond those proposed in this article?
(2) Aaron J. Shenhar & Dov Dvir, Reinventing Project Management: The Diamond Approach to Successful Growth and Innovation. (Boston, MA: Harvard Business School Press, 2007)
(3) For more information see these articles: The New Employment Deal and the Impact on NPD Knowledge Workers, The Generalist vs. Specialist Engineer Argument, How Does Job Stress Impact NPD Effectiveness?
(4) For more information, see Critical Aspects of Project Portfolio Management in NPD.
New Product Visions is a consulting company that helps organizations improve the effectiveness of their new product development processes. We specialize in small to mid-sized companies that manufacture highly engineered products. Contact us today about how we might help you!
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