Measuring New Product Development (NPD) Success

SuccessThere 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.

NPD-Framework_1

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?

Triple ConstraintTraditionally, 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?

Notes:

(1) Accenture Study: Innovation Efforts Falling Short Despite Increased Investment. May 2013.

(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!

Specialties: NPD consultants, new product development consulting, developing new products, new product development seminars, small business consulting, new product development expert, product development process, new product development strategies, integrating NPD for mergers & acquisitions, organizing for innovation, management role in NPD, project risk analysis

9 thoughts on “Measuring New Product Development (NPD) Success

  1. Good article. I was Director of R&D for 5 years at a successful, award-winning, mid-sized aerospace and defence and NASA prime contractor. (I was project manager for many years before that and engineer before that.)

    I implemented a NPD process that indirectly included the standard three metrics, but I think more importantly I implemented a “aggregate opinion” process following part of Applied Information Economics (AIE). It had an embedded Stage-Gate process of stages of development and gate reviews before proceeding. After all of the standard gate view information, the decisions were based on opinion aggregation based on four metrics, all based on opinion scales below.

    The scales for the first two ranged from -5 to +5, where a positive value indicated agreement and negative meant disagreement, and the magnitude (1-5) indicated strength of belief of the voting participant, with zero being unsure either way. The average vote (including the sign in the average) and standard deviations were calculated. The sign of the average indicated the collective decision (for/against), the magnitude indicated the collective strength of belief (weakly to strongly), and the standard deviation indicated the level of disagreement within the participants.

    The second two are scales of 1 to 10 as they do not need a sign for a decision, but indicate risk or value. Again average and standard deviation provide collective value and disagreement.

    The four metrics are:
    1. Sufficient information? Does the voting participant believe the information package for the gate review is sufficient to make a decision about this product, or is there more work to be done in the current phase before re-submitting? (The missing information would have to be identified in the gate review notes.)
    Scale: -5 to +5. A positive average means a decision to move forward to the next question. Negative means the product manager needs to do the identified work and re-submit.

    2. Continue or kill? If the decision in #1 was positive, does the participant believe the product should move to the next stage or be killed as a product. Again, -5 (strongly believe to kill it) to +5 (strongly believe to continue).

    3. Disruptiveness to the industry. (If we built it, will it disrupt the market in our favour?) Scale 1 to 10.

    4. Disruptiveness to the company. (If we don’t build it and someone else does, will they steal our existing customers?)

    I designed the required and optional voting participants to be diverse stakeholders across departments and levels. Early stages required input from the most direct participants but later stages required higher ups and a wider net.

    I’ve also seen virtual market based bidding as a means to aggregate opinions, but that is far more complex especially for small to mid-sized companies.

    It worked well to evaluate risks and potential problems, especially from disagreements. When Marketing gave all +5 and engineers gave all -5, that’s a “cure for cancer” product: easy to sell, hard to make. The reverse is the “engineer’s toy”. Even just identifying who disliked products and why helped to find hidden risks. It also helped to make people feel they’ve been heard, even if overruled.

    • Chad, thanks for your input. I employ something similar in my implementation of the portfolio process and phase gate process. Of course these are meant to help first make sure that the project makes sense at the beginning of the project, and continues to make sense as the product is developed and is finally introduced. Many of the measures I am proposing to measure NPD effectiveness really should address how robust these processes are. Thanks again.

  2. My company’s Gate 4, held approx. 14 months after the launch of a new product, is intended to address some of these additional measures. The cost, performance, and schedule measures are only valid for the development and release phase of the project. We don’t close our projects until the Gate 4 is held and the business measures, including revenue, profitability, margins, and competitive landscape over the year of product availability, are trotted out and the product is deemed as successful and worthy of keeping in our portfolio. Granted, not all products have a swift uptake but the structure of the gate forces us to have a formal review and discussion of the product’s position.

  3. Great article and comments.

    Our company focuses on helping companies’ manufacture their new products in China. We have worked with fortune 500 companies, small businesses, and individual inventors. Across these three groups you can imagine the level of quality of inputs varies drastically for each group. In our experience, fortune 500 companies had better success with there NPD because they are highly in tune with their markets, customers, products, marketing department, sales department, finance and most importantly they have scale and reach. However, even the best, highly efficient NPD teams can fall flat on launch day. Why? like everyone has posted, NPD is an extremely, all encompassing business process that is very complex with many players with different goals and rewards. And because it is so complex we strongly recommend all our clients to stage gate the idea as rigorously as possible right from the start; the sketch on the napkin, the talk with your colleague at lunch, shouldn’t move any further until it meets that particular gates requirements. Even if your are an inventor with a new product idea, don’t build a physical prototype until you validate your idea. We have found that a digital 3D prototype, landing page and google ad words is the quickest way to validate and refine your idea. Just like companies A B test marketing copy, you can A B test product design concepts!

    However, even if you can get the above correct by identifying a concept at a price point that your customers want, doesn’t mean you have a winner, yet. It only means you have identified a product that your customers want at a price point. Now, the undulating process marches forward, backward, left, right sideways and must be checked and guided down the NPD path and pop out on the shelf of a participating retailer near you.

    Just from the manufacturing side, working with Chinese factories, in China, in a different language and a different culture just makes the complexity, well, that much more complex. Just being able to successfully control/understand China manufacturing has given our company a great product/service to sell and this is just a small part of the puzzle that needs to be executed properly.

    NPD is truly an amazing process and I enjoy being part of it everyday.

  4. Did the research uncover any %’s by industry for a best in class?
    For example, a semiconductor mfr may have expect a higher % NPI vs say snow shovels given the compressed technology cycle inherent in the semiconductor industry.

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