A key determinate of innovation success is a robust process for choosing and defining new products. This is part of the “fuzzy front end” and sets the stage for successful innovation. I have written extensively about the concept of the portfolio process (1), but in this two-part article I will focus on the role of a solid product definition in innovation success.
In Part I (2) of this article we discussed four key issues. First, it is important to view product definition as a process, not a singular event. Always remember that the purpose of the product definition is to communicate and make explicit assumptions about what the product will be and maybe just as important what it will not be. We considered some of the challenges in writing a definition and how to address them. Finally, we looked at who should be responsible for the product definition process.
Now let’s turn our attention to the key elements of a thoughtful product definition. We will assume a standardized manufactured product. There are typically two types of documents necessary. The first is essentially a marketing document and sets out the vision for the new product. For the purposes of this discussion, we will call this a “new product proposal”, or NPP for short. Further along the development path, another document will be required and translates the marketing document into an engineering/manufacturing document, and we’ll call that the “product design specification” or PDS for short. While the NPP will likely be written by a product manager with input from all stakeholders, generating the PDS will typically be the responsibility of the project manager.
The NPP will contain six major sections. These include project background, product description, primary uses and test criteria, potential risks, market and financial impact, and finally, a section on resources and major milestones. The background section should describe the business need for the project. In other words, why does the business need to develop the product? Additionally, there should be a discussion of the competitive landscape.
The product description section may be the most extensive. It will provide an overview of the new product and establish an overall “vision”. It will likely include key features and benefits, but allow flexibility on how the project team accomplishes that. How will the new product provide competitive advantage and be positioned? It should describe any new manufacturing processes that might need to be developed as part of the project. Who are the customers and what need is being satisfied? What accessories and product variants are anticipated? What is included in the product, what might be added later, and maybe most importantly, what is explicitly not included in the product nor or in the future? Key performance specifications should be provided, written in a way that provides minimum and target requirements. If software is required, there should be a discussion of those key considerations (3), as well as any service and support considerations.
There should be a section that describes how the product will be used and tested to validate performance, at least for any of the key performance specifications. Potential risks should be highlighted including business, technical, project budget, and schedule risks, if known at this point.
The market and financial impact section might also be very expansive for many projects. This section will require substantial thought on the burdened cost structure for the new product, how much the product can be sold for and unit volume projections, and how these projections might change from introduction through the product life cycle. This information provides the basis for an estimate of gross margin and gross margin percentage over some reasonable period of time. Factoring in project costs up to and after launch, on-going marketing and G&A costs, EBIT and cumulative EBIT can be calculated along with appropriate financial metrics such as NPV.
It is important to again emphasize that especially at the outset of a project, there will be many assumptions. For instance, the product cost estimate is not a single number but a statistical entity. Depending on the type of project the variability in that estimate may easily be +/- 20%. Financial estimates, therefore, need to be viewed with a healthy dose of skepticism and it is important to present worst and best case scenarios rather than a single, definitive projection. In many cases, I believe the value of these kinds of financial projections provide a powerful tool later in the project for decision making. For instance, what happens if a project is delayed six months to allow more features to be added, and possibly selling the product at a higher margin? Is this justified relative to other factors, like the opportunity cost of coming to market six months later? The point is, it is very difficult to have absolute confidence in the accuracy of the projections, but the ability to look at relative differences between various scenarios is a powerful tool.
Before some comments on the final section of the NPP, I want to take a moment and emphasize the importance of product pricing strategy. There was a fascinating article in the Journal of Product Innovation management recently that discussed this issue (4). The authors point out the risk that you can jeopardize all your effort and investment in a new product by not fully considering your price-setting strategy early enough. Product cost is typically determined early in the development process, and without major design loopbacks, you can only impact cost at the margin. I have experienced this personally several times. If you have not fully vetted your pricing strategy, you may either be forced to kill a project after spending significant money (let alone the opportunity cost of not working on other projects) or impact margins and/or market share. Another valid reason for focusing on price, cost, and margin early is to force the organization to consider how customers will view the cost/benefit calculation. While we are always tempted to expand the scope of a new product, will the customer really be willing to pay for it?
The referenced article points out there are two main objectives in setting price: maximizing market penetration or maximizing profit. Based on which one is most important, there are three tools to help set the price: value informed (what is the customer willing to pay for a benefit?), competition informed (what is the competitive price?), and cost informed (what is your product cost?). The optimum price setting strategy or combination of the three strategies will be based on the relative product cost compared to competitive offerings and the competitive intensity, and whether you want to maximize market penetration or profit. Without reviewing all of the author’s conclusions here (5), the point is that serious effort on thinking through your pricing strategy, and therefore the product cost structure, is important early in the project before the cost structure is locked in.
The final section of the NPP should include information on resources and key milestones. It is important that a single overall project manager is assigned responsibility to drive the project to completion and the nature of the team structure be identified (6). At this point, the key members of the project team from engineering, manufacturing, product management/marketing, and service/support should be identified. Explicit in the discussion of resources is that they are actually available to work on the project. A common problem is that a project starts officially, but the resources are not actually available. Of course in many projects the actual contributing members will change as the needs of the project change.
For relatively simple less risky projects, the NPP may in fact be a project plan that details the key milestones all the way through to introduction of the product, maybe including a preliminary Gantt chart. For most all other projects, it is important not to assume that you can actually establish a firm project schedule at this stage. In the context of a typical phase gate development process, the NPP is part of Phase 1, or a concept phase. The main purpose of this phase is to draft the NPP and refine it. The focus is on building the business case. Some basic decisions about the design of the product will be made by engineering or key questions to answer identified. For most projects, therefore, the NPP should only set the target date to the end of what might be called Phase 2, or a concept phase. Phase 2 is typically where a proof-of-concept prototype might be built. I would still consider Phase 1 and 2 to be part of the “fuzzy front end” as there will still be many loop-backs in terms of finalizing the scope of the project, product cost, establishing the schedule, etc. The NPP would typically only set target dates for the end of Phase 2, not establish a date for introduction. For most projects where there is significant uncertainty, whether foreseeable or unforeseeable (typically known as unk-unks), establishing a firm introduction date at this point in the project is foolish (7).
The second key document that falls into the scope of a product definition is what might be termed the “product design specification” or PDS for short. The PDS is an engineering document and will typically be treated just like any other CAD document. Once this document is “released”, it will fall under the “change order” process when any changes are necessary. Creating the PDS document typically falls within the scope of responsibility for the project manager, with input from all stakeholders on the core team. It will typically be an output of Phase 2, as engineering begins to settle on the design, including architectural decisions.
The PDS will typically include six primary sections including the product summary, reference documents, general specifications, technical specifications, service requirements, and manufacturing test requirements. It is worth noting here that an important consideration is alignment between the marketing, engineering, and manufacturing specifications. Sometimes it is useful for the product manager or marketing to actually write a draft of the product brochure at this point. This will make explicit assumptions about how the product will be positioned. Are the marketing specifications supported by the engineering specifications, and is manufacturing actually testing appropriately? These are important considerations.
The product summary section will provide an overall description of the product including notable features, functions, or performance capabilities. It will describe the product variants and differences. It will describe options and accessories. The process of creating this section will help focus the core team on issues such as how are the various product variants going to be manufactured? It will engage manufacturing to consider process implications, inventory issues, etc. The reference section of the PDS will list any supporting documents related to for instance, regulatory compliance, specifications for other existing products that might be used in conjunction with the new product, etc.
The general specifications section will provide basic information such as dimensions, weights, and power requirements if applicable. It will define acceptable environmental conditions where the product will be used. Can it only be used in an indoor environment with tight temperature and humidity control, or is the product used outdoors? Information on what regulatory requirements the product will comply with should be described here. Finally, how the product will be packaged and shipped, as well as any appropriate shipping tests, should be described. It is amazing how useful this information will be months or years after the product is introduced when customers or the service organization has questions.
The technical specification section of the PDS will likely be the most important and lengthy section. Here all the key performance requirements will be detailed, including what test will be done to verify performance. The requirements may involve mechanical, electrical and/or software functionality. The service requirements section will define any specific requirements related to servicing and maintenance of the product. This might include description of components that require specific service needs, routine calibration, special tools, etc.
The final section is the manufacturing test requirements. The team will need to debate and decide on exactly which of the engineering specifications will need to be tested, and how, as part of the manufacturing process to insure product quality. Not all specifications will require testing in normal production, so these test requirements will likely be a subset of the engineering specifications.
In summary, Part II of this article explored the two key definition documents. The “new product proposal”, or NPP, is a marketing document used primarily to establish the vision for the new product. The “product design specification”, or PDS, is an engineering/manufacturing document. It is important to remember that the value in creating these documents is not just the fact that you “check them off your list”, so to speak. The value is the process in creating them. There will be some conflict throughout the process, which is not necessarily a bad thing. It is only through the give-and-take of the process that assumptions are tested and everyone has the same view of what the product will be and what it will not be. If the organization does not have a robust process for defining new products, your ability to successfully innovate will be severely compromised.
How do you approach product definition? Do you use something similar to the NPP and PDS documents described? Are there other considerations that are important not considered in this article?
(1) See these articles on the portfolio process: Critical Aspects of Project Portfolio Management in NPD Success; The Importance of a Balanced Project Portfolio
(2) See Part I of this article: The Role of Product Definition in Innovation Success-Part I
(3) For many projects that have a substantial software component, there will likely be an entirely separate document for those requirements. If the business manages software development using the scrum process, than this will be the product backlog.
(4) T.M. Ingenbleek, Paul, T. Frambach, Ruud and M.M. Verhallen, Theo. 2013. Best Practices for New Product Pricing: Impact on Market Performance and Price Level Under Different Conditions. Journal of Product Innovation Management 30(3):560-573
(5) If you would like additional information on the key conclusions from this research, send me an email at firstname.lastname@example.org.
(6) Team structure options include for instance autonomous, heavyweight, lightweight or functional. The optimum choice will depend on many factors such as the product technology, overall organization structure, culture, etc. Autonomous teams are the best choice for new-to-the-world radical projects but also have disadvantages, and are certainly not as common in small to mid-sized companies. A more common structure is the lightweight team structure with a project manager who may have some direct reports on the project, but more than likely most members will report to other functional group managers. Another common organization structure for managing the project is the concept of a core team whose members represent each functional group. They assist the project leader in coordinating activities across functions.
(7) For a discussion of the importance to understanding project risk and the impact on project management tools, see this article: How Project Risk Impacts Project Management in New Product Development (NPD)
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