The Importance of New Product Development By: Nathan Sutter

THE IMPORTANCE OF NEW PRODUCT DEVELOPMENT

By: Nathan Sutter

Western Illinois University

College of Business & Technology

Advanced Management Accounting Systems

INTRODUCTION

Three research issues were addressed in the essay, "Performance Measures and Management Control in New Product Development." The three questions were; positioning NPD within the firm's organizational structure, the NPD process, and performance measurement. To successfully implement NPD into a company's product development process, performance measures need to be developed to determine the viability and successfulness of new products. Griffin (1997) as well as Hertenstein and Platt (2000) both agree that a formalized NPD process within an organization is necessary to have successful NPD programs.

In the case study of General Electric's Aircraft Engines division, NPD can help to reduce manufacturing inefficiencies in the production of products. General Electric managers said, "We never, shamefully, even discussed that. We thought manufacturing productivity was just a manufacturing problem." A specific engine that is used in Boeing planes was redesigned so that it used less material and therefore making the plane lighter. It was reported that the Boeing 767 saved $150 per hour flown. This is an example of the importance of the NPD process and how it can dramatically affect the profitability of a product. This example was specifically chosen as an existing product because it addresses the issue that existing processes can be improved from NPD principles, which help to achieve desirable results.

PROCESS OF NPD

In 1991 Rochford's article, "Generating and Screening New Product Ideas", Rockford lays out the New Product Development (NPD) process in eight stages. The eight stages are Strategic Planning, Opportunity Identification, Business Analysis, Feasibility Study, Development, Testing, Introduction, and Commercialization.

* Table 2 above was presented in "THE ACCOUNTANT'S CONTRIBUTION TO NEW PRODUCT DEVELOPMENT" by Patricia Hughes and Bernard Pierce; which appeared in The Irish Accounting Review in 2006.

Strategic planning is used to determine which financial and marketing guidelines are to be followed when determining where and how to innovate. Once a company defines areas of innovation then available fields of study can be explored. The fields of search are areas in which the firm can compete. When the fields of search are known then ideas are generated and screened in the opportunity identification stage. In 1987, Bobrow and Shafer wrote a paper titled, "Pioneering New Products: A Market Survival Guide." In this article it outlines specific tasks the finance function serves in the NPD process. The table above discusses these responsibilities and summarizes the role the finance function plays in the NPD process. It shows the finance function is most prominent in stages 3, 4, and 7 (Patricia Hughes). After each stage in the new development process management must approve of the continuance of the project. This prevents proceeding to the next stage in product development prematurely when major problems may have been missed. If the problems are discovered later in the production process and the problems are caught then it is too late and this mistake will cost the firm a considerable amount to fix the problems. Any NDP process that has been approved will need to be formally documented so that reproduction of the process is consistent (Patricia Hughes).

PERFORMANCE MEASURES AND MANGEMENT CONTROL

The table below describes the top financial measures used in companies at the time the survey was taken. The first column (Actual Emphasis) designates the importance placed on the financial measure used. The second column (Desired Emphasis) describes the amount of importance the financial measure should have. Economic value added and development process cost stick out because they are measures that are not currently used very often but should be as noted by the survey. The respondents surveyed thought that these measures should have more significance. The next section outlines the reasons why accurate reporting and control of development cost is so important. (Julie H Hertenstein)

* Exhibit 5 above was presented in "Performance measures and management control in new product development" by Julie H Hertenstein and Marjorie B Platt; which appeared in Accounting Horizons in 2000.

The table above describes only financial measures used to measure the performance of a NPD project. Along with financial measures there are non-financial measures that are just as important. Hertenstein and Platt (2010) list 28 non-financial measures that companies are using. These measures have the same ranking method as the financial measures discussed above. The top 5 most desirable non-financial measures were product satisfaction, alignment of design with strategy, product-ease of use, time to market, and % of products that meet 1st design needs. All but one of these measures was actually at the top of the company's list of important non-financial measures in NPD. A firm's ability to align design with strategy was the one measure that firms wish to emphasize more in their design processes. Management control in NPD can help to achieve greater significance and in the areas firms are weak in. The management function is important to the NPD process; and when management control is linked with design and company strategy, the NPD process can be focused to achieve the best results. (Julie H Hertenstein)

NPD RELATED COSTS

Imbro (1986) discusses Costs that are associated with developing new products. He summarizes these costs into three parts: (1) Model Cost, (2) Prototype cost, and (3) Production cost. The three parts are separate stages that must be approved by management to continue the development of products. Model costs do not require special allocation. The allocation is built into the budget for new product costs. Costs are estimated for the projects based on historical figures. The products in this stage are very premature and do not require individual tracking. The next stage, Prototype cost, is the cost associated with projects that have gotten the okay to continue to the next stage, which is to develop a prototype of the product. An analysis of the quantity to be produced is completed. The total project