Optimizing Product Development

23 Jul 2010 Sandeep Mehta

The paper Balancing Development Costs and Sales to Optimize the Development Time of Product Line Additions in Journal of Product Innovation Management has some very interesting data for all R&D managers.  It has attempted to quantify and test gut feel R&D portfolio managers use in deciding on how to fund development projects – the results might surprise you.

Development teams often use mental models to simplify development time decision making because a comprehensive empirical assessment of the trade-offs across the metrics of development time, development costs, proficiency in market-entry timing, and new product sales is simply not feasible. Surprisingly, these mental models have not been studied in prior research on the trade-offs among the aforementioned metrics. These mental models are important to consider, however, because they define reality, specify what team members attend to, and guide their decision making.

Clearly, problem facing portfolio mangers is rather large – to balance between schedule, costs, market timing and sales (amongst other objectives).  There are no easy approaches to do this quantitatively and managers have to depend on their intuition.  However, the paper’s analysis shows that there is a significant cost to this simplification.  The analysis is based on a significant dataset (albeit one that might have some geographical / cultural bias as it is all from Netherlands).

This survey-based study uses data from 115 completed NPD projects, all product line additions from manufacturers in The Netherlands, to demonstrate that there is a cost to simplifying decision making. Making development time decisions without taking into account the contingency between development time and proficiency in market-entry timing can be misleading, and using either a sales-maximization or a cost-minimization simplified decision-making model may result in a cost penalty or a sales loss.

The results are surprising, but intuitive.  Instead of maximizing just one dimension, optimal results are obtained when a balance is achieved between several competing objectives:

The results from this study show that the development time that maximizes new product profitability is longer than the time that maximizes new product sales and is shorter than the development time that minimizes development costs.

If one is forced lean towards something, development acceleration to maximize sales with associated increased development costs is better than minimizing development costs by extending the schedule.

Furthermore, the results reveal that the cost penalty of sales maximization is smaller than the sales loss of development costs minimization. An important implication of the results is that, to determine the optimal development time, teams need to distinguish between cost and sales effects of development time reductions.

 I have a feeling that this result may have may have other underlying causes like extending development schedule to reduce costs might demoralize teams or increase defects…

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