6.01 - Product Introduction – The Strategic Issues

The Case for Action

Introducing innovative products that create sustainable competitive advantage is clearly a strategic issue. And the case for action is compelling for any business. Effective New Product Introduction is fundamental to the long term success of all businesses. It has a major impact on:-

• Unit manufacturing costs
• Market Share
• Time to Market
• Customer Satisfaction
• Profitability
• Product quality and reliability
• Company Image

New Product Introduction (NPI) is the only source of long term competitive advantage. Companies with fast and efficient NPI processes that provide customers with the products and services they demand will win over competitors that are slow to react to market changes and advances in product and process technology.

Changing from a run of the mill operations process to one that is world class would typically give product cost savings in the region of 15%. Whereas, creating a world class New Product Introduction Process would normally give product savings in the region of 50%. However, it must be remembered that these savings will not be forthcoming until after the first product from the re-designed processes has been sold.

It has been proven that companies that are first to market are likely to have the largest market share in the long run. Market share has a major impact on economies of and profitability. Being six months late can slash a product’s life time by as much as fifty percent.

There are examples, probably in every industry, where one company launches a product and grabs the lion’s share of the market from its competitors. Conversely, there are examples where poor new product introduction causes the collapse of the company.

Companies with fast new product introduction processes can either be first to market of incorporate newer technologies in their products and processes. Alternatively, they can respond quickly to competitors’ actions and pursue a follow the leader strategy.

The Four Primary Variables in New Product Introduction

There are Four Primary Variables in New Product Introduction:-

• Time to Market
• Development Cost
• Quality (Product Functionality)
• Product Unit Cost

These variables are under the control of management. In almost every company performance against all the variables can be radically improved – up to a point. For example, it may not be possible to reduce unit manufacturing costs without increasing development costs. At this point a decision must be made to improve the performance against one of the variables at the expense of the others. Simple financial models should be developed to identify the best course of action. The old adage “it is better to be about right than precisely wrong” applies. The financial models should be conveyed in meaningful terms. For example:-

• Reducing time to market by one month increases profits by £100K.
• Decreasing development costs by £50K causes a one month delay that costs £75K in lost profit (net effect £25K loss on cutting the development cost)
• Including a specific gadget on the product costs £20K in the development costs but allows 1000 products to be sold for £1 extra profit (i.e. the increase in development costs out weigh the extra profit of £1000)

If managers understand these variables sensible decisions will be made that support the business objectives. Not understanding the variables leaves the management of the new product introduction process to luck.