Developing a Competitive Product Concept

(1)

Developing a Competitive Product Concept

.

NOTE: This thesis is censored because of proprietary information. Therefore company

names, raw materials, product and intermediate product names are altered.

Groningen, November 2009

(2)

Developing a Competitive Product Concept

.

University of Groningen

Faculty of Economics and Business MSc. Technology Management

Supervisors University of Groningen: Drs. H. van der Meulen

Prof. Dr. A.A. Broekhuis

(3)

MSc. Technology Management 2008/2009 | Summary III of VIII

Summary

This study contributed to new product development at ABC. The research goal was stated as follows: “Design a route of development for a new PRODUCT 2 competitive product concept, on which the management board of ABC can decide measures for developing the new product concept”. Consequently this study addressed multiple new product concepts, an aggregated concept design foreseeing in the goals set, a business case and a risk assessment.

It was found that the synthesis and final product depicted in figure I foresee best in the PRODUCT 2 customer needs and ABC’s strategic aims. The main advantage of this synthesis is that, at equal material cost and yields, it is always cheaper than PRODUCT 2. The material cost difference at current PP yields is 25%.

CENSORED

Figure I – Synthesis of the New PRODUCT 2 Competitive Product

The manufacturing process of this synthesis was innovated. The already developed PRODUCT 1 process resulted in a product cost price being too high. The innovation effort resulted in the creation of two processes: (1) using PP equipment and (2) using a semi-continuous work-flow (table I).

PRODUCT 1 process

PP process Semi-continuous process

Material Cost €7,72/kg €5,66/kg €5,21/kg

Tolling Cost €6,03/kg €1,19/kg €1,19/kg

Operational Cost €3,87/kg €0,99/kg €1,04/kg Total product cost €17,17/kg €7,83/kg €7,44/kg

Table I – Overview of the Product Cost Corresponding to the Redesigned Processes

(4)

MSc. Technology Management 2008/2009 | Summary IV of VIII Easy Entrance Dedicated PP Semi-Continuous Plant

Risk Very low Low High

Volume [tonne/year] 100 500 1.000

Alliance sales maximum

[tonne/year] 38.5 100 100

Production method PP PP PP, and semi-continuous plant

Fixed capital *€+ n.a. n.a. 3.632.365

Payback [years] 3 3,5 5,75

NPV *€+ 551.922 2.790.193 3.159.928

IRR [%] 64 97,5 59,5

Table II - Characteristics of Generated Scenarios

This research showed that ABC should use the easy entrance scenario to enter the market. This way a low risk market entrance can be made. Synergy effects with PRODUCT 1 are strongly present as economies of scale can be attained for raw material purchase. Furthermore, development effort is expected to be also beneficial to PRODUCT 1.

The risk assessment showed that ABC has an opportunity to make the new product even more competitive. When ABC invests in an integrated raw material 2 production facility product cost are believed to be reduced with €2,43/kg. When low cost producers enter the market an integrated raw material 2 production facility is crucial to maintain competitive.

Based on market experience ABC should decide whether to make the transfer to the dedicated PP scenario. When sales are expected to rise from 100 to 500 tonne/year within two years, ABC should further increase their profits by advancing to the dedicated PP scenario.

Keywords:

(5)

MSc. Technology Management 2008/2009 | Contents V of VIII

Used Abbreviations

B2B = Business to business

CF = Cash Flow

CIS = Chemical Information Services CSTR = Continuous Stirred Tank Reactor

GC = Gas Chromatography

GC-MS = Gas Chromatography-Mass Spectroscopy

HoQ = House of Quality

IRR = Internal Rate of Return

Kg = Kilogram

MCP = Material Cost Price

MEP = The administrative application used for financial, sales and QA purposes

MM = Million

PP = Production Plant

NPV = Net Present Value

PFD = Process Flow Diagram

PFR = Plug Flow Reactor

PIC = Product Innovation Charter PI-sheet = Product Information sheet

PV = Present Value

R&D = Research and Development

REACH = Registration, Evaluation, Authorisation and restriction of Chemicals

RPM = Rounds Per Minute

T = Temperature

TTM = Time-To-Market

QA = Quality Assurance

QFD = Quality Function Deployment SHE = Safety, Health and Environment

SHEQ = Safety, Health, Environment and Quality

UF = Use factor

(9)

MSc. Technology Management 2008/2009 | Introduction 1 of 84

1 Introduction

This thesis gives the results of a study investigating the development route for expanding the PRODUCT 1 family with a PRODUCT 2 competitive product for ABC. The research was conducted at the request of the R&D and marketing & sales department in the context of a final research project, concluding the Master Technology Management at the University of Groningen.

In this section first the company ABC will be introduced briefly, followed by the motivation for this research and the research goal.

The introductory chapter will be followed by a chapter stating the research design, including: the area of concern, framework of ideas and methodology used for this research. Subsequently the strategic objectives for this project will be described in chapter 3. Generated concepts shall be presented in the succeeding chapter and the results of the concept selection process will be presented in chapter 5. The selected concept will be further developed in chapter 6. Finally, conclusions and recommendations for a development route for the PRODUCT 2 competitive product will be presented.

1.1 Company Description

CENSORED

1.2 Research Motivation

Partially CENSORED

Company ABC is too dependent on one product, of which the demand is declining, therefore there is a need to develop new products.

During first scans of the archive of ABC and scientific literature, several ideas came up for new product concepts. However, ABC was not sure whether this scan was sufficient and did not know how to make a funded choice for a specific concept. Furthermore, due to negative financial results, ABC does not have sufficient resources to develop a funded business case for the selected concept. So in order to assist ABC in designing a new product concept and create a, for ABC suitable, development route this master thesis research project was formulated. The aim of this research project is to give the management board of ABC suitable information to base their ‘go to development decision’ on.

1.3 Research Goal

(10)

MSc. Technology Management 2008/2009 | Research Design 2 of 84

2 Research Design

Any decent piece of research should consist out of the following elements: (1) the area of concern, (2) the framework of ideas and (3) the methodology (Checkland and Holwell, 1998). In order to logically construct a clearly defined and recoverable master thesis, these elements will be used. The framework of ideas contains knowledge

that has been found through research and should apply to the area of concern. This framework is embodied in a methodology, which “marshalls various methods, tools and techniques in a manner appropriate to the framework of ideas, and use them to investigate the situation of interest” (Jackson, 2000).

The following sections will successively discuss these elements of research. Section 2.1 will concentrate on the area of concern which is formed by the PRODUCT 2 market and the organization (ABC). Secondly, section 2.2 introduces a framework of ideas which consists of theory relevant to the area of concern, as well as, an outline of the research approach used. Finally, section 2.3 elaborates on the methodology which is used to conduct the analysis and generate results.

2.1 Area of Concern

This section will discuss the area of concern, which is the context in which the subject of this thesis is embedded. ABC can be described as an open system. Hence, ABC is influenced and shaped by its environment and strives for survival (de Leeuw, 2002). This environment influences decisions and generates pressures for change. In paragraph 2.1.1 the PRODUCT 2 product market will be described. However, the PRODUCT 2 market characteristics are but one facet of the area of concern. The organization itself is also part of the area of concern and relevant aspects will be described in paragraph 2.1.2. The conclusive section will address the focus and intentions of this thesis, as well as, its position within the area of concern.

2.1.1 Dynamics of the PRODUCT 2 market

The PRODUCT 2 market is defined in this research as: “the entire environment of PRODUCT 2 suppliers and buyers”. An analysis of the PRODUCT 2 supply chain indicated that the product is situated in a business to business market (B2B market). A B2B market is defined here as: “the sales of products to customers who in turn use those products directly for or in their production processes or resell the product to other businesslike customers” (Biemans, 2004). The sales of PRODUCT 2 are thus dependent on the sales in other (consumer) markets, which makes the buying process of the limited amount of customers complex and difficult to analyze (Biemans, 2004; Jobber, 2007).

(11)

Suppliers

An investigation of the market indicated that currently seven organizations produce PRODUCT 2. The current producers of PRODUCT 2 are dispersed globally in the following fashion:

US 3 Europe 2

Eastern Asia 1 India 1

Since PRODUCT 2 its introduction in 1959 the market grew to a sales level of 9000 tonnes in 2007. It is expected that the market volume will decrease to 7000 tonne in 2010 and then the market volume will grow with 10% per year. Furthermore, four producers have integrated production facilities of raw material 2, a key raw material in the current manufacturing process of PRODUCT 2.

In combination with the experience and knowledge of both a ABC quality assurance employee and the manager of marketing and sales at ABC market shares were determined (figure 4). The obtained Herfindahl index of 0,26, indicates an oligopolistic market character. Additionally the total amount of producers is low, which is also an important characteristic of on oligopolistic market (Besanko et al. 2004).

In an oligopoly the actions on price and production strategy of one firm will significantly influence overall market price and production levels (Besanko et al. 2004). Thus, opposed to a monopolistic market, the PRODUCT 2 market and its players are closely linked. Therefore it is possible to obtain PRODUCT 2 market share if a different price and/or production strategy is applied due to the close interrelation of market players.

A scan of the market indicates a selling price of €11,90 to €16,00 per kg of PRODUCT 2 and a market value of approximately €100MM (using an average unit value of €14/kg).

Customers

The market dynamics, as indicated in the definition of a market, are also influenced by customers. In order to obtain understanding in which PRODUCT 2 customers exist and what their main (product) preferences are, an analysis of the downstream side of the supply chain was performed. It is important that the entire downstream side is investigated, since PRODUCT 2 is a B2B product and thus sales are heavily influenced by derivative and consumer markets (Biemans, 2004; McGee, 2006). The downstream side of the supply chain consists out of the perfumer, evaluator, manufacturer and the final (consumer) market.

The perfumer is a direct customer of the manufacturing process of PRODUCT 2 (figure 5). The function of the perfumer is to formulate a perfume that complies to the profile of the evaluator or manufacturer. The formulation which needs to be approved by the evaluator. The evaluator judges the formulations that are send to him by different perfumers. The formulation that fulfils the

35%

30% 20%

5%5%5%

(12)

MSc. Technology Management 2008/2009 | Research Design 4 of 84 evaluator’s criteria best, will be chosen and send to the manufacturer. The manufacturer is the producer of consumer goods (e.g. detergent powder) and will process the perfume in its products.

manufacturing

process Perfumer Evaluator Manufacturer Consumer market

Distibuters

Buyers

Perfume Sales

Figure 3 – A graphical representation of the downstream side of the PRODUCT 2 supply chain

Via distributors or direct sales the perfumer can also be reached, nevertheless it is the perfumer who determines the formulation used in a perfume. Hence, the needs of the perfumer have to be determined.

By consulting professional literature (Sell, 2000; Chiris, 1981) a quality assurance employee, a retired evaluator and a current salesman, insight in the general needs of the perfumer was obtained. By verifying these needs with an experienced perfumer three different sources were consulted and triangulation was applied.

Figure 4 – Depiction of the general perfumer needs

The general needs of a perfumer are depicted in figure 6 above. For more information about the perfumer needs see appendix 3.

The general perfumer needs are linked to PRODUCT 2 in order to gain insight in the direct customer preferences.

The PRODUCT 2 market is relatively large and alternatives for PRODUCT 2 (e.g. PRODUCT 1) could not compete with PRODUCT 2 for very long. PRODUCT 1 for instance, is a better performing chemical compared to PRODUCT 2. Due to the higher selling price, PRODUCT 1 sales levels don’t exceed 50

Quantity

Performance Stability

Safety Price

(13)

MSc. Technology Management 2008/2009 | Research Design 5 of 84 tonnes/year. In times when PRODUCT 2 capacity is short, the sales of PRODUCT 1 increase. Thus a similarity in performance and usage of PRODUCT 1 and PRODUCT 2 exists. Furthermore no significant safety, stability or quantity differences exist between PRODUCT 2 and PRODUCT 1. Hence, customers do not need a different smell compared to PRODUCT 2 for PRODUCT 2 purposes. Therefore the current odour description of PRODUCT 2 can be seen as the customer need regarding aroma performance and innovativeness.

Perfumers use PRODUCT 2 mainly in perfumes for: shampoos, fine fragrances, shower gels, soaps, detergents, softeners, all purpose cleaners and candles (PI-sheet PRODUCT 2, 2009; stability tests ABC, May 2000 and October, 1998). Because PRODUCT 2 is used in all purpose cleaners, it must be stable in chlorine.

The product safety aspects are also important for PRODUCT 2 customers, because usage of PRODUCT 2 is in cosmetics. Hence, it must be safe for humans to use. PRODUCT 2 has a (very) low toxicity level. It was tested that at inhalation, ingestion and with eye or skin contact the product has no known significant effects or critical hazards. Additionally, PRODUCT 2 is a non-sensitizer for the skin.

Price is an important need for PRODUCT 2 customers. Due to high switching costs no perfumer wants to switch to another PRODUCT 2-like aroma when it does not give any clear advantages. In addition, PRODUCT 2 is a commodity product, according to characteristics described by Biemans (2004) and Pollak (2007). Main characteristics that apply are: the relatively large market volume, low degree of differentiation and wide variety of usages. However, the little degree of differentiation and large market volume make supplier switches for customers relatively easy, since overall perfume quality will not be influenced.

Finally, the quantity and time aspects are important for the (indirect) customers of PRODUCT 2. The relative large amounts in perfumes and the voluminous consumer markets of PRODUCT 2 are main factors contributing to this. Additionally, PRODUCT 2 customers (both perfumers and manufacturers) want to have on-time deliveries due to market standards.

2.1.2 Organizational Context

(14)

MSc. Technology Management 2008/2009 | Research Design 6 of 84 In order to structure the process a conjoint analysis was used based on Crawford and Di Benedetto (2006). During the meeting twelve goals were presented and the priority was determined using conjoint analysis, giving insight in the strategic directions for this project. In order to prevent the bazooka effect and to more effectively use the time available, the strategic goals were determined up-front based on individual interviews with each separate member and theory about the key performance indicators (Slack et al. 2004).

The reasoning and choice of the participants makes it possible to link each strategic objective to a performance indicator according to the theory of Slack et al. (2004). Because three of the stated goals were not contributing directly to one of the performance objectives they were discarded. The result of the strategy determination is shown in table 1. For the reasoning about the link between the strategic objectives and performance indicators see appendix 6.

Project strategic objectives Performance indicators

1. The project must have a maximum payback period of 3 production years, after the first kg of production

2. Generate a cost price of below €9,50/kg product, after 2 months of production

3. Achieve an internal rate of return (IRR) of at least 15%, after seven plant production years

Cost (and quality, flexibility, speed and dependability) Cost

Cost (and quality, flexibility, speed and dependability) 4. Design a business case that enables a constant selling price right

after the first kg of production

5. Generate a 90% on-time delivery within one year of production 6. 98% of the deliveries must be on specification after 6 months of

production

Flexibility and dependability Flexibility and dependability Quality

7. Develop at least one new product, using one of the raw materials that are used in the new product, after two years of production 8. Obtain a 6 week delivery time anywhere within 3 years

9. Create a production capacity of 25% of the expected PRODUCT 2 market share before production

Flexibility and dependability Speed

Dependability

Table 1 - Prioritized list of the strategic objectives relevant for the development effort

2.1.3 Focus of this Master Thesis

Now the area of concern has been portrayed, the focus of this research can be addressed. It was found that haste is needed to improve the financial situation at ABC. Expansion of the PRODUCT 1 family was chosen to turn the tide. This decision is in line with the middle-long term strategy of ABC and furthermore, current knowledge about the PRODUCT 1 process and customers is likely to be beneficial.

(15)

MSc. Technology Management 2008/2009 | Research Design 7 of 84 Given the time scope of six months, this research will only design a route for further developing the new product concept. Hence, it is not aimed at implementing the proposed development route.

2.2 Framework of Ideas

In section 2.1 the area of concern was presented, showing the problem domain. This section will first introduce the theoretical background relevant to the subject at hand (section 2.2.1 and section 2.2.2). The research goal and questions for this research will be defined in section 2.2.3. The constraints by which this research abides are enumerated in section 2.2.4. Ultimately, a summarized overview of the framework used for executing this research is given.

2.2.1 Theory of New Product Development

New products have always been of interest to both academics and practitioners. Organized college-level instruction on the subject of new products management traces back to the 1950s. In 59 years of study on new product development it can be concluded that the creation of a new product is a process consisting of a sequence of steps (or activities) that an organization has to employ to conceive, design and commercialize a product (Ulrich and Eppinger, 2008).

A generic product development process of six phases was derived, applying to innovation processes (figure 7). This process begins with an opportunity and ends with profit. During the process an evolving product, or more specifically new product concept, exists (Crawford and Di Benedetto, 2006). This evolving concept generates a higher market value the more it is explored. Graphically this evolving process can be described using life cycle modelling (figure 7).

Figure 5 - The concept life cycle

Cl

ar

ity

Market Value

Concept Life Cycle

(16)

Need

Form

Technology

Need-form concepts New product concepts Form-technology concepts Need-technology concepts

A New Product Concept

A new product concept is an approximate description of the technology, working principles, and the form of the to be developed product (Ulrich and Eppinger, 2008). Crawford and Di Benedetto (2006) give a more concrete and in depth definition of a concept and link customer needs to a new product concept. Cooper already demonstrated in 1987 that customer preferences are (highly) important for the financial success of a new product concept. Therefore, this research will take the customer need element into account in the definition of a concept.

The form is the created physical product. The technology is the source used for attaining the form. Finally, the working principles must foresee in the customer needs (Crawford and Di Benedetto, 2006). The relation between the three aspects of a concept is graphically shown in figure 8.

Figure 6 – Concept combinations

Hence, the six development phases should generate enough knowledge and expertise (clarity) in all three facets of a new product concept in order for the concept to become a market success.

Knowing the characteristics of a new product concept, the contents of the development phases will be discussed hereafter.

Development Process: Elucidating the Phases

(17)

Planning Phase

The planning phase in new product development consists of articulating the opportunity that exists in the market or organization. This could be either an internal skill or resource, or a customer problem. During this phase an idea concept will be formulated. Important facets during this phase are (Ulrich and Eppinger, 2008):

 the mission statement: the opportunity statement rewritten as a product vision statement.

 product description: a brief description of the product defining, the basic function of the product without implying a specific product concept.

 benefit proposition: states the critical few reasons why a customer would buy the product.

 key business goals: here the project goals (supporting the corporate strategy) are mentioned.

 target markets for the product: here the primary as well as any possible secondary market(s) will be identified.

 assumptions and constraints: assumptions, when made carefully, help to maintain a manageable project scope. Constraints limit the development effort.

 stakeholders: to ensure that most of the subtle development issues are addressed, all products stakeholders must be mentioned in the planning phase. A stakeholder is defined as any person involved or affected by the development effort (de Leeuw, 2002).

The aforementioned facets will be mentioned in the Product Innovation Charter (abbreviated: PIC). It was already shown in 1987 that a clear defined protocol strongly supports the development process (Cooper and Kleinschmidt, 1987). Also significantly shown to be important is that the PIC has a fit with both market and technology. Hence, the ability of the concept development process to build on the firm’s existing competences and resources is salient.

Concept Development

Concept development is the second stage in new product development processes. During concept development the needs of the target market are identified, alternative concepts are generated and evaluated and one or more concepts are selected for further development and testing (Ulrich and Eppinger, 2008). Concepts can be generated by using the five step method consisting of:

1. clarifying the problem

2. performing an external search (e.g. users, experts, patents literature, benchmarking)

3. carrying out an internal search (e.g. individual/ group discussions, documentation, benchmarking)

4. exploring systematically (e.g. using a combination table (Ulrich and Eppinger, 2008)) 5. reflecting on the generated solutions and the process

(18)

MSc. Technology Management 2008/2009 | Research Design 10 of 84 screen to limit the amount of concepts, reduces the commitment of resources to concepts that are likely to fail.

Concepts that pass the concept screening stage will be evaluated in depth during concept scoring. Scoring the concepts is of great importance in the development process as it will determine indirectly which concepts will be “killed”. Therefore, concept scoring needs an increased resolution and will better contrast the concepts compared to concept screening. Other (management) objectives will also benefit (Crawford and Di Benedetto, 2006). First, it will help ABC to decide whether to go forward with a specific concept or to quit the project. Secondly, the scoring process helps to manage the new product development process by sorting the concepts and identifying the “best” one. And finally, executing concept scoring will encourage cross-functional communication and will thus facilitate learning, particularly making managers more sensitive to how other functions think (Crawford and Di Benedetto, 2006; Dale et al. 2007; Joglekar and Ford, 2005; Tidd et al. 2005; Ulrich and Eppinger, 2008). Based on the performed analyses, the next part of the concept development phase can be performed: concept selection. The selected concept will be further developed in such a fashion that the management board of ABC can make the go-to-development decision.

For making the decision to proceed to the actual development phases (system-level design and detailed design) six types of criteria can be classified (Cooper and Kleinschmidt, 1987; Cooper, 2003; Cooper, Edgett and Kleinschmidt, 2002). Based on scientific research and best practices these criteria are: (1) strategic, (2) product advantage, (3) market attractiveness, (4) synergies, (5) technical feasibility and (6) risk versus return criteria (Cooper, 2003; Cooper et al. 2002).

The deliverable of this phase encompasses the form and technology of the potential new product, plus a clear statement of benefit (Crawford and Di Benedetto, 2006). It must be accompanied by a set of specifications (stated in the PIC), an analysis of competitiveness and an economic justification of the project giving insight in the six decision criteria of Cooper et al. In order to attain a sufficient score on the go-to development decision criteria, a process innovation approach can be used for developing the concept. This approach is described in section 2.2.2.

Actual Development: System Level Design and Detailed Design

(19)

MSc. Technology Management 2008/2009 | Research Design 11 of 84 Figure 7 (pp 10) shows that most clarity is attained during testing and refinement. Therefore the actual development stages should carefully define the actions needed for conducting the testing & refinement phase. This way a high market value is attained in a cost and time effective manner.

Testing and Refinement

Testing and refinement is the fore last phase in developing a new product. It involves the construction and evaluation of multiple preproduction versions of the product. Both alpha and beta prototypes of the product and production processes are used to determine whether the concept foresees in the key customer needs, what the actual performance of the product is and to identify any engineering changes (Ulrich and Eppinger, 2008).

Ramp-up

The final development phase is the production ramp-up or launch phase. During this stage the product is made using the intended production system. The purpose of the ramp-up is to train the work force and to work out any remaining problems in the production process.

Though this is the final stage of the new product development process, the development effort is however not completely finished. New development cycles should be started in order to continuously improve and learn from the product and the customer reactions (Crawford and Di Benedetto, 2006; Tidd et al. 2005; Ulrich and Eppinger, 2008).

In 1988 Cooper designed the first version of the stage-gate model in order to structure the process of developing new products (Cooper, 1988). This model will now be discussed.

Organizing the Development Effort: A Multistage, Disciplined New Product Process

A stage-gate process is a conceptual and operational roadmap for driving new products from idea to launch, successfully and effectively (Cooper, 2003). The pay offs of using stage-gate have been frequently reported: improved teamwork, less recycling and rework, improved success rates, earlier detection of failures, shorter development times (approximately 30%) and increased profitability (Cooper, 1988, 2001 and 2003; Crawford and Di Benedetto, 2005). The explicit goals of a stage-gate process include:

 doing things right. Processes lay-out, prescribed actions and best practices as a guide for the project team.

 building in the critical success factors. Using stage gate the critical success factors at decision points can be build in at every project design.

(20)

MSc. Technology Management 2008/2009 | Research Design 12 of 84 stage is a gate. Such a gate serves as a quality control and “Go/Kill” check points in the process. Figure 9 shows the stage gate process graphically using the development phases described earlier.

PLANNING CONCEPT DEVELOPMENT (I) CONCEPT SYSTEM-LEVEL DESIGN DETAILED DESIGN TESTING & REFINEMENT RAMP-UP / LAUNCH Focus Concept Selection Go to development

Driving New Products to Market

Based on: (1) strategy (2) product advantage (3) market attractiveness (4) synergies (5) technical feasibility (6) risk versus return

CONCEPT DEVELOPMENT

(II)

Figure 7 - Stage-Gate Development Process

The Stages

In the stages the work is being performed. The stages enable gathering of the required information to advance the concept to the next gate. Stages are characterized by their cross-functionality. They consist of a set of parallel activities using information from different functional areas (Cooper, 2003; Tidd et al., 2005; Ulrich and Eppinger, 2008). The parallel activities in the stage gate process must be designed to gather vital information in order to drive down the technical and business risks and increase the degree of clarity about the concept. Since each stage becomes more costly than the preceding one, decisions manage the project. “As uncertainties decrease, expenditures are allowed to mount: risk is managed” (Cooper, 2003).

For each stage to obtain the desired information, the stages are linked to the development phases found by new product development research of Ulrich and Eppinger (2008). The stages are depicted as squares in the graphical stage-gate model in figure9.

The Gates

Prior to each stage is an entry gate, shown as diamonds in figure9. Effective gates are central to the success of a fast paced, new product process (Cooper, 1988 and 2003):

 Gates serve as quality control checkpoints (“is this project being executed in a quality fashion?”).

 Gates also serve as “Go/Kill” and prioritization decision points, providing the funnels where mediocre new product concepts are culled out.

(21)

MSc. Technology Management 2008/2009 | Research Design 13 of 84 Cooper intended the gates to have a common format consisting of: (1) deliverables, (2) criteria and (3) outputs. The deliverables are the inputs into the gate review. In other words these are the results of the actions taken during the foregoing stage. The criteria are the questions or metrics on which the concept is judged in order to generate the gate outcome. Finally, the outputs are characterized by the results (“Go/Kill/Hold/Recycle”) of the gate review.

2.2.2 Theory of Process Innovation

In order to propose a new product concept that foresees in the demands of the customer in a superior fashion, the generated concept will be innovated. Using a benchmark process and setting up appropriate objectives and attributes for the innovation effort, will generate a concept with the potential of delivering a high customer value and increased results for the organization. Another reason arguing that the process innovation perspective is suitable, is the clean slate that is necessary for carrying out the innovation effort. Since, the selected product concept is new for ABC, the effort will in a lesser degree be burdened by existing processes.

Developing the New Product Concept: A Process for Generating Innovative Results

Davenport (1993) describes a methodology for attaining a process vision and identifying enablers for process innovation. A process is defined here as a specific ordering of work activities across time and place, with a beginning, an end, and clearly identified inputs and outputs. Innovation is characterized by the radical level of change.

The approach of Davenport (1993) is based on best-practices from different industries and companies and has proven to yield impressive cost reductions. The method describes a high-level approach to process innovation in five steps (figure 10).

Figure 8 - Process Innovation sequence

Combining the approach of Davenport with findings of Tidd et al. (2005) every part of this approach should be evaluated and learned from. This way next development efforts will have increased performance. The learning cycles will however not be part of this thesis.

Identifying Processes for Innovation

For selecting a process for innovation five criteria are important: (1) knowledge of major processes, (2) the process boundaries, (3) the strategic relevance of each process, (4) the “health” of each process and (5) the quality of the culture and politics of each process.

Developing Process Visions

A process vision can be derived though the business strategy and contains process objectives and attributes (figure 11) (Davenport, 1993). The process objectives include the overall process goal,

(22)

Figure 9 – Strategies, Visions, Objectives and Attributes (Davenport, 1993)

specific type(s) of improvement required and numeric target(s) for the innovation. Both general process functionality and change goals should be addressed by these

objectives (Davenport, 1993). Process attributes, according to Davenport, are the descriptive non quantitative adjunct to process objectives and constitute a process vision of process operation in a future state.

Hence, the process vision should link high-level strategies to measurable objectives for process performance and understandable characteristics for process operations and they set targets both for the designers of the process as for those who manage the process.

Understanding Existing Processes

Understanding existing processes is important for at least four reasons (Davenport, 1993):

1. Understanding existing processes facilitates communication among participants in the innovation initiative.

2. There is no way to mitigate to a new process without understanding the current one.

3. Recognizing problems in an existing process can help assure that they are not repeated in the new process.

4. Understanding current processes provides a measure of the value of the proposed innovation.

Key activities that can be distinguished in understanding and innovating the benchmark process are: the current work flow, the assessment of the benchmark process in terms of the new process objectives and attributes, the identification of shortcomings in the process and the assessment of current technology usage and organization.

Identifying Change Levers

The process vision can be completed by identifying concrete enablers for process innovation. Davenport (1993) describes technological and organizational/ human factors as most important change enablers. Other research (Zuboff, 1988) supports Davenport’s findings in practice, and argue that process innovation can seldom be achieved in absence of a carefully considered combination of both technical and organizational enablers.

Designing the New Process

Knowing the complete process vision and having identified both organizational and technological enablers of change, the new process can be designed and assessments can be made for the proposed performance of the process.

(23)

2.2.3 Defining the Research Goal and Questions

Now the area of concern is portrayed, and an introduction is given to the development framework, the research goal and questions should provide structure for the successive part of this thesis. ABC has a lack of information for making the “go to development” decision. Therefore the research goal is stated as:

“Design a route of development for a new PRODUCT 2 competitive product concept, on which the management board of ABC can decide measures for developing the new product concept.”

It was already defined that new product development was selected in order to increase revenues. Therefore the structure of this thesis shall be led by these elements. The subsequent research model (figure 12 (pp.21))and questions are derived from those elements.

In order to attain the research goal the first two gates and three stages will be executed (table 2). The planning stage was already addressed in section 2.1 enabling the creation of the PIC. All following decisions of the development team should be consistent with the PIC. Furthermore, the cost of each successive stage increases which makes recycling expensive. Therefore in the focus gate the attainment of a strategic fit is highly important.

The attained project focus, in the PIC, shall be leading for the concept analysis. Analyzing customer needs, ABC’s strategic aims and competences enables a concept pre-selection. The remaining concepts will be analyzed in more detail. This will create enough information to conduct the concept selection in chapter 5.

(24)

Stage/Gate: Emphasis on: Criteria: Chapter:

Planning Stage Articulate opportunity and define new product market

Strategy

Product advantage Market attractiveness

2.1

Focus Gate Strategy determination

Focus on strategic fit Deliverable: PIC

Strategy

Product advantage Market attractiveness

3

Concept Development (I) Stage Concept generation Concept analyses Product advantage Strategy Synergy Technical feasibility 4

Concept Selection Gate Using concept analyses to make a funded choice for a concept

Strategy

Product advantage Technical feasibility Synergy

5

Concept Development (II) Gate Insight in technology, form and environment enable the design of the business case and development route Risk vs return Technical feasibility Market attractiveness Product advantage Strategy 6

Table 2 - Outline of the research

As this research is aimed at designing a development route for a PRODUCT 2 competitive product, the main research question is as follows:

“How should the development route for the selected PRODUCT 2 competitive product concept, for ABC, be designed?”

In order to scope and clarify this research question the elementary components will be defined here. A development route consists the following aspects, based on best practices (Cooper et al. 2002):

1. Strategic (degree to which the project aligns with the organization’s strategy and the fit with the targeted market).

2. Product advantage (the (unique) benefits the product offers and indications that the new product has a high degree of “value-for-money”).

(25)

MSc. Technology Management 2008/2009 | Research Design 17 of 84 5. Technical feasibility (concentrates on possible technological gaps and uncertainties)

6. Risk versus return (stating the expected profitability, return, payback period and the certainty of these return and profit estimates)

A PRODUCT 2 competitive product is defined in this research as: a physical product that outperforms PRODUCT 2 on speed (i.e. minimize the time a customer has to wait), cost (i.e. to do things cheaply), dependability (i.e. the ability to change processes), quality (i.e. to provide error free products and services) and/ or flexibility (i.e. to change fast and far enough) (Slack et al. 2004), and thereby better foreseeing in the current PRODUCT 2 customer needs. Based on the area of concern (section 2.1) it was found that the PRODUCT 2 competitive product should be an extension to the PRODUCT 1 product family. Hence, it should exhibit molecular similarity with PRODUCT 1.

In order to answer the main research question several sub questions were derived from the different elements in the research model, elaborated above (also graphically depicted in figure 12). Ultimately, the combined answers to these questions will yield an answer of the main question.

The first research question relates to the focus gate and will be based on the preceding elements from the planning phase of which the results are presented in section 2.1.

1. What does the Product Innovation Charter entail for the development project aimed at generating a PRODUCT 2 competing product?

Further, the outcome of the focus gate will facilitate the creation of various concepts that form an extension of the PRODUCT 1 product family.

2. What potential new product concepts do exist for competing with PRODUCT 2?

The aspects stated in the PIC and customer need analysis make it possible to assess the generated concepts at relevant criteria. Subsequently a selection can be made.

3. a How do the various concepts perform?

3. b Which of the generated new product concepts suffices best to the Product Innovation Charter?

The selected concept will be developed in more detail. The aggregation level must be appropriate to foster insight in the six relevant decision criteria for making the go to development decision.

(26)

MSc. Technology Management 2008/2009 | Research Design 18 of 84 These research questions will be investigated for the area of concern portrayed in section 2.1. Figure 12 below demonstrates the research model and structure for this thesis.

R e s e a rc h Q u e s ti o n 4 Risk Assessment R e s e a rc h Q u e s ti o n 3 .b R e s e a rc h Q u e s ti o n 2 R e s e a rc h Q u e s ti o n 3 .a R e s e a rc h Q u e s ti o n 1 Business Case Concept Analyses Generated Concepts C h 3 : F O C U S S e c ti o n 2 .1 : P L A N N IN G

Product Innovation Charter

Define strategy

Define the market opportunity Determine project strategy Entities involved and affected by project

Attain a project focus

C h a p te r 4 : C O N C E P T D E V E L O P M E N T ( I) Collect customer needs Determine competitiveness product concepts Find possible forms and technologies Determine concept strategic fit C h 5 : S E L E C T IO N

Select concept with best fit strategic aims

and customer needs

C h a p te r 6 : C O N C E P T D E V E L O P M E N T ( II ) Develop revenue model Develop costing model Aggregated concept development Sensitivity analysis Environmental analysis Chapter 7:

Conclusion and recommendations for the go to development decision

Concept pre-selection

Development route

(27)

2.2.4 Constraints

This thesis abides by certain constraints inherent to the case at hand, the time available and the knowledge present. ABC has asked for recommendations which aid the “go-to development” decision. This research only investigated concepts that are proven on industry scale, relate to PRODUCT 2 in a structural fashion based on structure/odour correlations and can be described as an extension of the PRODUCT 1 product family. Furthermore, the concept selection, executed during this research, was partially based on factors that are in essence not measurable. Therefore the operationalization of the decision criteria pursues current scientific knowledge, the opinion of experts and the author. Also, this thesis does not include the actual implementation of the proposed development route. Finally, as with the development of a new product concept, the recommendations posed were by no means meant to be final. As the new product concept will move along the development trajectory, or the environment changes (and thus the case at hand), these recommendations need to be placed in light of those events.

2.2.5 Overview of the Framework of Ideas

This section has presented a framework of ideas, which includes current literature about the development of new products and processes, as those will form the main perspective for conducting the actual research. Furthermore, the research objective, model and questions were outlined as those will provide the main structure for this thesis. Figure 12 gives an overview of the research part and outline of this report.

(28)

2.3 Methodology

2.3.1 Case Study Research

The final element of this research design comprises the methodology. As stated before the methodology marshals various methods, tools and techniques in a manner appropriate to the framework of ideas, and uses them to investigate the situation of interest (Jackson, 2000). The strategy chosen is case study1 research, which is especially useful “when “how” or “why” questions are being posed, when the investigator has little control over events, and when the focus is on a contemporary phenomenon within some real life context” (Yin, 2003). Within this research design the real-life context plays a prominent role, as this research tries to understand which development route is most likely to yield an innovative PRODUCT 2 competitive product for ABC.

For this research the singular case study will be used; only one case is being studied into extend. Advantages of the case study strategy, that concern this research, are: the opportunity to obtain an integral view of the research object, flexibility due to limited pre structuring at the start of the research and the acceptance of the obtained results due to the actual participation of the researcher (Verschuren and Doorewaard, 2007). Moreover, the singular case study is particular useful when a unique event is being studied (Yin, 2003). A potential disadvantage of using case study research is the limited external validity due to the focus on one single case. However, external validity is not aspired within the scope of this research. Nevertheless, to achieve profoundness data triangulation will be used if possible (Verschuren and Doorewaard, 2007; Yin, 2003).

2.3.2 Techniques

Within the case study research methodology, specific techniques can be used. A technique is defined as: “a specific activity that has a clear and well-defined purpose within the context of methodology” (Mingers and Brocklesby, 1997). Hence, techniques may be used within a methodology. This section will discuss the techniques used during this investigation to gain insight in respectively: concept performance, the selected concept its external environment and the selected concept’s risk versus return achievements.

Concept Analyses

A concept screening matrix, based on Pugh (1991), will be used to execute concept screening. Easy to measure criteria should be used, which are obtained from the PIC and the determined customer needs. This way minimal resources will be spend on inferior concepts. The matrix, designed by Stuart Pugh in 1980, was used to screen the new product concepts, as it is a quick and easy way to narrow the amount of concepts down (Ulrich ad Eppinger, 2008).

1_{“A case study is an empirical inquiry that: investigates a contemporary phenomenon within its real-life}

(29)

MSc. Technology Management 2008/2009 | Research Design 21 of 84 The left side of the selection matrix (figure 13) shows the selection criteria and the upper side of the screening matrix shows the concepts. In the screening matrix the score of each concept on each specific selection criterion is given relative to a reference

concept. The concepts are compared the reference and can be rated better than the reference concept (“+”), the same as the reference concept (“0”) or worse than the reference concept (-). Additionally, a concept can fail to comply to a constraint (“X”).

In order to conduct concept scoring, three techniques will be used. First a House of Quality (HoQ) will be build to relate the customer demands to concept characteristics. The House of Quality is part of Quality Function Deployment (QFD), which is invented in the Japanese automotive industry. It was designed as a technique aiding in the control of (complicated) projects. More specifically the technique was designed to reduce design time, cost and aid inter-functional communication and learning (Hausner and Clausing, 1988; Crawford and Di Benedetto, 2006). The HoQ can help new product development teams to think of novel concepts driven by customer needs and reduce the likelihood of developed products not having a market (Katz, 2002; Crawford and Di Benedetto, 2006).

The HoQ consists out of a list of specific customer demands (“whats” or “customer requirements”) and a list of specific characteristics (“hows”) and the objective to minimize, maximize or fix the characteristic. These lists and their relationships are expressed in the HoQ-model (figure 14, sections (A)). The relationship between the demands and characteristics are expressed in the model as having none, a weak, moderate or strong relationship (B). The triangular “roof” of the model (C) shows the tradeoffs between these characteristics, since some of them correlate (positive or negative). Furthermore, each of the analyzed concepts can be scored and compared on the concept’s degree of fulfilling the needs (D). Based on the given importance to each customer need (E), the number of and intensity of the relations of the characteristics; per characteristic the relative weight can be determined (F).

Succeeding the HoQ, the relative weights of the characteristics will be used as input for the concept scoring matrix. The concept scoring matrix is based on research about concept selection by Pugh (1991) and Ulrich and Eppinger (2008). In this model each concept will be rated on how well it fulfils each characteristic. Hence, this technique will yield a more internally oriented analysis and will assess the strategic fit of each concept. The extended Pugh selection method will analyse concepts based on

(30)

MSc. Technology Management 2008/2009 | Research Design 22 of 84 the characteristics from the HoQ. Relative to a chosen reference concept, ratings will be given on a scale from 0 to 5. Where 0 is no performance compared to the reference and a rating of 5 indicates much better performance compared to the reference concept. Multiplying the rating with the relative weight of a specific characteristic gives insight in the score per characteristic. Furthermore, summating the scores will give rise to insight in the overall score on each characteristic and thereby insight in the strategic fit between the organization and a concept

The final analysis conducted for concept scoring is gaining more insight in the competitiveness of the remaining concepts. Each characteristic used in the HoQ will be linked to the relevant performance objectives of Slack et al. (2004). Using the highest score possible in the extended Pugh matrix the competitiveness per performance indicator can be depicted, making the competiveness of each concept more explicit. Linking the competitiveness to the product innovation charter, the strategic fit can further be assessed.

Based on the analyses performed in the House of Quality, the concept scoring matrix and the linkage of the characteristics to the performance objectives the concept selection gate can be executed.

Environmental Analysis

To assess the specific environment in which the new product concept will be positioned the Porter’s five forces model will be used (figure 15). The forces model of Porter, first published in 19802, is one of the most commonly used tools for analyzing the external environment of the firm (McGee, 2006; Porter, 1998; Schilling, 2008).

The degree of existing rivalry is influenced by a number of factors. First the number and relative size of the competitors will shape the nature of the rivalry (Besanko et al. 2004; Porter, 1985 & 1998; Schilling, 2008). Rivalry is also influenced by the degree to which competitors are differentiated from each other (e.g. if competitors are highly differentiated they

will experience less direct rivalry). Demand conditions are also a factor influencing the degree of rivalry. Declining demand will make firms compete for a shrinking pool of revenues and competition can be very aggressive, and vice versa (Schilling, 2008). In declining industries, high exit barriers can also intensify rivalry by making firms reluctant to abandon the industry (McGee, 2006).

The degree to which the market is likely to attract new entrants (e.g. profitability and growth) and the height of entry barriers influence the threat of potential entrants (Schilling, 2008). Entry barriers can include factors such as large start-up costs, brand loyalty, difficulty in gaining access to suppliers,

2

M.A. Porter. Competitive Strategy. New York: Free Press. 1980.

(31)

MSc. Technology Management 2008/2009 | Research Design 23 of 84 government regulations and others. Where growth or profitability attract new entrants, entry barriers will deter them. When the entry barriers are significantly higher than the attractiveness of the market, the market is blockaded (McGee, 2006).

The amount to which the firm relies on one or a few suppliers will influence its ability to negotiate good terms. This is represented by the bargaining power of suppliers. Factors affecting this power are: the number of suppliers and their degree of differentiation, the purchase amount from a specific supplier, switching cost and finally (backward) supply chain integration ease and possibilities (McGee, 2006; Schilling, 2008). Bargaining power of buyers is affected by the same factors that apply to the power of suppliers (McGee, 2006).

Finally, the fifth force is the threat of substitutes. Substitutes are defined by Porter (1998) as: “products or services that are not considered competitors, but fulfil a strategically equivalent role for the customer”3. The threat of substitutes will be shaped by: their amount, closeness in function compared to the firm’s product or services and price.

The internal environment will also be of influence on the business case. Six potential interactions between internally driven factors of development will be analyzed (figure 16) (Ulrich and Eppinger, 2008). Development teams should consider these relations and trade-offs in an attempt to manage the development process. For example, decreasing development time may lead to lower product performance. Assessing these trade-offs

qualitatively creates awareness and understanding in the trade-offs. Using qualitative measures to compute the effect of changing one variable can support decision making. For example, what should the increase in sales volume be in order to justify for an increase in development time.

Risk versus Return

In order to evaluate the risk versus return of a new product concept three main techniques will be used based on discounted cash flows: (1) payback time, (2) net present value and (3) internal rate of return.

Payback Time

The payback technique basically answers the question: “how long will it take in order to recoup our initial investment?” The shorter the period of time needed to earn the investment back, the shorter the payback time. The appeal of this method is in its simplicity. However, due to its simplicity the

3_{An example: a coffeehouse might consider other coffeehouses as competitors, but other social destinations}

(like bars or restaurants) or beverages (such as soft drinks or beer) as substitutes.

(32)

MSc. Technology Management 2008/2009 | Research Design 24 of 84 model has some drawbacks. The acceptation of a project based solely on its payback time could give rise to inaccurate results.

First, there is no direct linkage between the payback time of a project and its value to the firm (Chambers and Lacey, 2004). Projects accepted through the payback model could increase, decrease or leave the value of the firm unchanged. A second shortcoming of the payback model is that it ignores all cash flows that occur after the payback period4. The third shortcoming of the payback method is that it ignores the time value of money (Chambers and Lacey, 2004; Schilling, 2008). This shortcoming could however be avoided by using discounted cash flows in the payback model.

Net Present Value

The net present value (NPV) is the premier capital budgeting model, because it relates directly to the objective of maximizing firm wealth (Chambers and Lacey, 2004). One advantage of the NPV is that is incorporates the time value of money, measuring revenues and costs in terms of present values (PVs). The working principle of the NPV constitutes around the transformation of all the project’s cash flows through time to the same commodity so that costs can subtracted from benefits. Hence, 𝑁𝑃𝑉 = 𝑃𝑉 𝑜𝑓 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 − 𝑃𝑉 𝑜𝑓 𝐶𝑜𝑠𝑡𝑠 = 𝐶₀+ 𝐶𝐹1 (1+𝑟)1+ 𝐶𝐹2 (1+𝑟)2+ 𝐶𝐹3 (1+𝑟)3 + ⋯ + 𝐶𝐹𝑛 (1+𝑟)𝑛 (eq. 2.1).

In which CFn = the cash flow in period n, and r = the discount rate.

A positive NPV means that the project’s benefits exceed cost. Therefore, the acceptation of the project increases the value of the firm.

Internal Rate of Return

The internal rate of return (IRR) is tantamount to answering the following question: “if the project is viewed as a bank account, what interest rate would the bank offer in order to produce the same benefits and costs as the project?” (Chambers and Lacey, 2004). Thus, the IRR is the discount rate that equates the present values of costs with the present value of the benefits of the project. The IRR can be determined using equation 2.2.

𝐶0+_{(1+𝐼𝑅𝑅)}𝐶𝐹1 1+ 𝐶𝐹2 (1+𝐼𝑅𝑅)2+ 𝐶𝐹3 (1+𝐼𝑅𝑅)3+ ⋯ + 𝐶𝐹𝑛 (1+𝐼𝑅𝑅)𝑛 = 0 (eq. 2.2)

In which CFn = the cash flow in period n, and r = the discount rate.

When the IRR is determined, this value can be compared to the required rate of return. Projects should be rejected when IRR is less than the required rate of return, and accepted when the IRR is equal or greater than the required rate of return.

NPV versus IRR

Though the NPV and IRR are based on the same cash flows, both incorporate the time value of money and in most situations lead to the same conclusions, the IRR speaks of projects in return and

4_{For instance, project A with a payback time of two years could be inferior to project B with a payback time of}

(33)

MSc. Technology Management 2008/2009 | Research Design 25 of 84 not in terms of (euro) values. Therefore, financial managers prefer the IRR. However, the NPV measures the project’s wealth as a result of undertaking the project. These two arguments are both subjective. However, it is important to know the distinctions between the two models as they can lead to different decisions.

First, both IRR and NPV have no problems providing information for accept-reject decisions. However only the NPV ranks mutually exclusive projects correctly as it measures the wealth of the project. The conflict arises from the fact that the NPV measures euro gains, whereas IRR measures percentage returns (Chambers an Lacey, 2004). As a percentage the IRR model can produce more dramatic results for projects of smaller investments and for projects with short time lengths (scale problems). As a consequence the IRR cannot accurately handle effects of capital reasoning due to its inability of handling scale differences. The NPV does not suffer from these shortcomings (scale problems) and can thus correctly rank mutually exclusive projects.

A second instance in which the NPV demonstrates better results compared to the IRR is the case of nonstandard projects5. Two nonstandard projects can be described (Chambers and Lacey, 2004). One in which a project exhibits cash inflows followed by only cash outflows (borrowing projects). The second project is the multiple sign-change project, in which cash flow streams switches from inflows to outflows more than once. While both methods work accordingly for standard projects, only the NPV gives consistently correct answers for nonstandard projects.

In borrowing projects the NPV can be interpreted as before, however the IRR must be interpreted reversed. The IRR in borrowing projects reveals the cost of borrowing rather than the return on investment (Chambers and Lacey, 2004). Therefore a high IRR in borrowing projects is bad.

Multiple sign-change projects are more troublesome for the usage of the IRR. Whenever there is more than one sign change in the cash flow stream, more than one IRR may exist. Hence, multiple answers can exist in the IRR formula (eq. 2.2). There is no problem using the NPV in multiple sign-change projects. The IRR technique can be difficult to apply since it leaves the decision which IRR to select unanswered (Chambers and Lacey, 2004). However, because both values for the IRR are valid in practice the most conservative value is selected.

2.3.3 Data Collection

In order to collect the necessary information, multiple source have been used. These sources, using the classification of Yin (2003), are: (1) documentation, (2) archival records, (3) interviews and (4) direct observations.

Documents that were used during this research mainly concern scientific and professional literature, patents and historical documentation of ABC.

5_{A standard project is a project whose cash flow streams begins with one or more cash outflows and is then}