Assessing mechanism for pre-development stage of new product development by stage-gate model

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1 Afrcan Journal of Busness Management Vol.5 (6), pp , 18 March, 2011 Avalable onlne at DOI: /AJBM ISSN Academc Journals Full Length Research Paper Assessng mechansm for pre-development stage of new product development by stage-gate model Wu, Me Fang 1* and Chang, Pao Long 2 1 Department of Industral Engneerng and System Management, Feng Cha Unversty, Tawan, Republc of Chna. 2 Department of Busness Admnstraton, Feng Cha Unversty, Tawan, Republc of Chna. Accepted 23 November 2010 The fast-paced changes n producton technology and keen globalzaton competton have caused product lfe cycles to be shortened greatly and have appeared to hghlght the role of new product development. New product development wll not only promote the compettve advantage but wll also keep the organzaton survval. Ths paper focuses on the pre-development stage of the new product development because each stage nput costs wll be more than the precedng one. Therefore, ths paper uses the scorng model and fnancal method n stage-gate model, and combned wth AHP, ABC and ROI methods, to construct a stage-gate funnel model of pre-development stage for flterng the creatve and nnovatve projects assessment mechansm of new products. Ths paper suggests that usng ths ntegrated, objectve and precse mechansm wll ncrease the successful opportuntes of new product and promote the operatonal effectveness of organzatons. Key words: Stage-gate model, pre-development stage, new product development (NPD), analytcal herarchy process (AHP), actvty-based costng (ABC), return on nvestment (ROI). INTRODUCTION The pressure of ntense global competton, the sustanablty and development of organzatons must depend on product dversty, dfferentaton, and nnovaton. The rapd shortenng of product lfe cycle (Faure, 2009; Lu and Yang, 2004) and consumers ncreasng self- selfawareness, hghlght the crucal role played by new product development towards ncreasng an organzaton s compettveness (Cooper, 1996; Cooper and Klenschmdt, 1991, 1993; Mllsona and Wlemon, 2006; Res and Res, 2004). The needs for the nnovaton of product development are also n the servce ndustry (Sngh and Sngh, 2009). Only 0.25 of development projects succeed commercally, and 0.33 of all newproduct launches faled. The crtcal drvers of success factors are dfferentaton, flter of pre-development, voce of customer, sharp defnton of product, resourced, executed Go/Kll ponts, project team, strength resources, nternatonal orentaton, and role of top management *Correspondng author: E-mal: mfwu@fcu.edu.tw.tel: ext 3627, Fax: (Cooper and Edgett, 2006). Other lterature ndcates that process features, customer demand, technology features, nnovatve process, ntroduce new product are also crtcal factors of new product development (NPD) (Ebrahm et al., 2010). Nevertheless, the conceptuazaton, product desgn, mass producton, and launchng of a new product requre ample materals, human resources and captal nvestment. Each stage nput costs wll be more than that of the precedng one (Cooper and Edgett, 2006; Musara and Fatok, 2010). The search ndcates that reduced labor cost, materal cost, energy cost are the most mportant man factors n the developng countres (Ebrahm, 2010). Settng-up an effectve screenng and assessment mechansm before physcal prototype and product desgn s mportant that wll promote new product development economc benefts. How mght a frm ensure the lmted resources of organzaton acheve operatonal effectveness (OE) (Porter, 1996)? What an assessment mechansm for predevelopment stage of new product development be able to possess compettve advantage for the organzatons? Sxty-eght percent of U.S. product developers now use type of stage-gate process (Grffn, 1997), ncludng

2 2446 Afr. J. Bus. Manage. DuPont, Procter and Gamble, Exxon, Gunness, Unlever, Lego and Royal and Royal Bank of Canada (Cooper, 2006). Ths paper constructs stage-gate funnel model (Clark, 1993; Cooper and Edgett, 2006) to provde an ntegrated, objectve and precse assessment mechansm for organzatons to verfy the beneft of new product development (NPD) and practcal usage n the ndustry (Cooper and Klenschmdt, 1986; Crawford, 1991; McQuarre and McIntyre, 1986; Parry and Song, 1994). The stage-gate n ths paper ncludes: frst stage s deas/creatvtes screenng, the second stage s nnovaton project/case buldng and thrd stage s prototype desgnng. Two gates are: Frst gate, uses analytcal herarchy process (AHP) (Saaty, 1980) n scorng model of Cooper and Edgett (2001) to evaluate the success factors of human resources competences, customer relatonshp, producton effcences and returns on nvestment. The second gate, apples actvty-based costng theory (ABC) (Cooper and Kaplan, 1988) and targetng costng (Makdo, 1989) to calculate the expected return on nvestment (ROI ABC ) n fnancal method of Cooper and Edgett (2001). Background The lterature revew s separated nto two parts, the frst part s related wth new product development, whle the second part s concerned wth stage-gate funnel model. New product development and processes New product successes factors are: developng organzaton, profcent marketng, R and D process well executed, functons well nterfaced, and coordnated and hgh level of management support (Cooper and Klenschmdt, 1987; Globe et al., 1973; Myers and Marqus, 1969; Roberts and Burke, 1974). The factors of falures (Hopkns and Baley, 1971; Cooper, 1975; Hopkns, 1980); between success and falure (Rothwell et al., 1974; Cooper, 1980; Zrger and Madque, 1990; Parry and Song, 1994; van der Panne et al., 2003; Cooper et al., 2004b), assocates wth cooperaton, communcaton, and organzatonal ntegraton (van der Panne et al., 2003). Parry and Song (1994) dscover that the compettve actvty and process profcency n the pre-development stage were sgnfcantly correlated wth success as the factors that were noted by prevous researchers. New product development processes as Cooper and Klenschmdt (1986) suggest nclude a 13-steps sequence, 4-step process as Stefanovtz et al. (2010) propose, or the 8-step process that Theme et al. (2003) descrbes. The common new product development process stages are pre-development stage, development and launch stage, and post-launch stage (Cooper and Klenschmdt, 1986; Crawford, 1991; McQuarre and McIntyre, 1986; von Hppel, 1986). Based on the aforementoned revew of related lterature, the steps and tasks for new product development processes are summarzed n Table 1 (Marona and Smpson, 2009;Ye and Zhang, 2006 ). Stage-gate funnel model The purpose of the stage-gate funnel model s to construct a consstent and structural nnovaton screenng processes. The stage-gate funnel model ams to mprove or control the efforts of new product development operatons as well as enable managers to make approprate choces and decsons n the development and management of new products, thus avodng the unnecessary dsperson of lmted resources wthn the organzaton and preventng the reducton of organzaton compettveness (Clark, 1993; Cooper, 2006, 2008; Cooper et al., 2001; Cooper and Edgett, 2006; O Connor, 1994; Samper et al., 2002; Yazdan and Holmes, 1999). Tradtonal development screenng n Fgure 1 s amed at forecastng and evaluatng market and techncal changes (Clark, 1993). Clark (1993) proposes the further managng stage-gate funnel model where t s suggested that n order for an organzaton to have excellent development capabltes, the organzaton must have a comprehensve development framework to help ncrease ts new product screenng ablty. The framework n Fgure 2 ndcates the followng ponts: 1. Innovaton, defnton and selecton of development projects create optmal products and processes. 2. Integrate and coordnate work and techncal tasks, and partcpate n the development actvtes of organzatonal unts for a perod of tme. 3. The effect acheved by managng development help to realze the organzaton s hgh effcency operaton. 4. The compettveness provded by nnovaton and mprovement wll enable product development to have a long-term compettve advantage. Cooper et al., (2001) ndcate that each stage s desgned to match the process of new product project, and each gate or a go/kll decson pont s an entry between each two stages. Stage-gate fve state nnovaton processes s shown n Fgure 3. Effectve gates wll cause the success of new product process, and should be met wth senor managers from dfferent functons, who are usually project leader or team members. Gates have a common format such as nputs, crtera, and outputs for delverables gate revew, project judgment standard and results gate revew (Cooper and Edgett, 2006). Cooper et al., (2001) also menton that the most popular assessment methods for the gates are: 1. Fnancal methods: nclude dfferent level of proftablty and return metrcs, such as NPV, ROI, and ROA, ROE or payback perod.

3 Fang and Long 2447 Table 1. New product development process. Process steps Ideas/Creatvtes Prelmnary assessment Tasks Ideas/Creatvtes are proposed based on market needs or factors n techncal developments. Identfcaton of new product dea sources and methods for obtanng new product concepts from dea sources are done n ths stage. The deas proposed n ths stage must pass verfcaton or else they should be rejected. Prelmnary market, desgn, manufacturablty assessment deas/creatvtes that are proposed should pass through prelmnary assessment crtera. The purpose s to search and collect related product nformaton and at the same tme market and technology assessments are done. Technology feasblty and resources acqurement are also the basc requrement for evaluatng for the product deas that have passed verfcaton. Innovaton project Detaled market study, fnancal/busness analyss are done n ths stage to dentfy product concepts are an Ideal products and to affrm ther unqueness characterstc n the market, these are done to further defne product type and product functons. Assessment on the fnal formed nnovaton projects should be done to help decde whether the product development plan wll be processed further or not. Prototype desgn and testng Product prototype and plot model are desgned based on product concept, and at the same tme market plannng s carred out, mergng wth the aforementoned market selecton n the predevelopment stage. The market detaled prcng, dstrbutng, advertsng, promotng and customer servce strateges are determned based on overall market plannng. Fnally the product prototype and market plannng results are further evaluated n order to decde whether projects wll be contnued or not. Product testng and valdaton Ths stage conducts testng and valdaton on product prototype and product desgn functon. In-House product and customer product testng are should be done to check for desgn defcences. Test market and tral sale should be hold at the same tme, that wll verfy whether the product functons need to be mproved or not. New product development actvty s now ready to enter the pre-producton fnal testng stage, a fnal revson and prelaunch busness analyss are done and assessed. Mass producton Fnal correcton on producton facltes and producton methods are analyzed before commercalzaton s done. Producton start-up wth materals, human resources and all other necessares should be readed for mass-producng. Market launchng Fnally the new product actual overall market strateges and plans wll be mplemented. Based on dfferent control benchmarks market share, sales volume, unt product cost, customer satsfacton trackng nformaton are collected and analyzed to evaluate the strengths and weaknesses. Observe product usage and track product mantenance should be redesgned that ensured the key factors are n the success of new products. 2. Busness strategy: allocatng resources across dfferent types of projects. 3. Bubble dagrams or portfolo maps. 4. Scorng models: rated or scored on a number of questons or crtera from 1-5 or 0-10 scales. 5. Check lsts: evaluated on a set of Yes/No questons, and must acheve ether all or a certan number of Yes answers. 6. Others: are varants or hybrds of the above models and methods. RESEARCH METHODOLOGY Assessment mechansm frame structure of pre-development stage s based on stage-gate model as shown n Fgure 4. Pre-development stage procedure of new product development Why n pre-development stage? Cooper and Edgett (2006) ndcate that the further stage of the NPD process, the more nput cost of NPD wll ncur. The pre-development stage actvtes of NPD standard operaton procedure n Fgure 5 ponts out the actvtes n

4 2448 Afr. J. Bus. Manage. Fgure 1. Tradtonal development screenng process. Fgure 2. Managng development screenng process. stage one, two and three are dong, and whch resources wll be used n the process. Bases on those actvtes and resources usage, the nput cost and proftablty of pre-development stage wll be examned. Establshng the frst screenng gate crtera For nsurng the success of NPD, the key components, such as market pull, technology push, sources of nformaton, profcent nternal R and D management and ample development funds need to be consdered (Myers and Marqus, 1969; Globe et al., 1973; Roberts and Burke, 1974). Ths paper ntegrates the key components wth expert questonnare on AHP desgn, ntervew managers of functonal departments, apples expert choce software to calculate the weght of components, organzes NPD commttee, and use scorng model (Cooper and Edgett, 2001) to establsh assessment mechansm for the frst gate. Because dfferent types of NPD stage focuses on dfferent mportant level of components, the paper dvdes new product nto sx new product types (Booz et al., 1982) for assessng accurately. The steps of establshng the frst assessment mechansm are: Step 1: Organzaton must set up a new product development commttee. The partcpatng members came from the organzaton tself the members are professonals who came from topmanagement teams or consultng groups. Step 2: The members used the chart and based on ther own opnons as experts carefully assess the sx types of each of the creatve projects of new product development.

5 Fang and Long 2449 Fgure 3. Stage-gate nnovaton processes. Fgure 4. Assessment mechansm of pre-development stage. Step 3: The four dmensons are assessed and scored. Equatons (1),(2) and (3) and expert choce software were used to calculate each total performance score (S). The followng equatons are AHP geometrc average method: A B C D = = = = ( A / B ) ( A / C ) ( A / D ) 1 ( B / A) ( B / C ) ( B / D ) 1 ( C / A) ( C / B ) ( C / D ) 1 ( D / A) ( D / B ) ( D / C ) The further step to calculate weght rato are: (1) D: Experts ratng on producton effcences A : Experts degree of mportance of return on nvestment B : Experts degree of mportance of customer relatonshp and market demand C : Experts degree of mportance of human resources competences D : Experts degree of mportance of producton effcences : New product type W A : Weght of return on nvestment (ROI) W B : Weght of customer orentaton and market demand W C: Weght of mportance of human resources competences W D: Weght of mportance of producton effcences Flter chart of Ideas/creatvtes projects n the paper shows n Table 2. The members of NPD wll assess the value of projects bases on ther expert opnons, and gve the scores to each factor for each new product types. The purpose of the chart s to certfy the benefts from each project of new product types that wll help contrbute to the overall NPD of the organzaton development strategy through score assessment. A: Experts ratng on return on nvestment B: Experts ratng on customer orentaton and market demand C: Experts ratng on human resources competences (2) S = X 1 W A+ X 2 W B + X 3 W C+ X 4 W D (3) X A : Score of return on nvestment X B : Score of customer orentaton and market demand X C: Score of human resources competences

6 X D: Score of producton effcences 2450 Afr. J. Bus. Manage. Fgure 5. Product development standard actvty process. Step 4: Fnally, all the members of the commttee must dscuss those projects scores and must acheve at a consensus to set the screenng gate crteron and decded whch project wll go or be klled n frst gate. Establshng the second screenng gate crtera The second screenng gate s founded on proftablty standpont that s based on fnancal method from Cooper and Edgett (2001). Ths paper nvolves usng actvty-based cost database that establshed by hstorcal data to calculate the expected returns on nvestment (ROI ABC) to assess proftablty of the organzaton. The second gate flter crtera are comparng expected returns on nvestment (ROI ABC) wth organzaton s gven target proft rate (ROI) to sort and to decde whch projects wll go or be klled n the second gate. The assessment procedures of the second screenng gate are: Step 1: The organzaton must set up and collect the standard operaton procedures data, ncludng R and D, manufacturng, dstrbutng process, and cost nformaton from hstorcal and current data. Step 2: Bult up an actvty-based cost database based on the data collected n Step 1. Step 3: Calculate and forecast the expected actvty-based proft that the organzaton wll gan from the new product project. The equaton for calculatng the expected ROI ABC s composed of three parts: Frst part s manufacturng costs, second part s marketng costs and the fnal part s new product development costs. The equaton for expected unt proft for new products s shown; π = P DM + DL + n = 1 MCD MCDR m j= 1 CD L k= 1 j CDR RCD k j RCDR k (4) π: Expected actvty-based proft per unt P: Unt sales prce of new product DM: Unt cost of drect materals DL: Unt cost of drect labor CD j: Manufacturng actvty cost drver CDR j: Manufacturng actvty cost drver rate J: Manufacturng actvty tem MCD : Marketng actvty cost drver MCDR : Marketng actvty cost drver rate : marketng actvty tem RCD : Developng actvty cost drver RCDR : Developng actvty cost drver rate K: Developng actvty tem Step 4: Use Equaton (5) to calculate the ROI ABC and sequencng order by value. ROI ABC =π/p Step 5: The members of NPD commttee must stll dscuss and establsh a consensus on what the target ROI of the project s, and be able to desgnate a second screenng crteron. Step 6: Fnally, members of NPD commttee wll compare target

7 ROI wth expected ROI ABC, and then decde whether the project should go nto the next stage or be klled n ths gate. Fang and Long 2451 Table 2. New product creatvty project screenng evaluaton chart. Type project Performance score of components Return on nvestment Customer orentaton and market demand Human resources competences Producton effcences Overall performance total X 1 X 2 X 3 X 4 S Components weght Total W A W B W C W D 1.0 Table 3. Performance evaluaton chart for A type new product. Product A Return on nvestment Customer relatonshp and market demand Human resources competences Producton effcences Overall performance total Project A Project A Project A Weght EMPIRICAL STUDY AND FINDINGS Ths paper uses case study method of termnal parts electronc manufacturng frm as sample. All of the data were collected by ntervewng 10 functonal managers, 10 engneers and 10 senor staffs n organzaton wth expert questonnare. The emprcal case studes verfy the process of establshng mechansms and ensure the feasblty of the assessment crtera of two gates. The analyss and dscusson of emprcal results are presented n ths secton. Emprcal fndngs for the frst gate Ths paper separates new termnal parts product nto sx types (Booz et al., 1982), they nclude: Type A: A new product that has yet to be launched by the market or by frms n the same ndustry. Type B: An extenson of exstng product lne, the products has the same functons but the new product has dfferent specfcatons wth the exstng product. Type C: Expandng the exstng product lne, product functons and specfcatons dffer from the exstng product. Type D: Improvng the exstng products, such as addng more auxlary functons for the new product. Type E: A product havng hgh market growth that s, the organzaton s expectng to enter emergng markets wth the exstng product. Type F: Reducng product cost, a new product that s made up of new materals or uses a new producton process. Step 1: Desgns AHP experts questonnare based on each par of two components, then proceeds to compare the two components and scored the level of mportance from a scale of 1 to 9. Intervews 30 persons who may be concerned n new product development to collect the data n the case study frm. After collectng data, the paper uses expert choce software to calculate the weghts of four components, the emprcal steps studes for the frst screenng gate are: Organzes the new product development commttee, and hold the NPD meetng on Monday afternoon n the 1 st week for each month. New product creatvtes projects ten days before the end of the month. Screenng evaluaton chart of dfferent product types wll be gven to members of the commttee on the meetng and members wll be asked to score each chart based on ther experts opnons. Step 2: Re-collect the evaluaton chart from members of the commttee, talled scores for the same project and calculate the mean of each dmenson scores. Step 3: The mean scores wll be flled n Table 2 so as to calculate and summarze the total value. The performance evaluaton chart of the nnovatve projects of

8 the new product A s shown n Table 3. Step 4: After consderable dscusson from the members 2452 Afr. J. Bus. Manage. Table 4. Manufacturng, marketng, and developng costs ratos and ROI ABC chart. Project Developng cost rato Manufacturng cost rato Marketng cost rato Expected ROI ABC Total revenues A2 6.7% 70% 20% 3.3% 100% B1 4% 68% 26% 2% 100% C1 5.2% 61% 33% 0.8% 100% D2 2.6% 65% 31% 1.4% 100% E3 1.7% 55% 37% 6.3% 100% F2 12.7% 53% 33% 1.3% 100% of NPD commttee, they set the performance scores of the frst gate whch must reach and above 80 ponts. Therefore, only nnovatve project A2 of new product Type A has an excellent performance score of 84.5 ponts and has passed the assessment crtera to go further to the next stage. Emprcal study for the second gate The nnovatve projects for the case frm that have passed through the frst gate assessment crtera are projects A2, B1, C1, D2, E3 and F2. The members of the NPD commttee pont out that any nnovatve project that has passed through the frst gate, the expected actvtybased return on nvestment (ROI ABC ) for the sad nnovatve project must surpass the 3% target ROI whch are set by the commttee. The steps for examnng the second screenng gate are: Step 1: Construct an actvty-based costng (ABC) database based on developng, manufacturng and marketng standard operaton procedure (SOP) and fnancal/cost nformaton collected from case frm. Step 2: Calculate the expected ABC profts and ROI ABC based on SOP for each nnovatve project that has passed the frst gate. Step 3: The members of the NPD commttee dscuss and set the ROI level whch should be 3% for any nnovatve projects of the current product types, basng the projects on market compettveness and future developments, and then decde whether the projects should go to further stage or be klled n ths gate. The case frm calculaton for each cost ratos and ROI ABC are summarzed n Table 4. In Table 4 project A2 s a completely new developed product, new facltes and hrng of labor s necessary, the manufacturng costs expense rato s the hghest at 70%; whle project E3 takes an exstng product and ntroduces t nto a new market such as the Eastern European market, the overall manufacturng cost rato s lower, nevertheless due to new market entrance, the marketng expense cost rato s hgher, thus t has the hghest marketng cost rato at 37%. Project F2 s a new product that can decrease manufacturng cost, and ts development cost rato s hghest at 12.7% whle ts manufacturng cost rato s the lowest at 53%. The summarzed expected ROI ABC of each project are 3.3, 2, 0.8, 1.4, 6.3 and 1.3%, respectvely. Based on the expected ROI ABC n Table 4, projects E3 and A2 had surpassed the 3% target ROI of termnal new products, therefore two nnovatve projects go to further stage and B1, C1, D2, and F2 are klled n ths stage. Ths paper examned the effcency for rejectng projects B1, C1, D2 and F2. The study results showed that the developng and marketng costs of C1 and F2 projects are too hgh to pass the second gate, and the manufacturng cost of project B1 was too hgh to pass also. Fnally, the manufacturng and marketng costs of project D2 are too hgh to pass ths gate. Accordng to Table 4, the cost rato of three procedures ndcate that development and launch stage costs, manufacturng cost, were greatest, whle post-launch stage costs, marketng cost, were the second one and predevelopment costs, R and D cost, were the least. The emprcal results ndcate that the pre-development stage s the most mportant stage to flter the projects for new product n order to ncrease the operatonal effcency of NPD for the frm. DISCUSSION Three-stage two-gate funnel model developed n ths study s sutable not only to the manufacturng ndustry but also to the servce ndustry as well. The emprcal study only lmts the experment and dscusson on the termnal parts manufacturng only, hence, two ponts must be dscerned. Frstly, when proceedng wth the frst gate screenng assessment of the new product projects, the weghted values n the performance evaluaton chart s based on the experts opnon of those n the manufacturng ndustry. If the servce ndustry wll use ths assessment mechansm to evaluate ther new product

9 creatvtes projects, they must collect experts opnons from experts n the servce ndustry; they need to recalculate for the four components weghts that are approprate for the servce ndustry. Furthermore, settng carefully. In the emprcal study of ths paper, the frst gate flterng crteron must surpassed 80 ponts, and the second gate flterng crteron also must exceed 3% target ROI for each new product projects to go further stage. Fang and Long 2453 the threshold crtera must be consdered based on the overall organzaton proftablty, the product development commttee members must dscuss and decde ths wthn themselves. Secondly, the second screenng gate s based on the organzatons proftablty vewpont, usng target ROI as decson makng crtera. Gve careful attenton to two aspects n the second screenng gate. Frst one, the task of determnng the reasons for usng target ROI as flterng crtera must be handed over to the NPD commttee members to consder whether the assessment mechansm were ftted to the organzaton s product strategy. Secondly, gate often occurs on the market vewpont to construct a screenng mechansm, that s, usng a market share or market growth as targets to set assessment mechansm crtera. In realty, both entrepreneurs n the manufacturng and servce ndustres are devoted to develop new products and servces for sustanng organzatonal survval. In order to reduce uncertanty as well as utlze lmted resources n the pre-development stage of new product development, careful screenngs of new product creatvty and nnovaton projects are mperatve. Ths paper provdes assessment mechansm to assst n the successful opportuntes of new product development that wll help ncrease core compettveness and operatonal effcences of organzatons. Concluson Frms have been affected by the recent fnancal crss, not only dd the market revenue decreased greatly causng frms to have dffculty n acqurng resources. New product development often nvolves rsks and at the same tme wth the huge amount of resources needed for nput; the benefts that can be produced from the new product wll be hard to estmate. Hence, n the predevelopment stage of the new product development, the creatvtes and nnovatons projects of the new product must be carefully montored; frms should proceed wth cauton n each step of the new product development procedure. Cooper (2003) ndcates eght to ten success factors that mpact the performance of new product development. Ths study breaks through from prevous researches by provdng methods and processes to ntegrate all of them nto crtera for flterng the creatvtes and deas projects. 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