New Product Development Process-No Sales Forecast-No NPD Work (Part II)

ABSTRACT The first part of this article showed that R&D departments in small and medium size enterprises (SMEs) have to increase ROI1 on R&D dollars in order to avoid further displacement of expensive R&D jobs to lower cost countries. Unfortunately, too many projects that are technically successful end up failing at launch. This is a sales & marketing failure that reduces nonetheless the ROI on R&D as well. This is why ensuring upfront that every new product development (NPD) project translates into a commercial success is a shared responsibility between S&M and R&D departments. R&D managers must reject any NPD proposal lacking a preliminary sales forecast. This protects R&D pipeline capacity against wasteful NPD activities that are bound to fail at launch. Hedging commercial risk upfront with a preliminary sales forecast is the best way to increase ROI on R&D investment and protect American R&D jobs. If the R&D manager does not have the in-house resources to forecast NPD sales, MarketChemica  can forecast the potential revenue for new chemical products and advise if a new product should be accepted in the R&D pipeline. This last aspect is the focus of the second part of this article. INTRODUCTION The first part of this article showed that the number one cause for new product failure in the American manufacturing remains lack of sufficient upfront marketing work. Moreover, an analysis of the NPD process cost structure showed clearly that early marketing work is in particular underfunded. Figure 1 shows that out of 63 ideas proposed for NPD in companies, 36 are accepted in the R&D pipeline. Nearly two thirds of these projects are abandoned along the way mostly based on market considerations. Only 14 products are launched commercially. Out of these 14 products 4 loose money and 9 survive at the breakeven point. Only 1 product is eventually making money for the company. It is obvious that in order to increase ROI in R&D it is very important to fail as many NPD projects as possible as early as possible. R&D department itself already performs this critical function based on strictly technical or regulatory consideration. The R&D department unfortunately forgets that secondary market research along with direct customer input can also accelerate early failures in the NPD process. R&D managers have to step out of their comfort zone and lead the transformation  of their R&D department from Product Driven to Market Driven. For example many NPD projects can be eliminated based on existing market size, clearly defined market segments, target market segment, competition intensity and price point at launch. These elements predict the new product market penetration rate and revenue potential of any given NPD projectl2. Finally, the NPD decision should be governed by the same financial considerations  as any other investment such as the company hurdle rate or internal rate of return. 10.24.13 NPD Process II (MC) Image1 Figure 1: The NPD attrition funnel in US manufacturing DISCUSSION The concept of market driven organization challenges the Executive to implement it across the functions of the enterprise and the R&D department is no exception to the rule! There are important differences between the NPD process in a product driven and a market driven R&D (Table 1). 10.24.13 NPD Process II (MC) Image2
Table 1: Market Driven versus Product Driven NPD process If the discussion revolving a new product is triggered with the objective to gain a specific account and is dominated by technical terminology you probably belong to an outdated, product driven organization. Modern organizations have clear strategic objectives. Product acceptance is based ona mix of technical considerations  and marketing factors such as market size, segmentation, market trends, competition intensity, demand and offer balance or market elasticity.
Bottom line, in a Product Driven organization the question is “Can we make this molecule for this specific customer?” In a market driven organization the NPD process is dominated by the question “Can we make money from this product in a specific market?” As soon as the discussion is including marketing concepts in the NPD process it is only natural to divide the product development not only function of the mass scale of the experiment (laboratory, kilolab, pilot, industrial validation) but also by the complexity of the marketing work accompanying  the new product development. One good way to deal with commercial risk upfront is by practicing the mantra of the Stage Gate™ process as described in a self-explanatory  manner in Figure 2. In order to nip commercial duds in the bud and improve the ROI on R&D it is important from the outset to have a clear idea on the product market size, main market segments and a rough market penetration rate. For example, all new products that do not have a large enough market to meet the company hurdle rate can be rejected at Gate 1 purely on a financial objective basis. 10.24.13 NPD Process II (MC) Image3
Figure 2: The NPD Stage Gate™ Process Reconnects R&D with Markets3 If the Sales Department does not come at the Gate 1 meeting with a preliminary business case it is incumbent on the R&D executive to probe the revenue potential of the new product. Discussions must revolve around aspects such as “Is the market big enough to generate the expected?”, “To which segment of the market are we targeting this product?”, ““What is the revenue potential in the first five years?” If there is no crisp, clear answer to these questions, the Sales & Marketing did not do their homework and the R&D manager should not accept the NPD project. An incremental effort in upfront market research will quickly demonstrate the viability of the new project and convince the R&D manager to take the risk. To Sales & Marketing defense, providing a sales forecast requires access to expensive commercial and technical data basis as well as considerable marketing expertise. Most of the time, SMEs simply do not have the internal resources to subscribe to all required databases and the expertise to build the product business case. This is why MarketChemica  developed the Mch NPD Forecast™, the first affordable consulting product dedicated to support NPD decisions for the chemical SME. CONCLUSIONS
The first part of this article showed that R&D departments in small and medium size enterprises (SMEs) have to increase ROI4 on R&D dollars in order to avoid further displacement of expensive R&D jobs to lower cost countries. Unfortunately, too many projects that are technically successful end up failing at launch. This is a sales & marketing failure that reduces nonetheless the ROI on R&D as well. This is why ensuring upfront that every new product development (NPD) project translates into a commercial success is a shared responsibility between S&M and R&D departments. R&D managers must reject any NPD proposal lacking a preliminary sales forecast. This protects R&D pipeline capacity against wasteful NPD activities that are bound to fail at launch. Hedging commercial risk upfront with a preliminary sales forecast is the best way to increase ROI on R&D investment and protect American R&D jobs. If the R&D manager does not have the in-house resources to forecast NPD sales, MarketChemica  can forecast the potential revenue for new chemical products and advise if a new product should be accepted in the R&D pipeline. This last aspect is the focus of the second part of this article. MarketChemica  offers specialized marketing services to the global fine and specialty chemicals industry. For more information on Mch NPD Forecast™and  Mch R&D PipelineAudit™  see marketchemica.com 10.24.13 NPD Process II (MC) Image4 1 ROI stands for return on investment, a widespread performance measure for any investment decision. 2 MarketChemica specializes in providing data and management support for the use of this critical marketing information. 3 Adapted from Cooper, Robert G. (1986). Winning at New Products. Addison-Wesley. ISBN 978-0-201-13665-4. 4 ROI stands for return on investment, a widespread performance measure for any investment decision.