- Email: [email protected]
Integrating the fuzzy front end of new product development
190
.I PROD INNOV 1998:15:184-196
MANAG
of product success, though little research has specifically examined the compensation and reward practices that are most conducive to improved performance in product development. Gregory Kunkel interviewed R&D and human resource executives at ten major companies from Fortune magazine’s “most-admired” list. In general, he found that the most effective reward systems are modified to increase management commitment, foster a risk-taking, innovative culture, and encourage meeting product development milestones. The company’s culture and shared value system are impcrtant determinants of new product success. Top management needs to devote enough human and financial resources to new product development, and should set up a recognition system that rewards dedication to product development, in order to support a cultcre of innovation. As an example of this kind of dedication, it was reported that at one company, key scientists actually lived at the corporate R&D center until the product they were working on was developed. It was also seen that cross-functional product development teams were used in all the firms studied, with posi:ive results. Tile author presents a set of the “best practices” in compensation and reward systems observed in the firms he studied. These are as follow: 1. Tie a portion of top management’s compensation to groduct development sMcceSs. This can be in the form of annual or long-term incentives. This pract,.ce sends a message to all managers and employees in the functional areas that top management will support the product development effort. 2. Use nolz-monetary recognition systems in cor$u2ctior2 with monetan, rewards. Non-monetary systems include public recognition (award dinners, mentions in company videos or newsletters, quality awards, manager of the year awards), prizes and plaques, and time off (in the form of extra vacation lor overtime, time allocated for work on pet projects, or trips to trade shows and conventions). 3. Reward teamwork. Common team goals should be established for all members of the team. In some of !he firms studied, half of an employee’s incentive opportunity was tied to team results and the other ‘lalf to individual accomplishments. 4. Deliver- rnonetaly rewards through the use of “standard” pay comepts. Many companies used technical “career ladders” (for example, giving a scientist the opportunity to earn a vice-president Level of salary and incentives) to reward technical
ABSTRACTS
and managerial achievements, rather than one-time “big-hit” incentive programs. Monetary rewards seemed to be more effective when coupled with a non-monetary recognition program. 5. Appoint an internal “point” person to champion or modify programs over time. A reward program should be revised periodically, since performance criteria may change over time. Changing the type of non-monetary recognition occasionally is also a good way to revitalize the program. htegrating the Fuzzy Front End of New Product Development, Anil Khurana and Stephen R. Rosenthal, Sloan Management Review (Winter 1997), pp. 103-120. Top managers frequently say that the weakest part of their new product development process is the fuzzy front end. An inadequate job at the front end of the project can result in new products getting canceled midstream because of poor match to company strategy, or late product launches because the product concept keeps changing. This article reports on an exploratory study of the front end of NPD at eleven companies, and develops a system view that shows the relationship between several critical activities that make up the fuzzy front end. Khurana and Rosenthal identify seven front-end activities, classified into two groups as follow: :I . Foundation Elements: Product strategy formulation and articulation, product portfolio planning, and product development organizational structure. 2. Project-Specific Elements: Product concept, product definition, value chain considerations, and front-end project definition and planning. Foundation elements overarch several projects and are the basis for project-specific elements. The distinction between two groups is important, for a couple of reasons: the activities in each group require different skills, and inadequate foundation elements reduces product and project success to a matter of luck. In the systems view proposed by the authors, the foundation elements need to be considered simultaneously with project-specific input such as product ideas, and market and technology analysis. The authors stress that the interrelationship between the activities is extremely important. Very briefly, the front end is visualized to work this way: Work on a new product opportunity commences at “pre-phase zero,” when the opportunity is first rec-
ABSTRACTS
ognized. If it seems promising, a team (perhaps including suppliers) begins development of the product concept and definition (“phase zero”). Technical and market feasibility are assessed during phase one, when product definition is solidified and the NPD project is formally planned. At this point, the front end is complete, as the business unit makes the first “Go/Kill” decision based on the merits of the project. The authors rated how well each of the eleven participant firms performed each of the seven frontend activities on a high-medium-low scale. They found that, even for those that claimed to have a detailed front-end product generation process, most firms lacked many of the capabilities needed for an effective front end and could have performed the activities better. Product Strategy. Few companies had clear product strategies. Though a product manager or team may have been appointed, no one person (including senior management) was responsible for product strategy formulation in many cases. Further, R&D often funded projects based only on superior technology, without consideration of how well they would satisfy product requirements. Product Portfolio Planning. In most firms, portfolio planning was either sporadic or not done at all. When well executed, however, results were encouraging. For example, one firm in a mature business used portfolio planning to achieve a balance between established and new technologies, rather than relying only on incremental innovations. The authors argue that portfolio planning should not only be done, but integrated into the front-end process. Product Development Organization Structure. The firms that did best at this activity had project leaders who were responsible for promoting both the project and the core team, This involved both lobbying for support and resources, and coordinating technical issues. While all firms studied had cross-functional core teams, only two of the eleven firms had cross-functional executive reviews designed to develop strategic skills and to establish norms for consensus building. Product Concept. Surprisingly, only four of the eleven firms developed clear, precise product concepts consistently. Sometimes, the concept remained unclear because top management did not do a good job in communicating their expectations of product benefits or market segments to the development team. The firms that did best went beyond the “voice” of the customer to observe “actions”: for example, videotapes of customer’s use of the product.
J PROD INNOV 1998:15:184-196
MANAG
191
Product Definition. The best performing firms strove to freeze product definition early, recognizing the need to keep flexible nonetheless. One firm used a multirelease platform or “missed elevator” approach to product definition: if the new customer need or technology-driven feature “missed the elevator” on one product release, it would be put into the next release. Value Chain Considerations. A broad value chain perspective is critical at early stages in NPD, as product designs and market delivery systems increase in competitiveness. While most firms recognize the need to plan for the “whole package” (sales interaction, delivery, after-sales service, follow-up), only a few creatively envisioned and planned the “package” at the front end. Front-End Project Dgfinition and Planning. The authors often observed confused priorities, incomplete planning, and poor contingency plans. A mismatch between management expectations and NPD activities can result in a product that meets performance targets but fails to achieve unit-cost goals. It was often found that available NPD staff was inadequate: a core group of indispensable people get tied up on too many projects and are unavailable to participate in any newer projects. The authors do not recommend that all firms use the same solution to their front-end problems. For example, not all firms used executive reviews, and those that did, used them in different ways. As a result, not all were successful. Company size, decision-making style, culture, and frequency of new product introduction will all influence the “best” front-end solution. The aim is to “become less fuzzy” by integrating the strategic and operational activities described above, while taking into account the business and environment realities faced by the firm. The Four Faces of Mass Customization, James H. Gilmore and B. Joseph Pine II, Harvard Business Review (January-February 1997), pp. 91-101. In today’s customer-driven business world, many firms are moving toward mass customization in an attempt to provide value to customers in the most efficient manner. Due to rapid changes in information technology and work processes, many goods and services can be customized to the unique specifications of individual customers at relatively low cost. There are pitfalls, however, to a mass customization strategy, and managers need to consider thoroughly what kind of customization would be valued by their customers.
.I PROD INNOV 1998:15:184-196
MANAG
of product success, though little research has specifically examined the compensation and reward practices that are most conducive to improved performance in product development. Gregory Kunkel interviewed R&D and human resource executives at ten major companies from Fortune magazine’s “most-admired” list. In general, he found that the most effective reward systems are modified to increase management commitment, foster a risk-taking, innovative culture, and encourage meeting product development milestones. The company’s culture and shared value system are impcrtant determinants of new product success. Top management needs to devote enough human and financial resources to new product development, and should set up a recognition system that rewards dedication to product development, in order to support a cultcre of innovation. As an example of this kind of dedication, it was reported that at one company, key scientists actually lived at the corporate R&D center until the product they were working on was developed. It was also seen that cross-functional product development teams were used in all the firms studied, with posi:ive results. Tile author presents a set of the “best practices” in compensation and reward systems observed in the firms he studied. These are as follow: 1. Tie a portion of top management’s compensation to groduct development sMcceSs. This can be in the form of annual or long-term incentives. This pract,.ce sends a message to all managers and employees in the functional areas that top management will support the product development effort. 2. Use nolz-monetary recognition systems in cor$u2ctior2 with monetan, rewards. Non-monetary systems include public recognition (award dinners, mentions in company videos or newsletters, quality awards, manager of the year awards), prizes and plaques, and time off (in the form of extra vacation lor overtime, time allocated for work on pet projects, or trips to trade shows and conventions). 3. Reward teamwork. Common team goals should be established for all members of the team. In some of !he firms studied, half of an employee’s incentive opportunity was tied to team results and the other ‘lalf to individual accomplishments. 4. Deliver- rnonetaly rewards through the use of “standard” pay comepts. Many companies used technical “career ladders” (for example, giving a scientist the opportunity to earn a vice-president Level of salary and incentives) to reward technical
ABSTRACTS
and managerial achievements, rather than one-time “big-hit” incentive programs. Monetary rewards seemed to be more effective when coupled with a non-monetary recognition program. 5. Appoint an internal “point” person to champion or modify programs over time. A reward program should be revised periodically, since performance criteria may change over time. Changing the type of non-monetary recognition occasionally is also a good way to revitalize the program. htegrating the Fuzzy Front End of New Product Development, Anil Khurana and Stephen R. Rosenthal, Sloan Management Review (Winter 1997), pp. 103-120. Top managers frequently say that the weakest part of their new product development process is the fuzzy front end. An inadequate job at the front end of the project can result in new products getting canceled midstream because of poor match to company strategy, or late product launches because the product concept keeps changing. This article reports on an exploratory study of the front end of NPD at eleven companies, and develops a system view that shows the relationship between several critical activities that make up the fuzzy front end. Khurana and Rosenthal identify seven front-end activities, classified into two groups as follow: :I . Foundation Elements: Product strategy formulation and articulation, product portfolio planning, and product development organizational structure. 2. Project-Specific Elements: Product concept, product definition, value chain considerations, and front-end project definition and planning. Foundation elements overarch several projects and are the basis for project-specific elements. The distinction between two groups is important, for a couple of reasons: the activities in each group require different skills, and inadequate foundation elements reduces product and project success to a matter of luck. In the systems view proposed by the authors, the foundation elements need to be considered simultaneously with project-specific input such as product ideas, and market and technology analysis. The authors stress that the interrelationship between the activities is extremely important. Very briefly, the front end is visualized to work this way: Work on a new product opportunity commences at “pre-phase zero,” when the opportunity is first rec-
ABSTRACTS
ognized. If it seems promising, a team (perhaps including suppliers) begins development of the product concept and definition (“phase zero”). Technical and market feasibility are assessed during phase one, when product definition is solidified and the NPD project is formally planned. At this point, the front end is complete, as the business unit makes the first “Go/Kill” decision based on the merits of the project. The authors rated how well each of the eleven participant firms performed each of the seven frontend activities on a high-medium-low scale. They found that, even for those that claimed to have a detailed front-end product generation process, most firms lacked many of the capabilities needed for an effective front end and could have performed the activities better. Product Strategy. Few companies had clear product strategies. Though a product manager or team may have been appointed, no one person (including senior management) was responsible for product strategy formulation in many cases. Further, R&D often funded projects based only on superior technology, without consideration of how well they would satisfy product requirements. Product Portfolio Planning. In most firms, portfolio planning was either sporadic or not done at all. When well executed, however, results were encouraging. For example, one firm in a mature business used portfolio planning to achieve a balance between established and new technologies, rather than relying only on incremental innovations. The authors argue that portfolio planning should not only be done, but integrated into the front-end process. Product Development Organization Structure. The firms that did best at this activity had project leaders who were responsible for promoting both the project and the core team, This involved both lobbying for support and resources, and coordinating technical issues. While all firms studied had cross-functional core teams, only two of the eleven firms had cross-functional executive reviews designed to develop strategic skills and to establish norms for consensus building. Product Concept. Surprisingly, only four of the eleven firms developed clear, precise product concepts consistently. Sometimes, the concept remained unclear because top management did not do a good job in communicating their expectations of product benefits or market segments to the development team. The firms that did best went beyond the “voice” of the customer to observe “actions”: for example, videotapes of customer’s use of the product.
J PROD INNOV 1998:15:184-196
MANAG
191
Product Definition. The best performing firms strove to freeze product definition early, recognizing the need to keep flexible nonetheless. One firm used a multirelease platform or “missed elevator” approach to product definition: if the new customer need or technology-driven feature “missed the elevator” on one product release, it would be put into the next release. Value Chain Considerations. A broad value chain perspective is critical at early stages in NPD, as product designs and market delivery systems increase in competitiveness. While most firms recognize the need to plan for the “whole package” (sales interaction, delivery, after-sales service, follow-up), only a few creatively envisioned and planned the “package” at the front end. Front-End Project Dgfinition and Planning. The authors often observed confused priorities, incomplete planning, and poor contingency plans. A mismatch between management expectations and NPD activities can result in a product that meets performance targets but fails to achieve unit-cost goals. It was often found that available NPD staff was inadequate: a core group of indispensable people get tied up on too many projects and are unavailable to participate in any newer projects. The authors do not recommend that all firms use the same solution to their front-end problems. For example, not all firms used executive reviews, and those that did, used them in different ways. As a result, not all were successful. Company size, decision-making style, culture, and frequency of new product introduction will all influence the “best” front-end solution. The aim is to “become less fuzzy” by integrating the strategic and operational activities described above, while taking into account the business and environment realities faced by the firm. The Four Faces of Mass Customization, James H. Gilmore and B. Joseph Pine II, Harvard Business Review (January-February 1997), pp. 91-101. In today’s customer-driven business world, many firms are moving toward mass customization in an attempt to provide value to customers in the most efficient manner. Due to rapid changes in information technology and work processes, many goods and services can be customized to the unique specifications of individual customers at relatively low cost. There are pitfalls, however, to a mass customization strategy, and managers need to consider thoroughly what kind of customization would be valued by their customers.