Medical Device Link.

Originally Published MX July/August 2002

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

Developing the Best Ideas

A rational, systematic approach to new-product selection provides the strongest assurance of market success.

Roger Miller

Growth is the fuel that powers business success. Stockholders profit from growth, of course, but so does just about everyone else—employees, vendors, government agencies, and communities. There are many paths to business growth. However, none are more potentially rewarding—or riskier—than the new product development route.

Let's focus on the risk side. How risky? A recent study by Deloitte & Touche found that in the area of manufacturing fully two-thirds of new products fail. Why?

A company may have too few products in its pipeline. It mobilizes all its resources around one new breakthrough product, only to find that the marvel fails to throw off enough cash or gain sufficient market share. Or, in an attempt to keep the products flowing, a company spreads itself too thin. It creates numerous new products at a feverish pace, wasting valuable resources on peripheral product or service offerings, none of which capture the customer's imagination or additional market share. In both cases, the failure can be traced to one critical oversight: not riveting attention on those new products most likely to help the company reach its corporate objectives.

To be successful, new products have to be defined in terms of the manufacturing company's strategy. That means that top management needs to follow a rational process to pinpoint the innovative offerings that will best support that strategy—while weeding out ideas for merely new products that fail to meet key strategic criteria. Knowing which project proposals not to pursue is just as important as knowing which products definitely make the cut.

Developing a clear, focused vision of new product initiatives begins with five basic questions:

• What will be the thrust or focus of future business development?
  
• What is the range of products and markets that will—and will not—be considered?
  
• What priority and business emphasis will various products and markets that fall within the scope be assigned?
  
• What key capabilities are required to realize the corporate strategic vision?
  
• What does this vision imply for growth-and-return expectations?

These questions represent the tough issues top managers have to confront as they ponder their organization's strategic direction. To come to terms with them effectively, executives need to have in mind a governing principle that provides a decision-making focus. This would be the basic concept of the business that underlies a company's intelligent quest for new business development, that causes it to reasonably accept or reject new product or market opportunities. Recognition of the governing principle enables company leaders to decide whether to emphasize current products and markets or concentrate on new ones; to determine what physical and human resources are necessary to support the corporate vision for products and markets; and to calculate the potential strategic impact of a new product on longer-term growth and return.

A company's basic conception of itself can be deemed its driving force. This engine exercises decisive influence over the kinds of answers strategic questions receive. Since the driving force is the pivot point of strategy, it is a key element in selecting which new product development projects to pursue. Rational new product selection involves initial screening of options, building the business case, assessing risks, and choosing the best course of action.

Step One: Initial Screening

Rational selection of the best new product ideas begins with screening to eliminate those that are not compatible with the corporate strategy. They are screened against the company's driving force.

Unfortunately, many organizations operate with only a vague idea about their strategic direction. "Gut feel" provides little guidance for new product initiatives. Without a clear vision, such companies make product and market choices that they live to regret—if they are lucky enough to live. Consider American Express, which bought insurance and investment companies, and Gillette, which decided to sell stationery supplies. Both companies eventually divested themselves of these incompatible product offerings, but it took years for each to repair the self-inflicted damage.

Off-strategy product decisions like these should raise serious red flags. They indicate that a company has lost its way, that its strategy is not clear, that there is confusion about the business's driving force.

Product and Market Scope. When top management has consciously selected a guiding principle to drive the enterprise, it can more effectively answer the two fundamental manufacturing questions: "Why are we making the products we are making and not others?" and "Why are we in the markets we are in and not others?" Each of the driving forces that might be operating implies a distinct view of the kinds of products or services an organization will—and will not—offer and the kinds of customer groups and markets it will pursue or avoid.

Two of the most common driving forces are product identification and market orientation. Some organizations seek to be known and respected for the products they offer, while others seek to retain their indispensability to selected markets (see sidebar, page 00).

Communicating the Guiding Principle. Without coming to terms with the conceptual driving force—and making sure that everyone in the organization knows which objective governs everything—it is difficult for management to keep product development strategically focused and to ensure the profitability of new products.

Here's a true story with a lesson: An original equipment manufacturer had a crackerjack new product development team that busied itself coming up with a number of innovative ideas for variations on existing products. The developers produced pricey bells and whistles they thought would be highly attractive. Unfortunately, it wasn't until they presented their ideas to upper management that they learned about the company's recent change in fundamental focus. No longer considering itself a products-offered company, the organization was looking to serve its market with different—rather than merely improved and more expensive—offerings.

It is incumbent on every company to determine which force is the prime mover behind its product and market choices; however, executives have to make sure that all those involved in new product decisions are motivated by it.

Brainstorming. To develop new product ideas requires creative thinking. Maintaining strategic focus based on the notion of the driving force does not necessarily constrain creativity, whatever the skeptics may think (see sidebar).

Innovative ideas can come from any part of the organization. They are developed in the field as a result of listening to clients' needs and imagining how the company might meet them. Product ideas come from the marketing department as a natural outgrowth of ongoing reconnaissance and research into current and emerging market conditions. Product development managers get ideas for new or enhanced products through monitoring the performance of current products and from evaluating requests for technical support and customer service. This first stage of new product selection is the time to cast a wide net to gather input from many sources and to discover alternatives fitting the parameters of the corporate driving force.

Into the Wastebasket. The goal of brainstorming was to generate as many product alternatives as possible within the framework of the company's strategic identity. The goal of screening is to knock out those that are not an exact fit. The cost of the potential products shouldn't be considered at this point. The screening should be carried out without committing large resources. The only consideration should be to determine, quickly and cheaply, how well proposed products fit the company's core strategy and existing competencies.

In a products-oriented company, top executives need answers to a few key questions before confidently giving a new product idea the green light or consigning it to the wastebasket.

• Does the proposed product fit in with those that the company currently produces?
  
• Is it an improvement, modification, or derivative of a current product?
  
• What resources—capabilities currently in place and those that must be acquired—are needed to bring the new product to market and provide the required levels of service?

Another actual case: An industry-leading medical device manufacturer that saw itself as driven by its cardiac and vascular-care product offering entertained the suggestion that it add a line of devices to control renal and urological problems to its portfolio. When company executives met to discuss new product opportunities, they applied their recognition of their products-oriented driving force to their decision-making process. They knew that new product development efforts centered around refining their existing cardiac and vascular-care products to ensure their remaining state-of-the-art would suit strategic business objectives better than entering a new field. They decided to focus on developing more-reliable cardiac rhythm–management products and more-advanced cardiac stents, and rejected the renal devices.

Step Two: Building the Business Case

The second step in rational new product development is to assess, in broad terms, the financial feasibility of proposed new products that have survived the strategic screening process.

The Second Screen. To stay in the running, each proposed new product must meet predetermined financial criteria for investment, return, and revenue. Other resource constraints, such as available time and human resources, also need to be considered in greater depth at this stage.

The new product decision team will probably have a good idea of how much time, money, and human resources the company can devote to new product development and still make a profit. For example, if the product development department has a budget of $10 million and new product A obviously will require at least $12 million to develop, there is nothing more to discuss. It's time to evaluate new product B. If a competitor will be introducing its next big product in six months, a product suggested to pit against it—as profitable as it could theoretically be—will be of little help if it can't reach the market inside of eight months.

As when screening product proposals against the corporate driving force, decision makers should now be able to say "go" or "no go" to each idea on the basis of whether it meets these non-negotiable must-have criteria. These musts are mandatory, measurable standards against which to judge new product alternatives.

The decision team should next request detailed information on each new product idea that has passed through the screen of these inflexible criteria.

Imagining the Ideal. When developing the criteria for new product initiatives worth pursuing, the decision team would begin well by enumerating as many attributes of an ideal new product as it can think of. It is highly unlikely that any proposed new product will possess all of these attributes, but this exercise produces a standard against which to judge each of them.

Some of the new product objectives will be must-category criteria. These usually deal with resources and resource constraints, and may be refinements of the more general parameters used for winnowing in the initial screening stage. For example, if a top competitor's new market entrant is due out in six months, the decision team may feel that its own company's product absolutely must be on the shelves a month, even two, sooner. If the product development department has a $10-million budget, but the company will need to release another blockbuster in the second half of the fiscal year, the team may set the project limit at $5 million, or even less.

Along with a set of must-have objectives, the executives working to rationally select the optimal new product development project will generate a list of "wants," product attributes that they would like to see, but that are not required (see sidebar, page 00). These desirable attributes will have different degrees of importance to different members of the decision team. Some will be regarded as almost essential, others as nothing more than icing on the cake. The decision group needs to reach agreement on the relative importance of each want-to-have criterion.

A way to do this is to assign an arbitrary weight of 10 to the most important want or wants (several may be considered equally important). Project screeners can then determine how important the rest of the criteria are, relative to these. For instance, "Will present a barrier to entry by competitors" may be the most important want (i.e., 10-weighted) for a decision team. If a new product proposal meets that objective to a high degree, the team may be willing to go with it even if it means changing the size and shape of the package, particularly if the latter objective has been assigned a weight of only 2 or 3.

Comparing the Real to the Ideal. The next step in this rational approach to new product decisions requires that someone gather specific information on how each of the candidate proposals meets the criteria. How much will the project cost? How long will it take? How labor-intensive will it be? What manufacturing equipment will need to be bought or modified? What can the company charge for the product? The more criteria there are, the more information will need to be assembled.

Whoever is given this task will need input from the finance, marketing, human resources, and manufacturing departments, and from any other information sources that can help in building a business case for the suggested new product. The more thorough the information-gathering at this point, the easier will be the decision makers' task, and the less time will be wasted later in going back to acquire missing information.

Armed with all the requisite information about the alternatives on the table, the decision team can begin the process of comparing proposals in terms of how well they meet each listed criterion. Once again, the team can use a scoring system ranging from 10, for the products that best meet the criteria, all the way down to 0 for those that do not fulfill them at all. For example, if product A will definitely present a very effective barrier to entry by competitors (a 10-weighted want), then its score for that want-to-have criterion would be 10. If, on the other hand, product B wouldn't do nearly as well at keeping the competition out, it might receive a score of only 5.

The decision makers need to evaluate each suggested new product with respect to every one of the criteria. At the end of this process, the scores are totaled and compared (see Table I). These quantitative appraisals will give the executives a pretty good idea of which products are viable and which should be eliminated from further consideration.

But what if, during the scoring step, the judgment that none of the new product opportunities is much good is uttered repeatedly? Then something is clearly wrong. Either new project proposals are needed, or else the criteria are unrealistic—no new product will ever fulfill them—and must be rethought.

If, on the other hand, all the proposed product development ideas not only appear feasible but are projected to be real winners, then perhaps the criteria for judging them should be made more demanding.

Step Three: Assessing the Risks

Every choice entails risks. No matter how well a new product idea meets the criteria established in stage two of the selection process, the decision team would be remiss if it didn't carry its analysis one step further. The next, critical step in the rational decision process is thinking about what could go wrong.

Look for Adverse Consequences. Now is the time for the team to rip its choices apart, to search for any and every problem that could arise if a winning product idea were to be developed. Far better to do it sooner, using pencil and paper or decision-analysis software, than to do it later, in the lab or on the plant floor using real materials and other costly company resources.

Perhaps a proposed product scored high because it would be very effective in keeping the competition out of the race, would require only a small development team, would cost just $800,000, and could be on the shelves in six months—maybe. But it might take six-and-a-half months, or longer, to actually bring that product to market. It behooves the decision team to assess the consequences of such a delay.

Possible adverse consequences can be rated in terms of the variables of probability and seriousness. A potential problem that would be highly serious if it occurred but that has a low probability of coming to pass would likely not cause the decision team to reject the product idea. Nor would a very unimportant consequence (one rated low in seriousness), even if it were highly likely to occur. But a very serious adverse consequence with a high probability of appearing would be an altogether different story. The costs of dealing with it could take even the highest-scoring product idea out of the running.

Risk is inevitable, and risk attached to a new product opportunity does not necessarily doom the project. It simply has to be recognized in time for something to be done about it. Different organizations have different thresholds for risk. However, to evaluate product development options and select from among them without conducting a disciplined, systematic search for potential negative consequences is an invitation to disaster.
Welcome the Naysayers. There are several reasons why people fail to identify adverse consequences. For example, if analysis of three new potential products produces a clear winner, it may seem a waste of time to hunt for possible risk. Also, people are often reluctant to inject a dose of pessimism when all around them enthusiastically declare: "We've finished all this work! We've produced a great new product opportunity!" And, of course, if the winner can no longer be perceived as such, the whole process must begin again.

But every organization has employees who actually seem to enjoy looking for the darker side. However frustrating and annoying such pessimistic individuals may be, they have their place, and that place is this step in the new product decision-making process. Now is the time to lend corporate naysayers an ear. Those pessimists should be encouraged to play devil's advocate and explore questions arising from the prospective selection of a new product opportunity, such as:

• What information about this new product opportunity might not be correct?
  
• What are the implications of its too marginally satisfying a must-have criterion?
  
• Were any assumptions made during the analysis that have yet to be verified?
  
• What could go wrong, in the short and the long term, if the company proceeds to develop this new product opportunity?
  
• What could keep this new product from being successfully launched?

Step Four: Choosing the Best Course

Having clearly identified the value that each new product opportunity can deliver and the risks that each one poses, the decision team is prepared to weigh the potential gains against the potential pitfalls. These executives must finally ask themselves whether they are willing to accept the risks associated with developing a new product in order to pursue the benefits that could accrue to the company.

No two organizations are likely to answer this question the same way. Each company has its own level of risk tolerance. Some organizations will take many risks in order to achieve spectacular returns, while others gladly settle for a lower payoff in return for a predictable outcome. The makeup of the decision team also is a factor. One team's answer to the final question might be totally unacceptable to a differently constituted team. What is important is that the managers responsible for selecting a new product idea for development do not automatically choose the proposed project that best meets their objectives without first taking the associated risks into consideration.

Conclusion

The identification of a new product likely to be a success for a company requires a methodical, rational process of evaluating alternatives against carefully developed criteria. The first, and most important, of these criteria are those related to the organization's strategic vision. Knowing what guiding principle motivates the company allows its new product decision team to screen alternatives in light of the demands of that principle. Products that are not compatible with and supportive of the company's vision thus are quickly and painlessly eliminated from further consideration. The remaining alternative project ideas can then be evaluated against other corporate objectives and the final selection made.

The choice of new products to manufacture is not the end, but the beginning, of the product development process. The decision makers can now hand the reins over to those responsible for turning the product ideas into tangible prototypes and for carrying out the subsequent steps of postdevelopment review and precommercialization business analysis. If the selection process was truly rational, then confirmation of the products' viability and profitability should be forthcoming during these stages.

The ultimate confirmation of the wisdom of new product development choices comes in the marketplace. Until then, there will always be uncertainty. But using a rational process to make new product decisions lessens that uncertainty considerably. Educated guesses are replaced with educated choices, and the likelihood of success skyrockets.

Roger Miller is a senior consultant with Kepner-Tregoe Inc. (Princeton, NJ), a management consulting firm specializing in strategic and operational decision making.

Copyright ©2002 MX