MPAE- 7th Sem

Industrial Design & Product Development Economics

Submitted By: DHIRAJ KUMAR 623/MP/10 NEHA MEENA 632/MP/10 PIYUSH GUPTA 637/MP/10 PRABHAT KUMAR 638/MP/10

ACKNOWLEDGEMENT

There are many people without the support of whom this

report could not have been completed. We gracefully thank

Mr. Sanjay Gupta sir for his proper guidance and

feedback. He was there whenever we needed his help and

gave me opportunity to learn about this topic. I would also

like to thank sir for providing us the opportunity to explore

this topic as a part of our curriculum.

CONTENTS

1. Industrial Design

2. Product Development

3. Development Economics

4. Product Development Economics

a. Product development Process

b. Context of Economic Analysis

c. Types of Economic Analysis

5. Economic Analysis Process

a. Build a base-case financial model

b. Perform a sensitivity analysis by simulating the parameters in the model.

c. Understand trade-offs based on the sensitivity analysis.

d. Consider the influence of qualitative factors on project success.

6. Parameters in Product Development Economics

a. Time-based Competition

b. Minimizing the Time-to-Market and the Balance with Product Performance

c. Case- Study

7. Product Development Tools & Life Cycle Economics

8. Decision Trees

9. Application of Decision Trees to Product Design

10. New Product Development

a. The Eight Stages

11. References

INDUSTRIAL DESIGN

Industrial Design is the use of both applied art and applied science to improve

the aesthetics, ergonomics, functionality, and/or usability of a product, and it may also be used to

improve the product's marketability and even production. The role of an industrial designer is to

create and execute design solutions for problems of form, usability, physical ergonomics,

marketing, brand development, and sales.

Industrial design can overlap significantly with engineering design, and in different countries the

boundaries of the two concepts can vary, but in general engineering focuses principally

on functionality or utility of products whereas industrial design focuses principally on aesthetic

and user-interface aspects of products. In many jurisdictions this distinction is effectively defined

by credentials required to engage in the practice of engineering.[3] "Industrial design" as such does

not overlap much with the engineering sub-discipline of industrial engineering, except for the

latter's sub-specialty of ergonomics. [1]

The first use of the term "industrial design" is often attributed to the industrial designer Joseph

Claude Sinel in 1919 (although he himself denied this in interviews), but the discipline predates

1919 by at least a decade. Christopher Dresser is considered the world's first industrial designer.

Industrial design's origins lie in the industrialization of consumer products. For instance

the Deutscher Werkbund, founded in 1907 and a precursor to the Bauhaus, was a state-sponsored

effort to integrate traditional crafts and industrial mass-production techniques, to put Germany on

a competitive footing with England and the United States.

The earliest use of the term may have been in The Art Union, A monthly Journal of the Fine Arts,

1839

“Dyce’s report to the Board of Trade on foreign schools of Design for Manufactures. Mr Dyces

official visit to France, Prussia and Bavaria for the purpose of examining the state of schools of

design in those countries will be fresh in the recollection of our readers. His report on this subject

was ordered to be printed some few months since, on the motion of Mr Hume.”

“The school of St Peter, at Lyons was founded about 1750 for the instruction of draftsmen

employed in preparing patterns for the silk manufacture. It has been much more successful than

the Paris school and having been disorganized by the revolution, was restored by Napoleon and

differently constituted, being then erected into an Academy of Fine Art: to which the study of

design for silk manufacture was merely attached as a subordinate branch. It appears that all the

students who entered the school commence as if they were intended for artists in the higher sense

of the word and are not expected to decide as to whether they will devote themselves to the Fine

Arts or to Industrial Design, until they have completed their exercises in drawing and painting of

the figure from the antique and from the living model. It is for this reason, and from the fact that

artists for industrial purposes are both well paid and highly considered (as being well instructed

men) that so many individuals in France engage themselves in both pursuits.”

The practical draughtsman's book of industrial design: was printed in 1853

PRODUCT DEVELOPMENT: DEFINITION

The creation of products with new or different characteristics that offer new or

additional benefits to the customer.

Product development may involve modification of an existing product or its presentation, or

formulation of an entirely new product that satisfies a newly defined customer want or market

niche. [2]

Product development is the process of creating a new product to be sold by a business or enterprise

to its customers. In the document title, Design refers to those activities involved in creating the

styling, look and feel of the product, deciding on the product's mechanical architecture, selecting

materials and processes, and engineering the various components necessary to make the product

work. Development refers collectively to the entire process of identifying a market opportunity,

creating a product to appeal to the identified market, and finally, testing, modifying and refining

the product until it is ready for production. A product can be any item from a book, musical

composition, or information service, to an engineered product such as a computer, hair dryer, or

washing machine. This document is focused on the process of developing discrete engineered

products, rather than works of art or informational products.[10]

The task of developing outstanding new products is difficult, time-consuming, and costly. People

who have never been involved in a development effort are astounded by the amount of time and

money that goes into a new product. Great products are not simply designed, but instead they

evolve over time through countless hours of research, analysis, design studies, engineering and

prototyping efforts, and finally, testing, modifying, and re-testing until the design has been

perfected.

Few products are developed by a single individual working alone. It is unlikely that one individual

will have the necessary skills in marketing, industrial design, mechanical and electronic

engineering, manufacturing processes and materials, tool-making, packaging design, graphic art,

and project management, just to name the primary areas of expertise. Development is normally

done by a project team, and the team leader draws on talent in a variety of disciplines, often from

both outside and inside the company. As a general rule, the cost of a development effort is a factor

of the number of people involved and the time required to nurture the initial concept into a fully-

refined product. Rarely can a production-ready product be developed in less than one year, and

some projects can take three to five years to complete.

The impetus for a new product normally comes from a perceived market opportunity or from the

development of a new technology. Consequently, new products are broadly categorized as

either market-pull products or technology-push products. With a market-pull product, the

marketing center of the company first determines that sales could be increased if a new product

were designed to appeal to a particular segment of its customers. Engineering is then be asked to

determine the technical feasibility of the new product idea. This interaction is reversed with a

technology-push product. When a technical breakthrough opens the way for a new product,

marketing then attempts to determine the idea's prospects in the marketplace. In many cases, the

technology itself may not actually point to a particular product, but instead, to new capabilities and

benefits that could be packaged in a variety of ways to create a number of different products.

Marketing would have the responsibility of determining how the technology should be packaged

to have the greatest appeal to its customers. With either scenario, manufacturing is responsible for

estimating the cost of building the prospective new product, and their estimations are used to

project a selling price and estimate the potential profit for the company.

The process of developing new products varies between companies, and even between products

within the same company. Regardless of organizational differences, a good new product is the

result a methodical development effort with well-defined product specifications and project goals.

A development project for a market-pull product is generally organized along the lines shown in

Figure

Concept Development

Good concept development is crucial. During this stage, the needs of the target market are

identified, competitive products are reviewed, product specifications are defined, a product

concept is selected, an economic analysis is done, and the development project is outlined. This

stage provides the foundation for the development effort, and if poorly done can undermine the

entire effort. Concept development activities are normally organized according to Figure

Identify Customer Needs: Through interviews with potential purchasers, focus groups, and by

observing similar products in use, researchers identify customer needs. The list of needs will

include hidden needs, needs that customers may not be aware of or problems they simply accept

without question, as well as explicit needs, or needs that will most likely be reported by potential

purchasers. Researchers develop the necessary information on which to base the performance, size,

weight, service life, and other specifications of the product. Customer needs and product

specifications are organized into a hierarchical list with a comparative rating value given to each

need and specification.

Establish Target Specifications: Based on customers' needs and reviews of competitive products,

the team establishes the target specifications of the prospective new product. While the process of

identifying customer needs is entirely a function of marketing, designers and engineers become

involved in establishing target specifications. Target specifications are essentially a wish-list

tempered by known technical constraints. Later, after designers have generated preliminary

products concepts, the target specifications are refined to account for technical, manufacturing and

economic realities.

Analyze Competitive Products: An analysis of competitive products is part of the process of

establishing target specifications. Other products may exhibit successful design attributes that

should be emulated or improved upon in the new product. And by understanding the shortfalls of

competitive products, a list of improvements can be developed that will make the new product

clearly superior to those of others. In a broader sense, analyzing competitive products can help

orient designers and provide a starting point for design efforts. Rather than beginning from scratch

and re-inventing the wheel with each new project, traditionally, the evolution of design builds on

the successes and failures of prior work.

Generate Product Concepts: Designers and engineers develop a number of product concepts to

illustrate what types of products are both technically feasible and would best meets the

requirements of the target specifications. Engineers develop preliminary concepts for the

architecture of the product, and industrial designers develop renderings to show styling and layout

alternatives. After narrowing the selection, non-functional appearance models are built of

candidate designs.

Select a Product Concept: Through the process of evaluation and tradeoffs between attributes, a

final concept is selected. The selection process may be confined to the team and key executives

within the company, or customers may be polled for their input. Candidate appearance models are

often used for additional market research; to obtain feedback from certain key customers, or as a

centerpiece of focus groups.

Refine Product Specifications: In this stage, product specifications are refined on the basis of

input from the foregoing activities. Final specifications are the result of tradeoffs made between

technical feasibility, expected service life, projected selling price, and the financial limitations of

the development project. With a new luggage product, for example, consumers may want a product

that is lightweight, inexpensive, attractive, and with the ability to expand to carry varying amounts

of luggage. Unfortunately, the mechanism needed for the expandable feature will increase the

selling price, add weight to the product, and introduce a mechanism that has the potential for

failure. Consequently, the team must choose between a heavier, more costly product, or one that

does not have the expandable feature. When product attributes are in conflict, or when the technical

challenge or higher selling price of a particular feature outweighs its benefits, the specification

may be dropped or modified in favor of other benefits.

Perform Economic Analysis: Throughout the foregoing activities, important economic

implications regarding development expenses, manufacturing costs, and selling price have been

estimated. A thorough economic analysis of the product and the required development effort is

necessary in order to define the remainder of the development project. An economic model of the

product and a review of anticipated development expenses in relation to expected benefits is now

developed.

Plan the Remaining Development Project: In this final stage of concept development, the team

prepares a detailed development plan which includes a list of activities, the necessary resources

and expenses, and a development schedule with milestones for tracking progress.

System-Level Design

System-level design, or the task of designing the architecture of the product, is the subject of this

stage. In prior stages, the team was focused on the core product idea, and the prospective design

was largely based on overviews rather than in-depth design and engineering. Once the

development plan is approved, marketing may begin to develop ideas for additional product

options and add-ons, or perhaps an extended product family. Designers and engineers develop the

product architecture in detail, and manufacturing determines which components should be made

and which should be purchased, and identifies the necessary suppliers.

The product architecture defines the product in chunks, or the primary functional systems and

subsystems, and how these systems are arranged to work as a unit. For example, an automobile is

comprised of a body and a chassis with an engine, a transmission, final drive, frame, suspension

and braking system. The architecture of an automobile design determines the platform layout,

whether the vehicle is front-wheel-drive or rear-wheel-drive, the size and location of the engine,

transmission and final drive, the overall design of suspension system, and the layout and type of

other necessary subsystems such as brakes, wheels, and steering. The architecture may determine

the layout of the exhaust system, but it would not provide the detailed engineering needed to

determine the diameter and thickness of the exhaust pipe, the detailed design of mufflers, nor the

engineering of motor mounts and exhaust hangers needed to isolate vibrations from the passenger

compartment.

The architecture of the product, how it is divided into chunks and how the chunks are integrated

into the total product, impacts a number of important attributes such as standardization of

components, modularity, options for change later on, ease of manufacture, and how the

development project is divided into manageable tasks and expenses. If a family of products or

upgrades and add-ons are planned, the architecture of the product would determine the

commonality of components and the ease with which upgrades and add-ons can be installed. A

system or subsystem borrowed from another product within the company's line will economize on

development, tooling and manufacturing costs. With outsourced components, the supplier may

contribute much of the associated design and engineering.

Detail Design

Detail design, or design-for-manufacture, is the stage wherein the necessary engineering is done

for every component of the product. During this phase, each part is identified and engineered.

Tolerances, materials, and finishes are defined, and the design is documented with drawings or

computer files. Increasingly, manufacturers and developers are turning to three-dimensional solid

modeling using programs such as Pro-Engineer. Three-dimensional computer models form the

core of today's rapid prototyping and rapid manufacturing technologies. Once the database has

been developed, prototype components can be rapidly built on computerized machines such as

CNC mills, fused deposition modeling devices, or stereo lithography systems.

Testing and Refinement

During the testing and refinement stage, a number of prototypes are built and tested. Even though

they are not made from production components, prototypes emulate production products as closely

as possible. These alpha prototypes are necessary to determine whether the performance of the

product matches the specifications, and to uncover design shortfalls and gain in-the-field

experience with the product in use. Later, beta prototypes are built from the first production

components received from suppliers.

Production Ramp-up

During production ramp-up, the work force is trained as the first products are being assembled.

The comparatively slow product build provides time to work out any remaining problems with

supplier components, fabrication, and assembly procedures. The staff and supervisory team is

organized, beginning with a core team, and line workers are trained by assembling production

units.

Technology-Push Products

The generic development process is used with technology-push products, but with slight

modification. With technology-push products, the company acquires or develops a new technology

and then looks for appropriate markets in which to apply the technology. Consequently, an extra

phase is added at the beginning during which the new technology is matched to an appropriate

market opportunity. When the match has been made, the generic development process is carried

out as described.

Models and Prototypes

The terms prototype and model are often used interchangeably to mean any full-scale pre-

production representation of a design, whether functional or not. I prefer to use the term model to

describe a non-functional representation and the term prototype to describe a functional item.

An appearance model is a full-scale, non-functional representation that looks, as closely as

possible, identical to the prospective new product. Modeling and prototyping serve a variety of

purposes throughout the development effort.

Early on, engineering prototypes may be built of systems and subsystems to bench-test

performance and debug the system before proceeding with the design. Appearance models prove

out styling and ergonomics. A full-scale mockup of an automobile interior, for example, provides

a real-world test of ease of ingress, seating position, access to controls, visibility and appearance.

Models and prototypes are necessary because of the limitations of theoretical work and artificial

mediums. A product can be designed and put into simulated use on computer, but one doesn't

really know how it will work until the item is built and tested in its intended environment.

Prototyping and modeling efforts begin virtually at the inception of the project and continue into

production ramp-up.

The Role of Industrial Design

According to the definition given by the Industrial Designers Society of America (IDSA),

industrial design (ID) is the "professional service of creating and developing concepts and

specifications that optimize the function, value and appearance of products and systems for the

mutual benefit of both user and manufacturer." An industrial designer combines artistic form with

engineering necessities. The ID practitioner blends the human meanings expressed through form,

color, and texture with the mechanical realities of function in a way that broadcasts a coherent and

purposeful message to those who experience the product. Good industrial design can create

additional product benefits through the selection of materials and the architecture of the design.

Industrial designers have extensive training in art, as well as training in basic engineering,

manufacturing and fabrication processes, and marketing practices. Dreyfuss (1967) lists five

critical goals that industrial designers bring to a team when developing new products:

Utility: The product's human interfaces should be safe, easy to use, and intuitive. Each

feature should be shaped so that it communicates its function to the user.

Appearance: Form, line, proportion, and color are used to integrate the product into a

pleasing whole.

Ease of Maintenance: Products must also be designed to communicate how they are to be

maintained and repaired.

Low Costs: Form and features have a large impact on tooling and production costs, so they

must be considered jointly by the team.

Communication: Product designs should communicate the corporate design philosophy

and mission through the visual qualities of the products.

Industrial design is costly and the value per dollar spent is often difficult to quantity. The value

becomes obvious, however, when one experiences the results. When the purchaser intuitively

understands a product's function, and senses the quality of its construction and the integrity of the

company that produced it, these subliminal messages are normally the result of good industrial

design.

Industrial designers usually become involved in a development project almost at the outset.

Enthusiasm within the development team increases when industrial designers develop an attractive

concept early in the project. When members have a real concept to work towards, the effort ceases

to be a purely cerebral exercise, and instead, comes alive with personal meaning.

DEVELOPMENT ECONOMICS

What is development economics about? More than growth. Structural change. Institutional change.

LDCís not only have lower levels of per-capita income (productivity), but also lack institutions

common to DCís; e.g. law, property rights, administrative systems.

Differences in performance across economies are great and persistent. It is difficult to

understand why they persist. Indeed, as Lucas has remarked, once one starts to think about this

problem it is hard to think about anything else. It may be easy to understand why China was so

much richer than the west 2000 years ago -- communication and information were non-existent.

Difficult for societies to learn. But now it ought to be easy to copy and learn. Yet differences persist

and grow (divergence, big time). Why?

This could be due simple country differences and characteristics. But if so there is very

little we can say. Moreover, we could try to explain why these differences arise. It is also hard to

believe these are due to permanent differences. After all, Europe was poor 2000 years ago and

China was rich. Geographic advantages today were disadvantages before ferrous metallurgy.

Focus on institutions and policies is the result of research on comparative economic

performance which has produced some critical stylized facts:

1. Factor accumulation does not account for the bulk of cross-country differences in the

level or growth rate of GDP per capita. Rather it is TFP, whatever that means.

Differences in levels are large and cannot be explained by factor accumulation

2. Divergence, rather than conditional convergence, is the big story. There are huge,

growing differences in GDP per capita.

3. Growth is not persistent over time

4. All factors of production flow to the same places ñ e.g., the rich countries

5. National policies influence long-run growth

These facts, which we need to explore at more length suggest that development is not just

about raising the savings rate. Nor is it a question about differences in the amount of things. It is

primarily about why certain countries cannot adopt policies or develop institutions that permit long

run economic growth. [3]

PRODUCT DEVELOPMENT ECONOMICS

Product Development Process:

[4]

When Economic Analysis is performed?

1. Go/ No-go milestone: It is the decision process gate evaluating the progress for either to

continue or disregard or change. It is arise typically at the end of each development

phase.

2. Operational design and development decisions: It involves the detailing costing to

tradeoff for save cost and time.

Economic analysis usually a continual process and updating economic information.

Context of Economic Analysis:

Types of Economic Analysis:

Policymakers have a variety of economic analyses at their disposal to help them assess policies

and programs. Cost analysis, fiscal impact analysis, cost-effectiveness analysis, and cost-benefit

analysis are among the most commonly used tools. This document describes these four types of

economic analysis, compares and contrasts them, and explains which circumstances warrant their

use. [16]

Cost analysis

Cost analysis provides a complete accounting of the expenses related to a given policy or program

decision. It supplies the most basic cost information that both decision makers and practitioners

require and forms the foundation of all other economic analyses.

A cost analysis sounds simple, but it requires effort to perform a cost analysis thoroughly. Analysts

frequently identify only the most obvious costs, such as staff salaries, and fail to account for many

others. A complete cost analysis needs to consider:

Direct costs, like equipment and fringe benefits, in addition to staff salaries;

Indirect costs or overhead, such as central support services;

For new programs or policies, start-up expenditures and one-time costs, including hiring and

training;

Future costs, including wage increases, contributions for increasing pension and insurance

expenses, and other escalating costs; and

Capital costs, including debt service.

Fiscal impact analysis

A fiscal impact analysis is a comprehensive study of all governmental revenues, expenditures, and

savings that will result from the proposed policy or program. State and local fiscal offices routinely

produce fiscal impact analyses, which are also called fiscal notes when they are prepared for draft

legislation. This type of analysis helps policymakers determine whether a proposed initiative is

affordable from a budgetary standpoint.

Cost-effectiveness analysis

A fiscal impact analysis can help you assess how a program or policy will affect your budget but

it won’t tell you whether the program or policy is an efficient use of resources. There may be less

expensive options that produce equivalent results. To evaluate which program or policy creates

the result you want at the lowest cost, use cost-effectiveness analysis (CEA).

Suppose that you’re comparing two job-training programs, both of which serve 1,000 ex-offenders

per year. After doing a comprehensive cost analysis, you find that Program A costs $10 million

and Program B $7.5 million annually (see Figure 1). Program A, which costs $10,000 per client,

is more expensive than Program B, which costs $7,500 per client. Program A, however, places

more of its clients in permanent employment than Program B. The appropriate measure of the

programs’ cost-effectiveness is the total program cost divided by the desired outcome, in this case,

the total number of job placements. The results show that Program A is more cost-effective, i.e., a

better use of resources, because its cost per placement ($13,333) is lower than Program B’s

($15,000).

Indicator Total Cost Clients Cost per

Client Placement

Rate Placements

Cost per

Placement

Program

A $ 10,000,000 1,000 $ 10,000 75% 750 $ 13,333

Program

B $ 7,500,000 1,000 $ 7,500 50% 500 $ 15,000

Note that CEA is a valuable tool for weighing programs or policies with similar outcomes, but it

should not be used to compare programs that have different outcomes.

Cost-benefit analysis

Cost-benefit analysis (CBA) is a method for comparing the economic pros and cons of policies

and programs to help policymakers identify the best or most valuable options to pursue. A

characteristic feature of CBA is that it monetizes, or puts into dollar terms, all the benefits and all

the costs associated with an initiative so that they can be directly compared. Policies and programs

whose benefits outweigh their costs generate net benefits.

In contrast to CEA, CBA allows you to compare initiatives that have different purposes—such as

a reduction in victimization or an improvement in program participants’ reading scores—because

the outcomes have been monetized. In contrast to fiscal impact analysis, CBA evaluates the costs

and benefits of programs and policies from multiple perspectives, not just that of government

agencies. For example, when evaluating a criminal justice program using CBA, the costs and

benefits to victims, offenders, program participants, family members, and communities need to be

factored in.

Costs and benefits are measured over a long-term horizon, and future dollars are discounted to

reflect the “time value of money”, that is, the concept that money is worth more to us in the present

than at some point in the future. The result of a cost-benefit analysis is typically presented as a

benefit-cost ratio that indicates the benefit received for every dollar invested, providing a bottom-

line summary of the net benefit to society.

Of the four types of economic analysis described above, CBA is the most comprehensive.

However, it is not always necessary or advisable to conduct a cost-benefit analysis of an

intervention, as CBAs can be difficult and time-consuming to perform. The other tools may be

more feasible to use or may provide sufficient information. See Figure 2 for a simple comparison

of the kind of information each type of economic analysis can provide.

Type of economic

analysis

Information provided

Cost analysis How much something costs

Fiscal-impact analysis How your budget will be affected

Cost-effectiveness analysis How many outputs you get for your

dollar

Cost-benefit analysis How much benefits outweigh costs

Know your costs

Direct costs

o Staff salary plus fringe benefits (e.g., health insurance, employer’s share of social

security, workers compensation, unemployment insurance, pension contribution,

vacation wages)

o Equipment, such as computers and office supplies

o Rent, occupancy, office maintenance, and other space-related costs

o Training

Indirect costs

o Executive staff

o Central support (e.g., human resources, fiscal, information technology)

Start-up and one-time costs (e.g., furniture, equipment, consultants)

Future costs

o Wage increases, including anticipated collective-bargaining settlements

o Additional pension contributions

o Anticipated health-insurance escalation

Capital expenses

o Project planning, design, development, and professional services

o Real estate, materials, and construction

o Contingency

o Debt service

Broadly it can be classified as:

1. Qualitative Analysis: Securities analysis that uses subjective judgment based on non-

quantifiable information, such as management expertise, industry cycles, strength of

research and development, and labor relations. This type of analysis technique is different

than quantitative analysis, which focuses on numbers. The two techniques, however, will

often be used together.[6]

This is concerned with:

Factors/ issues cannot be measured and have often positive or negative effect on

developments costing and timing.

Analyzing these factors may be using techniques such as: brainstorming, what-if by project

team, and/or structured techniques (eg. Strategic analysis, game theory, and scenario

analysis methods).

2. Quantitative Analysis: A business or financial analysis technique that seeks to understand

behavior by using complex mathematical and statistical modeling, measurement and

research. By assigning a numerical value to variables, quantitative analysts try to replicate

reality mathematically.

Quantitative analysis can be done for a number of reasons such as measurement,

performance evaluation or valuation of a financial instrument. It can also be used to predict

real world events such as changes in a share price.

In broad terms, quantitative analysis is simply a way of measuring things. Examples of

quantitative analysis include everything from simple financial ratios such as earnings per

share, to something as complicated as discounted cash flow, or option pricing.

Although quantitative analysis is a powerful tool for evaluating investments, it rarely tells

a complete story without the help of its opposite - qualitative analysis. In financial circles,

quantitative analysts are affectionately referred to as "quants", "quant jockeys" or "rocket

scientists." [7]

This is based on cash inflows (revenues) and cash flows (costs) in life cycle of a successful new

product.

The limitations of this approach are:

It focuses only on measurable quantities.

It depends on validity of assumptions and data.

Bureaucracy reduces productivity.

Economic Analysis Process:

Step 1: Build a base-case financial model.

Step 2: Perform a sensitivity analysis by simulating the parameters in the model.

Step 3: Understand trade-offs based on the sensitivity analysis.

Step 4: Consider the influence of qualitative factors on project success.

Step1: Build a Base-Case Financial Model

This consists of:

Estimating the timing and magnitude of future cash inflows and outflows.

Computing the Net Present Value (NPV) of the cash inflows.

Inputs for NPV Base Case

Development cost and timing

Testing cost and timing

Tooling investment and timing

Ramp-up cost and timing

Marketing and support cost and timing

Sales volume and lifetime

Unit production cost

Unit revenue

Discount rate

Production cost = production volume × unit cost

Sales revenue = sales volume × unit price

(Notes)

Check the validity of assumptions in the financial model for accurate

analysis.

Sunk costs (previous expenditure) are NOT included in economic analysis.

Typical Cash Flow

Step2: Perform Sensitivity Analysis by simulating the parameters in the model:

Sensitivity analysis is the study of how the uncertainty in the output of a mathematical model or

system (numerical or otherwise) can be apportioned to different sources of uncertainty in its

inputs.[1] A related practice is uncertainty analysis, which has a greater focus on uncertainty

quantification and propagation of uncertainty. Ideally, uncertainty and sensitivity analysis should

be run in tandem.

This is concerned with calculating the change in NPV corresponding to change in the factors

included in the financial model. The factors are:

Internal Factors: Factors influenced by development teams (e.g. program expense,

development speed, production cost, and product performance).

External Factors: Those cannot arbitrary change (e.g. market response, sales volume,

product price).

What if each of the following changes?

1. Development cost

2. Development time

3. Unit production cost

4. Product performance

5. Sales volume

6. Product life cycle

7. Unit revenue

Step3: Use sensitivity Analysis to understand Project Trade-offs:

This is concerned with understanding the relative magnitude of financial interactions of changes

between internally driven factors. Six potential interactions should be managed as shown. A set

of rules are developed for trade-off.

Trade-offs exist between cost-driven factors.

Step 4: Consider the influence of the Quantitative Factors on Project Success:

It focuses basically on the interaction between project, firm, market and macroeconomic

environment.

Interaction between project and firm, this relates decision to firm context as a whole. Two

key interactions are externalities and strategic fit.

Interaction between project and market. This relates to decisions impacts the market. Three

groups beside development team have impact: competitors, customers, and suppliers.

Interaction between project and macroeconomic environment. This takes into account key

macro factors: major economic shift, government regulation, and social trends.

Parameters in Product Development Economics

“Development is the set of activities that transform a concept for satisfying perceived needs into a

product or service that is ready for the market,” (Johnson & Kirchain, 2011). In today’s technology

driven market, the importance of product development is well established. The development phase

not only helps to determine the functional performance of a product but also helps to determine

the financials of the product itself. In fact it is reported that between 70 and 90 percent of the

project’s costs are decided in the early phases of the product development (Bhimani & Mulder,

2001; Shehab & Abdalla, 2001). The rapid escalation in technology has led to a shift in parameters

that companies compete in to achieve maximum profits. One of these is time-based competition,

which is discussed in subsequent sections. [11]

Time-based Competition

Concept that time is a resource and a firm that make better use of time (in responding to the

changing market situations) acquires a competitive advantage. The term was coined by the

consultant George of the Boston Consulting Group and popularized by his 1998 book Competing

Against Time, in which he talks about the term time-based competition after he realized how

important it is to time the release of your product, and how long your product development cycle

is. He recognized the correlation between the change in profitability of a product and the duration

of its product cycle. In economics terms, he observed that sooner a finished product was released

in the market, it implied lesser development costs and after the introduction of the product, being

the pioneers in that field, i.e. being an innovator/the first one to release the product, would lead to

greater profits. In today’s world this is more relevant than ever before considering the multiple

patent wars going on i.e. the Apple vs. Samsung patent wars. It is very important to be able to

provide something to the market that is not there already. This is made possible only when product

development cycles are short and efficient. However, it is also important to weight the decrease in

development cycles, versus the “finished-ness” of the product, which is discussed in later sections

of this article. For example, Clark (1989) estimates that if a certain car cost 10,000 dollars, every

day’s delay in the release of the product represents a million dollar loss for the company. Another

McKinsey study reports that a company loses about ten times of its after-tax profits for shipping a

product six-month’s late as compared to what it would lose by overspending 50% more on product

development. In their 1991 book Developing Products in Half the Time, Smith and Reinertsen

argue that it is necessary to adopt an incremental approach to product innovation in order to reduce

time to market. This is because incremental product innovation reduces the amount of effort and

learning that must be done and, consequently, the amount of time needed to invest in the new

product prior to its launch. Financially its implications involve reduction of development costs

since the same processes as before are being carried out by essentially the same amount of labor

as the reduction in the time-to-market is stemming from concurrent-phase development and cross-

functional development teams; the labor costs are significantly reduced. Such a perspective has

led some companies (e.g., General Electric, Hewlett Packard) to adopt time-to-market as their

principal product development metric. (Cohen et al., 1996).

Minimizing the Time-to-Market and the Balance with Product Performance

However, on the flipside of the argument for shorter product development cycles, it can clearly be

seen that there is a trade-off between minimizing the time-to-market, and optimal performance of

the new product. Even a minor increase in the performance of the product could help the company

grab a significant portion of the market share. While on the other hand, this improvement in the

product’s performance might take too long to be achieved and thus the company could lose out on

the window of opportunity that it may have had in releasing the product without the additional

improvement. A very good example of such a case would be Apple Computer’s Lisa Macintosh

development in the early 1980s. The project was very ambitious and aimed to greatly increase the

product performance as well as to improve the general manufacture process, but its introduction

that was late by several quarters drove apple earnings down to about half their initial value as it

started out with in 1983.

The development capability hurdle needed to profitably undertake a new project increases with the

total existing product performance of all products readily available in the market. It decreases with

the product category demand rate, the profit margin, the market share lost to the competitors, and

the window of opportunity of releasing the new product. One of the most important things to

remember is that an improvement in the product’s performance does not necessarily guarantee a

shorter time-to-market (Cohen et al., 1996).

The basic breakdown of Cohen’s findings are that if performance improvements are additive in

nature, most of the limited time should be spent on the stage that leads to the biggest net

improvement, and is the most productive. Another observation they made was that faster was not

better if the product being replace has a high margin or if the new product has a large market

potential. It is always the best strategy to take more time developing the product better if the

product is going to face an intermediate rivalry in the market. Care needs to be taken in minimizing

the break-even time as it may lead to a premature product introduction (Cohen et al., 1996).

Case Study: Hewlett Packard

Hewlett Packard realized this balance between the two objectives of high product performance

target and a reduced time-to-market, with their BET metric i.e. Break-Even Time, which was

aimed at reducing the break-even time of their products by half. (Smith & Reinertsen, 1991).

Figure 1 depicts the return map employed by HP for managing the development process of a new

pocket calculator. The breakeven point is when the total cumulative investment in the development

of the project is equal to the total cumulative net revenue. Reducing break-even time can motivate

the product development team to address the crucial balance between a high product performance

target and a short time-to-market. A significant improvement in the product performance target is

likely to increase the slope of the sales curve, at the cost of delaying the new product launch.

Incremental product improvements on the other hand, are likely to generate sales curve that are

less steep but which bring revenues to the firm earlier. Again this trade-off varies from industry to

industry and product to product and needs to be studied closely, before the development strategy

is chosen. (Cohen et al., 1996).

Figure 1

The Return Map for the HP Pocket Calculator. Source: Adapted from Cohen et al., 1996.

PRODUCT DEVELOPMENT TOOLS AND LIFE CYCLE ECONOMICS

Business sustainability is gaining increased attention as a significant number of Fortune 500

corporations have incorporated sustainability as part of their corporate objectives (e.g.

www.walmart.com, www.apple.com, www.ge.com, www.toyota.com). Corporate sustainability

efforts are increasing and there has been a significant increase in the number of corporate

sustainability reports. Business leaders see a growing business case for sustainability reporting, as

just the process of collection and analysis of data is beneficial – since measurement is often the

first step toward improvement. Reinhardt [13] explored the notion of sustainability at the firm level

and discussed the dual need for both economic performance and also environmental performance.

Kleindorfer, et al. [8] discussed operations management’s (OM) role in sustainability and

recognized the need for considering the life cycle of products and the necessity for a

multidisciplinary approach that includes the fields of industrial ecology and engineering. Linton

et al. [10] looked at the convergence of supply chains and sustainability and concluded that

sustainability concerns forces firms to integrate issues and flows that extend beyond the core of

supply-chain management to product design, manufacturing by-products, product life extension,

and recovery processes to capture value at the end of a product’s life.

Much of the operations management sustainability literature can be categorized into the areas of

closed loop supply chains (CLSC) and the supporting functions of a CLSC to include

remanufacturing, reverse logistics, and inventory management [2]. A CLSC includes the 1712

collection, sorting, and return flows of products to manufacturers that have the intent of reusing,

repairing, remanufacturing, recycling, and otherwise capturing additional value and reducing the

impact of the product on the environment. There are several outstanding research issues that need

to be addressed to incorporate the broader view of sustainability in OM. Maximizing the efficiency

and profitability of CLSC depends on consideration of sustainability from the very onset of new

product development, by considering sustainability constraints and opportunities during the design

process

DESIGN FOR SUSTAINABILITY:

The design for sustainability literature base is sparse. McDonough and Braungart [11] spoke

about the triple bottom line (3BL) in their paper, whereby firms balance traditional economic

goals with social and environmental concerns. Karlsson and Luttropp [9] introduce the

concept of EcoDesign.

Linguistic Map of EcoDesign Concept. (Karlsson, Luttropp, 2006)

Research Study:

Design decisions made early in the product development process can greatly affect the cost

and the feasibility of reuse, re manufacturability, and recycling of discarded products, as

design decisions increase the cost hurdle of transition to another cycle of reuse,

remanufacture, or recycling, and the likelihood of entering landfills [7]. The challenge that

product design teams face in considering the inclusion of sustainability concerns is that this

must be done in the face of competing priorities in the form of VoC, VoP, cost, marketing, and

other strategic concerns early in the process. As a result, we propose the following three

approaches: 1) research and study of the eco-design literature and OM literature on

sustainability culminating in a set of Critical to Sustainability (CTS) criteria for use in many

design engineering toolsets; 2) Research and develop modified versions of existing

engineering tools such as QFD, DFSS, DFMA, which utilize the CTS criteria; 3) Research the

use of set-based concurrent engineering as the managerial and organizational configuration

of choice for pursuit of design for sustainability.

Cascading House of Quality from the Design for Six Sigma Body of Knowledge (ASQ Six-

Sigma Black Belt Body of Knowledge)

This approach leads to the necessity of establishment of Critical to Sustainability (CTS) Criteria

for use in Flowdown of Engineering Tools from QFD to DFSS to Suppliers and eventually to third

parties involved in the return flows. Identifying a set of DFS criteria gives the design team a set of

constraints that can be incorporated into many common design tools such as the House of Quality

[1], the modified cascading House of Quality used within the ASQ Design for Six-Sigma body of

knowledge, and the design structure matrix (DSM) [15]. In today’s Six-Sigma managed process,

CTQs are cascaded down to support a range of decisions within the product and process

development process, including product feature choices, detailed product design, and equipment

choices as shown in Figure.

The approach we propose will result in a set of critical to quality (CTQ) criteria and a set of critical

to sustainability (CTS) criteria. Sustainability concerns can be incorporated into the existing

quality systems by driving a set of design for sustainability criteria through the existing new

product development and quality systems of firms, whereby a developed set of CTSs for a part or

assembly would be treated with equal or weighted priority with the quality CTQs. By considering

sustainability concerns early in the product development process in the same competing constraint

space with VoC, VoP, and commercial and strategic initiatives, the marginal costs and added

project complexity of inclusion of the CTS criteria can be quantified and then compared to

anticipate revenues from return flows in the future, as shown in the following equation.

Present value of future revenues {Rdismantling + Rrecycling + Rdisassembly + Rreuse +

Rremanufacturing} – Present development costs {Cdissassbly/dismantingly design + Creversible

fastners + Crecyclable materials +Cmodular design} > 0

The proposed approach is basically to compile an appropriate set of DFS criteria and then develop

modified versions of the House of Quality and the DSM, which not only considers the VoC, VoP,

but also the DFS criteria. We focus on computation of the marginal costs of inclusion of the DFS

criteria in the present, to show the minimal amount of revenue, if any, that may be needed to offset

any additional capital investment necessary to incorporate sustainability concerns. Use of Quality

Function Deployment (QFD) or the House of Quality will provide a platform by which

sustainability criteria can be considered at the earliest stages of product development in the same

light as VoC and VoP concerns with the result being a set of CTQ and CTS design criteria that

will guarantee quality assurance and sustainability as the design team proceeds deeper into the

product development process and defines technical features, component characteristics, process

and product parameters, and operating instructions. The DSM methodology allows the team to

map the needed information flows from the various program activities and anticipate needed

design iterations. The proposed concept would be to take the sets of feature and specification trade-

offs produced by the House of Quality and compare their effect on project duration and complexity

through the DSM.

DECISION TREES:

A decision tree is a decision support tool that uses a tree-like graph or model of decisions and

their possible consequences, including chance event outcomes, resource costs, and utility. It is one

way to display an algorithm.

Decision trees are commonly used in operations research, specifically in decision analysis, to help

identify a strategy most likely to reach a goal.[14]

A decision tree is a flowchart-like structure in which internal node represents test on an attribute,

each branch represents outcome of test and each leaf node represents class label (decision taken

after computing all attributes). A path from root to leaf represents classification rules.

In decision analysis a decision tree and the closely related influence diagram is used as a visual

and analytical decision support tool, where the expected values (or expected utility) of competing

alternatives are calculated.

A decision tree consists of 3 types of nodes:

1. Decision nodes - commonly represented by squares

2. Chance nodes - represented by circles

3. End nodes - represented by triangles

Decision trees are commonly used in operations research, specifically in decision analysis, to help

identify a strategy most likely to reach a goal. If in practice decisions have to be taken online with

no recall under incomplete knowledge, a decision tree should be paralleled by a probability model

as a best choice model or online selection model algorithm. Another use of decision trees is as a

descriptive means for calculating conditional probabilities.

Decision trees, influence diagrams, utility functions, and other decision analysis tools and methods

are taught to undergraduate students in schools of business, health economics, and public health,

and are examples of operations research or management science methods.

DRAWING A DECISION TREE:

You start a Decision Tree with a decision that you need to make. Draw a small square to represent

this towards the left of a large piece of paper.

From this box draw out lines towards the right for each possible solution, and write that solution

along the line. Keep the lines apart as far as possible so that you can expand your thoughts.

At the end of each line, consider the results. If the result of taking that decision is uncertain, draw

a small circle. If the result is another decision that you need to make, draw another square. Squares

represent decisions, and circles represent uncertain outcomes. Write the decision or factor above

the square or circle. If you have completed the solution at the end of the line, just leave it blank.

Starting from the new decision squares on your diagram, draw out lines representing the options

that you could select. From the circles draw lines representing possible outcomes. Again make a

brief note on the line saying what it means. Keep on doing this until you have drawn out as many

of the possible outcomes and decisions as you can see leading on from the original decisions.

An example of the sort of thing you will end up with is shown in Figure

EVALUATING YOUR DECISION TREE:

Now you are ready to evaluate the decision tree. This is where you can work out which option has

the greatest worth to you. Start by assigning a cash value or score to each possible outcome.

Estimate how much you think it would be worth to you if that outcome came about.

Next look at each circle (representing an uncertainty point) and estimate the probability of each

outcome. If you use percentages, the total must come to 100% at each circle. If you use fractions,

these must add up to 1. If you have data on past events you may be able to make rigorous estimates

of the probabilities. Otherwise write down your best guess.

This will give you a tree like the one shown in Figure

Calculating Tree Values Once you have worked out the value of the outcomes, and have assessed the probability of the

outcomes of uncertainty, it is time to start calculating the values that will help you make your

decision.

Start on the right hand side of the decision tree, and work back towards the left. As you complete

a set of calculations on a node (decision square or uncertainty circle), all you need to do is to record

the result. You can ignore all the calculations that lead to that result from then on.

Calculating the Value of Uncertain Outcome Nodes Where you are calculating the value of uncertain outcomes (circles on the diagram), do this by

multiplying the value of the outcomes by their probability. The total for that node of the tree is the

total of these values.

In the example in Figure 2, the value for "new product, thorough development" is:

Figure shows the calculation of uncertain outcome nodes:

Note that the values calculated for each node are shown in the boxes

APPLICATION OF DECISION TREES TO PRODUCT DESIGN

Particularly useful when there are a series of decisions and outcomes which lead to other

decisions and outcomes.

Include all possible alternatives and states of nature- including “doing nothing”

Enter payoffs at end of branch

Determine the expected value of each branch and “prune” the tree to find the alternative

with the best expected value.

Example of Decision Tree:

NEW PRODUCT DEVELOPMENT

In business and engineering, new product development (NPD) is the complete process of

bringing a new product to market. A product is a set of benefits offered for exchange and can be

tangible (that is, something physical you can touch) or intangible (like a service, experience, or

belief). There are two parallel paths involved in the NPD process: one involves the idea

generation, product design and detail engineering; the other involves market research

and marketing analysis. Companies typically see new product development as the first stage in

generating and commercializing new product within the overall strategic process of product life

cycle management used to maintain or grow their market share.

The Eight Stages:

1. Idea Generation is often called the "NPD" of the NPD process.[1]

Ideas for new products can be obtained from basic research using a SWOT

analysis (Strengths, Weaknesses, Opportunities & Threats). Market and consumer

trends, company's R&D department, competitors, focus groups, employees,

salespeople, corporate spies, trade shows, or ethnographic discovery methods

(searching for user patterns and habits) may also be used to get an insight into new

product lines or product features.

Lots of ideas are generated about the new product. Out of these ideas many are

implemented. The ideas are generated in many forms. Many reasons are responsible

for generation of an idea.

Idea Generation or Brainstorming of new product, service, or store concepts - idea

generation techniques can begin when you have done your OPPORTUNITY

ANALYSIS to support your ideas in the Idea Screening Phase (shown in the next

development step).

2. Idea Screening

The object is to eliminate unsound concepts prior to devoting resources to them.

The screeners should ask several questions:

Will the customer in the target market benefit from the product?

What is the size and growth forecasts of the market segment / target market?

What is the current or expected competitive pressure for the product idea?

What are the industry sales and market trends the product idea is based on?

Is it technically feasible to manufacture the product?

Will the product be profitable when manufactured and delivered to the customer

at the target price?

3. Concept Development and Testing

Develop the marketing and engineering details

Investigate intellectual property issues and search patent databases

Who is the target market and who is the decision maker in the purchasing

process?

What product features must the product incorporate?

What benefits will the product provide?

How will consumers react to the product?

How will the product be produced most cost effectively?

Prove feasibility through virtual computer aided rendering and rapid prototyping

What will it cost to produce it?

Testing the Concept by asking a number of prospective customers what they think of

the idea – usually via Choice Modelling.

4. Business Analysis

Estimate likely selling price based upon competition and customer feedback

Estimate sales volume based upon size of market and such tools as the Fourt-

Woodlock equation

Estimate profitability and break-even point

5. Beta Testing and Market Testing

Produce a physical prototype or mock-up

Test the product (and its packaging) in typical usage situations

Conduct focus group customer interviews or introduce at trade show

Make adjustments where necessary

Produce an initial run of the product and sell it in a test market area to determine

customer acceptance

6. Technical Implementation

New program initiation

Finalize Quality management system

Resource estimation

Requirement publication

Publish technical communications such as data sheets

Engineering operations planning

Department scheduling

Supplier collaboration

Logistics plan

Resource plan publication

Program review and monitoring

Contingencies - what-if planning

7. Commercialization (often considered post-NPD)

Launch the product

Produce and place advertisements and other promotions

Fill the distribution pipeline with product

Critical path analysis is most useful at this stage

8. New Product Pricing

Impact of new product on the entire product portfolio

Value Analysis (internal & external)

Competition and alternative competitive technologies

Differing value segments (price, value and need)

Product Costs (fixed & variable)

Forecast of unit volumes, revenue, and profit

These steps may be iterated as needed. Some steps may be eliminated. To reduce the time that the

NPD process takes, many companies are completing several steps at the same time (referred to

as concurrent engineering or time to market). Most industry leaders see new product

development as a proactive process where resources are allocated to identify market changes and

seize upon new product opportunities before they occur (in contrast to a reactive strategy in which

nothing is done until problems occur or the competitor introduces an innovation). Many industry

leaders see new product development as an ongoing process (referred to as continuous

development) in which the entire organization is always looking for opportunities.

For the more innovative products indicated on the diagram above, great amounts of uncertainty

and change may exist which makes it difficult or impossible to plan the complete project before

starting it. In this case, a more flexible approach may be advisable.

Because the NPD process typically requires both engineering and marketing expertise, cross-

functional teams are a common way of organizing projects. The team is responsible for all aspects

of the project, from initial idea generation to final commercialization, and they usually report to

senior management (often to a vice president or Program Manager). In those industries where

products are technically complex, development research is typically expensive and product life

cycles are relatively short, strategic alliances among several organizations helps to spread the costs,

provide access to a wider skill set and speeds up the overall process.

REFERENCES:

[1]. http://en.wikipedia.org/wiki/Industrial_design

[2]. http://www.businessdictionary.com/definition/product-development.html#ixzz2jsXlnXHM

[3]. http://econ.la.psu.edu/~bickes/LectDevEcon.pdf

[4]. http://dspace.mit.edu/bitstream/handle/1721.1/34891/15-783JSpring-

2002/NR/rdonlyres/Sloan-School-of-Management/15-783JProduct-Design-and-

DevelopmentSpring2002/F0881366-8291-43DC-96E1-B4E863C5747E/0/13pdecon.pdf

[5]. http://edt.postech.ac.kr/04_lecture/lecture/imen346/lecture/Chp15_Economics.pdf

[6]. http://www.investopedia.com/terms/q/qualitativeanalysis.asp

[7]. http://www.investopedia.com/terms/q/quantitativeanalysis.asp

[8]. http://edt.postech.ac.kr/04_lecture/lecture/imen346/lecture/Chp15_Economics.pdf

[9]. http://faculty.ksu.edu.sa/22565/IE%20301%20Product%20Design%20and%20Innovation/VI-

%20MANAGING%20DEVELOPMENT/15)%20Product%20Development%20Economics-PDD.pdf

[10]. http://www.rqriley.com/pro-dev.htm

[11]. http://sites.tufts.edu/eeseniordesignhandbook/2013/product-development-economics/

[12]. Shehab, E., & Abdalla, H. (2001). Manufacturing cost modelling for

concurrent product development. Robotics and Computer-Integrated

Manufacturing, 17(4), 341–353. DOI:10.1016/S0736-5845(01)00009-6 [13]. http://www.decisionsciences.org/Proceedings/DSI2008/docs/171-3731.pdf

[14]. http://en.wikipedia.org/wiki/Decision_tree

[15]. http://en.wikipedia.org/wiki/New_product_development

[16]. http://cbkb.org/toolkit/types-of-economic-analysis/