Professional Documents
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PRODUCT DEVELOPMENT
by Ralph Bedrock
16 May 2007
This article considers the strategic significance of accountants in the new product
development (NPD) process. Without a formal process for developing new products and/or
services most organisations face decline and eventual failure. Effective strategies for NPD
have to be a significant outcome of the strategic management process, showing where and
how an organisation has chosen to compete. In so doing they show the competitive
advantage being sought or exploited. Such advantage is open to challenge from competitors
and if not sustained by further innovation will eventually disappear. Most importantly, I
think accountants must be actively engaged in the NPD process. This challenges some
common misconceptions about the role played by accountants in NPD and strategy making.
Key variables in strategy making
In terms of the barriers to NPD, in my examiner's comments in the September 2003 issue
of student accountant, I said that in my opinion, strategy concerned the relationship, explicit
or otherwise, between an organisation and its environment and that strategy was determined
by decision-making processes within the organisation. The term organisation referred to:
In profit making organisations, many myths about NPD exist. One of the most prevalent is
that small companies are more innovative than their larger counterparts. Space prevents a
fuller discussion of this assumption but I would argue that NPD in a smaller, medium-sized
enterprise is often profoundly influenced by its relationship with larger companies.
Equally important is its 15% rule whereby scientists and engineers working on NPD are able
to allocate 15% of their time to projects that do not need formal approval. This creates the
necessary freedom of space for new ideas to flourish. Rival companies with tighter control
systems are not so innovative - or profitable. The most important barriers to NPD are often
to be found inside the organisation, especially a culture that is stifling new thinking and
ideas. It may only take one 'no' to reject an NPD proposal. Innovative people and teams
often fail and need a management that is not 'destructively critical'. In one author's opinion
the rule is not to 'reward success and punish failure' but to 'reward success and failure and
punish inaction'. As Thomas Watson, founder of IBM, famously said: 'Success lies on the far
side of failure'. Many ideas may need to be tried and rejected before a 'winner' is found. The
key is to have a system that encourages the generation of new ideas.
However, 3M's world-famous Post-it notes show how a significant innovation opportunity
was nearly missed. Post-it notes were initially viewed as a failure by 3M, the parent
organisation. 3M's normal adhesive products are designed to glue things together effectively
and permanently. A product which stuck only as long as you wanted it to and could be used
repeatedly, did not fit with any of 3M's existing NPD critical success factors. The
momentum to commit resources to the product only came after samples of Post-it notes had
been sent to the CEOs of America's largest corporations, and their secretaries had demanded
further supplies of the new product. Samples had also been sent to the secretaries of 3M's
main board directors, with the same result. Involving the customer - be they external or
internal - is a key step in proving the viability of a new product or service. Equally important
to note is that new products at 3M have to show that they will be able to command
traditional 3M profit margins, and there is a exhaustive approval process before large-scale
investment into a new venture is made. Despite a positive culture towards innovation, Post-it
notes still took ten years to become a significant 3M product.
In the case of the company referred to earlier, the senior management team met once a
month to explicitly consider progress on new products and the responsibilities for making
things happen. The finance director felt that accountants, with their ability to subject
proposals to robust analysis, had an active and positive role to play in resource allocation
and in the appraisal of research and development projects with varying degrees of risk. An
accountant's realism can balance the naturally optimistic marketeer. Understanding the
nature of the company's markets and customers, and the margins and profitability they can
and should generate, provides a key input into assessing the viability, timescales and
processes involved with NPD projects. The accountant is uniquely positioned to provide
these key insights when making NPD decisions.
Critically, the accountant's role changes from the traditionally risk averse (the 'business
prevention officer') to that of ensuring profitable opportunities are not missed. This does not
mean that the appraisal process is any less rigorous. But the rigour comes from an
understanding or knowledge base that really appreciates the NPD process. Understanding
the cost drivers and structure and how they are affected by time and volume is critical to
making a positive contribution to taking necessary risks. As 3M shows, the attitude towards
innovation is significantly affected by the culture of the organisation.
Without this real business understanding there is a danger that the accounting treatments and
measures used will favour the known and measurable. For example, preferring capital
investment in a new machine (a tangible asset whose life and contribution can be estimated)
over a research and development project with unavoidable unknowns. These include the
people involved, their ability to work as a team, the need to involve others (including outside
consultants) to generate market information materials and technology. The danger of striving
to assess and allocate all direct, indirect, overheads, and services costs against a project may
quickly deem it financially vulnerable, particularly if current market projections are small.
Team players
Equally clear from my research is the importance of teams in making innovation and growth
happen. Others have cited the contribution of multidisciplinary teams to the innovation
process. The NPD process can be adversely affected by 'silo' management, where the
research and development function is largely divorced from mainstream activities, in
particular, sales and marketing. Conscious structures and systems need to be in place to
encourage the dialogue. Many companies find that a continued reliance on the product or
service to sell itself in the same way, and to the same customers, is at best a recipe for
stagnation. New product or service offerings may also need to be sold to internal customers
or key stakeholders, who themselves are broader, more creative individuals, actively looking
for ways to differentiate their own contribution. For example, new technology, such as
electronic data interchange, may automate the simple transactional relationships between the
buyer and the seller, but at the same time create the 'space' for the customer to look for other
ways in which their suppliers can add value.
Accountants can and must engage in the NPD process - the days of being outside the
decision-making team and 'simply analysing the alternatives until only one is left' should be
long gone. I referred to 'space' and freedom above as a result of technology, enabling more
positive relationships with customers. Equally, the creation of effective management
accounting information systems should give accountants a greater opportunity to engage
with and contribute to the NPD process. Some of this may involve moving from their
traditional comfort zones and into the creative entrepreneurial processes, allowing them to
become more significant players in the innovation process. In my experience of observing
NPD first hand, the managing director and the finance director are in a unique position.
They bring strategic thinking to NPD and are key members of the team shaping the future
direction of new products and services.
Adding value
The case study company makes a tear tape that facilitates easy opening of packaging on
cigarettes and processed food. The current move to ban cigarette advertising has meant that
promotion is increasingly limited to the cigarette pack itself. Consequently, the company has
developed a technology, with the involvement of key partners, which allows it to print
promotional messages on the tear tapes. In effect they have created a product which gives
more value to the customer, and which also has potential as anti-counterfeit and theft-
prevention technology.
Implicit in this case example is the need for the accountant to actively engage in the process.
The shift in the accountant's perception and role from being an acute analyst of what has
happened, to one significantly influencing the shape of the firm's future, is one I am
convinced is happening in firms that are growing and competing in global markets.
Conclusions
The accountant has a key role to play in the NPD process, itself a vital strategy area for all
organisations. This involves their ability to look forward and not simply backwards.
• Successful innovation requires a formal process through which an idea moves into an
innovation. In the December 2003 examination paper, very few candidates were able to
describe what such a process might look like.
• Accountants should be key members of a multidisciplinary team created to manage
the NPD process.
• Rarely, if ever, does the NPD process operate without involvement from key partners
outside the company. These strategic alliances make the process more complex, and
change project timescales and costs, but are vital to achieving significant innovation.
• NPD affects all parts of the value chain and system - process innovation may be just
as important as new products or services, particularly in industries which are 'mature'.
Often, this process innovation affects the way a product or service reaches the customer.
Managers in so-called mature industries should be alert to opportunities for new products
and services.
• Accountants should be aware of the dangers of preferring those projects or
opportunities that are familiar and lend themselves to traditional evaluation and control
methods. Research and development may appear more risky but it has more potential for
creating competitive advantage.
• Innovations may have to overcome significant cultural barriers. Managers in
companies typically prefer to exploit current products and markets rather than explore
new opportunities making it difficult to generate the 'space' and resources necessary for
new opportunities.
• Many large companies, committed to current technologies, cannot perceive the
challenges from new 'disruptive' technologies and ignore the new products or services that
emerge. Often radically different products or services have to be located outside of the
main business. Large, divisionalised companies with significant corporate headquarters
may find it particularly difficult to move into new areas of technology and business.
Overall, the message for accountants is very positive. They have a skill set that is relevant
and necessary to the NPD process. Accountants have a duty to actively engage in the process
and improve the outcomes by themselves being innovative.