BAB 12 : ECONOMICS OF PRODUCT DEVELOPMENT PROJECT.

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Presentation transcript:

BAB 12 : ECONOMICS OF PRODUCT DEVELOPMENT PROJECT

Elements of Economic Analysis Quantitative Analysis cash inflow : sale revenues cash outflow : product & process development cost, marketing & support cost, ramp-up cost, production cost NPV(net present value) Qualitative Analysis characteristics of a dynamic and competitive environment firm, market, macroeconomic environment

Typical cash flows for a successful new product

When Should Economic Analysis Be Performed? Go/no-go milestones: Should we try to develop a product to meet this market need? Should we proceed with the implementation of a selected concept? Should we launch the product we have developed Operational design & development designs: Should we spend more development cost in order to save development time? Should we wait to launch the product in order to reduce the product’s unit cost ?

Methodology Build a base-case financial model Perform a sensitivity analysis Use the sensitivity analysis to understand trade-offs Consider the influence of the qualitative factors on project issues

Step 1: Build a Base-case Financial Model Estimate the Timing and Magnitude of Future Cash Inflows & Outflows Development cost(all remaining design, testing, refinement costs up to production ramp-up) Ramp-up cost Marketing & support cost Production cost Sales revenues financial estimates must be merged with timing information Compute the Net Present Value of the Cash Flows The Base-Case Financial Model Can Support Go/No-Go Decision and Major Investment Decision

Example :

Step 2: Sensitivity Analysis Product Development Project Internal Factors - Development Program Expense investment cost development cost - Development Speed investigation time development time - Production Cost - Production Performance External Factors - Product Price - Sales Volume - Competitive Environment Net Present Value

Limitation of Quantitative Analysis It focuses only on measurable quantities It depends on validity of assumption and data Bureaucracy reduces productivity

Step 4: Consider the Influence of the Qualitative Factors on Project Success Projects Interact with the Firm, Market & Macro Environment Interactions between the Project and the Firm as a Whole Externalities : unpriced cost or benefit strategic fit : firm’s technology & competitive strategy Interactions between the Project and the Market Competitors Customers Suppliers Interactions between the Project and the Macro Environment Major economic shift Government regulations Social trend

Carrying Out Qualitative Analysis Decrease in the Price of a Substitute product Increase Competition in a Complementary Product Market The “Option” Value of Creating a Good Platform Product