Chapter 17 Outline

New Product Development

Firms that successfully develop and market new products can earn enormous returns. Example include Du Pont, which has produced a steady stream of successful innovations such as cellophane, nylon, Freon, and Teflon (nonstick pans); Sony, whose successes include the Walkman and the compact disk; Merck, the drug company that during the 1980s produced seven major new drugs; 3M, which has applied its core competency in tapes and adhesives to developing a wide range of new products; Intel, which has consistently managed to lead in the development of innovative microprocessors to run personal computers; and Cisco Systems, which developed the routers that sit at the hubs of internet connections, directing the flow of digital traffic.

In today's world, competition is as much about technological innovation as anything else. The pace of technological change has accelerated since the Industrial Revolution in the 18th century, and it continues to do so today. The result has been a dramatic shortening of product life cycles. Technological innovation is both creative and destructive.²² An innovation can make established products obsolete overnight. But an innovation can also make a host of new products possible. Witness recent changes in the electronics industry. For 40 years before the early 1950s, vacuum valves were a major component in radios and then in record players and early computers. The advent of transistors destroyed the market for vacuum valves, but at the same time it created new opportunities connected with transistors. Transistors took up far less space than vacuum valves, creating a trend toward miniaturization that continues today. The transistor held its position as the major component in the electronics industry for just a decade. Microprocessors were developed in the 1970s and the market for transistors declined rapidly. The microprocessor created yet another set of new-product opportunities--handheld calculators (which destroyed the market for slide rules), compact disk players (which destroyed the market for analog record players), personal computers (which destroyed the market for typewriters), to name a few.

This "creative destruction" unleashed by technological change makes it critical that a firm stay on the leading edge of technology, lest it lose out to a competitor's innovations. As we explain in the next subsection, this not only creates a need for the firm to invest in R&D, but it also requires the firm to establish R&D activities at those locations where expertise is concentrated. As we shall see, leading-edge technology on its own is not enough to guarantee a firm's survival. The firm must also apply that technology to developing products that satisfy consumer needs, and it must design the product so that it can be manufactured in a cost-effective manner. To do that, the firm needs to build close links between R&D, marketing, and manufacturing. This is difficult enough for the domestic firm, but it is even more problematic for the international business competing in an industry where consumer tastes and preferences differ from country to country. With all of this in mind, we move on to examine locating R&D activities and building links between R&D, marketing, and manufacturing.

The Location of R&D

By and large, ideas for new products are stimulated by the interactions of scientific research, demand conditions, and competitive conditions. Other things being equal, the rate of new product development seems to be greater in countries where:

• More money is spent on basic and applied research and development.

• Underlying demand is strong.

• Consumers are affluent.

• Competition is intense.²³

Basic and applied research and development discovers new technologies and then commercializes them. Strong demand and affluent consumers create a potential market for new products. Intense competition between firms stimulates innovation as the firms try to beat their competitors and reap potentially enormous first-mover advantages that result from successful innovation.

For most of the post-World War II period, the country that ranked highest on these criteria was the United States. The United States devoted a greater proportion of its gross domestic product (GDP) to R&D than any other country did. Its scientific establishment was the largest and most active in the world. US consumers were the most affluent, the market was large, and competition among US firms was brisk. Due to these factors, the United States was the market where most new products were developed and introduced. Accordingly, it was the best location for R&D activities; it was where the action was.

Over the past 20 years, things have been changing fast. The US monopoly on new- product development has weakened considerably. Although US firms are still at the leading edge of many new technologies, Japanese and European firms are also strong players, with companies such as Sony, Sharp, Ericsson, Nokia, and Philips NV driving product innovation in their respective industries. Both Japan and Germany are now devoting a greater proportion of their GDP to nondefense R&D than is the United States.²⁴ In addition, both Japan and the European Union are large, affluent markets, and the wealth gap between them and the United States is closing.

While it is no longer appropriate to consider the United States the lead market, it is questionable if any country is. To succeed today, it is often necessary to simultaneously introduce new products in all major industrialized markets. Because leading-edge research is now carried out in many locations around the world, the argument for centralizing R&D activity in the United States is now much weaker than it was two decades ago. (It used to be argued that centralized R&D eliminated duplication.) Much leading-edge research is now occurring in Japan and Europe. Dispersing R&D activities to those locations allows a firm to stay close to the center of leading-edge activity to gather scientific and competitive information and to draw on local scientific resources.²⁵ This may result in some duplication of R&D activities, but the cost disadvantages of duplication are outweighed by the advantages of dispersion.

For example, to expose themselves to the research and new-product development work being done in Japan, many US firms have set up satellite R&D centers in Japan. Kodak's $65 million R&D center in Japan employs approximately 200 people. The company hired about 100 professional Japanese researchers and directed the lab to concentrate on electronic imaging technology. US firms that have established R&D facilities in Japan include Corning, Texas Instruments, IBM, Digital Equipment, Procter & Gamble, Upjohn, Pfizer, Du Pont, and Monsanto.²⁶ The National Science Foundation (NSF) has documented a sharp increase in the proportion of total R&D spending by US firms that is now done abroad. According to NSF data, between 1985 and 1993, the amount of funds committed to foreign R&D soared ninefold, while R&D spending in the United States remained essentially flat.²⁷ Thus, for example, Motorola now has 14 dedicated R&D facilities located in seven countries, and Bristol-Myers Squibb has 12 facilities in six countries. At the same time, to internationalize their own research and gain access to US research talent, the NSF reports that many European and Japanese firms are investing in US-based research facilities.

Integrating R&D, Marketing, and Production

Although a firm that is successful at developing new products may earn enormous returns, new-product development is very risky with a high failure rate. One study of product development in 16 companies in the chemical, drug, petroleum, and electronics industries suggested that only about 20 percent of R&D projects result in commercially successful products or processes.²⁸ Another in-depth case study of product development in three companies (one in chemicals and two in drugs) reported that about 60 percent of R&D projects reached technical completion, 30 percent were commercialized, and only 12 percent earned an economic profit that exceeded the company's cost of capital.²⁹ Similarly, a study by the consulting division of Booz, Allen & Hamilton found that over one-third of 13,000 consumer and industrial products introduced between 1976 and 1981 failed to meet company-specific financial and strategic performance criteria.³⁰ A more recent study found that 45 percent of new products did not meet their profitability goals.³¹ This evidence suggests that many R&D projects do not result in a commercial product, and that between 33 percent and 60 percent of all new products that do reach the marketplace fail to generate an adequate economic return. Two well-publicized product failures are Apple Computer's Newton, a personal digital assistant, and Sony's Betamax format in the video player and recorder market.

The reasons for such high failure rates are various and include development of a technology for which there is only limited demand, failure to adequately commercialize promising technology, and inability to manufacture a new product cost effectively. Firms can avoid such mistakes by insisting on tight cross-functional coordination and integration between three core functions involved in the development of new products: R&D, marketing, and production.³² Tight cross-functional integration between R&D, production, and marketing can help a company to ensure that

1. Product development projects are driven by customer needs.

2. New products are designed for ease of manufacture.

3. Development costs are kept in check.

4. Time to market is minimized.

Close integration between R&D and marketing is required to ensure that product development projects are driven by the needs of customers. A company's customers can be a primary source of new-product ideas. Identification of customer needs, particularly unmet needs, can set the context within which successful product innovation occurs. As the point of contact with customers, the marketing function of a company can provide valuable information in this regard. Integration of R&D and marketing are crucial if a new product is to be properly commercialized. Without integration of R&D and marketing, a company runs the risk of developing products for which there is little or no demand.

Integration between R&D and production can help a company design products with manufacturing requirements in mind. Designing for manufacturing can lower costs and increase product quality. Integrating R&D and production can also help lower development costs and speed products to market. If a new product is not designed with manufacturing capabilities in mind, it may prove too difficult to build. Then the product will have to be redesigned, and both overall development costs and the time it takes to bring the product to market may increase significantly. Making design changes during product planning could increase overall development costs by 50 percent and add 25 percent to the time it takes to bring the product to market.³³ Many quantum product innovations require new processes to manufacture them, which makes it all the more important to achieve close integration between R&D and production. Minimizing time to market and development costs may require the simultaneous development of new products and new processes.³⁴

Cross-Functional Teams.

One way to achieve cross-functional integration is to establish cross-functional product development teams composed of representatives from R&D, marketing, and production. Because these functions may be located in different countries, the team will sometimes have a multinational membership. The objective of a team should be to take a product development project from the initial concept development to market introduction. A number of attributes seem to be important for a product development team to function effectively and meet all its development milestones.³⁵

First, the team should be led by a "heavyweight" project manager who has high status within the organization and who has the power and authority required to get the financial and human resources the team needs to succeed. The "heavyweight" leader should be dedicated primarily, if not entirely, to the project. The leader should be someone who believes in the project (a champion), and who is skilled at integrating the perspectives of different functions and at helping personnel from different functions and countries work together for a common goal. The leader should also be able to act as an advocate of the team to senior management.

Second, the team should be composed of at least one member from each key function. The team members should have a number of attributes, including an ability to contribute functional expertise, high standing within their function, a willingness to share responsibility for team results, and an ability to put functional and national advocacy aside. It is generally preferable if core team members are 100 percent dedicated to the project for its duration. This assures their focus in on the project, not on the ongoing work of their function.

Third, the team members should be physically co-located if possible to create a sense of camaraderie and to facilitate communication. This presents problems if the team members are drawn from facilities in different nations. One solution is to transfer key individuals to one location for the duration of a product development project. Fourth, the team should have a clear plan and clear goals, particularly with regard to critical development milestones and development budgets. The team should have incentives to attain those goals, such as receiving pay bonuses when major development milestones are hit. Fifth, each team needs to develop its own processes for communication and conflict resolution. For example, one product development team at Quantum Corporation, a California-based manufacturer of disk drives for personal computers, instituted a rule that all major decisions would be made and conflicts resolved at meetings that were held every Monday afternoon. This simple rule helped the team meet its development goals. In this case, it was also common for team members to fly in from Japan, where the product was to be manufactured, to the US development center for the Monday morning meetings.³⁶

Implications for the International Business

The need to integrate R&D and marketing to adequately commercialize new technologies poses special problems in the international business, since commercialization may require different versions of a new product to be produced for different countries. We saw an example of this in the opening case, which described how Procter & Gamble's R&D center in Kobe, Japan, developed a dish soap formula specifically for the Japanese market. To do this, the firm must build close links between its R&D centers and its various country operations. A similar argument applies to the need to integrate R&D and production, particularly in those international businesses that have dispersed production activities to different locations around the globe depending on a consideration of relative factor costs and the like.

Integrating R&D, marketing, and production in an international business may require R&D centers in North America, Asia, and Europe that are linked by formal and informal integrating mechanisms with marketing operations in each country in their regions and with the various manufacturing facilities. In addition, the international business may have to establish cross-functional teams whose members are dispersed around the globe. This complex endeavor requires the company to utilize the formal and informal integrating mechanisms that we discussed in Chapter 13 to knit its far-flung operations together so they can produce new products in an effective and timely manner.

While there is no one best model for allocating product development responsibilities to various centers, one solution adopted by many international businesses involves establishing a global network of R&D centers. Within this model, fundamental research is undertaken at basic research centers around the globe. These centers are normally located in regions or cities where valuable scientific knowledge is being created and where there is a pool of skilled research talent (e.g., Silicon Valley in the United States, Cambridge in England, Kobe in Japan). These centers are the innovation engines of the firm. Their job is to develop the basic technologies that become new products.

These technologies are picked up by R&D units attached to global product divisions and are used to generate new products to serve the global marketplace. At this level, emphasis is placed on commercialization of the technology and design for manufacturing. If further customization is needed so the product appeals to the tastes and preferences of consumers in individual markets, such redesign work will be done by an R&D group based in a subsidiary in that country or at a regional center that customizes products for several countries in the region.

Consider the case of Hewlett-Packard (HP).³⁷ HP has four basic research centers. They are located in Palo Alto, California; Bristol, England; Haifa, Israel; and Tokyo, Japan. These labs are the seedbed for technologies that ultimately become new products and businesses. They are the company's innovation engines. The Palo Alto center, for example, pioneered HP's thermal ink-jet technology. The products are developed by R&D centers associated with HP's global product divisions. Thus, the Consumer Products Group, which has its worldwide headquarters in San Diego, California, designs, develops, and manufactures a range of imaging products using HP-pioneered thermal ink-jet technology. Subsidiaries might then customize the product so that it best matches the needs of important national markets. HP's subsidiary in Singapore, for example, is responsible for the design and production of thermal ink-jet printers for Japan and other Asian markets. This subsidiary takes products originally developed in San Diego and redesigns them for the Asian market. In addition, the Singapore subsidiary has taken the lead from San Diego in the design and development of certain portable thermal ink-jet printers. HP delegated this responsibility to Singapore because this subsidiary has built important competencies in the design and production of thermal ink-jet products, so it has become the best place in the world to undertake this activity.

Microsoft offers a similar example. The company has basic research sites in Redmond, Washington (its headquarters); Cambridge, England; and Silicon Valley, California. Staff at these research sites work on the fundamental problems that underlie the design of future products. For example, a group at Redmond is working on natural language recognition software, while another works on artificial intelligence. These research centers don't produce new products; rather, they produce the technology that is used to enhance existing products or help produce new products. The products are produced by dedicated product groups (e.g., desktop operating systems, applications). Customization of the products to match the needs of local markets is sometimes carried out at local subsidiaries. Thus, the Chinese subsidiary in Singapore will do some basic customization of programs such as Microsoft Office, adding Chinese characters and customizing the interface.