Product Development Economics (1)

8/17/2019 Product Development Economics (1)

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Product development

economicsSreekumar.P


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Product DevelopmentProcess


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Product Design andDevelopment Process


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The proftability or fnancial viability othe new product has to be checkedbeore deciding to produce it.

This Economic Analysis is done in 2parts . !uantitative Analysis 2. !ualitative Analysis

Economic Analysis o a newproduct


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This based on the cash in"ows# investments$ costs% and e&pectedcash in"ows in uture' rom the newproduct.

The fnancial tools used or this analysisare'

Payback period method

(P) # (et present )alue% approach *++ # *nternal rate o +eturn % method Proftability *nde& ,ensitivity analysis

!uantitative Economicanalysis


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A new product$pro-ect interacts with theirm' the /arket and the /acro businessenvironment. ,o the in"uence on these0ualitative actors are to be considered

while evaluating a new product. *nteraction between Product and the irm

2. *nteractions between the Product and themarket # customers' suppliers' competitors%

1. *nteraction between the product and the/acro business environment in the country# Political' social' economic environment%

!ualitative analysis


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!ualitative actors interactingwith the new product

Macro Business Environment

Market

Firm

Product


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o3(o o milestones within di4erentstages o Development. Eg. 5etween6oncept development and 6oncepttesting

5eore taking 7perational decisionslike 7utsourcing a part o thedevelopment' ,peeding up

development time etc.

8hen to do Economicanalysis9


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Economic Analysis process

,elect a basicfnancialmodel Perorm

sensitivity

analysis

:nderstandpro-ect Trade3o4s

6onsider theimpact o

!ualitativeactors


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. Payback Period method#P5 method%

2. (P) model # (et Present )alue/odel%

1. *++ /odel# *nternal +ate o +eturn%;. Proftability *nde&

inancial /odels


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6onsider the total *nvestment re0uiredor launching the new product and theuture profts that can be e&pectedevery year due to the new product.

Add up the uture profts and see in howmany years the total profts e0uals theinitial investment.

* *nvestment is * and uture profts or <

years are P' P2' P1' P;' P *' then Payback period is

1 years. 8hile comparing several products'

select the one with the ?east P5 period.

Payback period method


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6apital E&penditure Data or 2new products


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Principle3 A +upee tomorrow is worth?E,, than a +upee today. # a bird inhand is worth more than 2 in the bush%

*n this method' the uture profts$annual cash "ows are discounted tothe Present value using a discountingrate. This P) is compared with the

initial investment in the product. *sum o P) is more than investment'the pro-ect is proftable.

(P) model# (et Present)alue%


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(P) > discounted sum o P) @*nvestment. * (P) is Positive' theproduct is proftable.

* multiple pro-ects are evaluated'select the pro-ect with the *E,T(P).

Discounting rate is considering

in"ation' cost o capital# bankinterest%. Etc. (ormally B to


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(P) ormula


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(umeric Problem

A Pro-ect has +s. 'BB'BBB investment.E&pected cash "ows are' +s. 2BBBB'1BBBB'


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*++ is the C or rate that makes theDiscounted cash"ows$profts E!:A? to the*nvestment.

*t indicates a (o proft3 (o loss situation. 6ash "ows discounted at *++ > investment. 7r' 6ash "ows discounted at *++ @

*nvestment > B. * *++ is more than 6ost o 6apital # bank

loan interest%' the product is proftable. *n case o multiple pro-ects' select the

pro-ect with ighest *++.

*++ method # *nternal rate o+eturn%.


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ormula or *++


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DiHcult to calculate *++ manually. ,ouse calculator unction. 7r by trial anderror. ,tart with *++ BC' i the (P) ispositive' then increase *++ to 2 andtry.

(P) and *++ methods may givedi4erent answers. 5ecause the time

actor o cash "ows is considered.


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sensitivity

analysis



!ualitativeactors


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There are ; ma-or actors whichin"uence the sensitivity o the fnancialmodels. 8e have to understand thesevariables and their interactions. There

are G possible interactions.

Pro-ect Trade3o4s

Development Time

Product cost

ProductPerformance

Developmentcost


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Eg. Decreasing Development time mayresult in lower product perormance

Eg. Decreasing product developmenttime may result in increasingdevelopment cost.

All such trade3o4s are to be considered ?imitations o !uantitative Analysis

. ocus on measurable data only. 2. Depends on validity o assumption. 1. /anagers make e&cuses like too

much development time shortens lie3

cycle.

Trade o4s


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sensitivity

analysis



!ualitativeactors


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!ualitative actors interactingwith the new product

Macro Business Environment

Market

Firm

Product


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ompetitors- !ill introduce products directl"competin# or su$stitutin# products

ustomers- t%eir e&pectations' tastes ma"c%an#e over time. E#. Denim' (eans' Fueleconom" cars.

*nteractions between Pro-ectand market


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Economic changes3 bank rates' credit'income' ta&es' ore& rates

ovt. regulations3 ?P policies'Technology import' D* rules' ,tart upsupport

,ocial trends3 changing demographics'inra development' literacy rates'

environmental awareness' pressuregroups.

*nteraction between pro-ect andmacro environment


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Product Development Economics (1)