Time to profitability
an antidote to the fallacy of accelerated time to market
Amid the mad dash to whittle product development cycles down to nil, an important fact has been ignored: The lion's share of a product's life cycle is in manufacturing, marketing and selling.
by Gary S. Tighe
A competitive advantage. A world-class process. A survival tactic. The ability to bring products to market quickly has been glowingly described in such terms. And, it's true, the time, money and effort spent in CAD, CAM, robotics, hard automation, human capital, focus groups, seminars, and consultants to shorten the design and manufacturing elements of new product development has yielded impressive results. Product design and manufacturing cycles today are world-class. The U.S. electronics industry has been the scene of discussions on shrinking product design and manufacturing cycles on all products to a few weeks. Semiconductor manufacturers have had many victories in their quest to bring new semiconductors or semiconductor systems to market ahead of the competition.
Yet, meanwhile, in an apparent paradox, Japanese companies are moving away from offering a dizzying array of products on short notice (see, for instance, “Japan's Dark Side of Time” by George Stalk Jr. and Alan Webber, Harvard Business Review, July/August 1993). Maybe we should be asking ourselves: Why?
The Design Cycle Blind Spot. Traditionally, most of the focus in new product development (NPD) has been on the visible and measurable design and manufacturing phases preceding product launch. And this focus can yield some impressive results. The quest for “more to market quicker” has provided an encyclopedic catalog of semiconductors for equipment designers for use in their end products and a plethora of innovative end products for consumers.
Time to Market vs. Time to Profitability
Exhibit 1. The Time to Profitability cycle, unlike the more common and short-sighted time to market, encompasses all activity, from the germ of an idea to the point at which a new product repays its development costs.
Unfortunately, the focus on bringing new products to market faster misses the fundamental reason for the existence of an enterprise: creating profits for its owners, managers and employees, or to put it bluntly, to make money (The Goal, Eliyahu Goldratt, North River Press, 1984). Focus on bringing more and more products to market faster and faster actually subjugates the profit objective to the objective of optimizing local conditions in one or two departments within the enterprise (in this case, the engineering and manufacturing departments). Thus the enterprise may bring more products to market faster, but may lose money and profits in the process. This is especially true if the products miss the market window or fail to fill a market need.
Another paradox is that, even though semiconductor and electronic companies are vigorous in their quest to reduce the design cycle times, benchmarking reveals that industry average design cycle times are increasing and predicted to get longer. The reason for this dichotomy is that new semiconductors and electronic component subsystems are more frequently being developed in response to specific customer and market applications. As these applications include more functions, the design requirements become more complex. This increased complexity translates to an increased need for extended CAD utilization, systems-level simulations, and broader systems knowledge on the part of design teams—all of which translates to an increase in the design cycle.
The complexity of design cycles and the increased time needed to complete them has encouraged manufacturers to increase focus even more on this portion of the new product development cycle. Industry consultants and experts argue that a 50 percent reduction in design cycle time for semiconductors and other electronic components, from 12 months to 6 months or less, will create a virtual fortress of competitive advantage for the winner. But logical examination of this argument reveals the difficulties in achieving such a competitive edge: Semiconductor and other electronic companies have equal access to critical design tools and process technology. Ongoing migration of technical personnel among the various manufacturers ensures that, over the long term, talent, technology and intellectual property is level throughout the industry. Customer acceptance and adoption of new designs is dependent on their design cycles, the design cycles of the end users, and the speed of new product acceptance by the end users. Substantial and ongoing investment in design cycle reduction by the industry and sharing of information on design cycle management ensure that few secrets exist. Therefore, significant competitive “leapfrogging” in design or manufacturing cycles is unlikely. Given previous investment levels in these areas, the marginal returns on capital investment for design cycle time reduction is likely to be rather small compared to other areas of investment opportunity. Clearly, if meaningful NPD cycle time reduction is the desired goal, it would appear a more productive focus may lie somewhere other than in the design phase. (Author's note: Quantification of the marginal return on investment in this area is clearly an area where additional research would be welcome.)
A New Paradigm: Time to Profitability
New product development consists of three distinct phases: innovation, design, marketing/manufacturing. Here's a brief demonstration of how the phases fit together and loop to precondition the market to buy the finished product.
Exhibit 1 illustrates the Time to Profitability cycle. The cycle encompasses all activity, from the germ of an idea to the Break Even Point (BEP) where a new product successfully repays its development costs and turns a profit. The cycle times shown represent typical cycle times for semiconductor NPD for system-level integration. In this example, cycle times of 48–60 months from idea recognition to breakeven are typical. The cycle model is broken into three segments: innovation or “fuzzy front end” (12 months); design (including manufacturing planning, 15 months); marketing and manufacturing (24–36 months). It is assumed the cycle is uninterrupted and linear; that is, once the design phase is authorized, it actually begins.
The innovation phase or the “fuzzy front end” includes the recognition, documentation and logging of an opportunity or idea and the evolution of the idea into a formal business plan or specification the enterprise can design, manufacture and sell. In the case of Harris Semiconductor, the recognition of the idea date is when the idea is logged into an electronic mail system. This interval, from idea log-in to business plan, requires 12 months (“Using a Concurrent Team to Re-invent the Innovation Process” by Gary S. Tighe, PDMA Visions, July 1995). The starting point metric is imperfect and research is needed to better identify when ideas or needs actually acquire viability in the market. It is easy to visualize a situation where a need might arise and go unrecognized for a significant period. Most companies need better sensors to detect market needs and direction earlier than present systems and processes permit.
The design and manufacturing planning phase includes all the elements needed to design, verify and test the design, and make ready the production resources. The phase begins with a Job Authorization, where the project is approved and capital is allocated. It ends with Market Release, when Design and Marketing agree the product is ready for market announcement. This phase requires 14–24 months for most semiconductor manufacturers. As noted earlier, recent benchmarking shows this to be an average for the semiconductor industry and the average is on the increase.
The marketing and manufacturing phase is the period from product announcement or launch until the cumulative new product profits equal the cumulative investment dollars. The third phase in the cycle includes product launch, post-launch reviews, sales, distribution, ongoing manufacturing, and marketing activities. In our case study, this phase takes 24 months or more, depending on how well the product is accepted and sold. In reality, the time interval required to fully understand the magnitude of a product failure could stretch to infinity!
The global objective in Time to Profitability is to achieve profitability quickly by bringing the right product to market in time for the customer to use it. The speed and quantity in which revenue and profits are generated is dependent on three market variables, each of which will influence ultimate product success: the right product, the right timing and an effective launch.
In this model the design and manufacturing planning portions of the NPD cycle require 25 percent of the cycle, while innovation, launch and selling require 75 percent. Given this, a focus on and investment in reducing the 25 percent design portion seems an illogical strategy.
Formation of a Time to Profitability Team. A Time to Profitability team consists of a core team and a supporting team. The core team is responsible for shepherding the new product development from idea tracking and logging through break-even, and is represented by members from Strategic Marketing, Design Engineering, Manufacturing, Marketing, Launch Team and Sales. The core team meets regularly to ensure the value proposition is intact and the project is supporting the global objectives of the enterprise. The supporting team is made up of members from those important functions needed periodically to support the NPD process (Quality Assurance, Finance, Legal, Purchasing, Human Resources). These team members join the core team as needed to ensure the project success.
NPD Process Team Interfaces and Responsibilities Diagram
Exhibit 2. A Time to Profitability team consists of a core team responsible for shepherding the new product from idea through break-even and a supporting team made up of members from functions needed periodically to support the process—Quality Assurance, Finance, Legal, Purchasing, Human Resources. This team matrix for a large semiconductor company (ACT II Gate Matrix, Harris Semiconductor Inc., 1996) serves as a NPD project participation road map.
Larger and more comprehensive Time to Profitability teams are sometimes needed in more complex organizations. Exhibit 2 shows a team matrix for a large semiconductor company (ACT II Gate Matrix, Harris Semiconductor Inc., 1996). The matrix serves as a NPD project participation road map and part of a Quality Manufacturing Line (QML) document.
Validation and the Learning Loop. In addition to having a concurrent team mentality and a focus on end results (profits), the enterprise must have an installed, operational method to ensure continuous learning by the teams and participants in the process. The traditional product development cycle includes the work from the start of design to product launch, as illustrated in Exhibit 3. Within that cycle, little consideration is given to determining or validating the usefulness of the product in the customer's system; neither is the eventual profitability or time to payoff or breakeven considered in depth.
Continuous feedback and periodic validation by the team and the enterprise ensures that not only will the existing project fill the market and customer needs but that all subsequent product development will get better and better at meeting customer and market needs—the goal of any “learning organization.”
Validation is a process where the design team remains in contact with key customers and market influencers to review the impact of two variables: design trade-offs that modify the original product specification, and changes in the marketplace or in the customer's requirements. Product changes are compared against the original market need to see if product performance is within the boundaries of acceptance. Market needs are evaluated to ensure new requirements have not surfaced that go beyond the technology's or product's ability to meet them. If either side of the validation equation is shifted, the assumptions on which the project are based must be reexamined to determine if there is still a project at all; that is, if Product Specifications = Current Market Reality.
THE “TIME TO MARKET” FOCUS concentrates on optimizing local functions such as development time cycles, number of new products introduced per time period, product costing, product uniqueness, and research resource allocation effectiveness, while ignoring or subjugating the larger end goals such as enterprise revenue and profitability
Broadening the area of concern to a “Time to Profitability” cycle and including the important objectives of time to profitability and investment payback greatly enhances the probability of success for the whole enterprise, not just the new product stream. The broader consideration of profitability and revenue stream requires consideration of how well the proposed new product satisfies market or customer demand at the time of introduction and throughout the product's life cycle. The process substitutes the traditional obsession with design cycle performance and cost accounting in favor of the financial performance of the product and the enterprise. ∎
A Learning Loop
Exhibit 3. The traditional NPD cycle illustrated by the top half of this learning loop has a missing element: the opportunity to learn from the customer. On the other hand, the Time to Profitability cycle provides an opportunity for continuous learning by incorporating feedback from customers and markets.
Gary S. Tighe of Harris Semiconductor, Melbourne, Fla., has over 30 years experience leading multifunction teams in Fortune 200 corporations. He has written extensively on new product development, reengineering and product launch.
PM Network • May 1997
PMI research shows project teams that draw from an array of perspectives and skillsets deliver powerful outcomes.