Chapter 17- Product Development Economics

Chapter 17- Product Development Economics

1. Elements of economic analysis

   • Quantitive analysis
     • Measurable factors
   • Quality analysis
     • Considers interactions between the project, firm, market and macroeconomic environment

2. Economic Analysis

   • Is useful in two circumstances:
     • Go/no-go milestones
     • Operational design and development decisions:

3. Economic Analysis Process

   • 4 STEPS

4. Step 1 of Economic Analysis Process

   • Build a Base-case Financial Model
     • Estimate the Timing and Magnitude of Future Cash Inflows and Outflows
       • Merging the project schedule with:
         • Project budget
         • Sales forecasts
         • Estimated production costs
     • Compute the Net Present Value of the Cash Flow
       • The net cash flow needs to be converted to its present value
     • The Base-Case Financial Model Can Support Go/No-Go Decisions and Major Investment Decisions

5. Step 2 of Economic Analysis Process

   • Perform Sensitivity Analysis
     • Calculate the change in NPV if there is a change in the factors of the model
       • Internal factors
         • Those those that the team can influence
       • External factors
         • Those that the team cannot change
     • Examples
       • Change in development cost
       • Change in development time

6. Step 3 of Economic Analysis Process

   • Use Sensitivity Analysis to Understand Project Trade-Offs
     • The team can make a change only if there is an expected gain
     • Six Potential Interactions
       • Potential interactions between 2 internal factors
         • Development time
         • Product cost
         • Product performance
         • Development cost
     • Trade-Off Rule
       • They are used to inform the team of the relative magnitude of the sensitivities of the profitability of the project on factors under control
     • Limitations of Quantitative Analysis
       • Focused on measurable quantities
       • Depends on validity of assumptions and data
       • Bureaucracy reduces productivity

7. Step 4 of Economic Analysis Proces

   • Consider the Influence of the Qualitative Factors on Project Success
     • Project interacts with the Firm, the Market, and the Macro Environment
       • Between the Project and the Firm
         • Externalities and strategic fit
       • Between the Project and the Market
         • Competitors, customers and suppliers
       • Between the Project and the Macro Environment
         • Major economic shifts, government regulations and social trends
     • Carrying out qualitive analysis
       • 1. Consider and discuss the interactions between the project and the firm, market and macro environment
       • 2. Determine the most appropriate relative emphasis on development speed, development expense, manufacturing cost, and product performance