manner? This type of analysis is very common, but fraught with potential errors. As mentioned previously, focus groups can provide valuable insights and help prevent the above dilemmas. First, focus groups will provide a more realistic answer to what students would actually be willing to pay for the proposed product. Further, this will also provide some insights as to whether students think this is a product they really need (or want) and can use. Students are very price sensitive, so any product competing for their dollars must offer value (or the perception of value).To make assumptions of market acceptance based on total student population and a blanket target rate is very risky and is probably unrealistic.
7 What role would the engineering or R&D groups play in this evaluation?The marketing department would be the most qualified to develop pricing, distribution, and margin scenarios (remember the 4 Ps). However, based on marketing research and studies, the results can have a direct impact on R&D and engineering. Some items to consider include:If students are only willing to pay $30 per unit, can a cheaper model be produced? R&D will look for alternative technologies or develop new ones. It may also include reducing some of the features of the unit in order to reduce costs/price.Engineering will work closely with marketing and R&D. Can less expensive materials be used, but still provide a quality product? Can we consider how the units are produced for more efficient methods? Can batch production be used rather than a continuous run? Can we find a supplier (or multiple suppliers) that can provide similar raw materials at lower cost?
8 The table above shows gross revenues and net profits. There is no mention of the cost of the product. What are some of the costs that would be involved? Can you determine from the chart above the total “costs” of the product?The chart does not provide any indication of product costs. Some of the costs to be included in the product’s price include:Cost of raw materialsR&D and engineering design costsManufacturing costs: fixed and variableOverheads: salaries of employees, benefits, legal department, sales group, etc.Costs of distribution (transport of product to stores)Marketing and PR (advertising)Intellectual property (royalty payments?).If these costs can be spread over a large number of units, the cost per unit will be low and the margin per unit will be higher. Spreading cost recovery over a longer time frame will also be beneficial (say three years instead of one).
Answers to Discussion Questions
1 The project leader has an important role. While all of the below are important, which is the most important and why:CommunicationsIntegrity and trustConflict resolution? While each answer is important, the correct answer is b. A project or product manager is a leadership role, and one of the principal hallmarks of leadership is trust. This will be of high importance in leading a product development team to success.
2 Some companies believe that a Product Development Manager must have strong technical skills. Is this true? Why or why not?The Product Manager will need leadership and managerial expertise more that technical expertise. The PM should expect to have technical subject matter experts (SME) assigned to the team. The required PMs skills include vision and focus on the objectives, strong communications and relationship building up and down the organization, managerial excellence, ability to track budgets and schedules, and the ability to resolve conflict. There are additional skills that could be listed, but these are the fundamentals.
3 What value does the Marketing Group bring to the product development effort?Marketing may assign a Product Manager to lead the development effortMarketing tracks industry trends and determines the 4 PsMarketing will develop pricing/margin scenario spreadsheetsMarketing will determine the break-even pointIt is likely that marketing will work with the finance group to determine NPV and other financial metrics
4 If the cost of each new product is $40, and our company expects margins of 25%, should we price our product at $50? Why or why not?At a cost of $40 and a selling price of $50, the required 25% margin will be realized. However, there is no guarantee that $50 will be accepted by the market. If the price, for example, must be dropped to $45 to sell, then the required margin will not be met. The company would then need to determine if a 20% margin is acceptable or find ways to cut costs so that the required profitability can be obtained.
5 One of the costs that may be in our product’s development is legal costs. What kind of legal activities would be in our budget?The legal department, depending on the product, may have a very key role to play in product development. Some of the activities may include:Developing and reviewing contracts with suppliersSubmitting patents for the new product(s)Determining intellectual property ownership and if royalties will be paidRegistering trademarks or copyrightsOutlining contracts or guidelines for product distribution rightsAdvising the product team and senior management of potential legal (product liability) or regulatory issues.
6 Why is it important to know the break-even point?Breakeven is related to profitability and NPV (net present value). It is important to know the breakeven point (the point where all costs are recovered, and the new product is profitable):If the breakeven point is too long (say 10 years), this may not be acceptable and prove to be a money-losing product. A long breakeven point will give competitors time to catch up and almost guarantee that your product will never meet margins.Each company is unique and will determine what is an acceptable breakeven based on time, NPV, costs, and price.
7 What are methods to anticipate customer demand and pricing?Customer focus groups.Brand and reputation of companyNote that brand recognition can offer the perception of quality, thereby allowing a higher selling price.Evaluating market acceptance based on similar products from competitors.Studying history of previously released products by your company. This may provide insight into pricing and market acceptance.
8 Projects should always exist to support the corporation’s strategy. Why?The company develops a strategy, or long-term plan, to remain profitable. The corporation issues new products that capitalize on its strengths. Consequently, all activities: projects, new product development, etc. should support the corporation’s strategy. If a new product is not part of the strategic plan, why should it be funded or supported?
9 Once products have reached the decline stage in the product lifecycle, they become a commodity. Is this true? What is a commodity?In the traditional sense, commodities are defined as base or raw materials. This includes items such as oil, wheat, sugar, gold, etc. These are considered primary commodities. However, secondary commodities include products that are produced using primary commodities, such as gasoline and plastics from oil, cereal and bread from wheat, etc. Commodities, unprocessed, are placed into three categories: agriculture, energy, and metals.To a lesser degree, products once they reach their maximum potential may be called a commodity, but this is not in the strict definition. This basically means that a product in “commodity” status is simply not able to command a high price and must compete with many other producers.
10 All costs in a product’s development should be recovered in the first year of a product’s sale in the marketplace. Is this a good strategy? Why or why not?This is an unrealistic expectation. The goal, of course, is to recover all costs and meet the breakeven point as quickly as possible. For more sophisticated products – e.g., newly developed cars (Tesla, for example), sophisticated electronics, and specialized applications (medical equipment) – the breakeven point will be longer. It is up to each company to determine an appropriate time frame to recover costs and become profitable.It is safe to assume that most companies will not expect cost recovery in the first year.
References
1 1 Innolytics.AG https://innolytics-innovation.com/what-is-innovation.
2 2 Fortune 500, Full List 1980, https://archive.fortune.com/magazines/fortune//fortune500_archive/full/1980.
3 3 Fortune 500, Full List 2020, https://fortune.com/fortune500/2020/search.