Measuring Development Performance in the Electronics Industry

Abstract

Within a year or so, the computer you purchased last month will probably be obsolete. For a manufacturer faced with such short product life‐cycles, the performance of the new product development (NPD) function can determine whether the firm itself is relegated to the scrap heap. With such a close link between NPD performance and a firm's overall success, we need to do more than simply ensure that individual projects are well managed; we need to assess NPD's overall contribution to the company's business performance.Christoph Loch, Lothar Stein, and Christian Terwiesch develop a two‐step model for measuring the performance of the NPD function. In this model, development output performance is the direct driver of business success. In other words, the output and the productivity of the NPD function directly affect a company's profitability and sales growth. Development output performance is driven by development process performance—that is, the operational management of development projects.Using data from the “Excellence in Electronics” project (a joint research effort of Stanford University, the University of Augsburg, and McKinsey & Co.), the two‐step model is applied to a sample of 95 business units operating in three international electronics industries: consumer/small products, computers/communications, and industrial measurement/large systems. This analysis has two main objectives: identifying the key measures of development output performance and their contribution to business success; and identifying the important measures of development process performance and their contributions to development output performance.Development productivity, measured by development expense intensity, is the clearest predictor of business success. In other words, you can't buy a competitive advantage by pouring more money into R&D. Success comes from more efficient NPD, not simply outspending the competition. In the computer industry, design‐to‐cost has a positive effect on profitability growth, and design quality has a positive influence on sales growth.The factors underlying development process performance are much more dependent on the nature of competition in each industry. For example, because competition in the large systems industry still focuses primarily on technical competence, design‐to‐cost efforts in this industry lag behind those of the computer industry. Important measures of development process performance for all industry segments examined in the study include supplier involvement in the design, early prototyping, a team‐based development organization, the use of team rewards, and value engineering.