The importance of first-time right New Product Introductions (and what happens if you don’t)

The performance of any high-tech company largely depends on its ability to successfully bring new innovations to market. There are two lines of reasoning on how to be successful with new product introductions (NPIs):

1. We need to do this right, so let’s keep it in-house
2. We need to do this right, so let’s work together with external contract manufacturers who are specialized in it

While gut feeling might favor option 1, in our experience working for many high-tech companies (start-ups, ventures and large OEMs), a lot can be said for option 2. Proper execution of your NPI can be a real game-changer when you are facing fierce competition, short design cycles and complex solutions.?

Properly executed NPI process = higher revenues, higher profitability

The introduction of a new product is essentially the beginning of its lifecycle. The following diagram shows the impact of a properly executed NPI on the revenue stream throughout a product’s life cycle [1]. This model was initially developed by German economist Theodore Levitt, who published his Product Life Cycle model in the Harvard Business Review in 1965.

Curve (A) shows the PLC curve where the NPI is well orchestrated, or properly executed. This means project milestones have been reached according to plan, and product market introduction is executed timely. Initial R&D expenditures are within budget and the net cash flows result in positive income.

Curve (B) depicts the financial situation when the NPI process is poorly executed. This generally means that several times milestones were missed, market introduction has been delayed, resulting in increased R&D and marketing expenditures, and negative impact on cashflows.

Additionally, delaying your product development and market introduction allows competition to catch up and eat up your market share. The consolidated effect is that it is difficult, if not impossible, that this NPI will yield positive results.

The lifecycle of electronic goods can vary between approximately 1 to 10 or more years. Costs of changes early in the development stage are relatively low compared to changes in or redesigns of the product during production or later in the product life cycle.

In both above cases, an agile and professional contract manufacturing partner can be the indispensable link in your NPI process, particularly between product development and the production ramp-up.

Differences in NPI valuation based on the Net Present Value

Another model that demonstrates the importance of ‘first-time right NPIs’ is the Net Present Value (NPV) formula [2]. This financial term is used to assess a project, where the expected future cash flows are discounted with a certain rate-of-return, or the expected return. NPV tells us today’s value of the expected future cash flows, or today’s value of invested cash, described with the following formula:

For illustration purposes, let’s consider the following PLC diagram below to assess the attractiveness of two differently managed NPI processes:

• A:?where NPI process has been executed according to the initial project plan.
• B: where NPI process has been executed rather poorly (extra R&D expenses, lower than normal cash flows as competition is becoming strong in your plain field).

According to the NPV formula, it is crucially important to have revenue streams coming in as quickly as possible and on a high level.

The profitability of an NPI depends heavily on the execution of product development. In our example, scenario A will yield approx. 4 million EUR profits over the lifetime of the product, while scenario B yields a loss of 714,000 Euro.

Scenario A is what you normally plan, however, scenario B is only obvious once it is already there. You don’t plan for this. Instead, it occurs during the NPI process and most of the time companies are too late to prevent this. Thus, costs are mounting, market introduction is delayed, competition becomes prevalent, and as a result, cash flows are delayed and diminished.

How we can help

As a contract manufacturer, Philips Micro Devices fulfills a crucial role in early stages of the product lifecycle for many customers. We support our customer base with the realization of evaluation, validation and application boards, including testing.

Successful execution of these stages is paramount for the success, and therefore, the profitability of our customers’ NPI. Working in harmony with our parent organization Philips Engineering Solutions, we can even offer End-2-End PCBA services, that goes beyond just PCB Assembly. Building on the decades-long expertise and professional teams we can offer design, layout, assembly, and the development and execution of test strategies.

Core competences of Philips Micro Devices are:

A representative of one of our prominent customers, a world-leading semiconductors company, said the following:

“Philips Micro Devices team is one of - if not - the best house of R&D engineering and fast prototype manufacturing I've ever had the pleasure of working with: very knowledgeable (expertise, experience), quite resourceful and always willing to setup, find solutions and simply deliver. Your key attributes are first-time-right, quality first and flexibility.”

If you want to learn more about how we can help you to execute your NPI successfully, please get in touch or visit our website at Philips Micro Devices.

References

[1]??Theodore Levitt, 1965. Exploit the Product Life Cycle (published in Hardvard Business Review)

[2]??Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2015). Fundamentals of Corporate Finance (11th ed.). The McGraw-Hill/Irwin