{ PRODUCT LAUNCH COSTS}EXECUTIVE FOCUS
By Rebecca Henry

What Are Late ProductLaunches REALLYCOSTING YOU?
New product introductions risk lost revenue
and market share without processes toeffectively collaborate and share informationE

ngineering organizations
are under relentlesspressure to speed lifecycle
times, while also reducing
development costs. Given thetremendous effort and resources that a
new product launch requires, productlaunch delays can cost an organizationa significant percentage of its return on
investment.
Companies in engineered-productindustries face especially complex andcostly product-development challenges.
Chief among these challenges is theneed to reduce time to market and get
products launched ahead of competitors.
In return, companies gain from:❯ Increased Sales and Better ProfitMargins. The earlier the productreaches the market, relative tothe competition, the longer thelifespan of that product.
❯ Lower Development Costs.
Streamlined processes, limited
iterations, and reduced slack
free up financial and operating
resources for other value-adding
activities.
❯ Larger Market Share. An earlyto-market product is less likelyto face initial competition. A
quick introduction also allows
more time for companies tobuild market share before theirproducts become commodities.

❯ Greater Market
Responsiveness.
Companies that bringproducts to market fastercan react more quickly
to competitors’ moves ormarket shifts with their own
product innovations, while also
besting competition by gaining
first-mover advantage.

SELLING AT PEAK

Singhal. “The effect of the delay isnegative regardless of when it occurred
Surprisingly, research hasn’t reallyin the product development process or
attempted to estimate the economic
the time of year of the announcement.”
consequences of postponed productAnd yet, the average new productlaunches, according to Vinod Singhal,development project exceeds its
departmental editor for Production
schedule byand Operations
The average new product development 120 percent,Management at
project exceeds its schedule byaccording toGeorgia Institutethe Center forof Technology, andNew Product
Kevin Hendricks,Development.
operations— Center for New Product Development
Reasons formanagement
delayed product launches include:
professor at Wilfrid Laurier University.
In “The Effect of Product Introduction❯ Poor management of theDelays on Operating Performance,”
development process
they analyzed the financial performance❯ Frequent design changesof over 450 publicly traded companies,❯ Lack of coordination amongacross industries, that experienceddifferent functional areas
product launch delays over a 16-year❯ Resource shortages
period.
The impact of launch delays depends“We find that product introduction
upon industry-specific levels ofdelays have a statistically significantcompetition. In competitive markets,negative effect on profitability,” saysfor example, the end point is fixed by

120%

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PRODUCT LAUNCH COSTS

others. As a result, any delay directlyreduces your time in market, effectively
narrowing the window of time aproduct sells at peak. The upfront sunkcosts (ideation, development, marketing,and launch), along with the cost ofcapital, decrease the net present value
represented by the product over time.

market reaction to product introduction
delays is actually quite rational given theimpact of delays on profitability.”
Management consulting firm
OakStone Partners estimates thata product delay can cost a company
upwards of 15 to 35 percent of theNet Present Value (i.e., the difference

health of a company, but net cash flow
provides a better indicator of the value
a product provides to the company.
Net cash flow not only factors inthe revenue generated by selling theproduct, but also the sunk costs ofdeveloping and manufacturing theproduct.

Figure 1: TYPICAL PRODUCT LIFECYCLE

IMPACT ON REVENUESAND PROFITABILITY

Benefit fromlonger sales life

Benefit fromlonger market share

SALES VOLUME

Product introduction
delays can negatively impact
revenues—from reducing thewindow of opportunity togenerate revenues to causing
the product to become
obsolete faster, note Singhaland Hendricks. In fact, overthe lifecycle of a particular
product, everything from higher
development expenditures topostponed revenue realization
to revenue penalties can all
dramatically impact profitability.
“In a competitive industry,
customers may not be willingto wait, choosing to buy acompetitor’s product instead,”
Singhal says. If your productlaunch is delayed by six months,
that’s six months for yourcompetitor to grab market share andwoo your customers, and less overallrevenue for you to pursue when you
finally do go to market. For example,in the electronics industry, a late
product introduction (9-12 months
beyond target) can cost 50 percent of a
product’s anticipated revenues.

IMPACT ON
SHAREHOLDER VALUE
Shareholders care about timeto-market. In fact, product delay
announcements decreased average
shareholder value by about 12 percent,according to Singhal and Hendricks.
“Our results suggest that negative stock
8EarlyLate		

Time

PRODUCT INTRODUCTION

between the present value of the future
cash flows from an investment andthe amount of investment or “NPV”),
depending on whether it involves amonopolistic product or a competitive
product (competing with othercompanies to deliver similar products
or serve the same markets).
When customer interests waneand market share is lost, revenue
penalties prevail.

MEASURING PRODUCTLAUNCH TIME IMPACT:Net Cash Flow vs. Product Revenue
Overall product revenue might
be a good measure for the financial

Figure 1 (above) shows thesevalues over time for a typical productlifecycle. Early in the product’s life, itcosts organizations money to conceive,
develop, market and launch theproduct; revenues then follow. At somepoint, market saturation occurs, sales
plateau and then begin to decline, andeventually the product is taken off themarket. From this point, there are more
sunk costs for the company associatedwith ‘end-of-lifing’ the product—
ongoing support costs, disposing ofcomponents that are no longer needed,
raw materials, surplus machinery,and removing the product from thecompany’s business systems.

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Experts estimate that40%

rework accounts for up to important to work
journal articles,
product andwith a manufacturer
company literature,that’s experiencedsocial media,
with similar productsof total project costs.
blogs, and forums
and has been exposed
all serve as critical information
to what works (and what doesn’t).
sources. But rushed for time
Another crucial consideration isand overwhelmed by too muchworking with a factory that has
data, product designers are often
existing equipment and knowforced to proceed without a
how with a specific categorycomprehensive understandingof products.
of the competitive landscape.
❯❯ Enable knowledge reuse to make
Emerging competitors,
better decisions, faster. Productblocking IPs, or advances indevelopment is experience-driven.
new technologies are easily
Companies should maximize
overlooked. Most organizations
reuse of the solutions they develop
performing competitive
and the lessons they learn. All
intelligence today are crying
too often, this knowledge andout for better integration ofexpertise is buried in enterprise
information from the vast sea ofsystems or siloed in parts of thecontent available to them. Arm
business and undiscoverable
engineers with tools to keepby engineers. Experts estimate
them ahead of the competition;that rework accounts for up tobuild product roadmaps and40 percent of total project costs.
strategies with insight into
Efforts to centralize data incompetitive activities, technology
content management systems failbreakthroughs, patent awards,
and traditional enterprise searchmarket shifts, and more.
is insufficient for engineers,❯❯ Reduce the number of productscientists or researchers who
MAXIMIZING MARKET
changes. Identifying andwant answers to their questions—
POTENTIALnot a list of links to mostly
Experts estimate as much as
The key to maximizing market
irrelevant documents.
potential lies in launching yourEngineering requires technicalproducts on time and within theproficiency and precise communication,
expected quality and cost. To
combined with the ability for globalof all costs in engineered products add
minimize delays, you’ll need to:
product development teams to
no value for the product or customer.
❯❯ Understand customer
communicate, collaborate, and connect
requirements. Experts
addressing potential gaps
with colleagues, experts, information,
estimate as much as 25 percent
early in the design phaseand insights on-demand and regardlessto 45 percent of all costs inexponentially improves productof language or location. When theseengineered products add no value
launch timelines. Initial designs
elements align and support thefor the product or customer. It’s
are influenced by optimal
new product development process,critical to ensure new products
performance and not usually forcompanies can improve their time-touniquely or more cost-effectively
manufacturing efficiency andmarket and compete more effectively
address unmet needs in current
cost. As design requirements
within their own industries.
markets and/or in new orevolve throughout the productG. Stalk and T. Hout, Competing Against Time, Simon & Schuster
adjacent markets.
development process, this can❯❯ Understand the competitive
throw a wrench into the project
landscape. Patents, websites,timeline. For this reason, it’sOnce a product is launched andreaches maturation, revenue plateaus
and drops off. The product launch
point signifies the point at which acompany starts to make money on
the product. Should the launch datebe delayed, the upfront development,
marketing, and launch costs continue,
thus negatively impacting cash flow
and reducing the amount of money thecompany makes off a product over time.
The question is, can yourorganization lead the market losing 15
percent to 35 percent or more of NPV?
Or, can you lead the market realizing
only 65 percent to 85 percent of yourproduct’s value? And, how will thedelay impact company growth?
What would it mean to yourorganization to accelerate time tomarket by a week? Or a month, ormore? What will be the impact on themaximum sales if your product is threemonths late to market? How about six
months? Will late entry adversely affectmarket share? These are all importantquestions to ask yourself as you
formulate a solid go-to-market strategy.

25-45%

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