Title

New Product Development Cycle Time: Investigation of Cycle Time and Accounting Measures, Determinants of Cycle Time and the Impact of Cycle Time on Financial Performance

Date of Award

1993

Document Type

Dissertation

Degree Name

Doctor of Science in Management Systems (Sc.D.)

Department

Management

First Advisor

Lynn Ellis

Second Advisor

Judith Neal

Third Advisor

Louis Mottola

LC Subject Headings

New products--Accounting, Product management, Corporate profits

Call No. at the Univ. of New Haven Library

AS 36 .N290 Mgmt. Syst. 1993 no.4

Abstract

A rapidly mounting body of literature has emerged advocating Short Cycle Time Strategy (SCTS). SCTS is a strategy of shortening the new product development cycle in order to gain competitive advantage and create high, sustained levels of financial performance. This study addresses two related questions. First, is SCTS a profitable strategy? If it is, then time might be a valid measure for profitably managing the new product development process. Second, what are the most important factors leading to shortening new product development cycle time?

This study provides a preliminary quantified, empirical basis for answers to these two questions. The study consists of a mail survey of 592 companies selected on a judgmental basis from throughout the U.S. and a number of high technology industries. Two hundred companies responded, providing 131 usable responses.

The data from the completed questionnaires is used to build four multivariate models. The first two are financial performance models with earnings before interest and taxes as a percent of sales (EBIT ratio) as the dependent variable and cycle time and several other SCTS-related factors as the explanatory variables. The second of the two models is not robust because it includes too few cases. The results therefore relate only to the first model.

The remaining EBIT ratio model shows clearly that cycle time is related to financial performance, but that the impact of shortening the cycle is limited, perhaps to a one-time, small improvement. The result suggests that companies may have other compelling, nonfinancial reasons to adopt SCTS.

The other two models relate to two alternate measures of cycle time. The first has the aggregate measure time through research and development (TRD) as the dependent variable. The second has the more inclusive aggregate measure idea to customer time (ITC) as the dependent variable. The two models have several explanatory variables in common, including average product life, project type (major new product and product extensions), concurrent engineering use, and extent of marketing/R&D interface in the early design stage. The models, taken together, quantify the following relationships, all of which are as conjectured in the literature:

1. The longer the average product life, the longer the cycle time.

2. The greater the investment in product extensions, the shorter the cycle time; the greater the investment in major products, the longer the cycle time.

3. The greater the concurrent engineering use, the shorter the cycle time.

4. The more extensive the marketing/R&D interface, the shorter the cycle time.

Separately, the two cycle time models quantify two more relationships, neither conjectured in the literature.

1. The time through research and development model shows a positive relationship between using Quality Function Deployment (QFD) and cycle time; the more QFD is used, the longer the cycle time. The literature conjectures that greater QFD use is associated with shorter cycle time. Since QFD is not included in the financial performance model, however, the additional time spent in time through research and development is presumably made up elsewhere in the cycle or in operations.

2. The idea to customer time model shows a negative relationship between patents per million dollars of sales and cycle time; the more the patents, the shorter the cycle time. The conjectured relationship is positive, with more patent protection being associated with longer time.

These results provide a meaningful basis for management action, because they target from among the many alternatives suggested in the literature the ones most likely to be effective in SCTS formulation.

Next, the EBIT ratio model also includes several of the SCTS factors already discussed, highlighting four areas of trade-off between shortening cycle time and financial performance:

1. Average product life. The cycle time models show that, the longer the average product life, the longer the cycle time. The financial model shows that longer product life is associated with better financial performance. These results suggest that shortening cycle time would develop products with shorter average life and might be associated with worse financial performance.

2. Project type. The cycle time models show that, the greater the investment in product extensions, the shorter the cycle time; and, the greater the investment in major new products, the longer the cycle time. The financial model shows that, the greater the investment in product extensions, the worse the financial performance. These results suggest that shifting investment into product extensions in order to shorten cycle time, a strategy often referred to as incrementalism, may be associated with worse financial performance.

3. Patent portfolio makeup. The idea to customer time model shows that, the more patents per million dollars of sales, the shorter the cycle time. The financial model shows that, the more patents per million dollars of sales, the worse the financial performance. The financial model also shows that, the greater the average age of the patent portfolio, the better the financial performance. These results suggest that the quality of the patent portfolio, measured by how long patent protection is available, is more important than quantity of patents and that a patent policy based on quantity alone may result in financial deterioration.

4. Marketing/R&D interface. The cycle time models show that, the greater the marketing/R&D interface, the shorter the cycle time. The EBIT ratio correlation analysis shows, the greater the interface, the worse the financial performance. The effect of this result could not be quantified, so that the trade-off may not be as significant as for the other three.

The identified areas of trade-off provide empirical support for the existence of an acceleration trap, a phrase coined by Von Braun (1990, 1991). He contended that a point exists at which further cycle time reduction will not result in additional product lifetime revenue streams, or may result in financial deterioration.

Further reduction of cycle time through incrementalism, for example, may result in failing to extend average product life or in shortening it by attracting competition sooner. One effective way out of the acceleration trap may be more effective barriers to entry, such as extending the time patent protection is available.

This study is a first step towards answering the questions; (1) does SCTS lead to improved financial performance? and (2) what factors lead to shorter cycle time? The next step is to replicate the multivariate models. Another suggestion for further research effort is to develop a time series data base from this study for longitudinal studies, to capture the effects of new product development policy over a long-term investment horizon.

Share

COinS