New project development (NPD) is a critical pursuit for all companies. Designing and marketing products gives a firm new streams of revenue and allows companies to remain competitive. With technological advances and globalization, new products have become the lifeblood of organizations to survive.
Yet, as the US and perhaps the world face a looming recession, companies are challenged with some very tough decisions. A typical response to recession is to cut costs. Unfortunately, travel budgets and R&D expenses are frequently among the first cuts when a firm sees an economic downturn on the horizon. Cutting travel budgets often means an inability to interact with customers at trade shows or in their home environment. Cutting R&D means sacrificing future development to save a little money today.
In this, Part 2 of a series on managing product risk during recession, we’ll discuss financial risks. While it might seem obvious that a recession brings financial risk with it, we will focus on project management approaches to balance customer, financial, technical, and people risks in NPD. (Read Part 1 on customer risk here.)
Financial Risks
Product development includes a lot of uncertainty. At the core, we must know what we want to do (requirements) and how to do it (technical development).
Customers are becoming more demanding and product life cycles are shrinking. These factors push the financial risks of NPD projects ever further. Some financial risks typical of an NPD project include the following.
- Market size and market share
- Pricing strategies
- Product category competition
- Product substitutions
- Raw materials cost and availability
- Distribution channels (s global or local parenthesis
- Marketing approaches
- Technical competency and capability
- Workforce stability
- Capital investment
Many of these financial risk categories are not within the control of the firm. Government regulations impact distribution, raw material costs, and parts availability, for example. Patents, licenses, and general IP concerns limit competition and drive research pathways. Aging or emerging technologies create differing opportunities for companies competing within the same industry.
Profit Potential
One area in which a company working in NPD has direct control is profit potential. Most firms make money by pursuing high volumes and low prices (e.g., Walmart and Amazon) or low volume and high prices (Ferrari and Chanel). The corporate strategy will identify the markets in which a company participates but the innovation strategy determines which projects move forward.
Looking at profit potential from a margin perspective (low-margin, high-volume versus high-margin, low-volume) helps product development teams filter ideas based on customer risk and technical capabilities. (Read Part 1 about customer risk in recession here.) Not every idea is good for every firm at every point in time. New product concepts must fit strategic market and technology thrusts for the company yet also be attractive from a financial perspective.
Consider some of the financial risk elements listed above. A company competing on low margins has built a supply chain and distribution channels that support inexpensive products with high shelf turnover rates. It would take a major pivot with long-term investments in people and equipment to secure suppliers with luxury goods. You have to ask if a recession is the right time to make an up-market pivot. If the answer is “yes”, then the firm must, in fact, double investments in marketing and R&D to develop a new line of products demonstrating high-quality manufacturing and service.
Health of Industry
Another area for deep examination is to realistically look at the health of the industry. Most past recessions are accompanied by the disappearance of entire industry segments. The dot-com led recession of 2000 was coupled with the disappearance of discount, full-service department stores like Sears, Montgomery Wards, and K-mart. Specialized retailers like The Gap and Best Buy stepped in to fill customer needs.
Most likely, Sears and Wards should have seen industry shifts occurring long before the recession. The overall industry of one-stop suburban department stores was shrinking. Even same-store and in-store data showed that consumers no longer were purchasing a washing machine, couch, automobile tires, pretty dresses, and kids’ toys on the same shopping trip. When the industry shifts, recessionary risks increase.
As the recession approaches (or is here already according to many economic measures), what can you do to change your marketing approach of new products? If the overall industry is shifting, how do you take advantage of new opportunities? Are all your firm’s functions operating in tandem or are you positioned to jettison products that don’t survive industry transitions accompanying a recession?
Technical Risks
Financial risks in NPD are naturally tied to customer risks. If you don’t serve markets and achieve customer satisfaction, you fail. But financial risks are also linked to technical risks. In the next article in this series, we’ll look at technical risks, keeping in mind that new technology always requires an investment (financial risk).
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