A Concept Paper Sponsored by American Express Incentive Services

Ever wash your hair with Clairol's "The Look of Buttermilk" shampoo? You're not alone. Despite the attractive farm scene on the bottle, the connection between buttermilk, farms, freshness and hair was too great a stretch for most consumers, and the product failed. Robert McMath's running series of articles, "What Were They Thinking?" in American Demographics, chronicles a host of such product development miscues. Microwave Sundaes is another case in point. Or how about EZ-Cal Soft Calcium Whip and Maalox Whip Antacid? Both were whipped before the race even started. Seen any vacuum-packed rice or peanuts on the shelves lately? It hasn't been for lack of manufacturers trying. Much more goes into a successful new product introduction that having a great idea or big company behind it. While research points to many traditional reasons why products fail, there's also compelling evidence that the motivation driving the launch team plays an equally critical factor. If so, careful use of incentives can help maximize the chances for success.

McMath estimates it costs $20 million to $50 million to launch a new product successfully, and 25,000 new items appeared in 1997 alone. Obviously, the stakes are high.

WHY THE EMPHASIS ON NEW PRODUCTS

ConAgra with Healthy Choice and Nabisco with SnackWells both cracked the "eating sensibly" consumer acceptance code. Healthy Choice has spawned over 463 line extensions, while SnackWells enjoys 105 SKUs on supermarket shelves. It is no wonder, then, that despite new product failure rates that various estimates place from 60 to 90 per cent, most companies consider new products their life's blood-- not just growth, but continued existence.

A 1996 American Management Association study revealed that corporations "once obsessed with cutting costs are now urgently trying to boost sales--with new products, new services, and new markets, both at home and abroad." The study quotes Charles Knight, chief executive officer of Emerson Electric, on the shortsighted strategy of companies trying to cut their way to success: "We got so bottom-line oriented that we were inhibiting growth. We were cutting, cutting. But you can only go so far. Michael L. Tushman and Charles A. O'Reilly III's Winning Through Innovation: A Practical Guide to Leading Organizational Change and Renewal discusses what they call the tyranny of success--"a pattern of success followed by failure, innovation followed by inertia, common across firms and industries and over time."

Early successes, they explain, become reflected in organizational culture, structures, and practices, which slowly become invariant over time, even in the face of a "dramatically changed strategic context and a palpably clear recognition of the need for change."

Robert J. Thomas, in New Product Success Stories: Lessons from Leading Innovators, concurs. He points out that while the Ford Taurus, for example, was a successful product, Ford failed to adopt a view of new product development as an ongoing process of innovation.

Fey & Rivin's The Science of Innovation (1997) reasons succinctly that in an increasingly competitive global marketplace, "winning companies will be those that can deliver superior products to customers faster." That's quality products and speed-to-market. No easy formula.

WHY PRODUCTS FAIL

New product research clearly shows various key reasons why new product introductions fail:

Customer needs not well-defined or understood
Errors found too late
Management by interference
Too many projects
Burnout
Poor communication.

According to Dan Dimancescu and Kemp Dwenger in World-Class New Product Development: Benchmarking Best Practices of Agile Manufacturers, poor definition of customer needs is the most pervasive problem.

According to a PricewaterhouseCoopers paper, "The Drive to Reduce Time-to-Market," 37 percent of new consumer products were late and 46 percent were over budget. As many sales and marketing managers will attest, there is potential profit in pain. With just 42 percent of the products that hit the market meeting the expectations of the people who manage them--according to Group EFO, a Weston, Connecticut, consulting firm--many companies have embraced an array of product development strategies and tactics looking for that next home run.

Some new product development (NPD) has embraced highly formalized schemes like QFD (Quality Function Deployment) and DFM (Design for Manufacturability). Some are based on informal processes undergoing various degrees of institutionalization following a grassroots NPD breakthrough.

NEW PRODUCT DEVELOPMENT PRACTICES

A good deal of literature exists on the subject of new product development (NPD). An excellent resource is the Product Development & Management Association (PDMA) and their web site (http://www.pdma.org).

Another excellent source of academic research into NPD is Dr. Kevin Dooley, Professor of Management at Arizona State University. In Dooley's study of 41 companies to determine the impact on NPD of best practices and maturity of processes, results indicate "the important influence of customer involvement, project selection, prelaunch activities, concurrent engineering, and group design on product and project success."

Dooley also notes, "The development process itself is made timely and cost-effective by managing the human resources in the project." One fundamental element of successful human management is proper incentives focusing the individuals on key steps, elements and practices.

Dooley examines both best practices (what is done) and maturity (how well it is done) as key elements for NPD success. Maturity is worth discussing because organizations vary widely on how they formalize their NPD processes are. A tool to describe process maturing is Software Engineering Institute's (SEI) process Capability Maturity Model (CMM,) originally developed so that the U.S. Department of Defense could evaluate the capabilities of its software suppliers.

Level 1 - initial - The process is characterized as ad hoc, and occasionally even chaotic. Few processes are defined, and success depends on individual effort.

Level 2 - repeatable - Basic project management processes are established to track cost, schedule, and functionality. The necessary process discipline is in place to repeat earlier successes on similar projects.

Level 3 - defined - The process for both management and engineering activities is documented, standardized and integrated into a standardized process for the organization. All projects use an approved, tailored version of the organization's standard process.

Level 4 - managed - Detailed measures of the process and product quality are collected. Both the process and products are quantitatively understood and controlled.

Level 5 - optimizing - Continuous process improvement is enabled by quantitative feedback from the process and from piloting innovative ideas and technologies.

THE IMPACT OF PEOPLE

Product success is driven by activities that occur at the boundaries of the NPD process, according to Dooley, including:

• Customer involvement, which represents the boundary between the organization and the customer;
• Project selection, which involves the decision of what project to work on;
• Manufacturing and launch preparations, which are the activities that ensure a proper hand-off between design and manufacturing/marketing.

Significantly, project success was found to be "strongly driven by concurrent engineering and group design, activities involving the way in which functional and cross-functional resources are utilized." Additionally, cycle time improvement was revealed to be "strongly driven by project selection, activities which carefully manage the pipeline of work in the NPD process, ensuring the resources are not over utilized and project priorities are constantly updated."

Dooley summarizes the results this way: "The success of the product depends on selecting the right projects, involving the customer throughout the process, and handing off the project in a smooth fashion to marketing and manufacturing. The timeliness and cost effectiveness of the NPD process depends on how human resources are managed in a functional and cross-functional manner. Improvement in process cycle time occurs through intelligent bottleneck management of the project stream."

Concurrent engineering, group design and smooth hand-offs are all facilitated by cross-functional teams.

Kenneth A Crow of DRM Associates elaborates: "Early involvement and parallel design are key objectives of integrated product development. The achievement of these objectives is dependent upon how people work together and organize product and process development activities. As a result, organizational approaches are critical to the success of integrated product development."

Crow succinctly sums up the positive economics of effective product development teams (PDT): "Although PDTs will require more resources early in the development process, the result will not only be superior designs, but reduced resources over the life cycle of development to production through reduced design/build/test iterations and less effort to correct initial design deficiencies through the reviews and engineering changes. The early involvement of the affected functional areas will lead to buy-in with the design of products and their processes and result in a smoother transition to production."

The authors of Fortune's "Hot Products from Hot Tubs" agree. "Most of the successful product development we observed was done by project teams. Call it the rugby approach: Everybody is on the field from day one--engineers, production, quality control, sales. Whenever a problem comes up, they all pile in together. That's very different from the relay approach, in which one functional team passes the baton to the next."

Asked about the role of incentives in the process, Dr. Dooley said he knew of no direct research on use of incentives in NPD, but that, "I know the research on team incentives in general supports non-monetary over monetary awards by a landslide." The theory in human resources, in general, is that money can only act as a satisfier for an extremely short amount of time; that more generally it can only act as a dissatisfier (if you're not compensated according to needs and/or expectations). As a chief executive once said: "double the pay of everyone in this company tomorrow, and it will not double productivity.'"

The 1997 PDMA report on New Product Development offers insight into the potential role of incentives in new product development.

Specifically, the Summary of Key Findings notes the widespread adoption of multi-functional teams in NPD, with over 84 percent of more innovative projects using them and even 40-50 percent of the less innovative projects using them.

Cash compensation is not being used to reward teams.

Sixty percent of U.S. firms use some variation of the stage-gate process for NPD, though third generation processes are more flexible, validating a decision not to prescribe process formulas in the incentive process.

New market research tools have allowed closer and better customer input into the process, and this is expected to continue. Best practice companies spend more in-depth time in qualitative studies with fewer customers, an ideal application for incentives.

Kill rates are up. The Trends and Processes section notes that initiating a NPD project is relatively inexpensive, but expenses soar in the development and test phases.

Eliminating less promising projects early is recognized as a critical success factor. Failure is actually a success-that no-go decisions are good-that businesses have to trust your development team to kill an idea if it's wrong!

A NEW PRODUCT DEVELOPMENT CHECKLIST

Here are key points gleaned from the study on successful new product development practices.

1. Implement a NPD process, improve it over time
2. Screen projects out earlier
3. Match the organization to the project goal
4. Use multi-functional teams
5. Investigate and use new market research techniques
6. Determine whether engineering tools are needed, and use them all
7. Rewards to successful NPD teams are overwhelmingly non-cash: private, off-site celebration dinners newsletter recognition and firm-wide award dinners, plaques, pins and team shirts (study cites trophy value).

The study notes that higher quality items provide significantly more trophy value. This finding points the way to a major opportunity for more significant non-cash awards as a logical next step. Overall, NPD success rates have not significantly improved over the years, and non-cash awards--properly applied--could be viewed as a missing link. Four of the eight Key Success Drivers cited validate the strategy of utilizing incentives as part of the New Product Development.

NEW PRODUCT DEVELOPMENT INCENTIVE AWARDS CONCEPT

As noted, the NPD goals in any organization are likely to be:

• Superior product innovation
• Speed-to-market

The pervasive use of teams in new product development would seem to be fertile ground for non-cash award reinforcement.

In an Industry Week article, David Goodall, corporate compensation director at Motorola, calls informal team rewards "the pats, perks, and pizza" that drive up team performance.

Pats are the informal positive feedback or "attaboy"s given to the team for accomplishments.

Perks are the benefits for team members accorded by virtue of team membership-for example, access to resources or meeting or conference participation.

Pizza refers to opportunities for team members to socialize together either during or after the workday.

The incentive industry likes to use terms like honor and recognition, trophy value and noncash awards, another way of saying "pats and perks."

But with a wide variety of company approaches to NPD, key to the success of new product development awards offerings is adequate collateral to help client companies match awards structures to new product development processes with which they are comfortable.

Concluding from Dooley that the most likely points of positive influence are in customer involvement, project selection and effective cross-functional teams, programs can be designed to impact these areas the most:

• Liberal use of defined value awards to encourage frequent customer input throughout the process.
• Awards used to reward not only idea generation but also steps leading to intelligent idea selection.
• Awards maximizing cross-functional team involvement and effectiveness to reinforce smooth transitions to manufacturing and marketing.

Here's a look at each of the three:

In World-Class New Product Development: Benchmarking Best Practices of Agile Manufacturers, the authors cite a study showing that 66 percent of development project failures stem from a weak understanding of user needs. "The key solution is to get all members of the development team into direct contact with a small, select group of customers."

A PricewaterhouseCoopers article cites an Industry Week Census of Manufacturers study to identify best practices of "world class companies." Forty-one percent of the world class organizations rely exclusively on customer participation to help develop new products. Only 25 percent of all others involve them.

For example, according to an article in OEM Magazine, Netscape's product teams, working with electronic feedback from customers, have been able to both add new features and capitalize on often-unexpected opportunities that present themselves during the developmental cycle. And all that on a very modest research budget.

In the American Management Association's Organizational Dynamics , an article profiles W. L. Gore & Associates, makers of Gore-Tex and a company known for organizing small teams around business opportunities. Still, Gore NPD teams found a tendency to get locked into a particular definition of the problem, or to a particular solution, too early. In this scenario, high quality project selection becomes critical.

A Fortune article describes effective organization knowledge sharing as a result of cross-functional teams. At Sharp, knowledge passes from the individual to the team, and then from the team to the organization. When a project is completed, the team members return to the normal hierarchy. Gradually, the experience of project teams spreads through the whole organization. "That's how you achieve continuity and repeatability," and minimize fumbles at key hand-offs.

A Compensation & Benefits Review indicates that at team-based organizations (e.g., Motorola, Xerox, TRW, Johnson & Johnson, Lucent Technologies, and Kraft Foods) monetary rewards alone do not always lead to high performance, while non-monetary rewards such as recognition and empowerment can explain the success or failure of many teams.

"Some experts completely reject the notion of monetary incentives for teams, believing either that linking pay to team performance can be insulting to individual star performers who feel their contributions disproportionately lead to success, or [monetary] team incentives cheapen the value of the team experience."

CAVEATS

Beyond these three identified critical success factors, success factors for NPD become less obvious.

As noted, efforts aimed at increasing process maturity (rewarding phase-gate milestones, for example, or various measurement schemes) are likely--at least in Dooley's view--to not have a significant impact on product development success. In the early 1980s, idea generation incentive programs were a very popular type of incentive program in corporate America. While the formulaic nature of existing idea generation programs that give an incentive for ideas makes it attractive to many customers, much of the formula (with its emphasis on process)-administration issues in particular-may limit its success in ongoing environments. A side-by-side comparison may be helpful here.

The key to a successful NPD awards strategy may lie in a less is more approach, steering clear of thorny and contested process issues, and allowing companies to reinforce behaviors that their cultures value.

APPLYING INCENTIVE AWARDS

As always, companies can reward:

• Results (sales, profit, number of products)
• Behavior (steps to sale, process)

Companies should consider both when applying incentives to new product development.

Consider the three identified critical success factors.

Customer input
Reward customer input and the development team for including the customer via focus groups, interviews and surveys with defined value awards like gift certificates, selective use debit cards, or other individual awards.

A Persona card account could be set up for longer-term customer partnering in the NPD process.

Awards are recommended following each specific customer behavior: attending a focus group, returning a survey, etc. Reward each discreet act to reinforce behavior and encourage future cooperation - e.g., prototype feedback, product testing.

Project selection
Reward development teams for timely, well-reasoned go/no-go decisions. Incentives at this juncture can impact both product innovation and speed-to-market.

If project selection is truly a critical success indicator, then reward team members for applying their companies' selection criteria quickly and decisively. In many organizations ideas languish in a limbo of halfhearted development or in an idea bank. Put a premium on speed and thoroughness. Target realistic but aggressive timeliness in order to reduce cycle time, move best ideas forward and reduce time and resources spent on less promising products.

This may require something of a paradigm shift in some organizations, as this would require rewarding teams for killing bad ideas. Be sure to provide adequate documentation supporting the value of timely and accurate project selection in collateral materials. Awards can make intelligent project selection a significant source of ongoing non-cash compensation for the team and strengthen the effectiveness of NPD efforts.

Cross-functional teams
Make cross-functional team members stakeholders in the NPD process by rewarding their involvement and effectiveness.

For example, if alignment to corporate goals and marketing strategy is key to success, tie some team rewards to the successful completion of the business case for the product.

• Reward team leaders for involving all necessary cross-function members.
• Reward cross-function members for active, quality participation.
• Pay special attention to critical hand-offs to manufacturing and marketing, rewarding those disciplines' team involvement throughout the NPD process. Basic measures have been used to evaluate NPD performance: quality, timing, financial performance, and development cost. A study of growth in fast track Silicon Valley, however, poses some alternative measures for NPD success:
• cycle time
• resource capacity
• team effectiveness
• resource capability
• competitive comparisons

According to a Compensation and Benefits Review article, "Organizations that do not support their teams with team approaches to rewards often see improved results slip away." The authors go on to explain that "because of their fluid nature, [non-cash] incentives and awards play a prominent role in most team-based pay programs," noting that such awards must be integrated with other incentive programs and "must be based on results that teams can control."

A recommendation is to give the NPD teams an awards budget and let them reward the behaviors they find most valuable. A Compensation & Benefits Review article cites a research study sponsored by the Consortium for Alternative Reward Strategies (CARS) Research that found that when a task force--regardless of the level of employees involved--designs a reward plan, that plan produces higher employee satisfaction and improves business performance more effectively than plans designed by the company's headquarters staff.

The time is probably overripe for a new product development awards strategy, particularly in those industries with the shortest cycle times, to assist these industries in better NPD results. A PricewaterhouseCoopers report indicates that over 30 percent of sales come from new products introduced within the preceding two years for high tech companies. According to Coopers & Lybrand's "Trendsetter Barometer," more high tech than non-tech firms are planning to increase investments in new product development, cited by 48 percent (12 points higher).

Additional Ideas
Idea Generation: identify, clarify, and qualify ideas that are on-target to the NPD process goals/business goals. Reward both teams and individuals for the ideas that succeed. Base the award value on either the value of the idea in revenue or savings to the business -give a percentage of the value back to the initiator of the idea (on a team reward, split the award value among the team).

Cross-Functional Team: Identify the steps necessary for an approved or defined idea to move forward within the NPD process. Most likely, this will include a series of team interactions. Reward attendance and being on time at these meetings. Also look at rewarding the team based on the performance of the product development stage and the product launch stage. Include in the team activity, steps like "client interaction and feedback," then reward for this step taking place (X value, based on value of idea). Also reward the client for their involvement.

Awareness and Training: Most times businesses rush forward with launching a new product. Communications is carried out. Sales materials are produced. But the element of training can be overlooked. As stated in "How to Sell New Products," July 1999 of Selling Power by Randy Scott of Square D:

"It's all about awareness and education. We can come out with a new product and just put it out there, but unless we're educated on the product beforehand, it's going to be difficult for us [to sell]."

It makes sense to put together formalized training that includes testing. Once testing is completed and a certain grade level attained, a reward could be used to reinforce the positive message and introduction.

CONCLUSION

There is no silver bullet. There is no quick answer. There is no magic book that has all the answers. There is no process that can answer it all. Instead, businesses need to use a mixture of the empirical and the emotional. It is important to capture the imagination and the energies of all those involved in the development of new products. NPD is about process and people. Do not leave out the human coefficient.

As outlined:

• Involve clients/customers in the NPD process and reward them for being involved and taking the time.
  
  
• Focus on project and idea selection not raw idea generation and reward individuals for not only coming up with solid ideas but for also "killing off" bad or off base ideas.
  
  
• Work on cross-functional team interaction skills and steps, along with smooth transition from idea, to development, to launch to on going product and reward key and core steps/processes (i.e. which are different for each company and each industry). Individual incentives offer a business the ability to identify and reward the right NPD behaviors, creating consistent and positive results.

A VIEWPOINT

The American Express Incentive Services team continually looks for ways and approaches to help businesses succeed. We are strong believers in the power of incentives and what incentives offer a business. Properly structured programs utilizing individual incentives give a business the ability to focus its resources on those behaviors that generate the best results.

In the simplest of terms individual incentives will create a spotlight on those actions, activities, steps, and processes that can make a difference between success and failure.

Most businesses assume that what they say, what they write, what they demand will get done. But what is missing is the classical, "WIIFM: What's In It For Me?" Don't take this for granted, because if you do, most people will overlook the obvious. They will do what is common, what is comfortable, what is easy. But by rewarding key behaviors with individual awards, activities and behaviors a business can increase their chances of success-mobilizing the whole team in the same direction.

One area of business that seems to need support in generating consistent and team "mind-share/focus" is the world of new product development. The authors of this document have a combined history of over 30 years of product development interactions. What we have found is the majority of documents, reports, metrics, etc., are great tools and methods. Yet, time and time again what are overlooked is the basics of the human element.

All development is carried out, lead, and involves people. These individuals have needs, wants, pre-conceived notions, fears, likes, dislikes, etc. How do you manage these core emotions and core abilities to generate a positive NPD result for your business? You can have input via motivation and incentive tactics to focus and guide a team and individuals to higher levels of performance and results. Beyond a salary it is important to reward people for their support-"what gets rewarded gets done."

It is important to combine both "attaboy" rewards (i.e., thank-yous, lunches, etc.) with monetary awards. By bringing both together you are helping to ensure that what needs to be done will get done. This is especially true in group development efforts, where people are most likely assigned to assist in a development project. This extra task can be looked at as a burden "on top of" their existing responsibilities. Also, getting a team to focus on the necessary processes and elements of solid product development requires rewarding proper action and behavior--as a team.

REFERENCES

Crow, Kenneth A. "Benchmarking Best Practices to Improve Product Development," DRM Associates. 1997. http://members.aol.com/drmassoc/pdt.html
Dooley, Kevin. The Impact of Best Practices and Maturity in New Product Development, ASU Conference on Quality & Management. 1997.
Fey, Victor R. and Rivin, Eugene I. The Science of Innovation. 1997.
Frohman, Mark and Pascarella, Perry. "Don't Abdicate: Teams' Effectiveness Starts and Ends at the Top," Industry Week. November 6, 1995.
Griffin, Abbie. Drivers of NPD Success: The 1997 PDMA Report. 1997.
Henkoff, Ronald and Kover, Amy R. "Growing Your Company: Five Ways to Do It Right," Fortune. November 25, 1996.
Jerry M. Newman, Frank J. Krzystofiak, "Value-Chain Compensation," Compensation & Benefits Review. April 17, 1998.
Keown, Shawn. "Reducing Time-to-Market in Developing Med Tech products," PricewaterhouseCoopers. 1998. http://www.pwc.com
Laton McCartney, "The Internet Zone," OEM Magazine, December 1, 1996. McMath, Robert M. "What Were They Thinking?" American Demographics, February 1998.
McMath, Robert M. "What Were They Thinking?" American Demographics, April 1998.
McMath, Robert M. "What Were They Thinking?" American Demographics, May 1998.
McMath, Robert M. "What Were They Thinking?" American Demographics, January 1998.
Pacanowsky, Michael, "Team tools for wicked problems," Organizational Dynamics, January 1, 1995.
Palo, Joseph D. and Rule, Erik "The Drive to Reduce Time-To-Market," PricewaterhouseCoopers. 1998. http://www.pwc.com
Sherman, Stratford Takeuchi, Hirotaka and Davies, Erin M. "Hot Products from Hot Tubs or How Middle Managers Innovate," Fortune. April 29, 1996.
Thomas, Robert J. New Product Success Stories: Lessons from Leading Innovators. 1994.
Tushman ,Michael L. and O'Reilly, Charles A., III. Winning Through Innovation: A Practical Guide to Leading Organizational Change and Renewal. 1997.
Boehm, Barrett L., Mistor, Paul G. and Reinwart, Richard. "Partnering with Customers and Suppliers," PricewaterhouseCoopers. 1998. http://www.pwc.com
Saunnier, Anne M. and Hawk, Elizabeth J. "Realizing the Potential of Teams through Team-based Rewards," Compensation & Benefits Review. July 1, 1994.