The role of management accounting in new product design ...

1 The role of management accounting in new product design and development decisions Research executive summary series Volume 9 | Issue 1. Bill Nixon John Burns Mostafa Jazayeri University of Dundee University of Exeter Manchester Metropolitan School of Business School of Business University Key findings: This CIMA-sponsored case study focuses on a company in the premium auto group (PAG) sector. It highlights the pivotal role of management accounting in the communication essential to the co-ordination of the activities among multi- disciplinary teams and an extended network of participants in the new product design and development (NPD&D) process. The case also reveals that management accounting , including in particular a balanced targets book (BTB) for each project, has evolved with and is embedded in six reinforcing components of the company's management process: its team-based matrix-type organisational structure, comprehensive information system, iterative top-down-bottom-up project management style, greater emphasis on planning rather than on control, informal system and culture.

2 The complementary, interaction among these six features and activities of the company's NPD&D process demonstrates the importance of integration and the high cost of functional silos. This can be seen especially in the context of communication and synchronisation of activities. From the evidence of this case the conventional cost management advice to control tomorrow's costs through today's designs'1 is too late and too narrow. Target costing in this PAG company has moved upstream to an earlier strategy and concept development phase that precedes design . The technical and financial scope of target costing has also evolved to more explicitly link the company's pedigree, performance and profit' design criteria. 1 Cooper, R., Chew, WB. (1996) Control tomorrow's costs through today's designs, Harvard Business Review, Volume 74(1), January February, pp88 97. Introduction but no longer sufficient for survival in the PAG segment. Price, Intensification of competition has made a steady stream of sales volumes and costs, including operating costs for owners new and improved products a pre-requisite for survival in are explicit, detailed components of the comprehensive data, most business sectors.

3 The risks of not adequately investing assembled in the early stages of ABY's strategy and concept in NPD&D may be a loss of competitiveness and greater definition phase. These data are the basis for the business case pressure to compete on low-margin prices. The consequences and feasibility assessment of a new model. of not investing in NPD&D are frequently easier to quantify The competitive pressures that forced most companies in the compared to the benefits. The NPD&D investment decision is PAG sector to adopt a price-led costing approach to NPD&D is very much about balancing the risks of missing the boat' and one reason why the management accounting role begins with sinking the boat'.2 An indication of the rising cost and relative the annual planning round (APR). This determines the total importance of the NPD&D activity is that global research and amount available for expenditure on all new product platforms, development (R&D) as a percentage of sales varies from about generations, models, modules, options and changes to existing in industrial engineering to in the pharmaceutical models.

4 The APR of ABY, and of all business units within the and biotechnology sector. The automotive and car parts sector group, is part of the parent company's multi-year product spends of sales on R&D, which amounts to more than 30 portfolio plan. billion per annum for the top ten companies (by R&D spend). These amounts do not include the cost of market research and Unpacking pedigree, performance and profit criteria promotion for launching new products. The synthesis of the pedigree, performance and profit design criteria within the business case is explicit and is facilitated by The financial management of NPD&D uncertainties reflects the detailed definitions and measures for the attributes of each tranformational changes that occurred in the last decade. These design parameter. changes are still on-going in the technology and management of the NPD&D process, in the nature of products and services, Marketers and industrial designers are primarily responsible for and in competitive and NPD&D strategies.

5 The main question defining pedigree in each target segment. Pedigree includes all addressed by this research is, How is management accounting aspects of exterior and interior design as well as service support. practice responding to these changes in the NPD&D process Performance involves a good deal of benchmarking and is and strategy?' In particular, the focus of this empirical research mostly the responsibility of the design engineers to analyse for is how the concepts, tools and practice of management each customer group. Marketing also plays a very proactive role accounting activities, such as investment appraisal, risk in defining customer performance requirements. For example: management , cost and value management and performance safety measurement, are supporting the changes in the NPD&D. reliability management process and strategy. fuel consumption Research method emissions acceleration This research took a case study approach in view of the ongoing top speed changes in the technologies, the nature of products and the traction management of the NPD&D process.

6 The automotive industry driver and passenger experiences. seemed a suitable focus for this research because it is extremely competitive and its NPD&D process has traditionally pioneered The specification of pedigree and performance are the basis of a the most sophisticated NPD&D management systems, technical concept description (TCD). especially supporting software systems. A long-established, Much of the cost, value engineering and risk assessments successful motor vehicles company was chosen, referred to associated with industrial and engineering designs and herein as ABY for reasons of confidentiality. A special appeal of technology trajectories, are undertaken in the strategy and ABY to the researchers was that, prior to a request for case study target setting (S&TS) section by 21 engineers, who report access, we had learned that the dominant design parameters directly to a management accountant. The S&TS section plays for all its models are unequivocally pedigree, performance and the pivotal role in producing the BTB in the first, strategy and profit.

7 Concept development , phase of the NPD&D process. The BTB. Case findings balances the pedigree and performance details of the TCD with the profit requirements of the company together with the price Competitive bases and ownership cost requirements of customers. The balancing The increase in competition especially in the last 20 years, has process is described below (Developing the BTB). meant a unique pedigree and performance are still necessary 2 Mullins, JW., Forlani, D. (2005) Missing the boat or sinking the boat: a study of new venture decision making, Journal of Business Venturing, Volume 20, pp47 69. 1 | The role of management accounting in new product design and development decisions Matrix and team structure of the detailed template and structure it provides. These relate to the activities and outcomes of each of the 14 stages in the An important feature of ABY's structure is its matrix-type five phases that may be involved in a major project.

8 The five system of responsibility. For example, the management phases are strategy and concept development ; concept approval;. accountant has a dual responsibility to the financial and design and validate; volume ramp; and market entry. managing directors for strategy and target setting. The relative autonomy and authority of the S&TS section means Although the 14 stages appear to occur in a sequential order, management accounting has an important influence in the they are actually managed in ABY in a parallel way. For example iterative top-down-bottom-up process. This process balances in each phase the potential obstacles and critical success factors the pedigree, performance and profit criteria. However, NPD&D (CSFs) in subsequent phases are carefully considered. One projects within ABY are a team effort that involves intensive reason the detail of the late development and delivery phases is and extensive communication among disparate functions, considered in the early preceding phases is because the teams module leaders and representatives of all NPD&D participants.

9 That begin a NPD&D project are responsible for all phases; no The period of technology trajectories covers: the four to five change-over occurs, for example, between the design phase and years it may take to develop a new vehicle platform; the 10-15 the development phase. years life expectancy of a platform; the five to eight years of each generation supported by a platform; and the 20-25 years Developing the BTB. of customer ownership. This long planning period is essential The BTB for the project (see Figure 1) supports and reflects to support a comprehensive after-sales service business that this parallel development approach. The BTB is agreed, usually is important to customers, ABY, its suppliers and dealers. The after multiple top-down-bottom-up iterations, by all project planning horizon of 25-30 years is also necessary to support the participants in stage four (project feasibility) of the early multi-year, product portfolio management of both ABY and its strategy and concept definition phase.

10 Above all, management parent company. of the process reflects an inclusive, participative approach to NPD&D. This approach emphasises a degree of structure, The prescribed NPD&D process control and order not usually associated with the creativity and Most companies have well-defined phases, relating to the uncertainty that are an essential part of the NPD&D process, definition, design , development and delivery of new products especially for more innovative projects. and services. The NPD&D process of ABY is remarkable because Figure 1. Developing balanced targets Manufacturing & assembly IT/IS Senior management BALANCED TARGETS. design & development Strategy and target setting BOOK (BTB). External groups Procurement Marketing 2 | The role of management accounting in new product design and development decisions Figure 2. Balanced target book financial target groups Return on sales NPD&D costs and investment BALANCED TARGETS. BOOK (BTB). Manufacturing and Total ownership costs assembly costs The initial BTB sets out financial and non-financial targets, concept and agreement on the accompanying business case consistent with the generic pedigree, performance and profit and feasibility.