Exploring the applicability or potential uses of New Product Introduction processes on the Industrial Policy making process

Author: Sara Grobbelaar

University of Cambridge

Word count: 2,985

Contents
Introduction ............................................................................................................................................ 3 Economic rationales for government intervention ................................................................................ 3 Debates on industrial policy.................................................................................................................... 5 Diversification as a development strategy for developing countries ..................................................... 5 A firm-level framework: The New Product Introduction process........................................................... 6 A process approach to industrial policy .................................................................................................. 8 Applying the innovation funnel to industrial policy best practices ........................................................ 9 Empirical analysis: Gauteng Department of Economic Development .................................................. 10 Conclusion: ............................................................................................................................................ 11 References ............................................................................................................................................ 12

Introduction
Despite its widespread use, industrial policy remains controversial. One of the reasons often cited for this, is that Government is believed to be notoriously bad at picking winners. Traditionally most academics writing on industrial policy were development economists, however, recently there has been a resurgence of industrial policy in the developed world which resulted in a number of authors contributing to this field again (See (Livesey, 2010)). In this essay we are careful to stay clear from suggesting that government should be engaged in the process of picking winners and rather adopt the reasoning from Rodrik (2004) that government should assist industry in activities so that industry could pursue self-exploration in order to diversify an economy.

The right way to think about industrial policy is as a discovery process where firms and government learn about underlying costs and opportunities and engage in strategic coordination (Rodrik, 2004, p.3)

The argument developed in this essay is that as most new products fail, the business sector has developed a robust New Product Introduction (NPI) process to assist in improving the chances of success and to ensure that companies have a steady stream of new products being introduced into the market (Cooper, 1979)(Cooper, 1983)(Cooper, 1986)(Cooper, 1990). In this essay we postulate that just like New Product Introduction (NPI) a process could be developed for the New Project Introduction process in industrial policy making. We suggest that a process approach for introducing new activities could assist government in supporting industry in the selfdiscovery process and to ensure that there is a continuous stream of new development projects introduced to develop the economy.

Economic rationales for government intervention

Rationale: Market failure From a neoclassical school of thought perspective the main justification for government intervention is the market failure argument. A number of reasons may contribute to markets not functioning properly which may include externalities, barriers to entry, asymmetric information and economies of scale and scope (Haukes and Londgren, 1999)(Pitelis, 2007). The market failure argument provides a simple and straightforward criterion for intervention. Following a market failure approach, policies in developing countries have been focussed on addressing certain critical weaknesses such as R&D program funding, training and up-skilling of the workforce and the provision of risk capital (Ul Haque, 2007). A market failure of particular interest to this essay is the lack of self-discovery that seems to be pervasive in especially developing countries. Entrepreneurs and companies in developing countries are hesitant to invest in new industries or areas where no industrial infrastructure and upstream and downstream activities already exist (Rodrik, 2004). 3

The market failure rationale is in principle a strong rationale (Bartik, 1990)(Haukes and Londgren, 1999): It provides a general rationale with the optimisation of social benefits at the centre; It provides a strong guide for policy action; It provides a guide for defining the optimal allocation of government resources; It provides goals that are possible to measure in dollar benefits.

The market failure approach also only allows government to intervene under a narrow range of situations and governments role is mostly focused on helping markets to function properly by ensuring property rights and the enforcement of contracts. (Ul Haque, 2007) There are however some serious limitations of the market failure approach which include: It is often difficult to locate and define where market failures occur (Bartik, 1990)(Haukes and Londgren, 1999)(Ul Haque, 2007); It ignores the systemic and dynamic nature of markets and the institutional framework of how markets function (Haukes and Londgren, 1999).

The central weakness of the market failure approach is its attempt to establish a policy perspective within the confines within the static equilibrium theory of markets and industry (Metcalfe, 2003)

Rationale: Systems failure The evolutionary (Metcalfe, 1993) and systems perspectives (Freeman, 1987)(Edquist, 1997) recognise the central role of innovation in economic progress and that there are a number of actors that play a role in the process of industrial development. This reasoning forms the basis of the systems failure rationale. i.e. economic progress and innovation are not only influenced by market forces but also the character of the entire innovation system (Pitelis, 2007)(Haukes and Londgren, 1999). Through the systems failure rationale, an additional domain is added to the policy intervention space. Although the market is acknowledged as one aspect of the economy it only forms one part of the elements required for innovation and diffusion (Haukes and Londgren, 1999). The systems failure perspective acknowledges that institutions and networks also play an important role in the development of systems of innovation (Freeman, 1995). The evolutionary and systems theories provide a more balanced view from the neo-classical school of thought in that governments need to respond to externalities as in the market failure perspective, but also important are the structural conditions under which technological progress could take place (Haukes and Londgren, 1999). The systems perspective as a policy framework has however been criticised that although rich in description, it is better suited for post-hoc analysis of innovation systems. It is argued that the systems perspective is well suited to explain why certain countries have been successful rather than to provide a tool for predicting success or the effect of policies on the system (Reid, 2009). 4

Debates on industrial policy

A middle ground has been reached on the rather extreme views of leftist economists who favoured the role of government to be a driving force of economic development and economists who favoured a market oriented approach. The debate seems to have settled on acknowledging market forces and the role of private entrepreneurship as well as the strategic and coordinating role government could play in industrial development (Rodrik, 2004). The systems failure perspective has also prompted the acknowledgement of the importance of including the development of upstream and downstream activities in the chain of production through industrial policy (Livesey, 2010)(Pitelis, 2007). A shift in debate from supporting small companies (Scumpeter, 1934) to large companies (Chandler, 1962) seems to have settled on seeing the total industry lifecycle (Utterback, 1994) and therefore acknowledging support of both types of firms (Livesey, 2010)(Pitelis, 2007). The debate on whether government should target enabling policies versus horizontal policies or vertical policies seems to be highly context dependent and frameworks exist which embrace both approaches (Livesey, 2010). Sustainability considerations in industrial policy have also been highlighted by some authors e.g. the introduction of frameworks for sustainable competitive advantage (Pitelis, 2005)(Pitelis, 2010).

Diversification as a development strategy for developing countries

Findings from a study by Imbs and Wacziarg (2003) indicated that as poor countries become richer the tendency is that their economies become more diversified. This expansion of activities in the economy carries on up to a relatively advanced level of development. Rodrik (2004) therefore identifies the ability of a country to expand the number of activities in the economy as key to development success for developing countries. In developing countries however, it is often the case that the return on new activities are difficult to gauge and therefore investment in new industries or businesses are limited. Rodrik cites information externalities and coordination externalities as the main reasons for this problem (Rodrik, 2004). The process of self-discovery therefore could be supported by government and in order to make this workable a carrot and stick strategy for government is suggested. The carrot will be support of new activities whereas the stick is processes to phase out bad projects, support is suggested to be subject to performance requirements and the close monitoring of these projects (Rodrik, 2004).

The trick for government is not to pick winners, but to know when there is a loser (Rodrik, 2004:12)

The following section provides a top-level introduction to the NPI process as suggested by Clark and Wheelright (1993). This framework forms the basis of the discussion to follow where it is attempted

to develop a part synthesis of the process of New Project Introduction in industrial policy making with the New Project Introduction process.

A firm-level framework: The New Product Introduction process

The lack of a solid NPI process has been cited as one of the most prominent reasons why firms fail at NPI or to consistently introduce new products to the market (Cooper, 1986) (Clark & Wheelright, 1993). It is therefore of high importance to firms to develop a robust NPI process in order to ensure a steady flow of ideas through new product development to eventually achieve market success. There are also some other marked advantages of creating a robust explicitly formulated NPI process within the firm, these include (Clark and Wheelright, 1993): Through an explicit process responsibilities and roles will be clearly defined; The NPI process creates a framework for employees within which they could focus and integrate capabilities and energies; An explicit NPI process provides a framework within which decision making is guided and input mechanisms could be created to ensure that market needs could be matched.

In grossly simplified terms, the NPI process could be characterised to consist of three main phases:

Figure 1: Phases and screens in the New Product Introduction process (Adapted from Clark & Wheelright, 1993)

Phase 1: Product / process and idea generation This phase is also referred to as the fuzzy front-end of the NPI process because it is highly uncertain and it is very difficult to know what the real value and benefits of ideas will be once implemented. This is also the cheapest part of the NPI process and the more good ideas you have to choose from the better your chances of success will be (Belliveau et al, 2002). The main challenge in managing this phase of the process is therefore to dramatically expand the mouth of the funnel in order to gather ideas from various sources rather than just the companys R&D department (Clark & Wheelright, 1993). Screen 1: Completeness / Readiness review A second challenge facing the firm introducing a NPI process is to narrow the funnel towards the concept development stage. The first screen is not a go/no go decision point but rather a review by peers to determine what additional information need to be gathered in order to make a go/no go decision (Clark & Wheelright, 1993). Phase 2: Detailed proposed project grounds During the second phase development projects under consideration are linked directly to the stated strategies and objectives of the business. This phase typically takes 1 to 2 months to complete and it has very specific purpose i.e. to defined the project in detail with project plans, budgeting and package t in a format that will enable managers to decide on which projects are most attractive to pursue (Clark & Wheelright, 1993). Screen 2 : Go-No-Go decision point Screen 2 is a senior management review and a Go/No-Go decision point. Projects passing this point will be funded and staffed with expectation that it will be carried through to market introduction phase (Clark & Wheelright, 1993). Phase 3: New Product Development During the last phase, the development project is staffed and the project is developed and eventually commercialised (Clark & Wheelright, 1993). Other considerations Key to the success of the NPI process is management buy-in and a project champion preferably from the higher ranks of the company (Zirger, 1990). In the NPI literature the importance of having cross functional teams involved in each of the decision making processes is deemed important in order to ensure that all objectives are achieved and that various divisions represented in the decision making process (Bunduchi, 2009). The strategic importance of the selection and development of platform projects in order to support the companys core technologies is stressed in the literature (Beaume et al, 2009).

It is also important to maintain a link between firm strategy and the screens or decision gates in order to ensure that the portfolio of projects in development reflect the firms strategy (Clark & Wheelright, 1993).

Criticisms of a linear model of NPI Although this linear model has been criticised in the literature it still provides a useful starting point for developing a structured NPI process (Cooper, 1986)(Clark & Wheelright, 1993)(Belliveau et al, 2002). It is acknowledged that many feedback loops exist in the process from the various stages of the development cycle that are not reflected in the linear model.

A process approach to industrial policy

Rodrik (2004) stresses the importance of the proper process to developing industrial policy to be put in place to be far more important than the actual policy decision to be made. A proper process will ensure that government is informed regarding shortcomings of the system and the areas where assistance is required i.e. be informed of market and system failures.

the analysis of industrial policy needs to focus not on the policy outcomes but on getting the process right (Rodrik, 2004: 3)

The policy making process has been described as a linear process with different stages initiated through problem identification followed by an agenda setting phase, policy analysis, policy development and then eventually implementation (Sutton, 1999).

Figure 2: The linear model of policy making (adapted from Sutton, 1999).

This model has however been criticised to be unrealistic and that policy making process could better be described as a circular process (May, 1987) (Nachmias et al, 1982). The argument put forward for proceeding with a linear model of policy making is that as with the linear model of NPI, a useful framework may be created for decision making and for creating an explicit process through a stage gate process. 8

Furthermore the study of applying business frameworks to policy settings has not received much attention in the literature1. It is therefore suggested that we explore the various utilities of processes and techniques along the NPI process for the New Project Introduction process of industrial policymaking.

Applying the innovation funnel to industrial policy best practices

It is postulated that just like NPI the New Industry Introduction process also has a fuzzy front-end that mainly consists of idea generation and selection processes which could be greatly improved by implementing an explicit process (Rodrik, 2004). The following section projects the industrial policy making best practices as introduced by Rodrik (2004) onto the NPI framework to develop a theoretical framework for a New Project Introduction process in industrial policy making: Proposed self-discovery process 1. Self-discovery / idea generation (Key issue: widening the funnels mouth) Economic development process Phase 1: Government needs to have a continuous process for identifying opportunities and eliciting information from the private sector (Rodrik, 2004) Screen 1: It is decided on what information is still required to be able to continue to be able to make a decision Phase 2: Information is gathered to identify which are the most attractive activities or industries to support (Rodrik, 2004). Screen 2: Decision is made regarding which projects to continue with GO-NO-GO decision point Phase 3: Implementation of the development strategy commences Strict performance requirements to be implemented (Rodrik, 2004) Continued Monitoring of project in order to minimise rent seeking and corruption (Rodrik, 2004) Sunset clause of development support to be included (Rodrik, 2004)

2. Detailed proposed project grounds (Key issue: narrowing the funnels neck)

3. Rapid focused development

Table 1: Proposed New Industry Introduction process

The following table furthermore outlines further touch points in terms of the NPI and New industry introduction process:
This point was made by Dr Christos Pitelis during a lecture in the Political Economy of Technology Policy class to MPhil in Technology Policy students at the University of Cambridge during November 2010.
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NPI key success factors Strategy of the firm to be linked to screens Management buy-in and strategic coordination

Cross-functional teams

Platform projects

Industrial policy analogy Industrial development project selection need to be cognisant of overall policy objectives (Rodrik, 2004). Portfolio management approach of NPI could be useful here. Buy-in from and participation of senior government officials in order to ensure that policy synergies exist (Rodrik, 2004). Political support for the project / project champion is crucial (Rodrik, 2004). Coordination and deliberation councils: Public-private bodies need to be created to ensure that relevant groups and their representatives are included in the policy making process (Rodrik, 2004). Cross cutting policies and coordination projects: Some strategies need simultaneous large scale investments to be made upstream and downstream which should be coordinated (Rodrik, 2004).

Empirical analysis: Gauteng Department of Economic Development

A first test of the usefulness of this framework for the development of industrial policy has been done through an in-depth interview with the Department of Economic Development of Gauteng (GDED) in South Africa. The process at the GDED could be summarised as in Figure 3.

Figure 3: Authors summary of the new industry development process at the GDED

The following characteristics of the management of industrial policy at the GDED exists:

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Idea generation activities are limited to addressing existing policy problems i.e. addressing identified weaknesses through interaction with the private sector and consultants and government officials regarding market and systems failures. Little in terms of formalised process currently exists in the area of supporting the selfdiscovery process. It is therefore recommended that this process be analysed in more depth and that this areas in deed could be an area of development for some economic development agencies

Conclusion:
From this analysis it could be included that there may be some utility for an explicit stage gate process within the industrial policy domain: It was postulated that the industrial policy making process could benefit from a formalised process framework for guiding the process through stages and gates. A part synthesis of the industrial policy making process and the NPI process was derived from industrial policy-making best practices. A first-pass test was done on a provincial economic development department and some gaps have been identified in their industrial policy process that could benefit from a rigorous stage gate process for industrial development especially in the self-discovery area.

Future research areas could be focused on further exploring the utility of management tools that have been developed throughout the NPI process for the industrial policy-making process.

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