BUSINESS ANALYSIS

NPD stages
Idea generation the search for innovative ideas Idea screening The first evaluation of innovative ideas Concept development The innovation idea is drafted in verbal or pictorial form, further explaining the nature of the concept, with initial ideas of ingredients, materials & technologies After interpreting the reactions from customers, it is decided whether the innovation concept has market potential.

BUSINESS ANALYSIS
Build business case A thorough market, technical, and financial analysis takes place. Business Analysis Here it is decided whether the innovation is technically feasible, has market potential and will make a sound financial contribution to the firm

WHAT IS BUSINESS ANALYSIS

Preliminary estimate of sales volumes and costs based on data which is more substantial than managerial hunches. Earlier evaluations based on market growth rate assumptions & stage of product category on its PLC. Now its down to specifics such as production costs, unit costs and prices, overheads & effect of new product on existing product sales.

Difficulties
It is not easy to estimate costs as there is no physical product yet. Costs are constructed by different methods depending on company policies & arbitrary preferences of financial advisors. Business analysis draws heavily from market research from previous activities. Alterations to be made to business analysis from later activities which are also based on market research.

Supplementing conventional methods

Conventional methods such as ROI & Net present value need to be supplemented with other indicators such as Market opportunity(size, growth, penetration potential, novelty); internal fit (portfolio balance, strategic fit, risk, resource requirements);technology (complexity, newness, leverage of existing capabilities); market milestone expectation (number of customers, number of product launches, favorable press stories).

3 stage approach
Basic financial concepts that explain projection of profits. Techniques for analyzing potential financial performance of a new product. Specialist research based techniques to help take a decision on continuation on new product development.

Basic financial concepts

Unit sales Focus on how many of the products are likely to sell.
Estimation of market size-estimates of total available markets, target segment, competitors position.

Revenues (net sales value)

Net sales value is the total sales after standard trade discounts are met.

Calculation of NSV
Calculation of NSV takes into consideration
Customer mix for new products & extent to which discounts are variable Allowing of target based discounts which are based on achievement of previous targets. Different terms negotiated with different distributors.

Fixed & variable costs

Fixed cost are those incurred irrespective of any variable costs.
Can be high for new pdts needing special acquisitions.

Sunk costs
costs incurred on design and concept development work, early market research studies and customer feedback research, internal costs of estimating capital equipment required. No capital asset and no salvage value Tendency to throw good money after bad

Variable costs- costs that vary as per quantity produced.

Direct marketing costs

Direct marketing cost are high for new products Include advertising, sales promotion & other sales related items. You have to look at all the costs to be incurred for the whole life of the product as there may be fluctuations.

Incremental profit
Once the previous information has been compiled, expected profits can be estimated. Relationship between net sales value and variable costs High fixed costs in the first few year. Therefore financial analysis to go beyond launch. Marketing cost follow a pattern highest during the launch and post launch stages.

Payback
Payback is the period of time it takes for the revenues of an investment project to equal the expenditures on the project. Rough indicator of liquidity associated with a particular investment in a new product and not a measure of profitability. Rough screen to help a company to decide where a company should place its investment in order to recoup it quickly. Ex: Stout type bear(3 years), Continental bear(3.5 years)

Discounted cash flow

DCF is based on year by year projection of cash flow. Unlike payback, here time value of money is recognised. Looks at opportunity costs Potential investment is assesed against the minumum return that investing alternatively might bring. The greater the perceived risk in the new project, the higher the required rate of return.

Financial techniques for NPD

Sales forecasting Unit sales depends on sales forecasting Sales forecasting estimates of market size, market growth, market share of current product, market segments & purchase intentions. Estimation of above has its difficulties and assumptions. Ex: Virgin wanted to launch 100 cosmetic product stores, but launched only 22.

continued
Several market research companies now run computer simulations. But they require the product to be developed. Therefore data not available during business analysis. ATR(awareness-trail-repeat) model

ATR model
Sales volume = (market size) x (% of market who are aware of the product) x (% of those who try the product) x (% of those who like the product to re-buy) x (no. of repeat purchases per year) x (unit cost) The above depends on Accurate estimate of market size Accurate assessment of trial & repeat(better data after product development & consumer trials) Availability of product for purchase No. of outlets that agreed to stock Amount of competitive product

Financial analysis-Problems
Product trial is easier when experienced Description on new product will affect types of response Unanticipated changes in marketing environment. Forecasting based on current trends
Radical product idea no trend

Sensitivity Analysis
Sensitivity analysis To know how small changes in price, cost forced by external changes will affect profitability. Cannibalization

Breakeven analysis
Break even analysis how much product to make and how much to charge so that profit generated by new products matches expectations. Break even analysis does not look at what happens during the total life of the product. Useful for assessing the potential of a new product before major investments are made.

Specialist research based techniques

Traditional accounting techniques give hard factual data. They do not encourage managerial creativity. Determination of development team, skill and expertise with new technology and enthusiasm of sales force are not taken into consideration. In view of this a no. of techniques like Newprod, Assessor & sprinter have evolved.

NewProd
Newprod empirically derived. Not based on decision rules by experts. 30 question to be answered. Each question to be rated Data analyzed to show differences in evaluators opinions on 30 questions. The analysis can help in deciding
Whether to go on to physical development How to deal with any weaknesses in the product How to handle broadly identified areas of uncertainty.

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