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Profitable new product design and development: the finance team is playing an increasingly important role in ensuring that the right amount of capital is allocated to research and development. Bill Nixon, John Burns and Mostafa Jazayeri-Defuli look under the bonnet of a leading car manufacturer to see how the relationship works.

We all know that change is the most predictable feature of the current business environment. What is more significant is the rapidly accelerating rate of change. The speed of change is creating new businesses, wiping out others and shortening strategy, product, process and technology lifecycles. The motor industry exemplifies the changes taking place in many other sectors. Relatively new "startups" now have the capability to go beyond imitating market leaders and to launch more advanced, cheaper versions of their own. The acquisition of Volvo by Geely, of Jaguar Land Rover by Tata, and of MG by the Shanghai Automotive Industry Corporation, is indicative of how market incumbents can be ousted by new entrants.

New customers are emerging in China, India, Africa, Russia and Brazil, and the demand for vehicles worldwide is anticipated to double to two billion cars by 2020. Intensification of competition and new customers are causing greater fragmentation of markets and customisation. Motor manufacturers are engaged in an expensive, high-risk battle to produce an "eco-car" and no one is quite certain how competing technologies to reduce emissions and dependence on fossil fuels will evolve. The trend in many sectors to move from products to services is also evident in the motor industry. Services, such as the "power by the hour" service provided by Rolls-Royce, appeals to business customers because they allow companies to purchase units of service and to account for them as a variable cost, rather than as capital expenditure that requires careful risk assessment and cash flow management. Private customers also like the "pay for what you use" model, such as the Zipcar hire system in the US, since it helps them avoid large expenditures and the costs and risks of ownership. Motor manufacturers must now manage an increasingly large number of different technologies, many of which have very unpredictable trajectories. This has dramatically increased the need for collaboration among teams within an organisation and between the business unit and communities of external groups of customers, suppliers, alliance partners, dealers, media, regulators and special interest groups concerned, e.g. with urban transport policy and environmental issues.

One impact of the rapidly changing business environment has been to increase the costs and risks of new product design and development. Even in a relatively mature industry, such as motor manufacturing, the sector spends 4.2 per cent of sales on R&D, which amounts to more than 30bn per annum for the top ten manufacturers (by R&D spend). These amounts do not include new model market launch cost or the market research that informs design and target costing. The costs and risks of the new product design and development (NPD&D) necessary for sustained performance have never been greater, yet most of what is known about the role of management accounting (MA) in NPD&D is grounded in a preinternet era. Recent research has concluded that there is a worrying lack of knowledge of what it means to practice accounting in new product development and that target costing is "uncharted research territory".

About this research

The dominant question, therefore, addressed by g a CIMA research project, reported here, is: "How is MA practice responding to these changes in the context and management of the NPD&D process?" More specifically, the focus of this research is on how the concepts, tools and practice of MA activities, such as investment appraisal, risk management, cost and value management and performance measurement, are responding to changes in the NPD&D management process and strategy.

A long-established company in the premium auto group (PAG) sector was selected for a case study, partly because pacing and emergent technologies usually appear first in this sector. With entry-level prices mostly above [pounds sterling]100,000 the sector is, perhaps not surprisingly, a good barometer of the economic and social climate. The company, referred to here as ABY for reasons of confidentiality, built its reputation and high brand value in the PAG sector on a unique combination of craftsmanship, aesthetic design and performance, including famous victories at Le Mans. A special appeal of ABY to the researchers was that, prior to requesting access for this case study, we learned that the dominant design parameters for all models are unequivocally "pedigree, performance and profit".

The history of ABY, which is a subsidiary of a global motor manufacturer, confirmed that these design criteria are not simply aspirations: market share, industry reviews, customer comments on social media, websites and financial results demonstrated consistent attainment of the criteria in the past decade. A second, related question, therefore, that pervaded this research was: "How is the balance among 'pedigree, performance and profit' achieved?" A further appeal of this case to the researchers is that ABY is a relatively small manufacturer, with 3,500 employees and an annual production of about 8,000 vehicles. It is much easier to reliably ascertain and comprehend the complexity of the NPD&D process and its organisational setting in a small PAG business unit than in a relatively large, high-volume production company.


Explicit links exist among the three processes of ABY's business model (customer relationship management and marketing, NPD&D and support), among the five phases of the NPD&D process, the 14 stages of the five phases and the activities of participants in every stage. This tightly integrated structure is intended to support communication among all NPD&D participants, to link strategy and operations and to avoid expensive delays and errors. Speed and time to market are almost always crucial to commercial success. The critical path for each project is agreed at the same time as the concept in the first strategy and concept definition phase.

Interestingly, conventional wisdom suggests that speed, tightly integrated organisational arrangements and well-defined criteria for stage-and phase-gate decisions are major constraints on creativity. Yet the tension between creativity and control of the NPD&D process is managed in ABY by six complementary, interacting organisational components, namely:

1 A team-based structure.

2 A comprehensive, very accessible, formal information system.

3 A top-downy bottom-up management style.

4 An emphasis on planning and prospective information relative to control and retrospective information.

S A powerful, informal information system that reinforces the formal system.

6 An open, trusting culture, grounded in a long history of engineering excellence and an acute understanding of the need for sound financial management in order to survive.

The MA activity is an integral part of each one of this set of components and is the common language that links all of the NPD&D participants, including customers and suppliers.

The role of MA in ABY's NPD&D is most evident in the formulation and implementation of a Balanced Target Book (BTB) for each NPD&D project. The BTB is prepared by a relatively autonomous strategy and target setting (S&TS) section simultaneously with the technical concept description (TCD) and business case in the initial strategy and concept definition phase that precedes the design phase.

The S&TS section, which is led by a CIMA member, has evolved more from the engineering function than from finance and includes 21 cost and value engineers. The management accountant has a matrix-type responsibility to both the CEO and the financial director. This dual responsibility reflects the importance attached to management accounting in linking high-level strategic goals with operational targets. The BTB is the explicit expression of the process that balances the pedigree, performance and profit design parameters; it is also the single most-used language to co-ordinate the activities of all NPD&D participants. The financial targets of the BTB and their interaction are shown in Figure 1.



The role of the BTB in ABY suggests that the conventional cost management advice to "control tomorrow's costs through today's designs" has become too late and too narrow. Abbreviated life-cycles and time-to-market pressures have pushed target costing upstream to the earlier Strategy and Concept Definition phase.

The technical and financial scope of ABY's BTB also goes well beyond the product price, cost and profit focus of traditional target costing. The BTB is the primary means by which ABY balances design parameters with each other, including the customer's total ownership costs and its ROI and ROS requirements.

A forthcoming CIMA research executive summary discusses in more detail the role of MA in ABY's NPD&D process. A second article in Financial Management will explain why even a comprehensive, sophisticated MA system is unlikely to be of much value in managing the NPD&D activity, especially the tension between creativity and control, unless it is also part of this set of integrated organisational components. A third article will focus more specifically on the very strategic control role of the BTB.

Bill Nixon is professor of management accounting at the University of Dundee; Professor John Burns is head of accounting at the University of Exeter Business School, and Dr Mostafa Jazayeri-Defuli is senior lecturer in management accounting at MMU Cheshire
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Title Annotation:Technical Notes
Author:Nixon, Bill
Publication:Financial Management (UK)
Article Type:Company overview
Date:Apr 1, 2012
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