8.2 New Product Development: Process, Double Diamond and Accounting Impacts
Key Takeaways
A typical NPD process runs from idea generation and screening through concept testing, business analysis, development, test marketing and commercialisation.
Stage-gate control places go, kill, hold or recycle decisions between NPD stages to limit money at risk.
The Design Council's Double Diamond separates the problem space (discover, define) from the solution space (develop, deliver).
Under AASB 138 research costs are expensed, while development costs are capitalised only when all six recognition criteria are met.
NPD cash flows must deduct cannibalised sales of existing products and include the working capital needed before launch.
8.2 New Product Development: Process, Double Diamond and Accounting Impacts
Executive Summary: New product development (NPD) is how organisations replace products that are maturing and capture new demand. This section sets out the stages of NPD, the gate decisions that control investment, the Design Council's Double Diamond, the factors that separate successful from failed launches, and the accounting and financial issues a CPA must address.
Why NPD Matters
Products move through a life cycle, and in fast-moving industries a large share of revenue comes from products launched in the last few years. Organisations without a reliable pipeline of new products see revenue fade as existing products mature and decline. Some firms set explicit targets for the share of sales from new products. 3M is the best-known example: it has long targeted a substantial share of sales (famously 30 percent) from products introduced in the previous few years. Such targets fight complacency and push managers to replace their own products before competitors do, although they need a genuine R&D culture behind them, or managers may relabel minor tweaks as "new".
The Stages of NPD
A typical NPD process moves through these stages:
- Idea generation: from customers, employees, R&D, competitors, suppliers and partners.
- Idea screening: removing ideas that do not fit strategy, capability or market potential.
- Concept development and testing: describing the product's features and benefits and testing them with target customers.
- Business analysis: estimating demand, price, costs, profit, cash flow and risk.
- Product development: building and testing prototypes.
- Test marketing: launching in a limited market to test the full offer.
- Commercialisation: full-scale launch, with production, distribution and marketing in place.
- Post-launch review and eventual withdrawal: comparing results with the business case and planning the product's exit when it declines.
Stage-gate control
Robert Cooper's stage-gate approach separates these stages with gates—decision points at which a committee decides to go, kill, hold or recycle the project based on agreed criteria (strategic fit, market attractiveness, technical feasibility, financial return and risk). Gates prevent weak projects from consuming more resources and make the cost of continuing explicit.
The Double Diamond
The UK Design Council's Double Diamond (2005) pictures innovation as two diamonds, each with a divergent (widening) phase followed by a convergent (narrowing) phase:
- Discover (diverge): research the users and the context widely to understand the problem.
- Define (converge): agree a clear statement of the problem to be solved.
- Develop (diverge): generate and prototype many possible solutions.
- Deliver (converge): test, refine and launch the solution that works.
The key discipline is separating the problem space (first diamond) from the solution space (second diamond). Teams that jump straight to building a product without defining the customer's problem often create well-engineered products that nobody wants—like a doctor prescribing treatment before diagnosing the patient.
What Drives NPD Success?
Successful launches tend to share several factors: a deep understanding of user needs; a product with a clear advantage for customers; strong marketing of the launch; efficient development; effective use of outside technology and partners; and a senior sponsor with the authority to push the project through. Common causes of failure include weak market research, an unclear target customer, underestimated costs, poor timing and launching before the organisation can produce at scale.
Accounting and Financial Impacts
NPD decisions show up in the financial statements and the budget, and the CPA's role is to make those effects visible early:
| Issue | What the CPA considers |
|---|---|
| Research and development costs | Under AASB 138 (IAS 38) research costs are expensed; development costs are capitalised only when all six criteria are met (technical feasibility, intention to complete, ability to use or sell, probable future benefits, adequate resources, reliable measurement) |
| Impairment | Capitalised development costs must be tested for impairment, and written off if the project fails |
| Target and life-cycle costing | Set an allowable cost from the market price less required margin, and consider costs across the product's whole life |
| Investment appraisal | NPV of the launch, with sensitivity to volume, price and timing; stage-gate funding limits money at risk |
| Cannibalisation | Incremental cash flow must deduct lost sales of existing products |
| Working capital | Inventory, receivables and marketing spend before revenue arrives |
A sound NPD business case therefore reports both its strategic logic and its financial effects, including the accounting treatment that will affect reported profit.
Worked Illustration: Gate Decisions for a New Appliance
An appliance maker is developing a smart, energy-efficient dishwasher.
- Gate 1 (after screening): the idea fits the strategy of premium, sustainable products and uses existing engineering skills. Decision: go, with $200,000 for concept testing.
- Gate 2 (after concept testing): 40 percent of target customers say they would probably buy at the planned price, but many want app control. Decision: go, adding app control to the specification.
- Gate 3 (after business analysis): the base-case NPV is positive, but it turns negative if launch slips by a year, because a competitor is expected to release a similar model. Decision: go, on condition that the launch date is protected by hiring additional firmware engineers.
- Gate 4 (after test marketing): sales in two test cities are 25 percent below forecast because retail staff cannot explain the app features. Decision: recycle—redesign point-of-sale training before national launch.
Each gate limits the money at risk, records the assumptions behind the decision and forces the team to act on evidence, which is exactly the discipline a finance business partner should bring to NPD.
A product team has interviewed hundreds of customers and observed how they use competing products. It now needs to agree a single clear statement of the problem it will solve. Which Double Diamond stage is it entering?
Develop
Deliver
Discover
Define
A software company has spent $2 million exploring whether a new analytics engine is technically possible. It then spends $3 million building the product after demonstrating technical feasibility and meeting the other AASB 138 criteria. How should the costs be treated?
Recognise $5 million as goodwill and test it for impairment at least annually
Expense $5 million, because AASB 138 treats all software spending as research
Expense the $2 million research and capitalise the $3 million development as an intangible asset
Capitalise $5 million, because the analytics engine was eventually completed and launched
A beverage company forecasts that a new sugar-free drink will sell $10 million a year, but expects $4 million of those sales to come from customers who would otherwise have bought its existing soft drink. What revenue should the NPD business case use as the incremental benefit?
$14 million, because cannibalisation increases total brand sales across both drinks
$4 million, because only switching customers are relevant
$10 million, because every sale of the new product is new revenue for the company
$6 million, because cannibalised sales of the existing product must be deducted
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