In the module, we will review:
- Why costing is important at the development stage.
- Why you need a plan to manage your development stage costing
- Generally accepted good practices
Costing is founded on accounting principles. Tracking the costs related to a project is necessary to make realistic projections for future profitability. As a project moves from the front end through to the development stage, costing information becomes more detailed and while numbers may not be entirely finalized, they should be coming close to how they will actually look once the product is in full production.
As the go to market strategy and other phases of product development are being established, decisions related to each of these areas will have an impact on the costing plan. In some cases, decisions may have changed from the front-end stage. Perhaps originally the plan was to sell the product direct to the consumer on a small scale and further review has shown that the best option is to go through the channel on a national scale.
It could be that the intent is still to bring the product to market. It could be that the product requires production supports that are not available in house; this could result in having to add cost implications for third party facilities or it could mean that the product concept could be licensed to another firm and some of costs that were originally anticipated move to the third party as revenue is traded for royalties. The licence could be exclusive, where there is only one third party, or there could be multiple licensees – perhaps regionally based (as with Coca-Cola bottling.)
In the case of a service or technological improvement to a production process, if the innovating company decides that is not within their core business definition, they may decide to sell their development work to date outright to another party. For example, if a company that normally produces stationery products identifies a better, more environmentally friendly way to package their products, the costs of developing that technology and appropriately marketing it could be overwhelming given the existing expertise within the firm. Selling it to a company already in the packaging industry will provide up front cash that can be used to reinvest in the existing business. This does mean that there is no longer any control over future development and there is generally no share in any future profits that may arise (although this could possibly be negotiated into a deal.)
If licensing or selling the innovation outright are not appealing but the resources do not exist in-house, then it may be possible to find a partner. This could involve a significant time investment as well as involve research to find the best possible partner. The partner will need to be convinced of the benefits to them of creating a partnership. All of the development research will need to be put together to show projections of how the new product will perform in the market. Additionally, research will need to be done to show how the product will enhance the partner company’s market offerings and improve their value-add to their existing customer base. Once a partnership is created, capital and development costs can be shared and their marketing and distribution expertise can also contribute to successfully launching an innovation. Partnerships are sometimes structured as an entirely new company with both partners having equity and that new company holds a license for the new product/process from the company that developed the innovative product/process to this point.