...primarily on target costing, a management practice used inside the product development process by the development team. Although this practice is appropriate for products competing mainly on costs, it presents several limitations when factors such as technology, time-to-market, or customer needs are more pressing. Based on observations from a field study of product development cost practices in high-technology firms and evidence from field studies described elsewhere, this paper identifies alternative practices to manage costs during product development. These alternative practices that facilitate cost management around the projects rather than managing costs inside product development projects are: parallel cost management teams, modular design for cost, clearly defined cost management strategies and cost policies, and product portfolio planning. Companies in our sample use them to manage costs during product development, when cost management is most effective, but still keep the attention of development teams focused on the critical success factors of time-to-market, technology, and customer needs.

INTRODUCTION

A significant portion of the profits that a product generates over its life is determined before the product reaches the market (Wheelwright and Clark 1992; Yli-Renko et al. 2001). During the product development stage, the organization designs the features that (1) give the product an edge over competing offerings and (2) affect the costs that will shape profit margins. Product design significantly affects the revenue side--technological performance, customer appeal, and timely market introduction--before the first unit is sold. The cost side follows a similar pattern; as a rule of thumb, 80 percent of the costs are engineered in during product development (Blanchard 1978; Cooper and Slagmulder 1997).

This paper examines practices other than target costing that high-technology companies use to manage costs during product development and provides tentative explanations for the desirability of these practices. These practices manage costs during product development but around the development team rather than inside it as target costing does. Following Young's (1999) classification of field research, the paper also intends to "raise new research questions."

Moving cost management efforts from the production stage to the product development stage translates into larger profits because cost reduction advantages accrue from the first unit. It also enables companies to deploy R & D resources to more innovative ideas, instead of modifying existing designs to reduce costs. Unless new knowledge about the technology or the market is gathered or new components become available, cost reduction projects after product introduction can be interpreted as quality problems (Anderson and Sedatole 1998; Carr and Tyson 1992). These cost reduction efforts can be compared to the costs associated with the rework of finished goods in manufacturing settings (Cole 1998). Finally, managing costs during the development stage--while the design is still fluid--is usually easier and cheaper than after the product is introduced (Ulrich and Eppinger 2000). Thus, managing costs during product development emerges as an important process to increase the profitability of future products. But product development projects face competing demands, and in some instances, focusing the attention of team members on product costs during product development does not generate the highest return.

DIFFICULTIES IN MANAGING COSTS DURING PRODUCT DEVELOPMENT

Two forces help explain the difficulty of managing product costs during the development phase. First, technology challenges, fast time-to-market demands, and the complexity of managing knowledge located in different places inside and outside the organization limit the attention that product development teams can devote to cost considerations (Koga 1999). Cost reduction initiatives often get postponed until the product reaches the manufacturing stage, when price pressure from the market and the need to keep attractive margins redirects attention to costs.

The second force is the complexity of modeling the cost impact of product design decisions on shared resources such as logistics, customer support, or quality departments (Cooper and Kaplan 1997). Without appropriate models of cost behavior, design decisions to lower the costs for each particular product may lead to high overall costs for the organization. But sophisticated cost models that encompass these cost externalities, though theoretically possible, are much harder to translate into practice. Figure 1 maps these two forces.

[FIGURE 1 OMITTED]

Target costing (Koga 1999; Ansari and Bell 1997)--the most popular management process to keep the cost element of the profit equation in mind during product development--appears to be more effective when product cost is very important to the success of the product and when modeling cost behavior at the organizational level is simpler. Target costing relies on adequate cost models and demands significant attention to cost criteria. As cost models become more complex and engineers focus their efforts on solving cutting-edge-technology problems under demanding time and budget constraints, the benefits of target costing may be less significant. Table 1 describes the potential limitations that affect target costing as we move out of the lower left corner of Figure 1.

A leading supplier of manufacturing equipment for integrated circuits (chips), one of the companies in our study, illustrates the tension between the importance of cost considerations in product development and the difficulty of managing them during this process. Because the wellspring for the technology of this company is quantum physics, product development teams focus on solving puzzles involving atoms and electrons. In addition, customers demand tight development schedules. When manufacturers develop a new chip, they define a specific date for selecting the equipment used to manufacture the new chip. Meeting this time window is very important and imposes additional pressure on the development team around time-to-market. On top of the technology and time demands, development teams work with limited resources and tight development budgets. Even if cost targets and cost models exist, product costs are not at the top of the engineers' list; customers will pay for having the latest technology on time. But as the product matures and new competitors enter the market, margins erode and reducing costs becomes paramount. Cost reduction teams often discover cost reduction opportunities missed during the development stage that are typically more expensive to pursue at the manufacturing stage.

THE DESIGN OF THE FIELD STUDY

The conclusions presented in this paper come mostly from two sequential field research studies that investigated 12 divisions of seven companies in the medical devices industry and eight computer hardware companies. Target costing may be of limited application in a diverse set of industries where product development emphasizes objectives other than costs, and modeling cost behavior is complex. We chose to focus on high-technology firms because their characteristics suggest the need for alternative cost management practices in product development to complement or replace target costing. The paper also relies on field research reports published in the product development and cost management literatures.

The first study pursued two objectives: (1) to identify new management accounting practices, especially how companies addressed the tension between the importance of product costs and the need to...

NOTE: All illustrations and photos have been removed from this article.



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