The document discusses the product development process and base case financial models for new product development. It describes the 5 phases of product development as planning, concept development, system-level design, detail design, testing and refinement, and production ramp-up. It also explains what a base case financial model is and how it is used to estimate the timing and magnitude of cash flows, calculate net present value and internal rate of return for a new product. The document provides an example base case model for the Nespresso coffee system which sells coffee brewing machines and pre-measured coffee pods. The model estimates costs such as development, production ramp-up, marketing, and revenues from machine and pod sales to evaluate the financial feasibility of the

1. Product Development
Process – Economics and
Base Case Financial
Models.
Presented By:
Shivangi Dubey P004
Rupsa Halder P005
Mohit S. Harsolekar P006
13th Jan 2016

2. WHAT IS PRODUCT DEVELOPMENT ?

3. EXAMPLE

4. IMPORTANCE

6. PRODUCT DESIGN

7. IMPORTANT TO UNDERSTAND ?
1) CONTRACT MANUFACTURING
2) CORE COMPETENCY
>Provides potential access to a wide variety of markets
>Increases perceived customer benefits
>Hard for competitors to imitate.

10. PHASE 0 : Planning
PHASE 1 : Concept Development
PHASE 2 : System – Level Design
PHASE 3 : Detail Design
PHASE 4 : Testing and Refinement
PHASE 5 : Production Ramp - Up

11. PHASE 0 : Planning
» Corporate strategy
» Assessment of technology
development
» Market Objectives
» Project mission statement
» Set supply chain strategy
» Research

12. PHASE 1 : Concept Development
» Identify needs of target market
» Generate product concept
» Alternative concepts
» Analysis of competitive products
» Economic analysis

13. PHASE 2 : System – Level Design
» Define product architecture
» Generate geometric layout
» Define functional specifications
of subsystems
» Preliminary process flow
diagram for final assembly
process
» Facilitate make-buy analysis
» Set target costs

14. PHASE 3 : Detail Design
» Complete specification of all parts
» Identification of all standard parts from
suppliers
» Define whole process plan
» Design tooling
» Define quality assurance processes
» Develop marketing plan

15. PHASE 4 : Testing and Refinement
» Construction and evaluation of
prototypes
» Obtain regulatory approvals
» Implement design changes
» Refine fabrication and assembly
processes
» Develop promotion and launch
materials
» Develop sales plan

16. PHASE 5 : Production Ramp - Up
» Train workforce
» Place early production with key
customers
» Carefully evaluate and
identify remaining flaws
» Begin operation of entire
production system
» Product launch and widespread
distribution after transition to
on-going production

17. Economics Involved in
Product Development
Process

19. What is a Base Case Model..??
• A Financial analysis model which consists of
the determination of the inflow and outflow
of cash from all the major activities in the
project simultaneously taking into
consideration the time required for each
activity.

20. Developing a Base Case
Estimating Timing And Magnitude of
Future Cash Flows.
Computing the NPV

21. The Cash Flow is obtained from the
most basic activities..
• Development Costs.
• Ramp Up Costs.
• Marketing Costs.
• Production Costs.
• Sales Revenues.

22. NPV
Net Present Value (NPV) is the difference between
the present value of cash inflows and the present
value of cash outflows.

23. IRR
• Internal Rate of Return
Defined as the interest rate that equates the
present value of an income stream to the
cost of the investment.

24. Time = Money

25. IIR with Different Development cost levels.

27. • Premium brand of Nestle which manufactures and
sells coffee brewers.
• Brews coffee from the premeasured coffee pods
which are also produced by the company in different
flavours and combinations.

28. Net Present Value computation for Base Model

29. • The expected sales are assumed to be spread
cyclically as 20%, 25%, 35% and 20%.
• Developmental Cost is $ 4 Million spread
equally over 4 quarters.
• Production Ramp Up cost expected to be $ 1
Million.
• Equipment and Tooling Costs: 2 million
upfront, then 1/2 million a year and scale up
with volume of machines sold.

30. • Marketing expense calculation: Nestle's
expense is $17,395 M.
• Nespresso will contribute nearly 4% to
Nestle's sales. Assuming the same 4% for
marketing cost, Nespresso's marketing cost
will be (17,395*.04) =$ 695.8. Per quarter cost
is 173.9.
• Assuming 50% of this is for machines and 50%
for capsules, it is 86.9 for each.

31. Cost and Revenue Base Model.

32. Cost and Revenue of Base Model with Capsules

33. Summary
• Nespresso machines are a base equipment whose
sales gaurantee the sael of the nespresso coffee
capsules.
• Inturn the estimates of revenue generated from
capsules is much higher to that of those
generated from the machine.
• This helps us to take the Go/No GO decisions in
the product development at every crucial stage.
• Financial analysis decides the feasibility of the
product development project as a whole.