Using System Dynamics to understand the effects of product development on profitability in SME's: A Case Study of Kuwait
Introduction
Product development that meets a consumer’s needs is a very important aspect of business growth and gives a business a competitive edge in the rapidly changing global market. Many companies are focused on meeting the consumers’ needs by investing in product development and innovation. By implementing a pull or push strategy the focus for these companies has shifted to either educating the consumer on why they require the company’s product or identifying the consumers need and tailoring their products to suit this needs. This has in turn shifted the focus of the company to be production oriented without considering how new product development is affecting their company’s production process. This particularly affects SME’s since they do not have the same resources to constantly produce new products as compared to their larger competitors in the global market. As a result there is constant pressure for an SME to invest in product development but they are however faced with various challenges like limited resources, lack of adequate skilled labor and insufficient resources required for successful development of a product.
In this very dynamic business environment companies attempt to create products and services that exceed the customers’ expectations. According to Meivorich (2006) a company has to find a balance between their product features and customer needs and expectations, as well as the quality of a design in the market and the external aspects of quality. Mascitelli (2006) stated that new product development process can be classified into three dimensions that is: product management costs, the speed of launching a new product onto the market and the market price a product reach on the market. This study aims to identify the various costs that are associated with new product development for an SME and the implications they have on the company’s profitability whether negative or positive. This will be accomplished through a thorough analysis of some of the theories talked about in NPD such as Advanced Product Quality Planning (AQDP), Design for Six Sigma (DFSS) and Stage gate. In addition to theories, the study will analyze established SMEs like, Kuwait Flour Co. and Americana in order to acquire the identify their Best practice in order to establish whether the science adopted in this study can be applicable to other organizations worldwide.
Problem Definition
Understanding the product lifecycle is a very important aspect of product development. This does not however provide a basis for one to understand the full effects of the product design and development until it is at its final stage. Dimitrov (2006) established the fact that the impact development on both the company and the product itself are much greater during the final stages of its lifecycle. This means that a company that is willing to invest in product development faces greatest risk since they might fail to meet consumer expectations and as a result their product may fail despite the costs acquired in researching and designing the new product. This is why the study targets this final stage of the product lifecycle by focusing on the effects of product development on SMEs profitability. The study will use system dynamics to gain a deeper understanding on how the process of developing a new product affects the profitability of an SME with limited resources and facing great competition from larger corporations.
Research Objective
The main objective of this research is to gain better understanding on how product development in an SME affects its overall profitability. By using System dynamics the study will try to obtain a greater understanding on the relationship between product development and profitability of an SME based in Kuwait.
Research Methodology and Design
The study will encompass the use of various methods in order to acquire all the required information required to draw conclusions. This will include:
Literature Review
This will involve an analysis of various literature works that have been published on the selected problem. There is however very little literature available that focuses on the product development of SMEs and its implications on a company hence the selection of this topic to research on. The review will mostly involve the analysis and understanding of various theories that have been developed and applied in product development. It will also include a deeper understanding of how to use systems dynamics to get the required result as in our situation.
The study will then apply a longitudinal case study methodology in order to facilitate information gathering among the staff of the SME’s in Kuwait. The selection criteria used to select these companies includes:
- The company has to be small or medium sized according to its scale of production with not more than 50 employees.
- The company should be engaged in traditional production and manufacturing of goods. This will make it easier for the researcher to observe the impact of new product development easily in the market and the company’s profitability.
- The company’s directors should be willing to participate in the study. Any type of resistance may hinder the results obtained during the study.
THEORETICAL FRAMEWORK
There exists a direct correlation between a firm’s profitability and new product development (Atuahene-Gima, 2010; Sinkula, 2009). This research affirmed the fact that firms that have invested in new product development are significantly more successful than their non-innovative counterparts. Among the factors that can be used to identify the success of a new product, its profit is considered to be the surest way (Montoya-Weiss and Calantone, 1994). However before the success of a product there are various factors that are essential in its development process and these factors have a major effect on the performance and thus the profitability of a product (Griffin, 1997b; Henard and Szymanski, 2001; Jayaram and Narasimhan, 2007; Montoya-Weiss and Calantone, 1994; Smith and Reinertsen, 1998; Swink et al., 2006).
Various studies have also set out to identify the keys to success for innovations strategies in small and medium sized firms (Riedle, 1989; Dogson and Rothwell, 1991; Bowen and Ricketts, 1992). This success factors have further been established to have a correlation with new product development and innovation in an SME considering various other variables (Keizer et al., 2002). There has been numerous research based on what these factors are and how they are brought about during the new product development process in an SME, there is however little research on how these effects affect the SME’s profitability. Understanding this particular aspect will be the key to a firm predicting the performance of its product with greater accuracy and also the firm will be able to understand the whole lifecycle of a new product in the current competitive market.
CONCEPTUAL FRAMEWORK
P
Assumptions
- There is a direct correlation between new product development and products profitability for an SME.
- The NPD process has either negative or positive effects on a company’s
Limitations
The study is focused on the effect of NPD on an SME’s profitability; the results obtained might however not lack some accuracy since a company’s profitability is affected by many other internal and external factors within the business environment and not just the NPD process.
Most of the SME’s used in the case study have limited resources as compared to their larger competitors. This will act as a major hindrance to the company since limited resources means that the SME is not able to produce at maximum capacity hence hinder the accuracy of the model developed for future use.
Research Questions
The research questions have been structured to support the main objectives of this thesis. They have been engineered to provide relevant data that is easy to understand and accurate based on the research topic. These questions are:
- What are the effects of new product development on an SME?
- Does the NPD process affect the profitability of an SME?
- What impact do these effects have on the SME’s profitability?
- How do the effects of NPD affect the SME’s profitability either positively or negatively?
Hypotheses/Propositions
H1. The following effects of product development for NPD affect an SME’s profitability a) increased market share b) Improved product quality c) Increased or reduced production costs
H2. The profitability of an SME is directly affected by the effects that are as a result of product development in a firm
Data Collection
The data will be collected using various tools that will be based on the type of information required. Secondary data will be used to gain further understanding of the topic based on other literal works published by various authors. The study will also be based on a field study that will be conducted on the two organizations chosen. The field study will involve observation of the SME’s routine through the period of 5 months to observe from the launch of a product to it penetration into the market. The study will also include interviews with the staff and management teams within these organizations.
TIMELINE
|
Time prior to submission deadline |
Task |
|
2 weeks |
Develop preliminary research questions and bibliography Writing the research proposal |
|
4 weeks |
Research design and methodology |
|
6 weeks |
Data collection |
|
6 weeks |
Data analysis and findings |
BIBLIOGRAPHY
Baker, W. E., & Sinkula, J. M. (2009). The complementary effects of market orientation and entrepreneurial orientation on profitability in small businesses*. Journal of Small Business Management, 47(4), 443-464.
Bowen, A., & Ricketts, M. (1992). Stimulating innovation in industry: the challenge for the United Kingdom. Kogan Page.
Dimitrov, M., Simov, A., Stein, S., & Konstantinov, M. (2007, June). A bpmo based semantic business process modelling environment. In Workshop on Semantic Business Process and Product Lifecycle Management (SBPM)(Vol. 251, pp. 101-104).
Edwards, T., Delbridge, R., & Munday, M. (2005). Understanding innovation in small and medium-sized enterprises: a process manifest. Technovation,25(10), 1119-1127.
Griffin, A. (1997). PDMA research on new product development practices: Updating trends and benchmarking best practices. Journal of Product Innovation Management 14 (6): 429–58.
Henard, D. H., & Szymanski, D. M. (2001). Why some new products are more successful than others. Journal of marketing Research, 38(3), 362-375.
Henard, D. H., and D. M. Szymanski. 2001. Why some new products are more successful than others. Journal of Marketing Research 38 (3): 362–75.
Jayaram, J., and R. Narasimhan. 2007. The influence of new product development competitive capabilities on project performance. IEEE Transactions on Engineering Management 54 (2): 241–56.
Keizer, J. A., Dijkstra, L., & Halman, J. I. (2002). Explaining innovative efforts of SMEs.: An exploratory survey among SMEs in the mechanical and electrical engineering sector in The Netherlands. Technovation, 22(1), 1-13.
Kim, N., & Atuahene‐Gima, K. (2010). Using Exploratory and Exploitative Market Learning for New Product Development*. Journal of Product Innovation Management, 27(4), 519-536.
Montoya‐Weiss, M. M., & Calantone, R. (1994). Determinants of new product performance: a review and meta‐analysis. Journal of product innovation management, 11(5), 397-417.
Rothwell, R., & Dodgson, M. (1991). External linkages and innovation in small and medium‐sized enterprises. R&D Management, 21(2), 125-138.
Roy, R., & Riedel, J. C. (1997). Design and innovation in successful product competition. Technovation, 17(10), 537-594.
Swink, M., S. Talluri, and T. Pandejpong. 2006. Faster, better, cheaper: A study of NPD project efficiency and performance tradeoffs. Journal of Operations Management 24 (5): 542–62.
