Business Analysis
The output of the business analysis stage is a prediction about whether the product is likely to be profitable or not if ultimately produced.
LEARNING OBJECTIVES
Demonstrate knowledge of the components included in the business analysis stage of product development
KEY TAKEAWAYS
Key Points
- The first step in the business analysis process is to examine the likely demand for the product, as well as possible licensing of technologies associated with the product.
- A cost appraisal is also carried out, which involves looking at development costs, management costs, operating costs, set-up costs, and marketing costs.
- Based on the above costs, as well as the level of competition and customer feedback, a selling price and break-even point can be identified.
Key Terms
- Fourt-Woodlock equation: a market research tool to describe the total volume of consumer product purchases per year based on households which initially make trial purchases of the product and those households which make a repeat purchase within the first year.
Business Analysis
After the initial screening stage, the number of viable proposals available to progress to the next stage will have decreased significantly. However, before the company begins the development of prototypes, there is one more evaluation process that must take place, and this is the business analysis stage. In this stage, additional information is gathered on the remaining innovations in order to decide whether the significant costs that development will require are justified.
Business Analysis: Financial ratio analysis allows an observer to put data provided by a company in context. The observer can gauge the strength of different aspects of the company’s operations.
The primary focus of the business analysis stage is to determine whether the product idea will ultimately be profitable or not. However, while this is the primary consideration, it is not the onlyconsideration. Social and environmental issues are frequently considered as well, particularly if there are certain regulations that the company must adhere to in these realms.
The first step in the business analysis process is to examine the projected demand for the product. While the major source of revenue would be product sales, another possible significant source of revenue is the licensing of the technology generated as a byproduct of the given product. Clearly this is not applicable to all products, but for certain classes of products, this can be a very significant source of income.
A complete cost appraisal is also necessary as part of the business analysis. As you can expect, it is difficult to anticipate all the costs that will be involved in product development. However, the following cost items are typical:
- Expected development cost, including both technical and marketing R&D
- Expected set-up costs (production, equipment, distribution)
- Operating costs that account for possible economies of scale and learning curves
- Marketing costs, especially promotion and distribution
- Management cost
Based on these costs, the business analysis stage will estimate the likely selling price. This figure will also depend on the level of competition, as well as customer feedback. Sales volumes must also be estimated based on the size of the market (using, for instance, the Fourt-Woodlock equation). Ultimately, profitability and the estimated break-even point can be derived. Customers base buying decisions on a personal value equation where the value is calculated by weighing the cost versus the benefits. This relates to the viability and feasibility of products that companies are considering to add to their line.