Analysis of investment decisions in new product launch - Essay Example

ANALYSIS OF INVESTMENT DECISIONS IN NEW PRODUCT LAUNCH Introduction Launching of a new product is a major investment decision for any corporation and hence needs to be evaluated thoroughly in order to avoid huge financial setbacks. A good number of big and a host of slightly smaller business have, nowadays, become extremely cautious and refined in the manner in which they economically assess key investment decisions concerning substantial fixed assets. This fact has been authenticated by the abundant research studies which document the need felt by companies to appraise the economic viability of the new product and take into consideration various key investment decisions prior to plunging into the relatively new territory (Rayburn, 1981)1. However, there is still a dearth of comprehensive studies concerning the actual investment decisions taken by these large corporate houses, with respect to launching and/ or marketing of new products in the market. Researchers such as Barwise, Marsh and Wensley (1989)2 investigated the role of finance and investment decisions with respect to strategic decision making process. Present research suggests that regardless of the fact that the expenses involved in marketing of assets frequently and to a significant extent, overshadow the analogous lay out of the tangible assets. So far the substantiation of the data gathered, on the basis of past research, overwhelmingly signifies that organizations are far less meticulous / accurate in undertaking financial assessments of their long term advertising or promotional investments than they are for related levels of overheads concerning other new ventures. Undeniably in several organizations barely any considerable effort is made to differentiate between short term and long term marketing expenditure concerning the appraisal of financial investment decision practices, whereby all the marketing actions are being considered as short term, i.e. existing stage, operating cost in line with practical economic accounting principles. This is predominantly factual in the significantly essential area of rationalizing the improvement and launch of new products in the market. The preliminary stages which include: research and development activities concerning the product / service, marketing research, conducting test marketing of the new product as well as pre-launch promotion; which are habitually assigned from a revenue budget and accordingly may be managed in the same manner as a usual, standard current expenditure items. In such organizations, any major expenditure involving a huge capital investment, the new venture can be contemplated to be executed only when the key strategic decision of investing in real fixed assets is accomplished. Investing in developing a sustainable competitive advantage: Decision analysis offers a constructive outline and methodology for coherent decision making, particularly in situations where the consequences are vague and uncertain.Various marketing activities must be thoroughly assessed and administered as tactical investment decisions, regardless of the manner in which they are handled for the purpose of financial accounting. Any major financial investment includes incurring huge expenditures, at present, with the anticipation that, in the future, considerable financial gains will be created which will compensate all the expenses initially made, prior to the product launch. In case of the time span during which the projected proceeds / cash inflows are expected to be received, is slightly longer as compared to the current financial year, it is imperative for the organization to consider analyzing of appropriate financial assessment. This is mainly crucial in cases where such investment expenditures are considered as high risk, on account of the unpredictability associated with the impending results. If the accomplishment of these investments is also vital to the realization of the organizations long term goals and its general mission, the requirement for a comprehensive monetary assessment and organization procedure is extremely vital. In several industries, aspects such as these are most apparently dominant in the fundamental marketing investments which are being made in creating brands, venturing into newer territories, capturing new markets, launching new products as well as developing new prospective channels of distribution such as the Internet, etc. Hence it is imperative that these high risk long term investments are monetarily appraised by utilizing the most modern and up to date methods accessible. Several organizations would routinely compute a full discounted cash flow for even one of most uncomplicated and comparatively minute investment on manual labor saving the equipments in their industrial units or their other similar operational units3. Critical Investment Decisions Any type of strategic investment entails a detailed analysis of its long term prospects as well as its economic viability. With respect to organizations, it commences with a decision to develop a wide-ranging long term development agenda, which is followed by a detailed analysis of the various short term measures, for instance, premeditated obsolescence, which is done with a view to acquire an edge over their corporate rivals. The duration of the long term goals, is estimated on the basis of the time sphere relative to the industry concerned, which lies anywhere between a few months (in case of some of the most cognizant segments) to over a decade in case of those sectors which are involved in manufacture and sale of huge intricate products such as aircrafts and steamers, for instance. The key investment decision involves an accurate analysis of the likely expenditure involved. The budgets for both the long term as well as the short term agenda of the organizations contemplating new product launch include: Comprehensive market research Technical research Development engineering i.e., renewing manuals in the service sector Type of plant i.e., whether by flow process or by conversion Recruitment and employment of new specialists and technicians Allowance for slippage Reduction of profit on existing products or services following the promoting of new ones4 The preliminary step involved in analyzing a prospective marketing investment or rather any strategic investment decision for that matter, includes a set of pre-determined business goals. These business goals can be further sub divided into a smaller sub group which influences the precise marketing goals and against which the essentials of the projected marketing overheads can be economically assessed. In the case of auxiliary business segments, their own individual goals must be accommodated / incorporated within the overall goals of the company. Every single business unit which exists within the auxiliary business segment, must have its own individual business goals which can further be incorporated with the goals of the auxiliary business segment, i.e. a chain of command of well-matched business goals must be created. During the process of decision making concerning launch of a new product, the management concerned must take into consideration several key factors i.e. they must determine that the new product fulfills all the criteria laid down by the individual sub units which exist within the organization, before the marketing activity is duly authorized. The basic cause of failure of a new product in the market is largely on account of negligence of the management in appropriately analyzing the investment decisions involved. The management must be held accountable and be able to justify the huge investments being made, regarding the accuracy of the research conducted, as well as its economic viability. No amount of product promotion or extensive marketing campaigns can come to the organization’s aid, if the investment decisions are not thoroughly analyzed. The financial explanation for any long term investment decision must be executed and spread evenly through out the complete duration of the investment so made since, in case if monetary returns oscillate significantly over this extensive period, it is irrational to endeavor any opinion regarding its performance, particularly over relatively shorter periods by means of only one single uniform appraisal. For reasons such as these, the technique universally adopted by approximately 93% of organizations (Reece and Cool, 1978)5, known as the return on investment (ROI), is inappropriate considering the difficulty involved in the accounting problems of describing the key terms ‘return’ and ‘investment’ and also since the technique tends to exaggerate the short term to the omission of any long term repayment. The IRR (or the Internal Rate of Return), or the PI (i.e., Profitability Index) which is frequently used in discounted cash flow techniques, and which take into consideration the time value of money, are other such crucial factors which are of a greater consequence, to the investment decisions, taken by organizations while launching a new product or while making a heavy investment, for satisfying its overall strategic objective. The monetary explanation of marketing investment decisions is an indispensable prerequisite for ascertaining that these key tactical resolutions, when employed, are effectual in accomplishing the predefined goals of the organizations. This signifies that there should be a superior division of financial reporting and management accounting systems which may enable the managers to have access to all the critical information required to assess their investment decisions and appraise their long term validity as well as viability, and also ascertain that they are not, in any way whatsoever, inhibited by the short term cautious necessities of external financial reporting. Appendices Appendix 1: Source: Hodgkinson, G. P., Starbuck, W. H., (2008). The Oxford Handbook of Organizational Decsion Making, Oxford University Press, Pp. 42 References: Barwise. P.. Marsh. P.R. and Wenslev. R. “Must Finance and Strategy Clash?“, Harvard Business Review, September-October 1989, 85-90 Brooke, M. Z., Mills, W. R., (2002). New Product Development: Successful Innovation in the Marketplace, Routledge, Pp.211 Hodgkinson, G. P., Starbuck, W. H., (2008). The Oxford Handbook of Organizational Decsion Making, Oxford University Press, Pp. 42 Michael John Baker, (2003). The Marketing Book, Butterworth - Heinemann, Pp. 511 Ravburn. L.G. “Marketing Costs - Accountants to the Rescue”, Management Accounting (US), January 1981, 32-41 Reece. J.S. and Cool. W.R. “Measuring Investment Centre Performance”, Harvard Business Review, May- June 1978, 28-46 Read More