Sub: BusinessManagement Topic:
New Product Launch
A product launch should be evaluated using a business case that is built around the future expectedcash flows. However, from a portfolio perspective there are some factors that must be considered inforecasting the future expected cash flows.
As new products arrive, the revenue and costs involved should not be looked at in isolation.There can be ripple effects across the business where a new product cannibalizes sales fromexisting products.
, the launch of a new car in a range can take sales away fromexisting models. The loss of revenue from the other products needs to be included in thecalculation of the benefits derived from the new one.
Creeping fixed costs
With an established portfolio of products it might be reasonable to expect that new productswill be accommodated within the existing head-office infrastructure and that economies of scale will result in extra gross profit without any extra indirect fixed costs. For smallincrements in scale this may be true, but for substantial changes head-office functions willalso need to grow, which will mean higher indirect costs. Although some economies of scaleare likely to occur, an allowance for costs creeping up should be made in calculating theviability of the new product.
In building a product range it can be a mistake to bring in cheaper or lower grades of productto widen the appeal to a greater number of customers. The danger is that the cheaperproduct may have lower margins, resulting in a lower profit from customers who would have