Article 1

Global Product Development

Steven D. Eppinger and Anil R. Chitkara

Many manufacturers have established product development activities in different countries around the world. Yet their senior managers often struggle to tie those decentralized organizations into a cohesive, unified operation that can efficiently drive growth and innovation. New empirical frameworks may help unlock practices with which managers can deploy well-coordinated global product development strategies.

Globalization pressures have begun to have a major impact on the practice of product development across a wide range of industries. A new paradigm has emerged whereby companies are utilizing skilled engineering teams dispersed around the world to develop products in a collaborative manner. Best practice in product development (PD) is now rapidly migrating from local, cross-functional collaboration to a mode of global collaboration. Global product development (GPD) therefore represents a major transformation for business, and it applies to a broad range of industries.

The objective of this article is to present frameworks that can help companies address various strategic and tactical issues when considering adoption of GPD. The concepts have been developed mainly through detailed discussions with managers at more than 100 companies in 15 countries in North America, Europe and Asia. Some data are from a recently completed study on GPD that product development company PTC has conducted with BusinessWeek Research Services, interviewing and surveying more than 1,100 engineering managers worldwide.

In our discussions with managers, many have found the ideas, frameworks and perspectives presented in this article to be helpful in addressing the transformation to global product development and its implementation today. There is no blueprint, but senior managers can more effectively plan for global product development and take fuller advantage of its promise by examining the various strategies, staged approaches and key success factors described herein and adapting those insights to their own unique set of circumstances.

Several best practices in product development evolved through the 1980s and 1990s. By 2000, it had become widely accepted that highly effective product development included co-location of cross-functional teams to facilitate close collaboration among engineering, marketing, manufacturing and supply-chain functions. Co-located PD teams could concurrently execute the range of activities involved, from understanding market and customer needs, through conceptual and detailed design, testing, analysis, prototyping, manufacturing engineering and post sales technical product support/engineering. This concurrent engineering practice resulted in better product designs, faster time to market and lower-cost production. PD activities were generally located in corporate research and development centers, which maintained linkages to manufacturing sites and sales offices around the world.

By contrast, the emerging best practice in PD today utilizes a highly distributed, networked development process facilitated by a fully digital PD system. Global product development combines certain centralized functions with some engineering and related PD functions distributed to other sites or regions of the world. This practice may involve outsourced engineering work along with captive offshore engineering facilities. The benefits of GPD are beginning to become clear. They include greater engineering efficiency (through utilization of lower-cost resources), access to technical expertise that is distributed internationally, design of products for more global markets and more flexible PD resource allocation (through use of outsourced staff).

The academic literature on global R&D offers a rich variety of perspectives, using terms such as virtual teams, distributed development, international R&D and other variants. Oliver Gassmann and Maximilian von Zedtwitz1 present several alternative models for organization of global teams and a list of factors affecting choice of locations for GPD operations, along with a literature review on managing GPD teams. Jose Santos, Yves L. Doz and Peter Williamson2 argue that a truly global innovation process uses global R&D sites both to gain access to foreign technology expertise and to access foreign market knowledge.

Conventional product development includes co-location of cross-functional teams. By contrast, best practice in PD today

CONVENTIONAL PRODUCT DEVELOPMENT

Largely co-located teams

Uses engineering located in existing engineering centers

Uses a combination of digital PD tools and conventional paper-based processes for engineering

GLOBAL PRODUCT DEVELOPMENT

Globally distributed teams

Takes advantage of engineering in multiple geographic locations, including low-, medium- and high-cost regions

Uses an entirely digital PD process to facilitate distributed, collaborative engineering features a highly distributed, networked development process facilitated by a fully digital PD system.

However, much of the academic discussion of GPD has been about what it is and why it should be done. There has been less focus on frameworks that managers can use to decide how to implement their decisions to adopt GPD as a corporate practice. Current views of globally dispersed PD are muddied by anachronistic assumptions about labor rates, vagueness about the value of intellectual property, outdated ideas about a company's core competencies and more. As executives make GPD a more strategic priority, the implications of not getting it right may have a significant impact on their businesses. It is important, therefore, to reframe the GPD discussion in light of today's market dynamics, enabling tools and underlying infrastructure. We extend popular definitions of GPD by characterizing it as a single, coordinated product development operation that includes distributed teams in more than one country utilizing a fully digital and connected, collaborative product development process. This may include third parties that provide engineering or design capacity, or it may be an entirely captive, company-owned operation.

Over the past five years, many industries have seen a rapid shift to global product development. In a 2003 Deloitte Research study of North American and Western European manufacturers, 48% of the companies surveyed had set up engineering operations outside of their home region. In fact, 22% of the North American manufacturers already had located engineering functions in China, as did 14% of the Western European manufacturers polled. In just the last two months of 2005, Microsoft, Cisco and Intel each announced major investments in product development operations in India totaling $3.8 billion, according to the companies' press releases.

As noted in the literature, global R&D networks have been utilized for many years. Two relatively recent factors, however, are now making feasible a truly integrated, yet distributed PD process. First, product design processes today are fully digital and completely networked. Computer design tools are the norm; high-bandwidth networks are ubiquitous. As author and New York Times columnist Thomas Friedman writes, such a digital business process enables its distribution across the globe in today's "flat world."4 Second, many more businesses now have experience with global collaboration. Throughout the 1980s and 1990s, many U.S., Western European and Japanese manufacturing companies located production operations in regions where labor cost much less than at home. Such organizations now have deep experience with globally distributed operations and suppliers. Many multinationals have also grown by acquisition of regional companies whose operations have since been integrated. Most manufacturers today know how to collaborate across global supply chains, and this experience applies directly to collaboration in GPD.

Companies are building their GPD capabilities today for any of four reasons:

Lower Cost

Many companies strive to reduce PD operating costs by redistributing activities to take advantage of labor arbitrage or to access more affordable capabilities. There is a huge pool of engineering talent in low-cost regions such as China, the Czech Republic, India and Vietnam and in medium-cost nations including South Korea, Hungary, Poland and Taiwan. (We consider "low-cost" to be 10% to 20% of the equivalent engineer's salary in the United States, and "medium-cost" to be 20% to 50% of U.S. wage rates.5)

Improved Process

Many engineering managers can recall the key lesson learned from both the 1980s emphasis on design for manufacturing (DFM) and the 1990s emphasis on time to market (TTM). This lesson was that co-locating development teams particularly the design engineers with the manufacturing engineers yielded both the cost benefit of DFM and the agility benefit of TTM. The prospect of moving design engineering to global manufacturing locations can be attractive again today.

Global Growth

Locating some PD activities in selected international locations can give companies access to critical information about markets in those regions. By using local engineers, companies make direct connections with potential new markets.

Technology Access

Companies are using GPD to develop integrated PD processes that include engineers in regions where critical new technology has been developed and where technical experts reside.

Although cost remains the primary reason that many companies initially consider GPD, it is technology, process innovation or revenue growth that drives a GPD strategy. This move from cost to growth and innovation has been a major shift in stated GPD objectives over the past two to three years.

GPD has been adopted across many industries and in many regions around the world. Some industries and regions, however, seem to be embracing it more quickly than others. A recent PTC/BusinessWeek Research Services survey of 1,157 engineering managers at manufacturing organizations across the United States, Europe and Asia found that 70% of the companies were either planning or executing GPD.

It is not surprising that software developers adopted GPD quickly. By the early 1990s, as the Internet began to enable global connectivity, leading companies were taking advantage of development operations in several countries. More recently, companies such as Microsoft, Accenture, Siemens, Intel, Hewlett-Packard and Toshiba have located software development operations in Bangalore. We have also seen the rapid growth of outsourced software development and support with Indian suppliers such as Infosys, TCS, Wipro, Satyam, HCL Technologies and others. Software development now represents approximately one-third of India's service exports.7

Electronics manufacturers led the way to production outsourcing, and most major manufacturers are now taking advantage of the density of electronics design expertise in the Far East. Their GPD efforts are not limited to lower-cost regions. Eastman Kodak recently created its Digital Product Center in Japan to drive product engineering for its digital cameras, under the assumption that access to highly skilled electronics and optics engineers was worth the premium wages.

Traditional manufacturing industries are close behind. Blue-chip names including Alcoa, General Electric, Schneider Electric, General Motors, Toyota and Siemens appear on new development centers in China, India, Thailand, Mexico, Russia and other countries that have an abundance of engineering talent.

American companies are rapidly embracing GPD. U.S. businesses have a strong culture of global collaboration and thrive on an entrepreneurial spirit that focuses resources on high-value opportunities. Their counterparts elsewhere face more stringent regulations with regard to changing the size and composition of their workforce. German manufacturers are resisting the loss of "quality German engineering" for as long as possible. Japanese business culture includes strong bonds of loyalty between employers and their workers, and thus a reluctance to move engineering work to lower-cost regions. However, substantial pressures for global growth and leaner operations dictate that the practice of GPD is growing in every high-cost country.

China is perhaps the world's fastest-growing manufacturing region, and many multinational corporations are locating offshore R&D facilities in China, often alongside their own production sites. At the same time, China-based businesses aim to become more global. While most still do all their engineering (and production) in China, some are taking advantage of highly experienced engineers in the West to develop new technologies and to help connect with international markets. Haier one of China's largest manufacturers of electronics and home appliances, with exports of more than $1 billion now has an R&D center in New York state as well as a manufacturing plant in South Carolina, both paying wages on an order of magnitude greater than in China. These operations have allowed Haier to connect with American consumers and retailers, understand American lifestyles and design products such as refrigerators, washers and wine chillers that Americans are now buying.

India is known as a source of experienced outsourcing partners for engineering work. In recent years, approximately one million IT, software, business process and engineering services jobs have been created in India, ranging from call center and CAD drawing work to patent research and tooling design.8 Having experienced success with outsourcing such jobs, many Western businesses are now establishing their own offshore R&D facilities in India.

Some of the most impressive companies in medium-cost regions have adopted a hybrid approach to GPD. In South Korea, for example, an effective GPD strategy takes advantage of low-cost engineering (co-located with production in China) for certain functions; uses limited amounts of higher-cost engineering in the United States or Europe for access to the latest technologies and key markets; and still keeps much of the engineering process at home in Korea. Hyundai Motors is an excellent example. The company does most of its engineering work in Korea, but its GPD strategy calls for tapping engineering skills worldwide. The automaker has established operations in the United States for engine calibration and testing (Michigan), vehicle styling (Southern California) and high-temperature testing (California desert). Hyundai also operates research centers in Frankfurt (for diesel engine technology) and in Tokyo.

Other medium-cost regions are attractive due to their proximity to and strong ties with high-cost countries. For example, Eastern Europe is an increasingly appealing location for Western European companies to set up operations either captive or third party. Alcatel, the French engineering conglomerate, inaugurated its R&D center in Bucharest in mid-2005 to support its advanced rail control systems business in Romania, the Balkans and the Commonwealth of Independent States (the former USSR). Alcatel has had a presence in Romania since 1991, with nearly 1,000 people in production, installation, maintenance and marketing.

Globalizing product development is an evolution that typically takes place over a number of years. Many companies have at least some experience with global operations and distributed engineering processes before they decide to formally develop a GPD strategy. These experiences may derive from the acquisition of a business that has PD resources. They may also be the result of collaboration with manufacturing engineers located near manufacturing facilities or with outsourced design partners used for specific projects.

Questions

For 11 to 15, please limit your answers within the information found in this article. You do not copy and paste information fromthe aricle.

11. (2 Marks) Define global product development (GPD)?

12. (4 Marks) Compare the new practice of global product development with the conventional approach?

13. (2 Marks) Why is the GPD Transformation Happening Now?

14.(4 Marks) Why global product development face challenges?

15.(1 Marks) Which sector (or company) is leading in GPD?

16. (4 Marks) After taking this course, do you believe that this is the leading way to develop products and why or why not? This one only needs your personal opinion.