© 2000 American Accounting Association
Vol. 14 No. 3
Submitted: February 1999
Accepted: March 2000
Corresponding author: Julie H. Hertenstein
Performance Measures and
Management Control in New Product
Julie H. Hertenstein and Marjorie B. Platt
Julie H. Hertenstein and Marjorie B. Platt are both Associate Professors
at Northeastern University.
SYNOPSIS: An exploratory study was conducted to examine management control
issues in new product development (NPD). The study focused on three manage-
ment control aspects that NPD managers considered important: (1) position of NPD
in the firm’s organizational structure; (2) NPD process; and (3) NPD performance
measures. Primary data were collected from NPD managers via interviews, work-
shops, and a questionnaire. For each management-control aspect studied, we ex-
amined current practice, recent changes, and how the control links to strategy.
The NPD function reported fairly high in the organization. The need to integrate
NPD and strategy encouraged higher reporting levels, and shifts in reporting from
engineering to marketing. The need to integrate NPD and strategy also drove the
addition of NPD/strategy steps into already well-defined, phased NPD processes.
However, NPD/strategy integration was not well reflected in performance measures.
The firms studied used varied financial and nonfinancial performance measures, yet
relatively few firms reported that their performance measures reflected key aspects
of their strategies. NPD managers generally expressed dissatisfaction with the per-
formance measurements, and firms appeared to be searching for more effective
Data Availability: Available upon request from authors.
The new product development (NPD) process transforms concepts into commercially
viable products; it is thus critical for strategy implementation and should be closely linked
to business strategy. NPD is a key upstream activity in manufacturing businesses,
The authors gratefully acknowledge the helpful comments of Eugene Imhoff (editor), Margaret Abernethy,
Jean Bedard, Germain Böer, Anthony Hopwood, Joan Luft, Mario Maletta, Tim Rupert, Alice Sapienza,
Peter Tiessen, participants at the Northeastern University Accounting Group Research Seminar, and three
anonymous reviewers. Funding for this research was from Northeastern University and the Design Man-
agement Institute. Finally, we thank the president of the Design Management Institute, Earl Powell, for his
continued support of our research.
304 Accounting Horizons/September 2000
preceding downstream manufacturing, sales, and distribution activities. As the follow-
ing example suggests, NPD is critically important to a firm’s financial success.
Yokogawa Electric is a $1.7 billion-a-year manufacturer of industrial testing and mea-
suring equipment headquartered near Tokyo. Facing difficulties, the company was forced
to improve its financial performance. They scrutinized their products, including an in-
dustrial recorder used to track temperature, pressure, and flow rates in process indus-
tries such as oil refineries. Product designers found that redesigning the cover enabled
them to use a new die-casting method to make the cover in a single piece; before, it
required 31 pieces. They also redesigned the recorder’s knobs, cutting the cost of materi-
als 90% and assembly time by 96%. Overall, production costs fell 45%. (Henkoff 1995)
The Yokogawa Electric example illustrates how NPD can reduce product cost and
improve the firm’s financial performance. Yokogawa Electric’s experience is not unique;
it has been widely reported that 75–90 percent of product costs are determined when
product design is finished (Berliner and Brimson 1988; Shields and Young 1991). Thus,
a firm seeking to control product costs might be expected to focus on upstream NPD
activities. Astonishingly, this is often not the case, as the following example shows.
Managers at General Electric’s Aircraft Engines operations failed to make dramatic
productivity breakthroughs despite many “work-out” (reengineering) projects. That
may have been because engineers looked only at how the engines were built, not how
they were designed. Admits William Vareschi, vice president of finance: “We never,
shamefully, even discussed that. We thought manufacturing productivity was just a
manufacturing problem.” When they changed their approach to focus on product de-
sign, the NPD team redesigned the CF6 engine, eliminating 24 brackets, five valves,
33 feet of cable, 24 tubes, and 70 fasteners. The new CF6 was 81 pounds lighter,
which cut the cost of flying a Boeing 767 by about $150 an hour. (Henkoff 1995)
(emphasis in the original)
This example shows that NPD not only influences the manufacturer’s product costs
and financial performance, but also that NPD can improve the customer’s financial
performance. This can increase demand and further improve the manufacturer’s
Since upstream NPD activities have a significant impact on attaining the firm’s
strategic and financial goals, NPD activities require management control
just as manu-
facturing, distribution, and other downstream activities do. However, extant manage-
ment control system (MCS) literature has not directly addressed this important issue.
Research Questions on NPD, Strategy, and Management Control
In this study, we focus on three questions about each of three management control
system (MCS) mechanisms. Early in the preliminary phase of this research, NPD manag-
ers identified these questions and mechanisms as key concerns requiring attention at
their firms. The three management controls include: (1) positioning NPD within the firm’s
organizational structure; (2) the NPD process; and (3) performance measurement.
Strategy was highlighted not only early, but also throughout the study as a key
influence on MCS for NPD. NPD was viewed as critical for strategy implementation;
“Management control is the process by which managers influence other members of the organization to
implement the organization’s strategies” (Anthony and Govindarajan 1998, 6).
Performance Measures and Management Control in New Product Development 305
in addition, NPD managers viewed NPD as potentially contributing to strategy for-
mation although this potential was not being fully realized. In order for NPD to
make these strategic contributions, management controls had to be structured to
effectively link NPD to strategy. Each of the three mechanisms above can potentially
enhance the NPD/strategy link. Locating the NPD function correctly in the organiza-
tion facilitates the flow of strategic information to NPD for strategy implementation
and from NPD for strategy formation. Structuring the NPD process appropriately
enables strategic goals to be used to select and guide NPD projects. Finally, effective
performance measures can signal strategically important goals that the NPD team
must address, and measure their success in achieving these goals. To the extent
these MCS mechanisms are not effectively linked with strategy, NPD outcomes will
not be consistent with the firm’s strategic goals. Thus, for each MCS mechanism
studied, we asked:
1. What is the current practice?
2. How, if at all, has this control mechanism changed recently?
3. How, if at all, has strategy influenced this control mechanism, or changes to it?
Summary of Key Findings
Our findings are based on interactions with over 75 industrial design managers
involved with NPD over three research phases. These managers work in firms that are
above average or superior with respect to product design and development. The sample
firms primarily manufacture goods representing 14 industries including computer hard-
ware and peripherals, automotive components, durable consumer products, consumer
electronics, other manufactured consumer goods, telecommunication products, and of-
fice furniture and equipment.
Position of NPD in the Organization
We find that NPD managers generally report to a vice president, typically in the
marketing or engineering (R&D) function. The position of NPD is changing; NPD man-
agers are reporting to higher-level executives, and moving to marketing from engineer-
ing. Managers state that the need to link strategy and NPD motivates these changes;
for example, reporting at higher organization levels allows NPD managers to partici-
pate in strategy formation.
All firms studied use a stage-gate™ NPD process (Cooper 1993) in which projects
proceed through specified, sequential stages; at the end of each stage, senior manage-
ment makes “go” or “no-go” decisions about continuing the project’s development. Many
firms in the study report recently revising, formalizing, and documenting the NPD
process, often adding explicit steps to link NPD to the firm’s strategy.
Many firms in the study do not measure NPD performance explicitly; however,
those that do use both financial and nonfinancial measures. Many firms were changing
NPD performance measures. The link between performance measures and strategy
appears weak, although NPD managers want increased emphasis on measuring NPD’s
alignment with strategy. NPD managers are generally dissatisfied with NPD perfor-
306 Accounting Horizons/September 2000
Motivation for Change
Among the firms studied, NPD management controls are dynamic; changes are
occurring in all three management control system mechanisms examined. Numerous
firms’ managers indicate changes were made to better integrate NPD and the firm’s
strategy. Other changes may result from a general concern with how to control NPD
In the next section, we discuss the prior management control research related to
strategy and NPD that framed our investigation and set our expectations. We then present
our three-phased methodology, followed by results and discussion. Finally, we develop
tentative conclusions from this research and identify future research opportunities.
A review of relevant MCS and NPD literature shaped our expectation for two of the
three management control mechanisms identified by NPD managers: (1) the NPD pro-
cess and (2) performance measurement. However, our search of the literature revealed
nothing on the third management control mechanism that NPD managers indicated
was important, specifically, NPD’s position in the organization (level and functional
Thus, we have no explicit expectations regarding the NPD functions’ formal
position in the firm.
NPD typically follows a well-defined process where new product concepts evolve
through several stages before products reach commercial production. Cooper (1993)
identifies 13 distinct NPD stages of what he calls the stage-gate process with senior
management making go or no-go decisions between each stage. Griffin (1997) reports
that just over 60 percent of surveyed manufacturing firms use a cross-functional stage-
gate™ NPD process. Several studies have shown that use of a repeatable NPD process
is related to successful new product outcomes (Cooper and Edgett 1996; Cooper and
Kleinschmidt 1995; Rochford and Rudelius 1997). Further, firms that include an ex-
plicit strategy step in their NPD process are more likely to produce successful new
products (Griffin 1997).
Given the consistent findings about the value of a repeatable NPD process, we ex-
pect firms to use a well-defined stage-gate™ process. We further expect firms engaged
in leading-edge design to include a specific stage that links strategy to product develop-
ment opportunities. The research on NPD process and its effects on new product out-
comes addresses current practice. It is not clear what NPD process changes to antici-
pate, as this is a new area of exploration.
Performance measures are a common control mechanism. They communicate de-
sired outcomes or behavior to employees and are used to evaluate success in achieving
goals. It is generally believed that the best performance measures are those linked to a
firm’s strategy (Kaplan and Norton 1992, 1993; Nanni et al. 1992; Langfield-Smith
1997). In an experimental setting, Griffin and Page (1996) find that subjects rate NPD
While there is literature discussing the preferred or optimal structure of NPD teams (Souder 1987; Larson
and Gobeli 1988; Griffin 1997), there was nothing to inform our discussion of the organizational structural
position of NPD within the firm.
Performance Measures and Management Control in New Product Development 307
performance measures as most appropriate when they are related to strategy. How-
ever, there is little empirical evidence that strategy guides the selection of NPD perfor-
mance measures in practice.
Several studies report that about half of surveyed firms measure NPD performance
(Griffin 1997; R&D Magazine 1995). Most firms that measure performance use a com-
bination of financial and nonfinancial measures (Griffin and Page 1996). Such combi-
nations are used in a variety of settings and are generally agreed to be most appropri-
ate for performance measurement (Abernethy and Lillis 1995; Cooper 1996; Govindarajan
1988; Hertenstein and Platt 1998; Kaplan and Norton 1992, 1993; Simons 1987).
Certain functions such as NPD and R&D are critical to the success of innovative
The performance of these functions is difficult to measure financially because of
the long-term nature of the work and the lag between NPD or R&D work and financial
performance in the market (Hertenstein and Platt 1997; Langfield-Smith 1997). In an
empirical study of R&D management controls, Rockness and Shields (1988) found that
financial measures were less useful in evaluation and in determining rewards than in
planning and monitoring activities. Additionally, identifying individual members’ con-
tributions to NPD team financial outcomes is difficult (Milgrom and Roberts 1992).
These factors may partially explain why NPD managers prefer nonfinancial perfor-
mance measures that more directly assess critical strategic dimensions such as cus-
tomer satisfaction, time to market, and product quality (Hertenstein and Platt 1997).
We expect NPD results to be assessed in both financial and nonfinancial terms.
However, we expect NPD managers to want increased emphasis on nonfinancial mea-
sures and decreased emphasis on financial measures due to the lag between NPD work
and product launch and to the difficulty in separating NPD financial results from those
of other functions such as marketing or manufacturing. Further, because Cooper (1984a,
1984b) and more recently Griffin (1997) report that strategic guidance is an important
determinant of success for NPD projects, we expect NPD managers to perceive a fit
between the firm’s strategy and the performance measures that the firm emphasizes.
We obtained the data for this study over an 18-month period from industrial design
managers involved with NPD. We focused on industrial design managers because of their
distinctive skills and contributions to NPD teams. Industrial designers focus on the user’s
interaction with the product—for example, its ease of use—but they bring more to NPD
than user-product interaction. Their cross-functional training enables them to view NPD
from multiple perspectives,
to facilitate group decision making by providing concrete
drawings and models of the team’s conceptual designs, and to help the team find a con-
sensus and build on it (Fujimoto 1991). Thus, industrial design managers are good sub-
jects for a study of NPD management controls because they not only participate on NPD
teams, but also their expertise places them in a unique position to understand and appre-
ciate contributions and perspectives of other team members.
NPD overlaps with the development phase of R&D; however, NPD is distinct from R&D, as employees
from numerous business functions, not just R&D, collaborate to plan, design, develop, and launch new
This cross-functional training includes marketing, manufacturing, process engineering, product engi-
neering, and human factors as well as color theory, graphic composition theory, and visual principles of
design (Industrial Designers Society of America 1997).
308 Accounting Horizons/September 2000
The study’s methodology was evolutionary, proceeding through three sequential
phases: preliminary interviews, an expert panel workshop, and a performance mea-
surement survey. Each phase addressed issues identified as important in the prior phase.
The preliminary interview phase identified three key MCS mechanisms that design
managers and senior managers currently consider critical to NPD. These three mecha-
nisms were then explored in detail in the expert panel workshop. Finally, performance
measurement was investigated further in the last phase due to industrial design man-
agers’ dissatisfaction with this MCS mechanism. During all three phases, we addressed
the three basic research questions of current practice, recent changes and links to strat-
egy. In addition, following each phase, we discussed findings with industrial design
managers to interpret results and clarify information.
Our goal in selecting firms for various study phases was to examine firms consid-
ered above average, if not superior, in industrial design to reveal practices of leading-
edge firms in design and NPD. Firms in the first two phases were hand chosen with this
criterion in mind. Firms in the performance measurement survey were also likely to be
above average because they were members of an organization focused on effective de-
sign management practice.
Phase I: Preliminary Interviews
To shape our research agenda, we conducted preliminary research with knowledge-
able practitioners to identify and understand management control issues critical to
NPD. The unstructured preliminary interviews focused on management control issues
that the firms represented considered important. During this phase, we led a roundtable
discussion with six industrial design managers from manufacturing firms, service firms,
and design consultancies. We next interviewed in-depth the senior design manager at a
large high-tech manufacturing company and a principal in a design consultancy. Fi-
nally, we held an executive workshop with 11 industrial design managers attending a
design management conference.
Phase II: Expert Panel Workshop
Three management control mechanisms that concerned design managers emerged
from the preliminary interviews. We chose to investigate these mechanisms in greater
depth with firms that had leading-edge industrial design functions. We composed an
expert panel by identifying eight such firms
that represented a variety of product manu-
We invited their industrial design managers to participate in a
workshop focused on the three management control mechanisms identified in the pre-
liminary interviews. Each expert panel member presented his or her firm’s current
practice on the three control mechanisms, recent changes to these controls, and how
each was linked to strategy.
Phase III: Performance Measurement Survey
Managers in the preliminary interviews and the expert panel indicated dissatisfaction
with and need for improvement in performance measurement. The third phase of this study
extended our description of NPD performance measures begun in the expert panel.
The Design Management Institute was instrumental in identifying the leading-edge product design firms.
The eight firms were Bissell, Black & Decker, IBM, Kodak, Prince, Steelcase, Thomson/RCA, and Whirlpool.
Performance Measures and Management Control in New Product Development 309
At a design management conference,
we administered a performance measure-
ment survey to conference attendees.
The survey was designed to determine the range
and number of performance measures used, the design manager’s assessment of actual
and desired emphasis placed on the performance measures, and the extent to which the
firm’s performance measures were related to strategy. The survey included 43 perfor-
mance measures derived largely from the expert panel presentations. We modified the
list of measures based on the preliminary interviews and our literature review (Potter
et al. 1991; Kaplan and Norton 1996). To help survey respondents, we grouped the 43
measures into financial (16) and nonfinancial measures (27), with the latter divided
into eight categories (see Exhibit 1).
We explored not only the measures the firms used, but also the emphasis placed on
them. We examined the degree to which each measure was actually emphasized to un-
derstand its practical importance, since it is possible that a measure could be calculated,
but ignored. We also assessed how much emphasis industrial design managers believed
should be placed on each measure; if they disagreed with the actual emphasis, that could
cause the dissatisfaction with performance measures observed in earlier phases.
In the survey, we also wanted to explore issues expert panelists raised about link-
ing strategy and NPD. We developed three questions to explore the relationship be-
tween performance measures and strategy: (1) whether measures the firm emphasized
reflected critical aspects of the firm’s strategy, (2) whether the firm measured achieve-
ment of specific strategic goals, and (3) whether the firm assessed the alignment of
design with company strategy. If performance measures are not linked to strategy, this
may partially explain design managers’ dissatisfaction with performance measurement.
RESULTS AND DISCUSSION
Phase I: Preliminary Interviews
Three distinct control mechanisms emerged as common concerns across the various
firms, including industrial design’s position within the firm’s organizational structure,
the NPD process, and NPD performance measurement.
Position of NPD in the Organization
Preliminary interviews indicated that the level of industrial design’s reporting re-
lationship is being debated in the firm. According to the design manager at a high-tech
manufacturing company, the firm moved industrial design to a higher reporting level
due to its strategic importance.
The [design function] developed a common design language [set of characteristics]
that enabled designers to develop a wide range of products clearly imprinted with
[the company’s] brand image. [Company name] came to view design as a strategic
advantage or core competency. Recognizing the increased importance, [design func-
tion] has recently received greater visibility at [company name]; it was moved to
report to [an EVP]—a higher level than previously.
The 21st Annual International Design Management Conference, Chatham, MA, October 1996, sponsored
by the Design Management Institute.
These individuals represented all facets of design, including product design, graphics design, package
design, and corporate image design.
This set of measures appears reasonably comprehensive, as respondents added no measures when they were
asked to list any financial or nonfinancial measures used by their firm that were not included in the survey.
310 Accounting Horizons/September 2000
Financial and Nonfinancial Measures of Design Performance in Questionnaire
Financial Measures Nonfinancial Measures
Development process cost—total
Development process cost—phase
Gross Profit—new products
Economic value added (EVA
Percent sales—new products
Percent sales—new customers
Percent sales—repeat customers
Sales to break even
Time to market
Cycle time, by phase
Time to revision
Time to break even
Design Effectiveness Measures
Percent first designs meet needs
Team assessment of design
Percent projects that reach
Assessment of CAD use
Design Efficiency Measures
Number of design modifications
Frequency of specification changes
Team assessment of individual
Ratio: # designers/# employees
Alignment: design with company
Achievement of specific strategic
Customer Satisfaction Measures
Satisfaction—ease of use
Number of patents
Number of new products
Number of new products
Number of design awards
Peer evaluation of design
Percent new features
Number of products in
Number of products
Number of products
Performance Measures and Management Control in New Product Development 311
Design managers describe fairly well-defined NPD processes. Descriptions from
different firms are similar; for example, they indicate that teams, with representa-
tives from marketing, design, manufacturing, engineering, and others, as needed,
develop new product designs. Many tasks appear routinized and cross-functional, for
example, “The marketing folks, with the finance folks, estimate what the competi-
tive selling price will be when the product is released.” Yet, despite typical, well-
defined processes, design managers are not fully satisfied and continue to seek fur-
ther process improvements.
Design managers voice dissatisfaction with design performance measures, par-
ticularly financial measures such as revenue and net income. These managers ex-
press concern that financial measures alone do not adequately reflect the nature and
depth of contributions that designers make to NPD outcomes. Since financial results
such as sales or product profitability are not realized until after product launch, they
do not reflect designers’ current performance. Related to their dissatisfaction with
performance measures, design managers express frustration that they can not effec-
tively communicate design contributions and accomplishments to senior manage-
ment. They ask:
How do we show the value of design?
In analyzing the benefits from NPD, how much is due to design [not other functions]?
The question is not whether design is good or bad; rather, is the design appropriate
for the firm’s [strategy and markets]?
The salience of these issues was heightened at several firms that were downsizing,
where senior managers were asking design managers to justify industrial design’s
value to the firm.
Changing NPD Controls
Throughout the preliminary interviews, managers indicated that these three mecha-
nisms used to control NPD are changing. Because change is difficult, and employees
typically resist it, the fact that firms are changing these control mechanisms suggests
the firms consider them important to achieving their goals. This prompted us to focus
explicitly on changes to NPD control mechanisms in later phases of the study. The
NPD managers also pointed out that while the link between NPD and strategy is im-
portant, it is often weak in practice. Moreover, they suggest that the desire to strengthen
the connection between NPD and strategy often motivates changes to the firm’s MCS.
These observations motivated us to focus directly on links between strategy and the
controls we were investigating.
Phase II: Expert Panel
We asked the eight expert panelists to make presentations focused on three
management controls: position of NPD within the organizational structure, NPD
process, and NPD performance measurement. For each management control, they
presented their firm’s current practice, recent changes, and integration with firm
312 Accounting Horizons/September 2000
Position of NPD in the Organization
Expert panel members indicate that the head of industrial design reports fairly
high, with most reporting to a vice president or higher. They also state that at several
firms, industrial design recently was assigned to report at a higher level.
organizational change, seen in three firms, moved the industrial design group from
engineering to marketing.
Participants tie their discussion of these organizational changes to the need for
close integration between industrial design and strategy, arguing that NPD teams play
a key role in strategy implementation by interpreting strategic concepts and shaping
them into products.
Participants indicate the primary reason for changes in reporting
relationships is the need to better integrate design and strategy, where reporting higher
in the organization increases design’s access to and knowledge of strategy. The shift to
reporting to marketing rather than engineering is also viewed as enabling product de-
sign to be better aligned with corporate strategy.
Expert panelists indicate that industrial design not only implements strategy, but
it can also contribute to strategy formation, although they believe this potential is not
being realized. All agree that industrial design managers are more likely to participate
in strategy implementation than strategy formation; only two panel members actually
participate in strategy formation.
Exhibit 2 describes the NPD process typical among these firms. As shown there,
advanced concept discussions informed by strategy generate product concepts that cross-
functional teams design and develop into the final product prototype in stages. At stage-
gates between stages, senior managers reevaluate the project and decide whether to
proceed with development.
All expert panelists indicate their firms have recently changed the NPD process,
generally in two key areas. First, many firms have recently formally documented their
NPD process. Several panelists observe that formal documentation enables consistent
replication of the process, and helps management monitor and control the process and
improve it when needed.
Second, although the link between the advanced concept stage and strategy is rep-
resented in Exhibit 2 as standard, it reflects a recent change for some firms. Managers
report their firms are introducing explicit steps linking strategy and NPD early in the
advanced concept stage to guide new product ideation and conceivably the rest of the
NPD process. This finding is consistent with Griffin’s (1997) results that strategy-set-
ting activity in the NPD process is one factor that significantly distinguished the best
performing firms in NPD.
The panel presentations also suggest that despite these changes, and despite
progress in linking NPD and strategy, more work is needed. NPD teams do not al-
ways have access to needed strategic information, especially in later stages. Panelists
indicate they sometimes lack sufficient information on corporate or product strategy
In one instance, industrial design had been moved down a level.
The firms in the expert panel were predominantly single-business firms; thus, their “corporate strategy”
was what others might refer to as a business-unit strategy.
This type of process is characteristic of the more advanced processes used to develop products and of the
most successful firms engaged in NPD (Griffin 1997).
Performance Measures and Management Control in New Product Development 313
…Multi-functional Teams from
…Advanced Concept Development:
Link to Corporate Strategy
…Stage-gate™ Process: Go/No Go Decisions
The New Style/New Product Development Process…
• Production and
• Quality testing
• Marketing campaign
• Technical development
• Production design/
• Product prototyping
• Design development
• Market research and
Go No Go
Go No Go
Go No Go
314 Accounting Horizons/September 2000
to facilitate design. They describe how NPD teams attempt to access needed strate-
gic information; when those efforts fail, “we make up the strategy to design the prod-
uct.” Thus, they anticipate further changes—and progress—in this area.
Participants indicate their firms use both financial and nonfinancial measures to
assess industrial design performance. Each expert panelist discussed between one
and six financial performance measures and between four and seventeen nonfinan-
cial performance measures.
Most expert panelists indicate that product cost and process cost (the cost to
develop the new product) are the key financial measures of industrial design perfor-
mance, while customer satisfaction measures are the key nonfinancial measures. In
measuring product cost, they typically first develop a target cost, then use the target
cost to evaluate product cost estimated during NPD.
In only one instance, however,
did an expert panelist state that design performance measures are related to the
In fact, strategy was rarely mentioned during presentations on per-
formance measurement, in sharp contrast with presentations on the other two con-
trols, where the desire to link NPD to strategy was a key reason cited for recent
Despite numerous and varied performance measures, these managers, like those
in the preliminary interviews, are dissatisfied with performance measurement. Ex-
pert panel members indicate their search for effective measures to communicate in-
dustrial design’s performance and contribution to product and firm success is ongo-
ing. They indicate that objective performance measures are crucial and are receiving
increased scrutiny from senior management.
Some firms are making explicit changes in their design performance measures.
Two firms had implemented new design performance measures within the past two
years; another three of the eight firms are considering or developing new design
To explicitly address the expert panelists’ clear dissatisfaction with NPD perfor-
mance measurement, we designed a survey questionnaire to explore current use of
design performance measures, design managers’ assessment of actual and desired
emphasis placed on the various performance measures, and the extent to which per-
formance measures are linked to strategy.
Phase III: Performance Measurement Survey
The survey was administered to attendees at a design management conference.
Out of 107 companies represented at the conference, 46 usable surveys were completed,
Presentations typically emphasized new measures their firms had adopted; they did not necessarily enu-
merate every measure used.
Target costing begins with establishing a target price based upon analysis of what the market will bear
and future customer preferences (Cooper and Chew 1996). Target costing works back from market-based
pricing and subtracts a standard or expected return-on-sales percentage to yield an allowable cost for new
products (Kaplan 1990).
It is possible that some measures presented by others might have been related to key strategic goals—for
example, product cost—but the presenter did not designate them as such.
Performance Measures and Management Control in New Product Development 315
Descriptive Statistics: Overall Sample
Type of Company 67%: Company/company division
33%: Design consultancy
Company Size 26%: Small (fewer than 50 employees)
6%: Medium (50 to 499 employees)
60%: Large (more than 500 employees)
Design Group Size 44 employees, on average
Percent Work Completed In-House 65%
Measure Design Performance? 39%: Yes
Considering New Performance Measures? 41%: Yes
15%: Don’t know
All statistics presented are based on all survey respondents, n = 46. In some cases, the breakdown of the
sample does not add to 100 percent due to nonresponse.
a 43 percent response rate.
Descriptive statistics about companies in the overall sample
are presented in Exhibit 3. Only 39 percent respond that their firm currently measures
Forty-one percent of the respondents indicate their firm is considering new design
performance measures, while 39 percent are not considering new measures and the
remainder do not know. Interestingly, a majority (57 percent) of those considering new
measures do not currently measure design performance. Just over 60 percent of all
respondents are either currently measuring or are considering measuring design per-
formance at their company. As we found in earlier phases, design performance mea-
surement is receiving considerable attention.
Product Firms That Measure Design Performance
To extend expert panel findings on design performance measurement, we focused
on firms who measured design performance and produced products, thus eliminating
industrial design consultancies, service firms, and firms that produced products but did
not measure design. Focusing the analysis on this subgroup reduces the sample to eight
respondents; however, it enables us to concentrate on a set of designers of particular
interest because they work in NPD and it extends our understanding of similar compa-
nies from the expert panel.
These respondents work in somewhat larger firms than in the overall sample, with
88 percent responding they work in a firm with “500 or more” employees, and the re-
mainder in a firm with “50 to 499” employees. The design group is smaller, with about
Only one respondent was accepted for the sample from each firm at the conference. In the case of multiple
respondents from one firm, one respondent was selected randomly to be part of the sample.
316 Accounting Horizons/September 2000
23 people, on average. As with the overall sample, 65 percent of the design work is done
in-house. Two of the eight firms are considering new design performance measures.
Again, the results that follow are for the eight firms that measured design performance
and manufacture products.
Usage. All but one of the 43 measures in the survey was checked as currently used
by at least one respondent firm.
Consistent with findings from the expert panel, re-
spondent companies, on average, use about 5 financial measures and about 11 nonfi-
nancial measures to evaluate design performance.
Exhibit 4 shows design performance measures that a majority of firms use. Rev-
enue, product cost, and total development process cost are the most frequently checked
financial measures. This rank order is about what we expected based on expert panel
discussions and on business’ traditional use of revenue and cost to evaluate financial
strength. Customer satisfaction and innovation measures are the most frequently used
nonfinancial metrics. Moreover, firms use a diverse set of nonfinancial measures; at
least one measure from seven of the eight categories of nonfinancial measures appears
in this list of frequently used nonfinancial measures.
Currently Used Design Performance Measures: Frequency and Percentage
Revenue/Sales 7 88
Product Cost 6 75
Development Process Cost—Total 5 63
Satisfaction—product 7 88
Satisfaction—style 7 88
Satisfaction—ease of use 7 88
Number of patents 7 88
Number of new products developed 7 88
Team assessment: design effectiveness 6 75
Achievement of specific strategic goals 6 75
Time to market 5 63
Number of products started 5 63
Number of design modifications 5 63
Number of products completed 5 63
Percent of respondents reporting current use of measure at their firm. Only those measures used by a
majority (63 percent) or more of the firms are shown.
This result is comparable to that found for the expert panel firms, where three of the eight firms reported
active consideration of new performance measures.
The one measure not checked as currently used was number of designers/number of employees.
Individual measures from the employee-related performance measure category were not frequently used.
Performance Measures and Management Control in New Product Development 317
Financial Measures: Mean Ratings and Rank Order of
Actual Emphasis Given and Desired Emphasis
Actual Emphasis Desired Emphasis
Mean Rank Mean Rank
Measure n Rating Order n Rating Order
Product cost 6 7.0 1 6 7.5 1
Revenue/Sales 7 6.7 2 7 7.0 4
% Sales—new products 5 4.4 3 5 5.2 12.5
Market share of product 6 4.3 4.5 6 6.7 7
Sales to break even 4 4.3 4.5 4 6.3 9
Development process cost—total 5 4.2 6 5 7.4 2
New income/Profit 5 3.8 7 5 6.8 5.5
% Sales—new customers 5 3.4 8.5 5 5.4 10
% Sales—repeat customers 5 3.4 8.5 5 6.8 5.5
Cash flow 5 3.0 10.5 5 5.2 12.5
Gross profit—new products 7 3.0 10.5 7 5.3 11
Development process cost w/phase 5 2.8 12 5 6.6 8
Gross profit—total 5 2.4 13 5 4.4 14.5
6 2.2 14.5 6 7.2 3
% Sales—proprietary products 5 2.2 14.5 5 4.4 14.5
Stock price 5 0.8 16 5 1.8 16
Mean rating 3.5 5.9
Actual vs. desired emphasis. To gauge the importance of various performance
measures, we asked respondents to indicate how much emphasis is placed on each
measure (actual emphasis), as well as how much emphasis should be placed on each
measure (desired emphasis), using a ten-point scale ranging from 1 = no emphasis to
10 = heavy emphasis. Exhibits 5 and 6 contain the mean ratings of actual emphasis
and desired emphasis for the financial measures and nonfinancial measures, respec-
tively. In addition, the rank order of the measures, based on the mean ratings, is
As Exhibit 5 shows, the average actual emphasis rating for the financial measures
(3.5) is less than that for desired emphasis (5.9). This finding is true, also, for each financial
measure considered separately. A sign test was performed on respondent’s pairs of ratings
comparing actual to desired values across the 16 financial measures. Because the sample
size varies from four to eight respondents, a sign test was conducted rather than paired t-
tests to increase the power of the test. The test was based on n = 57 pairs for which 3 signs
were positive and 54 signs were negative. These results indicate that the desired ratings
are significantly higher than actual ratings at the .01 level of significance.
Thus, industrial design managers in this survey desire greater emphasis on all
financial measures in the survey, even those they rate as actually having minimal em-
phasis. We expected the opposite—that industrial design managers would want to re-
duce the emphasis on financial measures due to their concerns about the ability of
financial measures to capture important aspects of design performance, and to their
preference for nonfinancial performance measures. The higher desired emphasis may
318 Accounting Horizons/September 2000
Nonfinancial Measures: Mean Ratings and Rank Order of
Actual Emphasis Given and Desired Emphasis
Actual Emphasis Desired Emphasis
Mean Rank Mean Rank
Measure n Rating Order n Rating Order
Satisfaction—product 6 7.7 1 5 9.8 1
Satisfaction—ease of use 6 7.2 2 5 9.0 4
Time to market 6 6.7 3 5 9.0 4
Satisfaction—style 6 6.3 4 5 7.8 9.5
Employee morale/satisfaction 5 6.0 6.5 5 8.4 7.5
Number new products developed 6 6.0 6.5 6 7.7 11
Number design modifications 5 6.0 6.5 5 7.4 12.5
Cycle time within phase 6 6.0 6.5 5 6.8 18
Number new products introduced 6 5.8 9 6 7.8 9.5
% products—1st design meets needs 4 5.5 11.5 4 9.0 4
Team assessment—design effect 6 5.5 11.5 6 8.5 6
Peer evaluation 6 5.5 11.5 6 6.8 18
Frequency of changes in specs 4 5.5 11.5 4 7.3 14.5
Achievement of strategic goals 5 5.4 14 5 8.4 7.5
Number products completed 5 5.2 15 5 7.2 16
Number patents 6 5.0 16 6 6.3 20.5
% new features 5 4.6 17 5 7.4 12.5
contribution 5 4.4 18 5 6.8 18
Alignment of design w/strategy 4 3.8 20 4 9.3 2
Number products started 5 3.8 20 5 6.0 22
Number products in pipeline 5 3.8 20 5 5.8 24
Assessment—CAD use 5 3.4 22 4 5.8 24
% design projects go to production 5 3.2 23 4 6.3 20.5
Time to revision 5 2.8 25 4 7.3 14.5
Time until product breaks even 5 2.8 25 5 5.8 24
Number design awards 6 2.8 25 6 5.7 26
# designers/# employees 3 1.0 27 3 1.7 27
Mean rating 4.9 7.2
suggest that these design managers realize that it is critical to express results in finan-
cial terms to communicate to senior management.
As Exhibit 6 shows, analysis of nonfinancial performance measures yields similar re-
sults to those reported above for financial measures. Again, industrial design managers
indicate they want the measures to be emphasized more than they actually are. A sign test
similar to that described above was conducted for nonfinancial measures. The test was based
on n = 80 paired comparisons across the 27 measures, for which 5 signs were positive and 75
were negative, yielding a significant difference at the .01 level. These results are as expected,
based on earlier research findings. Moreover, design managers in earlier phases indicated
that nonfinancial measures correspond better to their assessment of design’s contribution to
NPD. Therefore, it is consistent that they want greater emphasis placed on these measures.
Performance Measures and Management Control in New Product Development 319
Further analysis of the rank order data in Exhibits 5 and 6 shows there is a signifi-
cant, positive rank order correlation between actual and desired emphasis on financial
measures (r = .55, p < .05, n = 16) and on nonfinancial measures (r = .70, p < .00001, n =
27). For each type of measure, those rated high (low) in actual emphasis are those that
design managers rate high (low) in terms of desired emphasis, producing a similar order-
ing of the measures for actual ratings and desired ratings. This result suggests that, on
average, industrial design managers in the sample basically agree with the firm on em-
phasis given to performance measures within financial and nonfinancial categories, and
that they consider the measures emphasized by the firms to be the “right” measures.
A final observation from Exhibit 6 concerns nonfinancial measures with high de-
sired emphasis ratings. While design managers agree that customer satisfaction and
time to market should be heavily emphasized, they also rate highly the two strategic
measures, especially the extent to which design is aligned with corporate strategy, the
measure with the greatest difference between actual (20) and desired (2) rank. This
again highlights a theme raised earlier, the importance of linking strategy and design.
The Connection of Design Measurement to Strategy
Pursuing the interesting finding that product design managers want greater
emphasis placed on the extent to which design is aligned with corporate strategy, we
further stratified our subgroup of firms that produce products and measure design
performance to focus on respondents who indicate performance measures currently
used by their company reflect critical aspects of their corporate strategy. Five of the
eight respondents fall into this category. We looked at these five respondents’ use of the
strategic measures and the degree of importance attached to them.
All five firms currently measure achievement of specific strategic goals; further,
the managers generally agree with their firm’s emphasis on this performance measure.
These results suggest these industrial design managers acknowledge the importance of
achieving strategic goals, an outcome consistent with their recognition of the impor-
tance of NPD for strategy implementation. However, while three of the five respon-
dents say that their firm uses the strategic alignment measure, a far greater disparity
exists between the ratings for actual and desired emphasis, with desired much greater
than actual. These results are consistent with expert panel findings that firms are striving
to align NPD with strategy, but have not fully achieved this goal.
Summary of Performance Measurement Survey
Consistent with expert panel findings, the survey results show that for companies
that make products and measure design performance, the firms use a variety of financial
and nonfinancial design performance measures. Industrial design managers consider
product cost the number one financial measure in terms of its actual emphasis, and also
its desired emphasis. This suggests these managers understand NPD’s significant impact
on product cost, and product cost’s importance to the firm. Indeed, they indicate that even
more emphasis should be placed on product cost than is currently placed on it. And,
contrary to our prior expectations, these industrial design managers want greater em-
phasis, not reduced emphasis, on financial measures in general. However, consistent
with our expectations, design managers desire greater emphasis on nonfinancial perfor-
mance measures. Moreover, the ordering of both financial and nonfinancial measures
with respect to actual emphasis compared to desired emphasis is similar, indicating that
these managers generally agree with the relative weighting of these performance measures.
320 Accounting Horizons/September 2000
The results also indicate that achievement of strategic goals is an important design per-
formance measure, and that performance measurement should place more emphasis on
the alignment between design and competitive strategy.
CONCLUSIONS AND FUTURE RESEARCH
This study addressed three management control mechanisms that practicing in-
dustrial design and NPD managers consider critical to their success: design’s position
in the firm’s organization structure, the NPD process, and performance measures. The
results of this study are descriptive and exploratory. The findings cannot be general-
ized to the population of all firms engaged in NPD or all industrial design managers,
but should be interpreted as representing the practices and opinions of the firms and
managers participating in the study.
Position of NPD in the Organization
The position of the NPD function was a new area for MCS research. We find that
the head of most industrial design functions reports to the vice president level or above.
Recent changes involve reporting higher within the organization and reporting to mar-
keting rather than engineering. A primary motivation for these changes is to link NPD
As expected, we find that study firms have a well-defined NPD process, and some
firms have explicitly incorporated strategy into the NPD process, often early in the
advanced concept stage. However, extending beyond earlier findings, we find that firms
want more explicit links between strategy and the NPD process, especially to guide
later stages of NPD.
Consistent with earlier studies, many firms in this study do not use performance
measures to evaluate design performance. Firms that do measure design performance
use a variety of financial and nonfinancial performance metrics. Product cost is the
most important financial measure used; customer satisfaction and timing measures are
the most important nonfinancial measures.
As expected, industrial design managers want more emphasis on nonfinancial mea-
sures. Contrary to expectation, these managers want more emphasis on financial mea-
sures, as well. This result may suggest that industrial design managers realize that
both types of measures are important to effectively communicate performance to senior
Further, in contrast with our expectations, we failed to find that NPD managers
perceived a fit between the firm’s strategy and the firm’s performance measures. First,
many firms engaged in NPD do not measure industrial design performance at all.
Product cost itself is an example of a measure that could be considered a “specific strategic goal.” That is,
product cost plays an important role in many competitive strategies, especially for those firms that pursue
the low cost producer strategy (Porter 1980).
We focused on one participant in the NPD process, industrial design managers. Other NPD participants,
such as representatives from marketing, engineering, or production, may have different responses to
issues pertaining to management control of NPD.
Performance Measures and Management Control in New Product Development 321
Further, although five firms in the survey report that performance measures do reflect
critical aspects of their corporate strategy, three firms indicate that their performance
measures do not, a troubling result suggesting these firms may be encouraging behav-
ior inconsistent with their strategies. Even those who felt performance measures re-
flected corporate strategy report that the firm’s actual emphasis on strategic measures
was less than desired. Respondents rate the two strategic measures among the highest
in terms of the emphasis they want placed on them. They suggest that the link between
strategy and performance measures could be much stronger.
Throughout the study, managers were dissatisfied with performance measurement.
Firms were struggling to find more effective measures, as many firms had recently imple-
mented new design performance measures, and many are considering new measures.
Linking NPD Management Controls to Strategy
Changing management controls for NPD is a consistent theme, affecting all three
management control mechanisms examined. Managers in this study often link “change”
with “strategy.” Their increasing recognition that strategy must guide NPD, and that
NPD is key to strategy implementation has led to changes in management controls to
increase the availability and use of strategic information during NPD.
Other changes may result from the sheer difficulty of controlling the creative, inno-
vative NPD function. They may simply reflect companies conducting live experiments
as they struggle with a challenging issue, especially since managers lack guidance to
support choices they must make, as little academic research on management control of
NPD has been conducted.
This exploratory study raises important issues warranting further study, especially
about performance measures where managers report considerable dissatisfaction.
Some firms in this study indicate that their performance measures reflect criti-
cal aspects of their strategy; others indicate that they do not. Research needs to
address whether firms whose performance measures reflect critical aspects of their
strategy perform better, are more profitable, are able to more effectively implement
In particular, since the highest rated performance measure is product cost, research
should examine the relationship between product cost and strategy. Of particular in-
terest is whether NPD outcomes related to product cost differ depending on firm strat-
egy, and whether the firm’s strategy affects the development and use of product cost
information during NPD.
Although industrial design managers are generally dissatisfied with performance
measurement, the survey indicates that they do not want to deemphasize financial
measures and that the relative emphasis among the financial measures and among the
nonfinancial measures is about right. However, the data suggest
—although we can-
not definitively say—that these managers may want more emphasis on nonfinancial
than financial measures. We need to examine this issue and whether their dissatisfac-
tion stems from an alternative explanation offered by some managers in the study.
The mean desired emphasis rating for nonfinancial measures (7.2) was higher than that for financial
322 Accounting Horizons/September 2000
Specifically, they indicated that existing financial measures do not capture the “right”
data, because accounting systems do not provide a “full” picture of an NPD project since
product development costs are expensed as incurred, and cumulative revenues and
costs are not recorded. Thus, future research should examine what financial informa-
tion is most useful to measure and manage NPD.
NPD is a strategically important activity. It influences the firm’s operating and
financial success. Better understanding what controls, especially performance measures,
are effective for NPD will contribute to our understanding of management control and
will provide helpful guidance to firms.
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