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Agile Product Development: Managing Development Flexibility in Uncertain Environments Stefan Thomke; Donald ReinertsenAs product complexity and the rate of market change have dramatically increased over the last years, firms find it increasingly difficult to forecast product requirements in their development processes. This article redefines the problem from one of improving forecasting to one of increasing product development agility and thus reducing the need for accurate long-term forecasts. It introduces the notion of development flexibility, shows how it can be measured, and presents results from a large empirical study on integrated systems development, which found that projects using flexible technologies outperformed projects using inflexible technologies by a factor of 2.2 (in person-months). Finally, the article proposes three major strategies for introducing flexibility into organizations. These strategies can help firms increase their agility and position themselves to succeed in accelerating and more turbulent markets. Assignment: Create a PowerPoint presentation addressing the questions below. This week’s case analysis assignment will be completed individually.
What is development flexibility and how is it different from manufacturing flexibility? Also, explain the difference between agility and flexibility of development.
What are the challenges for implementing development flexibility?
What are the approaches that the authors propose for increasing development flexibility? Which one will you prefer and explain your rationale with examples.
Your recommendations for improving development flexibility – especially in the current context of vendor-driven development.
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CMR130
10/01/1998
Agile Product
Development:
MANAGING DEVELOPMENT
FLEXIBILITY IN UNCERTAIN
ENVIRONMENTS
Stefan Thomke
Donald Reinertsen
California Management Review Reprint Series
©1998 by The Regents of the University of California
CMR, Volume 41, Number 1, Fall 1998
This document is authorized for use only by SHERYL MORATAYA in Agile Systems Management Summer 19 taught by RASHMI JAIN, Montclair State University from Apr 2019 to Jun 2019.
For the exclusive use of S. MORATAYA, 2019.
Agile Product
Development:
MANAGING DEVELOPMENT
FLEXIBILITY IN UNCERTAIN
ENVIRONMENTS
Stefan Thomke
Donald Reinertsen
any companies appreciate the importance of agility in executing
business processes. While academic research has established a linkage between flexibility and firm competitiveness, thus far it has
focused primarily on manufacturing and strategic flexibility.1 But
another business process has a clear and compelling need for flexibility as well:
product development.2 This article examines what development flexibility is,
how it can be quantified, how it enhances performance, and how it can be
introduced into an organization.
M
Development Flexibility
Although the term “flexibility” is used in many contexts, here we propose
the following operational definition:
Development flexibility can be expressed as a function of the incremental economic cost of modifying a product as a response to changes that are external (e.g.,
a change in customer needs) or internal (e.g., discovering a better technical solution) to the development process. The higher the economic cost of modifying a
product, the lower the development flexibility.
The economic cost of modifying a product arises from a change’s impact
on four factors: the product’s development expense, its unit cost, its performance, and the development schedule. Changes in each of these factors can in
The authors would like to thank Steven Wheelwright and two anonymous reviewers for their very
thoughtful feedback. Stefan Thomke would also like to acknowledge discussions with David Bell, Marco
Iansiti, Gary Pisano, David Upton and Eric von Hippel.The financial support of the Harvard Business
School Division of Research is gratefully acknowledged.
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CALIFORNIA MANAGEMENT REVIEW
VOL. 41, NO. 1
FALL 1998
This document is authorized for use only by SHERYL MORATAYA in Agile Systems Management Summer 19 taught by RASHMI JAIN, Montclair State University from Apr 2019 to Jun 2019.
For the exclusive use of S. MORATAYA, 2019.
Agile Product Development: Managing Development Flexibility in Uncertain Environments
turn be quantified and expressed in terms of cumulative profit impact. For
example, suppose that a program change will raise product cost by 3% and
delay the schedule by 2 months. If a sensitivity analysis determines that the
cost is worth $500,000 per percent and the schedule is worth $750,000 per
month, then this change has a total economic cost of $3.0 million.3 The higher
the economic cost of modifying a product as a response to a given change, the
lower a firm’s development flexibility.
Note, however, that our definition does not restrict the source of flexibility.
Flexibility can stem from the choice of a particular design technology, but it can
come from other choices that designers and managers make as well. Academic
research and many managers’ experiences have shown, for example, that flexibility decreases as a development project nears completion, which can have a
significant impact on product success.4 Thus, when Ford decided to forgo a
fourth passenger door in its new minivan—in spite of market research that indicated a change in customer preference for the door—it made a tradeoff between
potential revenue and a costly and late change to the body design. As a result,
many customers switched to a competitor that met their need for a fourth door.5
Changes occur for many reasons, some of which are difficult to predict
or anticipate. Consider the following incident that a development manager
described to us:
His design firm was asked to develop a single integrated circuit (IC) that would
combine the functions of multiple ICs on a personal computer. These ICs usually
execute support functions for the central processing unit (CPU), such as controlling external and internal devices. A critical feature in the design was the exact
CPU clock frequency, because it determined the speed at which the design had to
operate. Late in the design process, the manufacturer of CPUs (Intel Corporation)
introduced an improved microprocessor that ran at a 50% higher clock rate. This
technology shift caught the design firm by surprise since it expected no changes
in clock speed during the development project. The lack of flexibility led to a
complete redesign which eventually added 15% to their total development time.
Quantifying Development Flexibility
As the above suggests, while the term flexibility is often used qualitatively, there is value in trying to express development flexibility in more precise,
quantitative terms. To do so, we propose a construct that we call the “Flexibility
Index” of a design. It measures how well a design responds to a specific change.
As shown in Figure 1, the need for change arises from a change in a perturbing variable. A change in a development project should be made when the
economic cost of making this change is less than the economic benefit of making
the change. Thus a project can be considered flexible if the economic cost of a change is
low in relation to the change in the perturbing variable. Projects in which this economic cost is high can be viewed as inflexible.
CALIFORNIA MANAGEMENT REVIEW
VOL. 41, NO. 1
FALL 1998
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This document is authorized for use only by SHERYL MORATAYA in Agile Systems Management Summer 19 taught by RASHMI JAIN, Montclair State University from Apr 2019 to Jun 2019.
For the exclusive use of S. MORATAYA, 2019.
Agile Product Development: Managing Development Flexibility in Uncertain Environments
FIGURE 1. The Flexibility Index
Change in
Perturbing Variable
Change in
Cumulative Profits
Attenuated by
Flexibility
Index
X%
X
%
FI
FI
Example: Development of a Power Supply
Increase current
output by 10%
5
Reduce profits
by 2%
Decrease weight
by 10%
2
Reduce profits
by 5%
Note: In this illustration, the relationship between change and the flexibility index (FI) is shown to be linear. In reality, we suspect the
relationship to be of a more complex functional form—for example, piecewise linear, consisting of linear sections and discontinuities. In a practical setting, however, a good starting point would be an average FI value over a range of interest. Furthermore, the
change in cumulative profits only considers the economic cost of the change.This should be compared with the economic benefit
of the change to determine whether making the change is a good business decision.
Flexibility can be expressed in terms of a “Flexibility Index,” which is
the ratio between the percent change in a perturbing variable and the percent
change in projected life cycle profits. For example, consider a power supply that
was designed to weigh 10 pounds and to provide 10 amps of output current . If
a change in market requirements demanded 11 amps (a 10% change), it would
be necessary to assess how this change will alter projected life-cycle profits. If
the cost of making this change was 2% of project profits, then the ratio between
these two variables would be 10:2 giving a Flexibility Index of 5. Similarly, if a
change in market requirements demanded a 1 pound lighter power supply, it
would be necessary to assess the cost of making this 10% weight reduction. Suppose that such a change would delay the project and add costs leading to a 5%
reduction in project profits. The Flexibility Index with regard to weight reduction would be 2, less than half the Flexibility Index for a change in output current. This means that the design is less tolerant of a need to reduce weight.
Generally, the higher the Flexibility Index, the less economic cost is incurred
to change a particular product attribute.
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CALIFORNIA MANAGEMENT REVIEW
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FALL 1998
This document is authorized for use only by SHERYL MORATAYA in Agile Systems Management Summer 19 taught by RASHMI JAIN, Montclair State University from Apr 2019 to Jun 2019.
For the exclusive use of S. MORATAYA, 2019.
Agile Product Development: Managing Development Flexibility in Uncertain Environments
The Flexibility Index is attribute-specific. It is possible to change the current output of this power supply with lower economic cost than changing its
weight. Thus, development projects do not have some vague, general property
of flexibility, but rather are able to respond to changes in specific perturbing
variables with reduced economic costs. This attribute-specific property is important,
because managers should only invest in flexibility on attributes where the likelihood of
future changes makes this flexibility potentially valuable. For example, personal computer designers can easily anticipate that their designs will have to accommodate
larger disk drives. It is wise to design the product to make this change easy to
do. In contrast, it is very unlikely that a personal computer will need 2 or 3 keyboards attached to it at the same time. To leave flexibility on this attribute would
be wasteful.
The New Need for Flexibility
If development flexibility has so far not been explicitly managed, why
should managers do so now? They should, quite simply, because the product
development environment is shifting in such a way that makes development
flexibility increasingly important.
Two primary forces lie behind this shift. First, for many projects, product
complexity has dramatically increased. As products acquire more functions, the
difficulty of forecasting requirements rises exponentially. Second, the rate of
change in most markets is also increasing, thereby reducing the effectiveness
of traditional management approaches to forecasting the future. As a result,
managers need to redefine the problem from one of improving forecasting to
one of eliminating the need for accurate long-term forecasts.
There are two important ways to reduce exposure to the consequences of
forecasting errors. The most obvious is to shorten development cycles. This acts
to reduce the number of changes that will occur during development. This is an
important benefit of rapid product development, and one that has already been
emphasized in the literature.6 In contrast, the use of flexibility reduces the cost
of those changes that do have to be made, and thus is a method for reducing the
consequences of forecasting errors—a theme that has received little attention up
to now.
Development Flexibility as an Alternative to Accurate Forecasting
Flexibility is a powerful method of controlling development risk. Traditionally, risk-reduction efforts have emphasized acquiring information about
the future so as to increase the probability that the firm makes a correct choice.
However, acquiring accurate information about the future becomes difficult or
impossible when markets have many degrees of freedom and when the rate of
change is high.
Development flexibility provides a powerful alternative to forecasting
the future. By choosing design technologies and management strategies that
CALIFORNIA MANAGEMENT REVIEW
VOL. 41, NO. 1
FALL 1998
11
This document is authorized for use only by SHERYL MORATAYA in Agile Systems Management Summer 19 taught by RASHMI JAIN, Montclair State University from Apr 2019 to Jun 2019.
For the exclusive use of S. MORATAYA, 2019.
Agile Product Development: Managing Development Flexibility in Uncertain Environments
decrease the “turning radius” of the firm, managers become less reliant on accurate long-term forecasting. Consider the example of the original IBM Personal
Computer.
During the design of the PC, there were two viable design solutions for
long-term storage. The Radio Shack TRS-80 successfully offered a cassette
recorder, while the Apple II used a floppy disk drive. Both technologies were
accepted in the marketplace, and it was unclear if either would become dominant. IBM could have performed market research to resolve this risk, but generating consumer preference data that could be relied upon was unlikely. Instead,
IBM’s PC offered both a cassette port (a socket that a cassette player could plug
into) and a floppy drive. This is an example of a management choice, in this case
regarding the architecture and feature set of the product, that made the product
more flexible. Such flexibility made the product more tolerant of changes in the
marketplace. The IBM Personal Computer was positioned such that it would not
have to react to a change in consumer preference. As the market developed,
consumers expressed a clear preference for the easier-to-use floppy disks and
the cassette port was eliminated in IBM’s next product, the IBM PC-XT.7
Thoughtful choices regarding development flexibility are critical, since
without such flexibility the firm is forced to invest in the more difficult riskmanagement strategy of accurately forecasting a potentially unknowable future.
The lower the development flexibility, the greater the economic incentive to
invest in such forecasts. This is important because such investments may provide
a small return in markets that move rapidly. One could argue that in the IBM
Personal Computer situation, it was cheaper to pay the cost of the extra components for a cassette port than to forecast with high certainty the true needs of
the marketplace and to bear the consequences of an incorrect forecast.
The Main Problem: Unstable Customer Needs
That product requirements are unstable is a fact known to practitioners
and well documented in academic literature.8 One of the authors has worked
with hundreds of product developers and has yet to find a single project in
which the requirements remained stable throughout the design. Surveying
more than 200 product developers over the past five years, he found that fewer
than 5% had a complete specification before beginning product design. On average, only 58% of requirements were specified before design activities began. The
inevitable result is changes. Academic research in the area of technological innovation has shown that a significant part of these changes can be attributed to:
▪ the co-evolution of technical solutions in components that are part of
a larger system;
▪ customers’ inherent difficulty in accurately specifying their needs at the
outset of a design project system.
Individual designs are often part of larger systems, and their requirements are derived from their role in such systems. As designers at the system
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CALIFORNIA MANAGEMENT REVIEW
VOL. 41, NO. 1
FALL 1998
This document is authorized for use only by SHERYL MORATAYA in Agile Systems Management Summer 19 taught by RASHMI JAIN, Montclair State University from Apr 2019 to Jun 2019.
For the exclusive use of S. MORATAYA, 2019.
Agile Product Development: Managing Development Flexibility in Uncertain Environments
and subsystem level engage in problem solving, they can alter interfaces within
the system. Since these interfaces are in reality the product requirements for
subsystems, these subsystems in turn are subject to changing requirements.
These findings have been supported by Allen, who studied engineering problem
solving and its related evolution of the technical solution path in the design of a
number of aerospace systems.9 He found that design engineers who were developing an aerospace subsystem conceived of and evaluated a number of design
alternatives and eventually selected the one judged best. The designers’ preferences for these alternatives, however, changed frequently and quickly as the
design evolved, and it would have been very difficult to conclusively determine
the best alternative at the outset of the project. Moreover, these different alternatives required different subsystem components or interfaces to other system
components—resulting in rapidly changing product requirements (or specifications) as the development project evolved.
In many areas of product development, the increasing speed of technology development and its related technological obsolescence have further
increased the instability of component requirements. For example, a designer
of a personal computer may find that the chosen central processing unit (CPU)
becomes obsolete before development is complete—resulting in costly and timeconsuming design changes if the Flexibility Index relative to this product attribute is low.
At the system level, requirements are driven by rapidly evolving customer
needs, an additional source of instability. Academic research has shown that
familiarity with existing product attributes can interfere with an individual’s
ability to express needs for novel products.10 In other words, it is hard for inexperienced customers to accurately describe their needs. Needs become more
refined (or change) as the customer comes in direct contact with the product
and starts to use it. This happens quite often in systems that involve humanmachine interactions, resulting in responses such as the familiar “I’m really not
sure what I want, but I’ll know when I see it.” For example, designers of applications software sometimes find that customers significantly revise requirements
after they use their software for the first time, leading to very costly and timeconsuming redesigns of an otherwise functional product.
Benefits of Development Flexibility
Development flexibility should be viewed as a parameter in an economic
tradeoff. A PC motherboard, for instance, can be designed to work at a certain
clock frequency. If the clock frequency of the CPU increases, a costly redesign
may be needed. Alternatively, the same motherboard could be designed to operate at the higher frequency from the very beginning of the design process. The
choice to design for the higher frequency would add unit cost to the design since
it alters the layout and component choices for the motherboard. Yet this extra
cost may be paid back handsomely if the market shifts more quickly than
expected to higher-frequency motherboards. Again, the investment in raising
CALIFORNIA MANAGEMENT REVIEW
VOL. 41, NO. 1
FALL 1998
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This document is authorized for use only by SHERYL MORATAYA in Agile Systems Management Summer 19 taught by RASHMI JAIN, Montclair State University from Apr 2019 to Jun 2019.
For the exclusive use of S. MORATAYA, 2019.
Agile Product Development: Managing Development Flexibility in Uncertain Environments
the Flexibility Index with regard to CPU clock frequency is only worthwhile
when its benefits exceed its costs.
Such investments to raise the Flexibility Index of the design with respect
to certain attributes can be viewed as an insurance policy on the design. For
example, if there was a 10% chance that the motherboard market was going to
shift, and the shift would cost $2 million in profit before tax, a “fair” price to pay
to raise flexibility on this attribute would be $200,000.
The benefits of flexibility vary with the competitive environment. In
slow-moving and in easily predictable environments, there may be little value in
investing in flexibility. In fast-moving and “turbulent” environments, however,
flexibility can have large benefits. It is in such environments where the ability to
accommodate evolving customer needs and technologies is of exceptional benefit. The benefit of such high design flexibility can be derived from the ability:
▪ to pursue a more efficient development strategy that can tolerate a higher
risk of design changes;
▪ to make (late) product changes that lead to better design solutions with
respect to customer needs …
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