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Incentives in New Product Development Projects and the Role of Target Costing

  • Jürgen Mihm


    (INSEAD, 77305 Fontainebleau Cedex, France)

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    This paper investigates how self-optimizing engineers affect new product development (NPD) project outcomes and development times. A variety of widely used NPD project management approaches, including heavyweight project management, may allow or even encourage engineers to introduce late design changes and exhibit weak cost compliance, reducing the product's profit or competitiveness. Providing specifically designed incentives for individuals can eliminate such encouragement, and thus improve cost compliance and project timeliness. This paper discusses several practical incentive schemes, including profit-sharing contracts and component-level target costing. For many industrial projects, component-level target costing makes the most efficient use of available information to optimize project outcomes and reduce development times.

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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 56 (2010)
    Issue (Month): 8 (August)
    Pages: 1324-1344

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    Handle: RePEc:inm:ormnsc:v:56:y:2010:i:8:p:1324-1344
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    1. Ulrich Hege & Dirk Bergemann, 1998. "Venture capital financing, moral hazard, and learning," Post-Print hal-00481696, HAL.
    2. Robert Gibbons, 2005. "Incentives Between Firms (and Within)," Management Science, INFORMS, vol. 51(1), pages 2-17, January.
    3. Christian Terwiesch & Yi Xu, 2008. "Innovation Contests, Open Innovation, and Multiagent Problem Solving," Management Science, INFORMS, vol. 54(9), pages 1529-1543, September.
    4. Lambert, Richard A., 2001. "Contracting theory and accounting," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 3-87, December.
    5. Ananth V. Iyer & Leroy B. Schwarz & Stefanos A. Zenios, 2005. "A Principal-Agent Model for Product Specification and Production," Management Science, INFORMS, vol. 51(1), pages 106-119, January.
    6. Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers 742, Cowles Foundation for Research in Economics, Yale University.
    7. Karl T. Ulrich & Scott Pearson, 1998. "Assessing the Importance of Design Through Product Archaeology," Management Science, INFORMS, vol. 44(3), pages 352-369, March.
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