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


  • Jürgen Mihm

    () (INSEAD, 77305 Fontainebleau Cedex, France)


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.

Suggested Citation

  • Jürgen Mihm, 2010. "Incentives in New Product Development Projects and the Role of Target Costing," Management Science, INFORMS, vol. 56(8), pages 1324-1344, August.
  • Handle: RePEc:inm:ormnsc:v:56:y:2010:i:8:p:1324-1344

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    References listed on IDEAS

    1. Karl T. Ulrich & Scott Pearson, 1998. "Assessing the Importance of Design Through Product Archaeology," Management Science, INFORMS, vol. 44(3), pages 352-369, March.
    2. Bergemann, Dirk & Hege, Ulrich, 1998. "Venture capital financing, moral hazard, and learning," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 703-735, August.
    3. 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.
    4. Robert Gibbons, 2005. "Incentives Between Firms (and Within)," Management Science, INFORMS, vol. 51(1), pages 2-17, January.
    5. Christian Terwiesch & Yi Xu, 2008. "Innovation Contests, Open Innovation, and Multiagent Problem Solving," Management Science, INFORMS, vol. 54(9), pages 1529-1543, September.
    6. Lambert, Richard A., 2001. "Contracting theory and accounting," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 3-87, December.
    7. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-328, March.
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    Cited by:

    1. repec:eee:ejores:v:261:y:2017:i:3:p:1066-1084 is not listed on IDEAS
    2. Elena Katok & Enno Siemsen, 2011. "Why Genius Leads to Adversity: Experimental Evidence on the Reputational Effects of Task Difficulty Choices," Management Science, INFORMS, vol. 57(6), pages 1042-1054, June.
    3. Wenqiang Xiao & Yi Xu, 2012. "The Impact of Royalty Contract Revision in a Multistage Strategic R&D Alliance," Management Science, INFORMS, vol. 58(12), pages 2251-2271, December.
    4. Wu, Zhengping & Crama, Pascale & Zhu, Wanshan, 2012. "The newsvendor’s optimal incentive contracts for multiple advertisers," European Journal of Operational Research, Elsevier, vol. 220(1), pages 171-181.
    5. Bock, Stefan & Pütz, Markus, 2017. "Implementing Value Engineering based on a multidimensional quality-oriented control calculus within a Target Costing and Target Pricing approach," International Journal of Production Economics, Elsevier, vol. 183(PA), pages 146-158.
    6. repec:spr:jmgtco:v:28:y:2017:i:2:d:10.1007_s00187-016-0243-4 is not listed on IDEAS
    7. Kai Yang & Yanfei Lan & Ruiqing Zhao, 2017. "Monitoring mechanisms in new product development with risk-averse project manager," Journal of Intelligent Manufacturing, Springer, vol. 28(3), pages 667-681, March.
    8. Gopalakrishnan, Mohan & Libby, Theresa & Samuels, Janet A. & Swenson, Dan, 2015. "The effect of cost goal specificity and new product development process on cost reduction performance," Accounting, Organizations and Society, Elsevier, vol. 42(C), pages 1-11.
    9. Kerkhove, L.P. & Vanhoucke, M., 2016. "Incentive contract design for projects: The owner׳s perspective," Omega, Elsevier, vol. 62(C), pages 93-114.


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