The PDMA Handbook of New Product Development

21.3. Why Are Good Gate Decisions Vital?

Making effective and efficient NPD project continuation/termination decisions is of critical important for several reasons. First, developing new products is expensive! Gillette is reported to have spent $1 billion developing its Mach 3® razor, and Boeing has spent over $10 billion on its Sonic Cruiser (which will likely never be commercialized). And Iridium, Motorola's former satellite telephone service, involved launching 66 satellites into space at a cost of $5 billion. Successful new products must recoup all of their related development, testing, and marketing costs, but they also must pay for the failures (many of which cost tens or hundreds of millions of dollars) and those NPD projects killed prior to commercialization. In extreme situations, firms might not survive if they develop the wrong products (e.g., aircraft manufacturers and pharmaceutical companies), since the cost of development is so great or because it takes years to recover and develop a successful product or technology.

Second, the cost and time to complete each subsequent stage of the NPD process frequently increases dramatically (Cooper and Kleinschmidt, 1986; Urban and Hauser, 1993). So that scarce resources are not wasted, it's best to stop NPD projects quickly if they are not going to be successful. However, PACs struggle to balance Type I errors (allowing a project to continue and it subsequently fails in the market) and Type II errors (terminating a project ...