The Economic View
Core Principle: Make product development decisions based on economic impact to increase profits.
Transform all decisions into life-cycle profit comparisons rather than chasing popular proxy variables. This enables multivariable trade-offs that maximize economic value.
E1: The Principle of Quantified Overall Economics: Select actions based on quantified overall economic impact.
Consider economic impact when making project decisions. Choose between releasing early with fewer tests versus testing more and releasing later based on economics, not philosophy.
E2: The Principle of Interconnected Variables: We can't just change one thing.
Decisions simultaneously affect multiple variables. Proxy variables are interconnected because they represent other variables.
E3: The Principle of Quantified Cost of Delay: If you only quantify one thing, quantify the cost of delay.
Quantify the economic value of cycle time to make informed trade-offs. Cost of delay (COD) dominates Flow economics and provides the most eye-opening business insight.
E4: The Principle of Economic Value-Added: The value added by an activity is the change in the economic value of the work product.
Value added equals the price difference an economically rational buyer would pay before and after the activity. Convert all waste to life-cycle profit terms for accurate comparisons.
E5: The Inactivity Principle: Watch the work product, not the worker.
Key insight: The biggest waste isn't unproductive engineers—it's work products sitting idle in queues.
Eliminating inactivity creates more value than improving efficiency. When you increase value-added time in variable processes, you create queues whose costs exceed efficiency gains.
E6: The U-curve Principle: Important trade-offs are likely to have U-curve optimizations.
U-curves combine hyperbolic and linear functions with two key properties:
- Optimization never occurs at extremes - requires balancing competing factors
- Flat bottoms - missing the exact optimum costs little
This makes the framework robust to imperfect information.
E7: The Imperfection Principle: Even imperfect answers improve decision-making.
Without economic frameworks, intuition creates 50-to-1 variations in cycle time pricing. Economic frameworks reduce this to 2-to-1. The analysis process reveals critical assumptions, enabling continuous improvement of economic understanding.
E8: The Principles of Small Decisions: Influence the many small decisions.
Companies often manage big decisions well but lack frameworks for numerous small decisions that have enormous cumulative economic impact. Focus on enabling good small decisions throughout the organization.
E9: The Principle of Continuous Economic Trade-offs: Economic choices must be made continuously.
Product development requires many small, random trade-offs throughout the process as new information emerges from markets, design, customers, and engineering. Follow Principle E1 over original plans.
E10: The First Perishability Principle: Many economic choices are more valuable when made quickly.
Opportunities shrink and obstacles grow over time. Measure and shorten decision-making time. Empower front-line workers to make decisions since they detect opportunities and obstacles first.
E11: The Subdivision Principle: Inside every bad choice lies a good choice.
Decompose decisions into components with different economics. Use your economic framework to evaluate parts separately, keeping good components and improving or discarding bad ones.
E12: The Principles of Early Harvesting: Create systems to harvest the early cheap opportunities.
Design processes to recognize and capture low-cost cycle time improvements early in development. Actions at the beginning cost less than at the end.
Example: Allow engineers to buy up to 4 weeks of schedule improvement at max $500/week, controlling by time and value to limit risk.
E13: The First Decision Rule Principle: Use decision rules to decentralize economic control.
Economic decision rules accomplish four critical things:
- Align all economic choices across the project
- Ensure system-level optimization
- Enable low-level control with limited risk
- Streamline decision processes
Example: Boeing authorized engineers to increase unit cost by $300 to save one pound of weight, enabling system-level optimization without approval delays.
E14: The First Market Principle. Ensure decision-makers feel both cost and benefit.
Decision-makers must experience both costs and benefits of their choices. Use pricing to control demand—when prices rise, demand falls. This enables decentralized control without decision delays.
E15: The Principle of Optimum Decision Timing: Every decision has its optimum economic timing.
Time decisions based on economics, not broad concepts like "front-loading" or "responsible deferral." Make decisions when further delay no longer increases expected economic outcome. Waiting reduces uncertainty but delays benefits.
E16: The Principle of Marginal Economics. Always compare marginal cost and marginal value.
Use marginal analysis for incremental decisions instead of comparing total costs and values. When marginal value exceeds marginal cost, the action improves economic value.
Example: A 100% complete feature may offer better marginal economics than an 80% complete feature, despite conventional wisdom favoring completion of planned objectives.
E17: The Sunk Cost Principle. Do not consider money already spent.
Base decisions on marginal economics, not sunk costs.
E18: The Principle of Buying Information: The value of information is its expected economic value.
Information reduces uncertainty and creates economic value. Don't pay more than the economic value it creates. Product development investments create value even when products fail if they generate valuable information.
E19: The Insurance Principle: Don't pay more for insurance than the expected loss.
Backup solutions trade development expenses for risk reduction. The economic benefit of risk reduction must exceed insurance costs.
Parallel development economics: If one solution has 10% failure rate, n parallel solutions have 0.1^n failure rate. Incremental value decreases geometrically while incremental cost remains constant, creating U-curve optimization where the optimum may equal one solution.
E20: The Newsboy Principle: High probability of failure does not equal bad economics.
Uncertain opportunities have large payoff asymmetries, making them excellent sources of innovation. Filtering out high-failure-probability opportunities also eliminates the best asymmetric opportunities, reducing economic value.
E21: The Show Me the Money Principle: To influence financial decisions, speak the language of money.
Influence financial decision-makers by speaking economics, not proxy variables. This enables fast decisions and enthusiastic support.