John Feland Thesis Defense Slides: 19 Nov 2004

John Feland Copyright© 2004 22 November, 2004 1

Product Capital Model

Measuring the Value of Design to Corporate Performance

John Feland


Measures of Product Development

Schedule

Cost

Performance


Cost, Schedule, and Performance Are Not Enough


Comprehensive Design

Technical Factors(feasibility)

HumanFactors(usability)

BusinessFactors(viability)



Product Financial Capital

Product Social Capital

Product Intellectual

Capital


Product Financial Capital Defined

Creation and Consumption of Financial Capital supporting the development of Products•Financial measures associated with product development

– Gross Margin– Net Income– Total Assets


Product Intellectual Capital Defined

Creation and Consumption of intellectual capital supporting the development of products•Measures come from Knowledge Management and Innovation Strategy

– Patent Applications– New Product Releases– Research and Development

Expenditures


Product Social Capital Defined

Persistent perception of benefit to end user

• Actor-Network Theory considers artifacts and people as equal actors

• Social Capital defined as perception of mutual benefit within Social Networks

• Product Social Capital measures benefit in product-user relationship

• Online customer reviews used as data source– Average Customer Rating– Incidence of New Customer Reviews


Sample Online Customer Review


Are Online Reviews About Products?

Product Design

Customer Support

Product Accessories

Third Party Software

Percentage of Comments*

99% 10% 19% 33%

Average Rating for Category

4.2 2.8 4.3 4.5

Results of coding 231 Palm V customer reviews (5/99-5/02)

*Reviews can be classified in more than one category


Methodology• Develop measures of Product Capital• Extract Corporate Performance

measures• Test Hypotheses

– Construct multivariate linear models– Report analytical results

• Explain Contributions• Detail implications• Suggest next steps


Hypothesis 1

The metrics of the Product Capital Model correlate to corporate performance, acting as state variables describing the efforts of the enterprise in the pursuit of product innovation


Hypothesis 2

The Product Capital Model metrics outperform purely financial measures in describing the efforts of an enterprise pursing product innovation


Hypothesis 3

Product Social Capital is a leading indicator of future product revenues


Candidate Products for Study

http://www.amazon.com/gp/product/images/B000031KIM/ref=dp_product-image-only_0/104-3032049-5339169?_encoding=UTF8&n=507846


Paired Comparison Opportunity


http://www.amazon.com/gp/product/images/B00006I5BH/ref=dp_product-image-only_0/104-3032049-5339169?_encoding=UTF8&n=172282

http://www.amazon.com/gp/product/images/B00005ALB1/ref=dp_product-image-only_0/104-3032049-5339169?_encoding=UTF8&n=172282

http://www.palmone.com/us/products/smartphones/treo600/

http://www.geekzone.co.nz/click_thru_content.asp?ContentId=283&URL=http://www.handspring.com/developers


Data Sources• Product Financial Capital

– SEC Filings for Palm and Handspring– 15 Quarters of Palm– 13 Quarters of Handspring

• Product Intellectual Capital– 145 patents– Manufacturer press releases– SEC Filings for Palm and Handspring

• Product Social Capital– Over 4000 online customer reviews– Covering 31 Personal Digital Assistants


General Linear Model

bmxy

3Capital SocialProduct

2Capital alIntellectuProduct

1Capital FinancialProduct

ePerformanc Corporate

bxm

bxm

bxm

y

nn

nn

nn

n

n

n


Corporate Performance Measures

Market Capitalization

Gross Revenues

Return on Assets

$-

$20,000

$40,000

$60,000

$-

$200

$400

$600

-100.00%

-50.00%

0.00%

50.00%

HandspringPalm

HandspringPalm

HandspringPalm


Testing Hypothesis 1

bmxy Metrics CapitalProduct tionCapitalizaMarket

bmxy Metrics CapitalProduct Revenues Gross

bmxy Metrics CapitalProduct Assetson Return



b

mx

mx

mx

mxmx

y

quarter oneby led RatingsAverage

nsApplicatiotent Current Pa

quarter oneby led nsApplicatioPatent

Assets Total MarginGross

tionCapitalizaMarket

R2 = 79%


Gross Revenues

b

mx

mx

mx

mx

mx

mxmx

y

quarters by two led RatingsAverage

quarters by two led ReviewsofNumber

turent Expendi Developmeand Research

nsApplicatiotent Current Pa

quarter oneby led nsApplicatioPatent

Assets TotalIncomeNet

RevenuesGross

R2 = 93%


Return on Assets

b

mx

mx

mx

yquarter oneby led RatingsAverage

quarters by three lednt Developmeand Research

IncomeNet

Assets on Return

R2 = 53%


Product Capital Model Performance

Gross Revenues Return on Assets Market Capitalization

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

R2 = 93% R2 = 53% R2 = 79%

Product Social CapitalProduct Financial CapitalProduct Intellectual Capital



Testing Hypothesis 2

bmxy Metrics CapitalProduct tionCapitalizaMarket

bmxy Metrics Financial lTraditionationCapitalizaMarket

Compared to



-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

Aug-99

Mar-00

Oct-00

Apr-01

Nov-01

May-02

Dec-02

Jun-03 Jan-04

Mil

lio

ns Actual Market Capitalization

Predicted Using Financial Metrics

Predicted Using Product Capital Model


Gross Revenues

$0

$100

$200

$300

$400

$500

$600

Jul-98 Dec-99 Apr-01 Sep-02 Jan-04

Mill

ion

s

Actual Gross Revenues




Return on Assets

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%


Actual Return on Assets



Product Capital Model R2=53% Financial Only R2=80%


Implications of Product Capital Model

• Demonstrates the impact of Design Performance on Business Performance

• Improved characterization of Market Capitalization and Gross Revenues over purely financial measures


Product Social Capital Exhibits Leading Behavior

Average Ratings

Number of Reviews


One Quarter

Gross Revenues

Two Quarters

Two Quarters

Return on Assets

One Quarter


Hypothesis 3

Product Social Capital is a leading indicator of future product revenues


Correlation Analysis

Product Social Capital

Lead IntervalsMINI Cooper 1, 5 months

Thunderbird 1-6 months

Handspring 0-4 quarters

Palm* current quarter* Only the “Number of Comments” correlated to Palm Gross Revenues


MINI Cooper Leading BehaviorCumulative Sales

0

50

100

150

200

250

300

350

400

450

Nov-01 May-02 Dec-02 Jun-03 Jan-04 Aug-04

Th

ou

sa

nd

s

Leading by Five Months

R2 = 11%

PredictedActual


Cumulative Sales

0

5

10

15

20

25

30

35

40

Nov-01 May-02 Dec-02 Jun-03 Jan-04 Aug-04

Th

ou

san

ds

Leading by Four Months

R2 = 12%

Ford Thunderbird Leading Behavior

PredictedActual


Cumulative Sales

$-

$100

$200

$300

$400

$500

$600

$700

$800

$900

Mar-00 Oct-00 Apr-01 Nov-01 May-02 Dec-02 Jun-03 Jan-04

Mill

ion

s

Leading by Three Months

R2 = 78%

Handspring Leading Behavior

PredictedActual


Cumulative Sales

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000


Mill

ion

s

No Predictive Capability

R2 = 10%

Palm Leading Behavior

PredictedActual


Product Social Capital Predicts Future Sales

• Measures of Product Social Capital predict product sales

• Three of four cases exhibit predictive behavior

• Lead interval of three to five months• Number of Customer Reviews is

primary leading indicator


Contributions

1. Higher levels of design performance, as measured by the Product Capital Model, correlate to enterprise performance

2. Product Social Capital is a leading indicator of product sales

3. Use of Online Customer Reviews as source of data in support of design research


Implications for Research and Practice

• Industry: Comprehensive Design as a Competitive Advantage– Cost, Schedule and Performance are

insufficient to support product innovation

– Product Capital Model measures the design impact on the enterprise

• Academia: Comprehensive Design Research– Explore Comprehensive Design

activities– Develop new tools and methods


Next Steps• Comprehensive Design Activity

–> Product Capital Metrics –> Enterprise Performance

• Develop and validate Comprehensive Design methods

• Apply Comprehensive Design methods to industrial practices


Questions?


One final contribution


Design literature• "The person trained in the creative process has a

greater chance of developing worthwhile innovations than the person without such specialized training."

– John Arnold• “emerging synthesis of artist, inventor,

mechanic, objective economist and evolutionary strategist.”

– Buckminster Fuller• Effective design requires “a synthesis of

technical, human, and economic factors.” – Morris Asimow

• Innovation Champion “must cut across the special interests (technology, marketing, production, and finance) which are essential to the product’s … development."

– Donald Schon


Innovation literature

Designers as knowledge brokers– Hargadon and Sutton

Inspiration from user observations, fail faster to succeed sooner

– Tom Kelley

You can't be a leader over the next five years and not be totally into design… If you don't already know how, learn how to speak design

– Tom PetersOnce a dominant design is established, process

innovations become paramount– James Utterback


Design as a Cost Center

Cost of new product des ign

6,9 % 5,5 %

12,0 %

17,5 %

45,7 %

12,5 %

Market Research

Produc tDevelopmentSpec ification

Concept Design

Detail design

Manufac turing Selling

Pe

rce

nta

ge

of

tota

l c

os

t


Design-based Innovations, not

Technology-based Innovations


Multivariate Linear Model

3Capital SocialProduct

2Capital alIntellectuProduct

1Capital FinancialProduct

ePerformanc Corporate

bxm

bxm

bxm

y

nn

nn

nn

n

n

n


Product Financial Capital Metrics

• Gross Margin

• Net Income

• Total Assets

$-

$500

$1,000

$1,500

$2,000

Millio

ns

$(600)

$(400)

$(200)

$-

$200

Mill

ions

$(100)

$-

$100

$200

Mill

ions


Product Intellectual Capital Metrics

• Patent Applications

• New Product Releases

• Research and Development Expenditures

0

10

20

30

0

1

2

3

$-

$10

$20

$30

$40

$50M

illi

on

s


Product Social Capital Metrics

• Average Online Customer Reviews

• Number of New Customer Reviews Posted

0

50

100

150

200

3

3.5

4

4.5

5


MINI Cooper

0

5

10

15

20

Aug

-01

Dec

-01

Apr

-02

Aug

-02

Dec

-02

Apr

-03

Aug

-03

Dec

-03

Apr

-04

Th

ou

sa

nd

s

Monthly Sales


Ford Thunderbird

0

5

10

15

20

Aug

-01

Feb

-02

Aug

-02

Feb

-03

Aug

-03

Feb

-04

Th

ou

sa

nd

s

Monthly Sales


Palm

$-

$100

$200

$300

$400

$500

$600

Q4

19

98

Q2

19

99

Q4

19

99

Q2

20

00

Q4

20

00

Q2

20

01

Q4

20

01

Q2

20

02

Q4

20

02

Q2

20

03



Handspring

$-

$100

$200

$300

$400

$500

$600

Q4

19

98

Q3

19

99

Q2

20

00

Q1

20

01

Q4

20

01

Q3

20

02

Q2

20

03

http://www.amazon.com/gp/product/images/B00006I5BH/ref=dp_product-image-only_0/104-3032049-5339169?_encoding=UTF8&n=172282



Other Comprehensively Designed Products

http://www.apple.com/support/ipod/tutorial/

http://www.apple.com/support/ipod/tutorial/


“A measurement system that is so strictly financially focused leads to neglecting other aspects of the company and its development.”

Jeffrey Pfeffer and Robert Sutton p. 24, Knowing Doing Gap, 2000


Decay of Product Social Capital

0

1

2

3

4

5


Decay of Product Social Capital

00.5

11.5

22.5

33.5

44.5

5



-$10,000

-$5,000

$0

$5,000

$10,000

$15,000

Dec-99 Apr-01 Sep-02 Jan-04

Mill

ion

s Market Capitalization

Financial Only


-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000


Mill

ion

s


Financial Only




Gross Revenues

-$20

$0

$20

$40

$60

$80

$100

$120

$140


Mill

ion

s

Gross Revenues

Financial Only


$0

$100

$200

$300

$400

$500

$600


Mill

ion

s Gross Revenues

Financial Only




Return on Assets

-100%

-80%

-60%

-40%

-20%

0%

20%


Return on Assets

Financial Only


-60%

-50%-40%

-30%

-20%

-10%0%

10%

20%


Return on Assets

Financial Only




Form of Financial Only Models

Metrics Financial lTraditionationCapitalizaMarket mxy

bmxy Metrics Financial lTraditionaAssetson Return

Metrics Financial lTraditionaRevenues Gross mxy

John Feland Thesis Defense Slides: 19 Nov 2004

Design

Transcript of John Feland Thesis Defense Slides: 19 Nov 2004