John Feland Thesis Defense Slides: 19 Nov 2004

Product Capital Model
Measuring the Value of Design to
Corporate Performance

John Feland

John Feland Copyright© 2004 22 November, 2004 1

Measures of Product Development
Cost

Schedule Performance


Cost, Schedule, and Performance
Are Not Enough


Comprehensive Design

Technical Business
Factors Factors
(feasibility) (viability)

Human
Factors
(usability)


Product
Social Capital

Product Product
Financial Intellectual
Capital 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?
Results of coding 231 Palm V customer reviews (5/99-5/02)

Product Customer Product Third Party
Design Support Accessories Software

Percentage of 99% 10% 19% 33%
Comments*
Average Rating for 4.2 2.8 4.3 4.5
Category

*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


Paired Comparison Opportunity


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
y mx b
mn xProductFinancialCapitaln b1
n

yCorporate Performanc
e mn xProductIntellectual Capitaln b2
n

mn xProductSocial Capitaln b3
n


Corporate Performance Measures
$60,000
Handspring
Market Capitalization Palm
$40,000

$20,000

$-

$600 Handspring
Gross Revenues $400
Palm

$200

$-

Handspring
Return on Assets 50.00% Palm
0.00%

-50.00%

-100.00%


Testing Hypothesis 1

yMarket Capitalization mxProductCapital Metrics b

yGross Revenues mxProductCapital Metrics b

yReturn on Assets mxProductCapital Metrics b


Market Capitalization

mxGross Margin mxTotal Assets
mxPatent Applications led by one quarter
y Market Capitaliza tion mxCurrent Patent Applications
R2 = 79% mxAverageRatings led by one quarter
b


Gross Revenues
mxNet Incom e mxTotal Assets
mxPatent Applications led by one quarter
mxCurrent Patent Applications
yGross Revenues mxResearchand Developm ent Expenditure
R2 = 93% mxNum berof Reviewsled by twoquarters
mxAverageRatings led by twoquarters
b

Return on Assets

mxNet Income
mxResearchand Development led by threequarters
yReturn on Assets
mxAverageRatings led by one quarter
R2 = 53%
b


Product Capital Model Performance
Gross Revenues Return on Assets Market Capitalization
R2 = 93% R2 = 53% R2 = 79%
70.00% 70.00% 70.00%
60.00% 60.00% 60.00%
50.00% 50.00% 50.00%
40.00%
40.00% 40.00%
30.00%
30.00% 30.00%
20.00%
20.00% 20.00% 10.00%
10.00% 10.00% 0.00%
0.00% 0.00% -10.00%

70.00% 70.00% 70.00%
60.00% 60.00% 60.00%
50.00% 50.00% 50.00%
40.00% 40.00% 40.00%
30.00% 30.00% 30.00%
20.00% 20.00% 20.00%

10.00% 10.00% 10.00%

0.00% 0.00% 0.00%

Product Financial Capital Product Intellectual Capital Product Social Capital


Testing Hypothesis 2

yMarket Capitalization mxProductCapital Metrics b

Compared to

yMarket Capitalization mxTraditional FinancialMetrics b


$70,000 Actual Market Capitalization
Millions

$60,000 Predicted Using Financial Metrics

$50,000 Predicted Using Product Capital Model

$40,000
$30,000
$20,000
$10,000
$0
-$10,000
Aug- Mar- Oct- Apr- Nov- May- Dec- Jun-03 Jan-
99 00 00 01 01 02 02 04


Gross Revenues
Actual Gross Revenues
$600
Millions

Predicted Using Financial Metrics
Predicted Using Product Capital Model
$500

$400

$300

$200

$100

$0
Jul-98 Dec-99 Apr-01 Sep-02 Jan-04


Return on Assets
Actual Return on Assets
Predicted Using Financial Metrics
20% Predicted Using Product Capital Model
10%
0%
-10%
-20%
-30%
-40%
-50%
-60%

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 Number of
Ratings Reviews
Market One Quarter
Capitalization
Gross Two Two Quarters
Revenues Quarters
Return on One Quarter
Assets


Hypothesis 3

Product Social Capital is a leading
indicator of future product revenues


Correlation Analysis
Product Social Capital
Lead Intervals
MINI 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 Behavior
Cumulative Sales
450
Thousands

400
350 Predicted
Actual
300
250
200
150
100 Leading by Five Months
2
50 R = 11%
0
Nov-01 May-02 Dec-02 Jun-03 Jan-04 Aug-04


Ford Thunderbird Leading Behavior
Cumulative Sales
40
Thousands

35
Predicted
30 Actual
25
20
15
10 Leading by Four Months
5 R2 = 12%
0
Nov-01 May-02 Dec-02 Jun-03 Jan-04 Aug-04


Handspring Leading Behavior
Cumulative Sales
$900
Millions

$800
Predicted
$700 Actual
$600
$500
$400
$300 Leading by Three Months
2
$200 R = 78%
$100
$-
Mar-00 Oct-00 Apr-01 Nov-01 May-02 Dec-02 Jun-03 Jan-04


Palm Leading Behavior
Cumulative Sales
$6,000
Millions

$5,000 Predicted
Actual
$4,000

$3,000

$2,000
No Predictive Capability
$1,000 R2 = 10%
$-


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 Peters
Once a dominant design is established, process
innovations become paramount
– James Utterback


Design as a Cost Center
Cost of new product design
Percentage of total cost

45,7 %

sion
eci
fD
o
nce
orta

17,5 %
12,5 %
Imp

12,0 %
6,9 % 5,5 %

Market Product Concept Detail Manufacturing Selling
Research Development Design design
Specification


Design-based Innovations,
not
Technology-based Innovations


Multivariate Linear Model

mn xProductFinancialCapitaln b1
n

yCorporate Performanc
e mn xProductIntellectual Capitaln b2
n

mn xProductSocial Capitaln b3
n


Product Financial Capital Metrics
• Gross Margin $200

Millions
$100

$-

$(100)

• Net Income $200
$-

Millions
$(200)
$(400)
$(600)

• Total Assets $2,000
Millions

$1,500
$1,000
$500
$-

Product Intellectual Capital Metrics
• Patent Applications 30

20

10

0

• New Product Releases 3

2

1

0

• Research and Millions
$50
$40

Development $30

Expenditures
$20
$10
$-


Product Social Capital Metrics
5
• Average Online 4.5
Customer Reviews
4

3.5

3

• Number of New 200

Customer Reviews 150

Posted 100

50

0


MINI Cooper
Monthly Sales

20

Thousands
15

10

5

0
Dec-01

Dec-02

Dec-03
Aug-01

Aug-02

Aug-03
Apr-02

Apr-03

Apr-04

Ford Thunderbird
Monthly Sales

20

Thousands
15

10

5

0

Aug-01

Aug-02

Aug-03
Feb-02

Feb-03

Feb-04

Palm
$600
$500
$400
$300
$200
$100
$-
Q4 1998
Q2 1999
Q4 1999
Q2 2000
Q4 2000
Q2 2001
Q4 2001
Q2 2002
Q4 2002
Q2 2003

Handspring
$600
$500
$400
$300
$200
$100
$- Q4 1998

Q3 1999

Q2 2000

Q1 2001

Q4 2001

Q3 2002

Q2 2003

Other Comprehensively Designed Products


“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

5

4

3

2

1

0


Decay of Product Social Capital

5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0


$15,000

Millions
Financial Only
$10,000

$5,000

$0

-$5,000

-$10,000
Dec-99 Apr-01 Sep-02 Jan-04
$70,000
Millions

$60,000 Market Capitalization
Financial Only
$50,000
$40,000
$30,000
$20,000
$10,000
$0
-$10,000

Gross Revenues
$140

Millions
$120 Gross Revenues
Financial Only
$100
$80
$60
$40
$20
$0
-$20
$600
Millions

Gross Revenues
$500 Financial Only
$400
$300
$200

$100
$0

Return on Assets
20%
0%
-20%

-40%
-60% Return on Assets
Financial Only
-80% Product Capital Model

-100%

20%
10%
0%
-10%
-20%
-30% Return on Assets

-40% Financial Only
-50%
-60%


Form of Financial Only Models

yMarket Capitalization mxTraditional FinancialMetrics

yGross Revenues mxTraditional FinancialMetrics

yReturn on Assets mxTraditional FinancialMetrics b


John Feland Thesis Defense Slides: 19 Nov 2004

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John Feland Thesis Defense Slides: 19 Nov 2004