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IDEO Know How Talk 2 Dec 2004 regarding my PhD work

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  • 1. Product Capital Model Measuring the Value of Design to Corporate Performance John Feland John Feland Copyright© 2004 22 November, 2004 1
  • 2. John Feland Copyright© 2004 22 November, 2004 2
  • 3. Measures of Product Development Cost Schedule Performance John Feland Copyright© 2004 22 November, 2004 3
  • 4. Cost, Schedule, and PerformanceAre Not Enough John Feland Copyright© 2004 22 November, 2004 4
  • 5. Drawing Inspiration from the past • "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 John Feland Copyright© 2004 22 November, 2004 5
  • 6. Comprehensive Design Technical Business Factors Factors (feasibility) (viability) Human Factors (desirability) John Feland Copyright© 2004 22 November, 2004 6
  • 7. “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 John Feland Copyright© 2004 22 November, 2004 7
  • 8. Measures of Design Performance • Productivity • Lead Time • Total Product Quality – Conformance Quality – Design Quality John Feland Copyright© 2004 22 November, 2004 8
  • 9. Measures of Design Performance • Productivity ->Cost • Lead Time ->Schedule • Total Product Quality ->Performance – Conformance Quality – Design Quality John Feland Copyright© 2004 22 November, 2004 9
  • 10. Product Capital Model Product Social Capital Product Product Financial Intellectual Capital Capital John Feland Copyright© 2004 22 November, 2004 10
  • 11. 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 John Feland Copyright© 2004 22 November, 2004 11
  • 12. 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 John Feland Copyright© 2004 22 November, 2004 12
  • 13. 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 John Feland Copyright© 2004 22 November, 2004 13
  • 14. Sample Online Customer Review John Feland Copyright© 2004 22 November, 2004 14
  • 15. 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 John Feland Copyright© 2004 22 November, 2004 15
  • 16. 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 John Feland Copyright© 2004 22 November, 2004 16
  • 17. 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 John Feland Copyright© 2004 22 November, 2004 17
  • 18. Hypothesis 2 The Product Capital Model metrics outperform purely financial measures in describing the efforts of an enterprise pursing product innovation John Feland Copyright© 2004 22 November, 2004 18
  • 19. Hypothesis 3 Product Social Capital is a leading indicator of future product revenues John Feland Copyright© 2004 22 November, 2004 19
  • 20. Candidate Products for Study John Feland Copyright© 2004 22 November, 2004 20
  • 21. Paired Comparison Opportunity John Feland Copyright© 2004 22 November, 2004 21
  • 22. 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 John Feland Copyright© 2004 22 November, 2004 22
  • 23. General Linear Model y mx b mn xProductFinancialCapitaln b1 n yCorporate Performanc e mn xProductIntellectual Capitaln b2 n mn xProductSocial Capitaln b3 n John Feland Copyright© 2004 22 November, 2004 23
  • 24. 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% John Feland Copyright© 2004 22 November, 2004 24
  • 25. Testing Hypothesis 1 yMarket Capitalization mxProductCapital Metrics b yGross Revenues mxProductCapital Metrics b yReturn on Assets mxProductCapital Metrics b John Feland Copyright© 2004 22 November, 2004 25
  • 26. 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 John Feland Copyright© 2004 22 November, 2004 26
  • 27. 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 John Feland Copyright© 2004 22 November, 2004 27
  • 28. Return on Assets mxNet Income mxResearchand Development led by threequarters yReturn on Assets mxAverageRatings led by one quarter R2 = 53% b John Feland Copyright© 2004 22 November, 2004 28
  • 29. Useful Measures of ProductCapital • Product Financial Capital – Gross Margin – Net Income – Total Assets • Product Intellectual Capital – Patent Applications – Research and Development Expenditures • Product Social Capital – Average Customer Rating – Incidence of New Customer Reviews John Feland Copyright© 2004 22 November, 2004 29
  • 30. 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 John Feland Copyright© 2004 22 November, 2004 30
  • 31. Testing Hypothesis 2 yMarket Capitalization mxProductCapital Metrics b Compared toyMarket Capitalization mxTraditional FinancialMetrics b John Feland Copyright© 2004 22 November, 2004 31
  • 32. Market Capitalization $70,000 Actual Market CapitalizationMillions $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 John Feland Copyright© 2004 22 November, 2004 32
  • 33. Gross Revenues Actual Gross Revenues $600Millions 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 John Feland Copyright© 2004 22 November, 2004 33
  • 34. Return on Assets Actual Return on Assets Predicted Using Financial Metrics20% Predicted Using Product Capital Model10% 0%-10%-20%-30%-40%-50%-60% Jul-98 Dec-99 Apr-01 Sep-02 Jan-04 Product Capital Model R2=53% Financial Only R2=80% John Feland Copyright© 2004 22 November, 2004 34
  • 35. 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 John Feland Copyright© 2004 22 November, 2004 35
  • 36. Product Social Capital ExhibitsLeading Behavior Average Number of Ratings Reviews Market One Quarter Capitalization Gross Two Two Quarters Revenues Quarters Return on One Quarter Assets John Feland Copyright© 2004 22 November, 2004 36
  • 37. Hypothesis 3 Product Social Capital is a leading indicator of future product revenues John Feland Copyright© 2004 22 November, 2004 37
  • 38. John Feland Copyright© 2004 22 November, 2004 38
  • 39. 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 John Feland Copyright© 2004 22 November, 2004 39
  • 40. Ford Thunderbird Monthly Sales 20 Thousands 15 10 5 0 Aug-01 Aug-02 Aug-03 Feb-02 Feb-03 Feb-04 John Feland Copyright© 2004 22 November, 2004 40
  • 41. 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 John Feland Copyright© 2004 22 November, 2004 41
  • 42. Handspring $600 $500 $400 $300 $200 $100 $- Q4 1998 Q3 1999 Q2 2000 Q1 2001 Q4 2001 Q3 2002 Q2 2003 John Feland Copyright© 2004 22 November, 2004 42
  • 43. Correlation Analysis Predictive interval (Months) 7 6 5 4 3 2 1 0 -1 * MINI Tbird Palm Handspring * Only the “Number of Comments” correlated to Palm Gross Revenues John Feland Copyright© 2004 22 November, 2004 43
  • 44. 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 John Feland Copyright© 2004 22 November, 2004 44
  • 45. 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 John Feland Copyright© 2004 22 November, 2004 45
  • 46. 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 John Feland Copyright© 2004 22 November, 2004 46
  • 47. 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% $- Jul-98 Dec-99 Apr-01 Sep-02 Jan-04 John Feland Copyright© 2004 22 November, 2004 47
  • 48. Product Social Capital PredictsFuture 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 John Feland Copyright© 2004 22 November, 2004 48
  • 49. Unique Insights from Online ReviewsJohn Feland Copyright© 2004 22 November, 2004 49
  • 50. Sample Online Customer Review John Feland Copyright© 2004 22 November, 2004 50
  • 51. Decay of Product Social Capital 5 4 3 2 1 0 John Feland Copyright© 2004 22 November, 2004 51
  • 52. Decay of Product Social Capital 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 John Feland Copyright© 2004 22 November, 2004 52
  • 53. Indication of Product Adoption Early Adopters Innovators Early Majority Late Majority Laggards John Feland Copyright© 2004 22 November, 2004 53
  • 54. Indication of Product Adoption 35 30 25 20 15 10 5 0 Fe 9 00 01 02 03 00 01 02 03 -9 g- g- g- g- b- b- b- b- g Fe Fe Fe Au Au Au Au Au John Feland Copyright© 2004 22 November, 2004 54
  • 55. Indication of Product Adoption 35 30 25 20 15 10 5 0 Fe 9 Fe 0 Fe 1 Fe 2 03 Au 0 Au 1 Au 2 Au 3 -9 0 0 0 0 0 0 0 g- g- g- g- b- b- b- b- gAu Early Adopters Innovators Early Majority Late Majority Laggards John Feland Copyright© 2004 22 November, 2004 55
  • 56. John Feland Copyright© 2004 22 November, 2004 56
  • 57. MINI Cooper Means Exterior Design Interior Design Overall Rating Fuel Economy Fun-To-Drive Performance Build Quality Less than 25% Comfort 25% 25% - 50% 55% Greater than 50% Performance ## Comfort 0% 0% Fuel Economy 0% 0% 2% Fun-To-Drive 0% 0% 0% 0% Interior Design ## ## 0% 0% 0% Exterior Design 0% 0% 0% 0% 3% 0% Build Quality 0% 6% 0% 0% 0% 4% 0% Reliability ## ## 0% 0% 0% ## 0% 5% John Feland Copyright© 2004 22 November, 2004 57
  • 58. MINI Cooper Variance Exterior Design Interior Design Overall Rating Fuel Economy Fun-To-Drive Performance Build Quality Less than 25% Comfort 25% 25% - 50% 55% Greater than 50% Performance 1% Comfort 0% ## Fuel Economy 6% ## 9% Fun-To-Drive ## 6% 0% ## Interior Design ## ## 1% ## ## Exterior Design ## 0% 0% 0% 2% 1% Build Quality 0% 0% 0% 0% 0% 0% 0% Reliability 0% 0% 0% 0% 0% 0% 0% ## John Feland Copyright© 2004 22 November, 2004 58
  • 59. Thunderbird Mean Exterior Design Interior Design Overall Rating Fuel Economy Fun-To-Drive Performance Build Quality Less than 25% Comfort 25% 25% - 50% 55% Greater than 50% Performance 3% Comfort 1% 0% Fuel Economy 0% 0% 0% Fun-To-Drive 0% 0% 0% 0% Interior Design 2% 1% ## 0% 0% Exterior Design 0% 0% 0% 0% ## 0% Build Quality ## 5% ## 0% 0% ## 0% Reliability 0% ## 0% 0% 0% 0% 0% 0% John Feland Copyright© 2004 22 November, 2004 59
  • 60. Thunderbird Variance Exterior Design Interior Design Overall Rating Fuel Economy Fun-To-Drive Performance Build Quality Less than 25% Comfort 25% 25% - 50% 55% Greater than 50% Performance ## Comfort 0% 0% Fuel Economy 0% 0% 0% Fun-To-Drive 0% 0% 0% 0% Interior Design 0% 0% ## 3% 0% Exterior Design 0% 0% 0% 0% ## 0% Build Quality 0% 0% ## 9% 0% ## 0% Reliability 2% ## 1% 0% 0% 0% 0% 0% John Feland Copyright© 2004 22 November, 2004 60
  • 61. John Feland Copyright© 2004 22 November, 2004 61
  • 62. Other Comprehensively Designed Products John Feland Copyright© 2004 22 November, 2004 62
  • 63. Key Insights 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 John Feland Copyright© 2004 22 November, 2004 63
  • 64. Implications forResearch 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 John Feland Copyright© 2004 22 November, 2004 64
  • 65. Next Steps • Comprehensive Design Activity – > Product Capital Metrics –> Enterprise Performance • Develop and validate Comprehensive Design methods • Apply Comprehensive Design methods to industrial practices John Feland Copyright© 2004 22 November, 2004 65
  • 66. One final contribution John Feland Copyright© 2004 22 November, 2004 66
  • 67. Questions? John Feland Copyright© 2004 22 November, 2004 67
  • 68. Innovation literature Designers as knowledge brokers – Hargadon and Sutton Inspiration from user observations, fail faster to succeed sooner – Tom Kelley You cant be a leader over the next five years and not be totally into design… If you dont already know how, learn how to speak design – Tom Peters Once a dominant design is established, process innovations become paramount – James Utterback John Feland Copyright© 2004 22 November, 2004 68
  • 69. 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 John Feland Copyright© 2004 22 November, 2004 69
  • 70. Design-based Innovations, not Technology-based InnovationsJohn Feland Copyright© 2004 22 November, 2004 70
  • 71. Multivariate Linear Model mn xProductFinancialCapitaln b1 n yCorporate Performanc e mn xProductIntellectual Capitaln b2 n mn xProductSocial Capitaln b3 n John Feland Copyright© 2004 22 November, 2004 71
  • 72. 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 $- John Feland Copyright© 2004 22 November, 2004 72
  • 73. 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 $- John Feland Copyright© 2004 22 November, 2004 73
  • 74. 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 John Feland Copyright© 2004 22 November, 2004 74
  • 75. Market Capitalization $15,000 Millions Market Capitalization Financial Only $10,000 Product Capital Model $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 Product Capital Model $40,000 $30,000 $20,000 $10,000 $0 -$10,000 Dec-99 Apr-01 Sep-02 Jan-04 John Feland Copyright© 2004 22 November, 2004 75
  • 76. Gross Revenues $140 Millions $120 Gross Revenues Financial Only $100 Product Capital Model $80 $60 $40 $20 $0 -$20 Dec-99 Apr-01 Sep-02 Jan-04 $600 Millions Gross Revenues $500 Financial Only Product Capital Model $400 $300 $200 $100 $0 Jul-98 Dec-99 Apr-01 Sep-02 Jan-04 John Feland Copyright© 2004 22 November, 2004 76
  • 77. Return on Assets 20% 0% -20% -40% -60% Return on Assets Financial Only -80% Product Capital Model -100% Dec-99 Apr-01 Sep-02 Jan-04 20% 10% 0% -10% -20% -30% Return on Assets -40% Financial Only Product Capital Model -50% -60% Jul-98 Dec-99 Apr-01 Sep-02 Jan-04 John Feland Copyright© 2004 22 November, 2004 77
  • 78. Form of Financial Only Models yMarket Capitalization mxTraditional FinancialMetrics yGross Revenues mxTraditional FinancialMetrics yReturn on Assets mxTraditional FinancialMetrics b John Feland Copyright© 2004 22 November, 2004 78
  • 79. 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 John Feland Copyright© 2004 22 November, 2004 79