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Product Capital Model
      Measuring the Value of Design to
          Corporate Performance

                               John Feland

 John Feland Copyright© 2004    22 November, 2004   1
John Feland Copyright© 2004   22 November, 2004   2
Measures of Product Development
                                 Cost




   Schedule                                          Performance

   John Feland Copyright© 2004   22 November, 2004             3
Cost, Schedule, and Performance
Are Not Enough




   John Feland Copyright© 2004   22 November, 2004   4
Comprehensive Design

               Technical                      Business
               Factors                         Factors
               (feasibility)                        (viability)



                                Human
                                Factors
                                (usability)

  John Feland Copyright© 2004   22 November, 2004                 5
Product Capital Model
                             Product
                           Social Capital




        Product                                        Product
        Financial                                    Intellectual
         Capital                                       Capital
   John Feland Copyright© 2004   22 November, 2004                  6
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   7
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   8
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   9
Sample Online Customer Review




   John Feland Copyright© 2004   22 November, 2004   10
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                        11
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   12
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   13
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   14
Hypothesis 3


 Product Social Capital is a leading
   indicator of future product revenues




   John Feland Copyright© 2004   22 November, 2004   15
Candidate Products for Study




   John Feland Copyright© 2004   22 November, 2004   16
Paired Comparison Opportunity




   John Feland Copyright© 2004   22 November, 2004   17
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   18
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                            19
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          20
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              21
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                      22
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                      23
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                  24
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                                25
Testing Hypothesis 2

  yMarket Capitalization               mxProductCapital Metrics b

                                    Compared to


yMarket Capitalization               mxTraditional FinancialMetrics b



      John Feland Copyright© 2004     22 November, 2004                 26
Market Capitalization
           $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


           John Feland Copyright© 2004      22 November, 2004                                        27
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

       John Feland Copyright© 2004   22 November, 2004                                    28
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%
   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                                    29
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   30
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

    John Feland Copyright© 2004     22 November, 2004                  31
Hypothesis 3


 Product Social Capital is a leading
   indicator of future product revenues




   John Feland Copyright© 2004   22 November, 2004   32
John Feland Copyright© 2004   22 November, 2004   33
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                             34
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                          35
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                     36
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              37
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                        38
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


    John Feland Copyright© 2004   22 November, 2004   39
John Feland Copyright© 2004   22 November, 2004   40
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

   John Feland Copyright© 2004   22 November, 2004   41
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
   John Feland Copyright© 2004   22 November, 2004   42
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   43
Questions?




   John Feland Copyright© 2004   22 November, 2004   44
One final contribution




   John Feland Copyright© 2004   22 November, 2004   45
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
    John Feland Copyright© 2004   22 November, 2004                     46
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

    John Feland Copyright© 2004   22 November, 2004                      47
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                        48
Design-based Innovations,
             not
 Technology-based Innovations


John Feland Copyright© 2004   22 November, 2004   49
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                            50
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                51
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               52
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   53
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                                                                                   54
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                                                              55
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                                                                                         56
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                                                              57
Other Comprehensively Designed Products




    John Feland Copyright© 2004   22 November, 2004   58
“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             59
Decay of Product Social Capital

  5

  4

  3

  2

  1

  0




      John Feland Copyright© 2004   22 November, 2004   60
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   61
John Feland Copyright© 2004   22 November, 2004   62
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                                        63
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                                    64
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                                65
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                  66

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John Feland Thesis Defense Slides: 19 Nov 2004

  • 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 Performance Are Not Enough John Feland Copyright© 2004 22 November, 2004 4
  • 5. Comprehensive Design Technical Business Factors Factors (feasibility) (viability) Human Factors (usability) John Feland Copyright© 2004 22 November, 2004 5
  • 6. Product Capital Model Product Social Capital Product Product Financial Intellectual Capital Capital John Feland Copyright© 2004 22 November, 2004 6
  • 7. 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 7
  • 8. 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 8
  • 9. 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 9
  • 10. Sample Online Customer Review John Feland Copyright© 2004 22 November, 2004 10
  • 11. 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 11
  • 12. 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 12
  • 13. 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 13
  • 14. 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 14
  • 15. Hypothesis 3 Product Social Capital is a leading indicator of future product revenues John Feland Copyright© 2004 22 November, 2004 15
  • 16. Candidate Products for Study John Feland Copyright© 2004 22 November, 2004 16
  • 17. Paired Comparison Opportunity John Feland Copyright© 2004 22 November, 2004 17
  • 18. 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 18
  • 19. 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 19
  • 20. 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 20
  • 21. 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 21
  • 22. 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 22
  • 23. 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 23
  • 24. 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 24
  • 25. 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 25
  • 26. Testing Hypothesis 2 yMarket Capitalization mxProductCapital Metrics b Compared to yMarket Capitalization mxTraditional FinancialMetrics b John Feland Copyright© 2004 22 November, 2004 26
  • 27. Market Capitalization $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 John Feland Copyright© 2004 22 November, 2004 27
  • 28. 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 John Feland Copyright© 2004 22 November, 2004 28
  • 29. 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% 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 29
  • 30. 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 30
  • 31. 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 John Feland Copyright© 2004 22 November, 2004 31
  • 32. Hypothesis 3 Product Social Capital is a leading indicator of future product revenues John Feland Copyright© 2004 22 November, 2004 32
  • 33. John Feland Copyright© 2004 22 November, 2004 33
  • 34. 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 34
  • 35. 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 35
  • 36. 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 36
  • 37. 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 37
  • 38. 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 38
  • 39. 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 John Feland Copyright© 2004 22 November, 2004 39
  • 40. John Feland Copyright© 2004 22 November, 2004 40
  • 41. 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 John Feland Copyright© 2004 22 November, 2004 41
  • 42. 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 John Feland Copyright© 2004 22 November, 2004 42
  • 43. 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 43
  • 44. Questions? John Feland Copyright© 2004 22 November, 2004 44
  • 45. One final contribution John Feland Copyright© 2004 22 November, 2004 45
  • 46. 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 John Feland Copyright© 2004 22 November, 2004 46
  • 47. 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 John Feland Copyright© 2004 22 November, 2004 47
  • 48. 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 48
  • 49. Design-based Innovations, not Technology-based Innovations John Feland Copyright© 2004 22 November, 2004 49
  • 50. 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 50
  • 51. 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 51
  • 52. 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 52
  • 53. 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 53
  • 54. 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 54
  • 55. 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 55
  • 56. 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 56
  • 57. 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 57
  • 58. Other Comprehensively Designed Products John Feland Copyright© 2004 22 November, 2004 58
  • 59. “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 59
  • 60. Decay of Product Social Capital 5 4 3 2 1 0 John Feland Copyright© 2004 22 November, 2004 60
  • 61. 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 61
  • 62. John Feland Copyright© 2004 22 November, 2004 62
  • 63. 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 63
  • 64. 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 64
  • 65. 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 65
  • 66. 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 66