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IDEO Know How Talk 2 Dec 2004 regarding my PhD work
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.
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
Product Capital • 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 to yMarket Capitalization mxTraditional FinancialMetrics b John Feland Copyright© 2004 22 November, 2004 31
32.
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 32
33.
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 33
34.
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 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
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 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
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 48
49.
Unique Insights from
Online Reviews John 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- g Au 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 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 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 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 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 Innovations John 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
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