IDEO Know How Talk 2 Dec 2004 regarding my PhD work

• 1. Product Capital ModelMeasuring the Value of Design toCorporate Performance John Feland John Feland Copyright 200422 November, 2004 1

2. John Feland Copyright 2004 22 November, 2004 2 3. Measures of Product Development Cost SchedulePerformance 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 products development." Donald Schon John Feland Copyright 2004 22 November, 2004 5 6. Comprehensive Design Technical Business FactorsFactors (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 Suttonp. 24, Knowing Doing Gap, 2000John Feland Copyright 2004 22 November, 20047 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 CapitalProductProductFinancialIntellectual Capital Capital John Feland Copyright 2004 22 November, 200410 11. Product Financial Capital DefinedCreation and Consumption of FinancialCapital supporting the development ofProductsFinancial measures associated withproduct 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 ExpendituresJohn 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) ProductCustomer Product Third Party Design SupportAccessories SoftwarePercentage of99%10%19%33%Comments*Average Rating for 4.22.84.34.5Category *Reviews can be classified in more than one category John Feland Copyright 2004 22 November, 200415 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 Modelcorrelate to corporate performance,acting as state variables describing theefforts of the enterprise in the pursuit ofproduct innovation John Feland Copyright 2004 22 November, 2004 17 18. Hypothesis 2 The Product Capital Model metricsoutperform purely financial measures indescribing the efforts of an enterprisepursing 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 Capitalnb2 n mn xProductSocial Capitaln b3 n John Feland Copyright 2004 22 November, 200423 24. Corporate Performance Measures $60,000 Handspring Market Capitalization Palm $40,000 $20,000 $-$600 Handspring Gross Revenues $400 Palm$200$- Handspring Return on Assets50.00%Palm0.00%-50.00% -100.00% John Feland Copyright 2004 22 November, 200424 25. Testing Hypothesis 1 yMarket CapitalizationmxProductCapital Metrics b yGross Revenues mxProductCapital Metrics b yReturn on Assets mxProductCapital Metrics b John Feland Copyright 2004 22 November, 200425 26. Market CapitalizationmxGross Margin mxTotal AssetsmxPatent Applications led by one quarter y Market Capitaliza tion mxCurrent Patent Applications R2 = 79% mxAverageRatings led by one quarterbJohn Feland Copyright 200422 November, 200426 27. Gross RevenuesmxNet 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, 200427 28. Return on Assets mxNet IncomemxResearchand Development led by threequarters yReturn on AssetsmxAverageRatings led by one quarter R2 = 53%bJohn Feland Copyright 2004 22 November, 200428 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 PerformanceGross RevenuesReturn on AssetsMarket 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, 200430 31. Testing Hypothesis 2yMarket Capitalization mxProductCapital Metrics bCompared toyMarket Capitalization mxTraditional FinancialMetrics bJohn 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 000101 02 0204 John Feland Copyright 200422 November, 200432 33. Gross RevenuesActual Gross Revenues $600MillionsPredicted Using Financial MetricsPredicted Using Product Capital Model $500 $400 $300 $200 $100 $0Jul-98 Dec-99Apr-01Sep-02Jan-04 John Feland Copyright 2004 22 November, 200433 34. Return on AssetsActual Return on AssetsPredicted Using Financial Metrics20% Predicted Using Product Capital Model10% 0%-10%-20%-30%-40%-50%-60% Jul-98 Dec-99 Apr-01 Sep-02Jan-04 Product Capital Model R2=53% Financial Only R2=80%John Feland Copyright 2004 22 November, 200434 35. Implications of Product Capital Model Demonstrates the impact of DesignPerformance on Business Performance Improved characterization of MarketCapitalization and Gross Revenues overpurely financial measuresJohn Feland Copyright 2004 22 November, 2004 35 36. Product Social Capital ExhibitsLeading BehaviorAverage Number ofRatings ReviewsMarketOne QuarterCapitalizationGross Two Two QuartersRevenuesQuartersReturn on One QuarterAssetsJohn Feland Copyright 2004 22 November, 200436 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 1050 Dec-01Dec-02 Dec-03Aug-01 Aug-02Aug-03Apr-02 Apr-03Apr-04 John Feland Copyright 2004 22 November, 2004 39 40. Ford ThunderbirdMonthly Sales20Thousands151050 Aug-01Aug-02Aug-03 Feb-02 Feb-03 Feb-04 John Feland Copyright 2004 22 November, 200440 41. Palm $600 $500 $400 $300 $200 $100$-Q4 1998Q2 1999Q4 1999Q2 2000Q4 2000Q2 2001Q4 2001Q2 2002Q4 2002Q2 2003John Feland Copyright 2004 22 November, 200441 42. Handspring$600$500$400$300$200$100$- Q4 1998 Q3 1999 Q2 2000 Q1 2001 Q4 2001 Q3 2002 Q2 2003John Feland Copyright 2004 22 November, 200442 43. Correlation Analysis Predictive interval (Months)76543210-1 *MINI TbirdPalm Handspring * Only the Number of Comments correlated to Palm Gross Revenues John Feland Copyright 200422 November, 200443 44. MINI Cooper Leading BehaviorCumulative Sales450Thousands400350Predicted Actual300250200150100Leading by Five Months 250R = 11% 0 Nov-01May-02 Dec-02 Jun-03Jan-04 Aug-04John Feland Copyright 2004 22 November, 200444 45. Ford Thunderbird Leading BehaviorCumulative Sales40Thousands35 Predicted30 Actual25201510Leading by Four Months 5 R2 = 12% 0Nov-01May-02Dec-02 Jun-03Jan-04 Aug-04John Feland Copyright 200422 November, 2004 45 46. Handspring Leading Behavior Cumulative Sales $900Millions $800Predicted $700 Actual $600 $500 $400 $300 Leading by Three Months2 $200 R = 78% $100$- Mar-00 Oct-00 Apr-01 Nov-01 May-02 Dec-02 Jun-03 Jan-04 John Feland Copyright 200422 November, 200446 47. Palm Leading Behavior Cumulative Sales$6,000Millions$5,000PredictedActual$4,000$3,000$2,000 No Predictive Capability$1,000 R2 = 10% $-Jul-98Dec-99Apr-01Sep-02Jan-04 John Feland Copyright 200422 November, 200447 48. Product Social Capital PredictsFuture Sales Measures of Product Social Capital predictproduct sales Three of four cases exhibit predictivebehavior Lead interval of three to five months Number of Customer Reviews is primaryleading indicatorJohn Feland Copyright 2004 22 November, 2004 48 49. Unique Insights fromOnline 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 Capital543210John Feland Copyright 2004 22 November, 2004 51 52. Decay of Product Social Capital54.543.532.521.510.50 John Feland Copyright 2004 22 November, 2004 52 53. Indication of Product Adoption Early AdoptersInnovatorsEarly Majority Late Majority Laggards John Feland Copyright 2004 22 November, 200453 54. Indication of Product Adoption353025201510 5 0 Fe 9 00 01 02 0300010203 -9g-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 Adoption353025201510 5 0Fe 9Fe 0Fe 1Fe 2 03Au 0Au 1Au 2Au 3 -9 0 0 0 0 0 0 0g-g-g-g-b-b-b-b- gAu Early AdoptersInnovatorsEarly Majority Late Majority Laggards John Feland Copyright 2004 22 November, 200455 56. John Feland Copyright 2004 22 November, 2004 56 57. MINI Cooper MeansExterior DesignInterior DesignOverall RatingFuel Economy Fun-To-DrivePerformanceBuild QualityLess than 25%Comfort25% 25% - 50%55% Greater than 50% Performance## Comfort0% 0% Fuel Economy 0% 0% 2% Fun-To-Drive 0% 0% 0%0% Interior Design## ## 0%0% 0% Exterior Design0% 0% 0%0% 3% 0% Build Quality0% 6% 0%0% 0% 4% 0% Reliability## ## 0%0% 0% ## 0% 5%John Feland Copyright 200422 November, 200457 58. MINI Cooper VarianceExterior DesignInterior DesignOverall RatingFuel Economy Fun-To-DrivePerformanceBuild QualityLess than 25%Comfort25% 25% - 50%55% Greater than 50% Performance1% Comfort0% ## Fuel Economy 6% ## 9% Fun-To-Drive ## 6% 0%## Interior Design## ## 1%## ## Exterior Design## 0% 0%0% 2% 1% Build Quality0% 0% 0%0% 0% 0% 0% Reliability0% 0% 0%0% 0% 0% 0% ##John Feland Copyright 200422 November, 200458 59. Thunderbird MeanExterior DesignInterior DesignOverall RatingFuel Economy Fun-To-DrivePerformanceBuild QualityLess than 25%Comfort25% 25% - 50%55% Greater than 50% Performance3% Comfort1% 0% Fuel Economy 0% 0% 0% Fun-To-Drive 0% 0% 0%0% Interior Design2% 1% ##0% 0% Exterior Design0% 0% 0%0% ## 0% Build Quality## 5% ##0% 0% ## 0% Reliability0% ## 0%0% 0% 0% 0% 0%John Feland Copyright 200422 November, 200459 60. Thunderbird VarianceExterior DesignInterior DesignOverall RatingFuel Economy Fun-To-DrivePerformanceBuild QualityLess than 25%Comfort25% 25% - 50%55% Greater than 50% Performance## Comfort0% 0% Fuel Economy 0% 0% 0% Fun-To-Drive 0% 0% 0%0% Interior Design0% 0% ##3% 0% Exterior Design0% 0% 0%0% ## 0% Build Quality0% 0% ##9% 0% ## 0% Reliability2% ## 1%0% 0% 0% 0% 0%John Feland Copyright 200422 November, 200460 61. John Feland Copyright 2004 22 November, 2004 61 62. Other Comprehensively Designed ProductsJohn Feland Copyright 2004 22 November, 2004 62 63. Key Insights 1. Higher levels of design performance, asmeasured by the Product Capital Model,correlate to enterprise performance 2. Product Social Capital is a leadingindicator of product sales 3. Use of Online Customer Reviews assource of data in support of designresearch John Feland Copyright 2004 22 November, 2004 63 64. Implications forResearch and Practice Industry: Comprehensive Design as a Competitive Advantage Cost, Schedule and Performance areinsufficient to support product innovation Product Capital Model measures the designimpact 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 literatureDesigners as knowledge brokers Hargadon and SuttonInspiration from user observations, fail faster to succeedsooner Tom KelleyYou cant be a leader over the next five years and not betotally into design If you dont already know how,learn how to speak design Tom PetersOnce a dominant design is established, processinnovations become paramount James UtterbackJohn Feland Copyright 2004 22 November, 200468 69. Design as a Cost Center Cost of new product designPercentage of total cost 45,7 %sionecifDonce orta 17,5 % 12,5 %Imp 12,0 %6,9 % 5,5 % Market Product ConceptDetail Manufacturing Selling Research Development Design designSpecification John Feland Copyright 2004 22 November, 200469 70. Design-based Innovations, not Technology-based InnovationsJohn Feland Copyright 2004 22 November, 2004 70 71. Multivariate Linear Modelmn xProductFinancialCapitaln b1nyCorporate Performance mn xProductIntellectual Capitalnb2nmn xProductSocial Capitaln b3nJohn Feland Copyright 2004 22 November, 200471 72. Product Financial Capital Metrics Gross Margin$200 Millions$100 $-$(100) Net Income $200 $- Millions$(200)$(400)$(600) Total Assets$2,000Millions$1,500$1,000$500 $-John Feland Copyright 2004 22 November, 200472 73. Product Intellectual Capital Metrics Patent Applications30 20 100 New Product Releases 3 2 1 0 Research and Millions$50$40Development $30Expenditures$20$10$-John Feland Copyright 2004 22 November, 2004 73 74. Product Social Capital Metrics 5 Average Online4.5 Customer Reviews 4 3.5 3 Number of New200 Customer Reviews 150 Posted 100 500 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-99Apr-01 Sep-02 Jan-04$70,000 Millions$60,000Market Capitalization Financial Only$50,000 Product Capital Model$40,000$30,000$20,000$10,000 $0-$10,000 Dec-99Apr-01 Sep-02 Jan-04 John Feland Copyright 2004 22 November, 200475 76. Gross Revenues $140Millions $120 Gross RevenuesFinancial Only $100Product Capital Model$80$60$40$20 $0 -$20 Dec-99 Apr-01Sep-02Jan-04 $600MillionsGross Revenues $500 Financial OnlyProduct Capital Model $400 $300 $200 $100 $0 Jul-98 Dec-99 Apr-01Sep-02 Jan-04John Feland Copyright 2004 22 November, 200476 77. Return on Assets 20%0% -20% -40% -60% Return on AssetsFinancial Only -80% Product Capital Model-100% Dec-99Apr-01Sep-02Jan-0420%10% 0% -10% -20% -30% Return on Assets -40% Financial OnlyProduct Capital Model -50% -60% Jul-98Dec-99 Apr-01Sep-02 Jan-04 John Feland Copyright 2004 22 November, 200477 78. Form of Financial Only Models yMarket CapitalizationmxTraditional FinancialMetrics yGross RevenuesmxTraditional FinancialMetrics yReturn on AssetsmxTraditional FinancialMetrics bJohn Feland Copyright 200422 November, 200478 79. Correlation AnalysisProduct Social Capital Lead Intervals MINI Cooper 1, 5 months Thunderbird 1-6 months Handspring0-4 quarters Palm* current quarter* Only the Number of Comments correlated to Palm Gross Revenues John Feland Copyright 200422 November, 2004 79