THE FINANCIAL REWARDS OF NEW PRODUCT INTRODUCTIONS

1. THE FINANCIAL REWARDS OF NEW PRODUCT INTRODUCTIONS MBA 555 Justin Lesak Team 1 Erin McCluskey Jonathan Brito Stephanie Sharkey Han Shen

2. Product Innovations • Product innovation is the result of bringing to life a new way to solve the customer's problem – through a new product that benefits both the customer and the sponsoring company.1 • Innovation is accomplished in all different industries. • Electronics • Food Industry • Automotive 1"Driving Growth Through Innovation, Robert B. Tucker

3. Topic • Investigate "how" new product introductions affect the firm financially. • Examined personal computer industry as study area. • Used 3 criteria ("key drivers of firm value") to see how it was affected by new product introductions. • Profit Rate • Profit Rate Persistence • Firm Size via Asset Growth      

4. Objective • Effect of new product introductions on the 3 drivers of firm value. • Relationship between new product introductions and components of firm profitability. • Gross operating income • SG&A (selling, general & admin) expenditures • Components of SG&A

5. Research History • General history suggests that innovation allows a firm to gain "degree of temporary market power" that they can leverage in 4 different ways • New features in new product equate to higher sales and firm growth • Enhance profits by willingness by buyers to pay for a superior/more innovative brand • May lower cost b/c the new product "sells itself" to current customers; lower SG&A         • Innovation allows for firm to transition to another plateau and allow persistent profits over longer time

6. Methodology • Method used: Linear regression • Consistent • Unable to investigate previous research methods. additionally no previous research has directly looked at this "HOW" component • Appropriate: • Yes because the method empirically estimates the effect of new product introductions on the performance of the firm. • Innovative: • In the sense this goal of HOW has not been directly investigated before and the combination of data appears to be the most objective possible way to examine it.

7. Econometric Model • The proposed model estimates the effect of new product introductions on the business performance of firm i in years t (Perfit).  • Perfit = αi + β1 Introit + β2 Introit-1 + φ Perfit-1 + εit • Introit and Introit-1 are variables reflecting the effects of current and lagged new product introductions. • Perfit-1: Lagged performance • εit: residual error •  The presence of both current-term and lags new product introductions allows for serial correlation as well as a state dependent dynamic relationship.

8. Data and Results • The Case has three hypotheses and the data will either support it or deny it.. • H1 - Firm profitability is positively related to its new product activity. • H2 - The persistence of firm profitability is positively related to its new product activity. • H3 - Firm size, as reflects in asset growth, is positively related to its new product activity.

9. Policy • The policy conclusions of the case are that product introductions enhance firm profitability by increasing firm size and profit rate. • Rather than incurring the additional expenses associated with selling its older products to new customers, a firm has lower SG&A expense by selling new products to its current customer. • The appropriate marketing strategy for a company in the personal computer industry is to just supply the customer instead of spending money on advertising to attract them.