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Product Design and Financial Performance

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Liang Guo, Assistant Professor, La Rochelle Business School


Today, there is a growing belief that ""good design is good business"" (Tom Watson Jr., former head of IBM). High-quality design is a powerful strategic tool that firms can use to gain a sustainable competitive advantage, to create corporate distinctiveness in an otherwise product- and image-surfeited marketplace, to give personality to a new product so that it can stand out from the crowd, and to reinvigorate interest in existing products (Kotler and Rath, 1984). Consider, for example, the Razr mobile phone, which helped drive a remarkable turnaround at one of the oldest technology firms in America, vaulting Motorola past Samsung and into the No. 2 spot in the cell-phone market, just behind sagging leader Nokia (Stone, 2005); Apple's hip-looking iMac, which not only revivified the company, boosting its market share and profits, but also started a trend toward style and fashion in personal computers (Reinhardt and Hamm, 1999; Sage et al., 1998); and the launch of the iPhone, which boosted Apple's stock price to a record high. Design works, and companies are taking note. Studies from the Dutch Design Institute (Roerdinkholder, 1995) and The Economist (1995) indicate that design budgets among American and European firms are increasing 8% to 20% a year. Automakers like GM and Ford have boosted spending on design by at least 50% since 1990 (BusinessWeek, 2004a). Chinese, Taiwanese, Korean, and Hong Kong firms are also committing huge resources to design in order to build global brands (Nussbaum, 2006).However, despite the wide recognition of the importance of product design, our academic research largely lags behind the practice. As Gemser and Leenders (2001) point out, ""Research on industrial design in general, and on the relationship between industrial design and company performance in particular, is extremely light (Bloch, 1995; Potter et al., 1991; Roy and Potter, 1993; Ulrich and Pearson, 1998). At best, the few studies which have been conducted in this area identify possible contributions of industrial design and/or offer anecdotal evidence on the positive effect of industrial design on company performance"" (pp.28-29). Hertenstein, Platt and Veryzer (2005) also state that few studies have attempted to quantify the contribution of good industrial design to improved company performance, leaving managers with the intuitive senses that good industrial design is profitable, based primarily on anecdotal evidence (p.4). This paper intends to offer useful complements to prior studies in the field by overcoming these three shortcomings. I hypothesized that product design effectiveness affects firms' financial performance in terms of sales, cost reduction, profitability, growth rates, and market return, and that these design-performance linkages are contingent upon the type of industry involved.I then tested these six hypotheses with six latent class regression models with a sample of 577 design award-winning firms and of 524 non-winners randomly selected within the same industries and countries. The paper concludes with a discussion of its theoretical and managerial contributions, its limitations, and opportunities for future research.




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