In the U.S. auto industry, innovation is critical to firm growth. At the same time, innovation is costly, the new product failure rate is high, and success quickly breeds imitation by competitors.
In this high-stakes environment, managers must demonstrate to CEOs and CFOs the impact of new product introductions on their firm’s financial performance and stock market value. Yet their efforts are often hampered by the subjectivity of assessments and by the use of different time frames for evaluating impacts.
Here, authors Pauwels, Silva-Risso, Srinivasan, and Hanssens apply econometric methods to overcome these shortcomings. Using time-series analyses, they investigate the impact of new product introductions on top-line (revenue), bottom-line (income), and stock market performance. They also examine the impact of promotional incentives and compare them with new product introduction effects.
The researchers focus on six manufacturers who account for 86% of the market—Chrysler, Ford, General Motors, Honda, Nissan, and Toyota. Overall, the study finds, new product introductions have positive short-term and long-term impacts on the firm’s top-line, bottom-line, and stock market value. Moreover, the impact on stock market value—the performance measure of most interest to top executives—increases over time. On average, the study found, the ability of product introduction to explain firm value forecast deviations is eight times higher after two quarters than it is in the week of product launch.
The introduction of the Honda Odyssey mini-van, for example, resulted in a small initial gain in Honda’s market-to-book ratio after one week (an elasticity of .0002), which grew steadily to a fivefold higher value by week eight, and stabilized at this level. This long-term elasticity of .001 may not seem much, but it corresponds to a $32 million increase in Honda’s market-to-book ratio for a single new product introduction.
Over the total sample of six car makers and six product categories, new product introductions had a positive impact on market capitalization in the long run for 81% of all brands.
In terms of incentive programs, the researchers find that investor response mirrors known consumer reaction to rebates: in the short run, top-line, bottom-line and stock market performance all improve. However, these effects are short-lived for all but firm top-line performance. Thus, while repetitive use of incentives seems to maintain, and even grow, a firm’s revenues, profit margins are eroded and bottom-line performance and stock market value
Interestingly, product introductions have a negative and persistent impact on the use of incentives. The more new products manufacturers introduce, the less they rely on promotional incentives. The Honda Odyssey again offers a case in point: a major redesign of the 1999 vehicle permanently increased margins, and the minivan continues to enjoy strong sales virtually without consumer incentives.
These findings have several important implications for product innovation strategy.
First, and foremost, in order to boost the long-term market capitalization of their companies, executives should focus on new product introductions and resist relying on rebates. While consumer incentives may yield a short-term lift or prevent severe sales erosion while product innovation projects are in the pipeline, they do not provide a viable long-term answer to the manufacturer’s challenges in this industry.
Second, while product introduction is typically viewed favorably by investors in the short run, the market acceptance or commercial success of the introduction largely determines its long-run impact on firm value. Thus, innovative firms need to pay special attention to appropriating product innovation rewards in the marketplace in order to enhance stock returns.
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