By Paul Mugge
What is the impact of investments in knowledge workers and financial new product development (NPD) resources to new product financial performance?
Innovation doesn’t happen in a vacuum. Companies need to invest their human capital and financial resources wisely in order to produce breakthrough new products that will make them market leaders.
But deciding where and how to invest those resources is a head-scratcher for many in the C-suite.
That’s one of the reasons researchers Ann McFadyen and David Henard decided to conduct a study on resource investment related to new product development, the findings of which were recently published in the Journal of Product Innovation Management.
“There was little empirical research conducted on dedicated resources to the New Product Development process,” said McFadyen. “Further, few, if any, researchers have examined the impacts over time.” It’s also difficult to capture new-product performance, she added.
Dr. McFadyen, a former associate professor at N.C. State’s Poole College of Management who is now an associate professor at the University of Texas-Arlington, and Dr. Henard, who is on the Poole College faculty, presented their research at the recent CIMS fall meeting.
Here’s what they knew starting out. Studies conducted on resources related to new product development focused on variables readily amenable to management action. These include cost structure; resource allocation; order-of-entry decisions; use of technical know-how; use of physical assets; cycle time; and brand leveraging.
But Drs. McFadyen and Henard felt that the most important contributor to new product success is intangible: the knowledge worker. The importance of this hard-to-quantify resource was often being left out of the equation.
They posited that the primary focus of the new product development process should be consistently investing in knowledge workers over time, and that firms that invest in intangible resources outperform those that solely focus on the development of tangible resources.
And after analyzing the results of their research on 41 companies over a seven year period, they confirmed their first hypothesis: The greater the investment in knowledge workers, the better new products performed in the marketplace.
The researchers were also able to support their second hypothesis: More persistent investment in knowledge workers over time leads to greater new product performance. “Investments in current and future knowledge resources create a competence that results in the strongest and most enduring position a firm can develop,” said Dr. McFadyen.
Persistent investment in its people allows a firm to boost its capabilities; leveraging embedded knowledge produces capabilities and competencies that, over time, make the resource strategically unavailable to competitors, the authors said.
Finally, what about the relationship between total new product expenditures and a product’s performance? The researchers hypothesized that there was a positive relationship between higher new product development spending and overall new product performance, and they were right.
The higher a firm’s expenditures in NPD tangible resources, the better their new products performed. Investment in complementary physical assets is necessary to new product success. And while knowledge workers may be the differentiating factor, new-product performance is shaped by needed physical resources as well. “Knowledge workers and physical assets are not mutually exclusive,” said McFadyen.
And, not surprisingly, new product development expenditures are likely higher when a firm’s access to cash is strong, or a company has high expectations of short-term profits. Conversely, firms may choose to put off expenditures to boost quarterly results, which the researchers caution may negatively impact new product performance.
To attain their findings, Drs. McFadyen and Henard analyzed surveys prepared over seven years by 41 firms who are members of the Industrial Research Institute, CIMS, or both. They also reviewed seven years of company-reported data cross-checked against financials reported to Compustat during the same period. Their focus was on the contribution of new product development performance to overall revenues.
They captured new product performance with an innovation-to-sales ratio; the relative contribution of NPD revenues to overall company revenues; knowledge workers were captured as the number of dedicated NPD personnel relative to the total number of employees; and NPD capital expenditures were captured by the dollar invested in the firm’s technical, non-routine activities targeted toward transforming research findings into production and commercialization of new products.
Check back for more news from the CIMS meeting!