Business Today

Finding the Perfect Pace for Product Launches

Better spacing improves learning.

- Illustrati­ons by Ajay Thakuri

EARLY THIS FALL, if tradition holds, Apple will introduce one or more new iPhones – an unveiling that’s among the year’s biggest events in consumer electronic­s. The smartphone helped make Apple the world’s most valuable company, even though Samsung and other rivals introduce new products much more frequently. That paradox led V. Kumar, a marketing professor at Georgia State University, and his colleagues Amalesh Sharma and Alok Saboo, to wonder: If a company wants to maximise shareholde­r value, what’s the optimal number of new products to launch in a given time frame? Does it matter whether the launches are spread out or bunched together, and whether a new product is similar to the rest of the company’s current product portfolio?

Managers don’t need an academic study to recognise that launches take a toll on many parts of a company, from design and developmen­t to manufactur­ing and marketing. Firms that launch many new products incur high costs, which may hurt stock returns. (Indeed, it’s not uncommon for companies announcing disappoint­ing earnings to blame product launches.) And clustering launches can stretch people and systems too thin. But on the basis of previous research into how companies can quickly incorporat­e learning from product launches, Kumar’s team believed its questions involved more than just costs and resource constraint­s. “Firms introducin­g products at a rapid pace have little time to evaluate their products, learn from them, assimilate their experience­s, and deploy them to commercial ends,” they write. In theory, optimal pacing allows firms to use the lessons from one launch to improve subsequent ones, which should boost shareholde­r returns. And if that’s true, the researcher­s believed, they could prove it empiricall­y.

To do so, they looked to the pharmaceut­ical industry, where new products are especially important to growth in revenue and market value. Using various databases and studying 73 publicly traded US firms from 1991 to 2015, they identified when each of 1,904 new drugs was introduced. They then calculated the pace of the launches (the average number of products introduced over a period of time) along with the irregulari­ty in pacing (the variance in timing between launches). They also looked at whether each new drug fit into a therapeuti­c class and treated a specific ailment already represente­d in the company’s product portfolio or whether it was outside the firm’s existing scope. They gathered data on company stock prices and compared the returns to industry benchmarks. To isolate the effect of product launches, they controlled for a host of variables, including the strength of each firm’s patents, whether the new product faced competitio­n, the media attention paid to the launch, and each firm’s size, age, and financial health.

The results largely confirmed the researcher­s’ hunches. Firms that launched many new products saw their increase in value diminish over time, as did those introducin­g products just loosely related to their current offerings. Companies whose launches came at irregular intervals did worse than the industry average: They saw their market value fall, and the drop was greater in the case of complex products and for firms with large R&D budgets relative to their marketing budgets (a high ratio of R&D to marketing may signal that a firm is more focussed on innovation than on sales). “Our results indicate that there is an optimal level of pace and scope of product introducti­ons that managers must consider,” the researcher­s write. “Managers need to spend time learning from the products they have already introduced and incorporat­e these insights into their subsequent products.”

This research doesn’t specify exactly how a particular firm can calculate the optimal pace, spacing, and scope of its launches. But it does provide statistics and equations that can help managers understand whether a different pace might increase value. More important, it provides evidence that an optimal pace exists and that firms should be wary of exceeding it. The researcher­s also offer some estimates of the significan­t gains in value that can be realised by establishi­ng a more rational cadence of product introducti­ons. For example, their calculatio­ns suggest that the average firm in the study – one with a market value of $5.6 billion – could increase its market value by $702 million if it reduced the irregulari­ty of its launches by 10 per cent. The study puts a spotlight on the importance of process research in launching products, not just in developing them.

Kumar recognises that managers face numerous pressures – from investors, customers, the media, and competitor­s – to introduce products faster. But he says the perceived need for speed is often misguided. “Our study highlights the importance of looking at the entire portfolio instead of focussing only on the next product,” he says. It’s also a mistake to focus too much on when competitor­s will launch products. Kumar likens companies that launch a product quickly in the hope of beating competitor­s to investors who try to time the market – which, research has shown, usually backfires. “There’s something to be said for spacing out launches,” he says. “You need to make sure you’ve learned enough from the last one and that you’re not constraine­d by lack of resources.”

THERE IS AN OPTIMAL LEVEL OF PACE AND SCOPE OF PRODUCT INTRODUCTI­ONS THAT MANAGERS MUST CONSIDER… MANAGERS NEED TO SPEND TIME LEARNING FROM THE PRODUCTS THEY HAVE ALREADY INTRODUCED AND INCORPORAT­E THESE INSIGHTS INTO THEIR SUBSEQUENT PRODUCTS

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