Profits Crash When Firms Delay Product Launches
Study Shows Cost of Firms Failing to Launch Products on Time
As Microsoft recently demonstrated with its belated Office 2007 software package and Vista operating system, postponing new product launches can take a heavy toll on the bottom line, according to a new study.
"We find that product introduction delays have a statistically significant negative effect on profitability," says Vinod Singhal, an operations management professor at Georgia Tech College of Management. "The effect of the delay is negative regardless of when it occurred in the product development process or the time of year of the announcement."
Companies in the pharmaceutical, hardware, and software industries are particularly susceptible to negative fallout from delayed launches because their products tend to be much more highly anticipated than, say, a new brand of soda, note Singhal and his research collaborator, Kevin Hendricks, operations management professor at the Wilfrid Laurier University.
"Software and hardware firms operate in a highly dynamic environment, characterized by short product life cycles, intense competition, rapid changes in product and process technology, and high growth rates in demand," Singhal says. "Although product life cycles in the pharmaceutical industry are longer, delays in product introductions shorten the period of exclusivity granted by patent protection. In the meantime, doctors start prescribing other drugs."
Surprisingly, little previous research has attempted to estimate the economic consequences of postponed product launches on these industries, write Singhal and Hendricks in their study, "The Effect of Product Introduction Delays on Operating Performance."
In the recent case of Microsoft, the company lost 10 percent of expected sales from June to December 2006 because of delays getting Vista and Office 2007 into the marketplace. Sony also suffered greatly last year when design issues kept its highly anticipated Playstation 3 videogame machines off store shelves for months longer than originally planned.
Product introduction delays can have a number of negative consequences on revenues, note the researchers. "In a competitive industry, customers may not be willing to wait, choosing to buy a competitor's product instead," Singhal says. "When product life cycles are short, delays reduce the window of opportunity to generate revenues. Delays can also cause the product to become obsolete faster."
Singhal and Hendricks analyzed the financial performance of a diverse set of over 450 publicly traded firms that experienced product introduction delays from 1987 to 2003. In the study, the researchers used operating income to measure profitability. They consider operating income (sales minus the cost of goods sold as well as general, administrative, and selling expenses) the best measure because it is not obscured by tax considerations, interest expenses, etc.
Examining operating performance both before and after product delay announcements, the researchers found that the median decline in return on assets ranged from 2.7 to 3.4 percent (mean decline of 6.0 to 7.7 percent) over a three-year period around the year of the delay announcement. The median decline in return on sales ranged from 1.5 to 3.1 percent (mean decline of 12.6 to 19.6 percent), while the median decline in sales over assets ranged from 5.9 to 11.0 percent (mean decline of 9.3 to 11.5 percent).
Announcements of product delays decreased average shareholder value by about 12 percent, according to the researchers. "Our results suggest that negative stock market reaction to product introduction delays is actually quite rational given the impact of delays on profitability," they write.
Reasons for delayed product launches vary, including poor management of the development process, lack of coordination among different functional areas, and shortages of resources, note the researchers. "Our results underscore the importance of planning and executing the launch of new products," Singhal says. "More attention should be paid to product development and innovation issues."
Writer: Brad Dixon, College of Management