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The OCR Glossary

Product Performance

Owen N. Parker & Mitchell C. Olsen

The long-term success of any organization depends, to a large extent, on the success of its products. Researchers have argued that corporate credibility is defined by the extent to which a company is willing and able to deliver products that satisfy customer needs and wants. Reputation itself is often defined in terms of the demonstrated capability of a firm to deliver high-quality products and services. When studying corporate reputation, then, it is essential to also discuss product performance. An emphasis on performance—specifically the success of new products—is paramount because so many new products fail. Empirically, new products’ failure rate is typically found to be 40 percent or higher. For novel innovations, the incidence of failure is even higher, as 76 percent of these commercialized products never reach the broader market.

As with all important organizational constructs, it is necessary to consider both how product performance is measured as well as the antecedents that ultimately lead to different performance outcomes. This entry first discusses the subjective and objective ways of measuring product performance; then it discusses the internal and external considerations that influence how well a product performs.

Measurement Approaches

Given the resources, time, and outcome uncertainty that go into the development of a single new product, it is important to assess the success or failure of that product. However, how is this success or failure defined? The literature demonstrates that there are a number of ways to examine the performance of a new product, each with its own advantages and disadvantages. Many of these approaches can be categorized as belonging to a different level of either a subjective or an objective perspective. From a subjective standpoint, performance assessments are drawn from the perceptions of either the consumer or the manager. Objective measures can capture performance at the market level or firm level.

Subjective: Consumer Level

At this level, product performance is assessed according to consumers’ knowledge of the product. This knowledge includes their awareness of and familiarity with the product. In addition, it is important to consider the degree to which consumers intend to purchase the product and, if they have purchased the product, their level of satisfaction with it. Managers will also want to understand consumers’ overall evaluations of the product, their attitudes toward it, and their perceptions of its quality.

These measures of product performance provide rich insight into consumer reactions to a product and, thus, can be valuable inputs to predicting objective measures of a product’s performance. They can also provide insight as to why an existing product may not be objectively performing as expected (either above or below expectations). The disadvantages with measuring product performance at this level include the inherent difficulty of properly capturing constructs (e.g., attitudes, associations) through consumer surveys and the inability to provide an objective financial assessment of performance.

Subjective: Manager Level

The group that is most knowledgeable about a product is generally the group of employees who actually work toward the success of the product on a daily basis. Therefore, it can be desirable to approach company managers to assess their evaluation of how their product has performed. This assessment can involve survey questions and/or in-depth interviews related to a product’s performance versus their expectations and the specific goals and objectives they have set for it internally. Managers can provide a depth of perspective around the success or failure of a product that cannot be captured from third parties (e.g., consumers) or sales data. Arguably, managers are also the group with the most vested interested in the performance of the product, so there are many advantages in recording their perspective.

However, there are at least two primary disadvantages with basing performance measurement on managers’ evaluations. First, there may be a certain degree of bias in their assessment, especially since part of their job may involve selling the upside of these products. Relatedly, their internal performance evaluations are likely based on the success of their products, thus creating a greater incentive to view current and past product projects as winners as opposed to losers. Even though responses to these survey instruments are almost always confidential, such that managers have no direct incentive to self-aggrandize, the inherent biases in managers’ subjective assessments represent a critical drawback of such measurement approaches. Second, performance evaluations may differ if the data are provided by the product’s project managers versus senior managers. Project managers are usually more familiar with the details of the product and follow it more closely than senior managers, who are likely to be less involved with the day-to-day activities surrounding the product. As such, project managers’ evaluations are likely to be more accurate, even if no less influenced by the biases inherent in this self-reporting approach.

Objective: Market Level

While the consumer mind-set and manager-level survey metrics may be lacking in terms of their ability to provide a financial assessment of performance, this is where both market- and firm-level indicators excel. There are multiple ways in which objective performance can be evaluated at these levels. Market-level indicators include the product’s return on investment, as well as its sales, market share, and profit. However, examining the absolute sales performance of a new product may provide a distorted view, especially if most of those sales came by cannibalizing the sales of the firm’s existing products. Therefore, additional insight can be gleaned by examining the incremental sales, market share, and profit to the brand, firm, and/or category.

Other market-level considerations include the product’s price elasticity and its diffusion rate—in other words, how quickly it is adopted by consumers within a marketplace. Of the consumers who initially purchase the product, it is also important to consider how many become loyal, repeat purchasers versus one-time buyers, since repeat purchasers represent greater value to the firm over the long term. For all of the aforementioned market-level performance measures, the time period must be specified. Performance evaluations may change depending on whether they are measured over the short term (less than 36 months after the product’s launch) or long term (more than 36 months).

There are clearly many market-level indicators to consider. The advantage is that these measures provide an objective, dollar-based assessment of a product’s performance within its marketplace and can relate directly to managers’ performance metrics. The disadvantage is that relying on single-item market-level assessments may provide a distorted view of a product’s performance. For example, unit sales gains may come at the expense of profitability. Therefore, when evaluating product performance, the researcher may want to consider using a multi-item measure or evaluating multiple dimensions separately to pinpoint when and where performance trade-offs may occur. Such multi-item approaches are often more diagnostically informative than single-item measures because multiple items allow for the triangulation of performance in a more comprehensive manner. Examining the variance between these multiple measures can also provide critical information, since a greater level of agreement across performance measures enables the researcher to have greater confidence in the validity of the performance assessment.

Objective: Firm Level

Products, much like plant and equipment, are tangible assets that are valuable to the firm. Therefore, additional value is provided to the researcher who examines the stock market reactions, or returns, to product announcements and introductions. Financial markets assess companies’ new products based on the expected future cash flows they are predicted to generate. Through event analysis, changes in the stock price reveal how much the product adds to, or subtracts from, the overall value of the firm.

Generally, market-level performance indicators quantify the current strength of the product, whereas financial measures at the firm level provide a forward-looking indicator of the product’s potential. While firm-level measures can provide a dollar value, the disadvantage of assessing product performance via stock market value is that, compared with market-level outcomes, a certain degree of subjectivity (i.e., the stock’s value reflects investors’ expected future cash flows) and volatility surround that dollar value. Furthermore, given their future-oriented nature, performance indicators at this level may not be as relevant to product managers’ immediate decisions.

Some factors that influence product performance itself are discussed in the next section.

Antecedents to Product Performance

Various factors are known to contribute to favorable product performance. Many of these antecedents can be subdivided into two main categories, consisting of considerations that are either internal or external to the firm.

Internal Considerations: The Development Process

In general, there are certain conditions internal to the firm that must be met for a product to perform well. Many of these conditions are tied to the product development process itself. A firm must be able to effectively engage in the predevelopment of a product, which is the ideation process, through which ideas are generated. Throughout the development phases, performance prospects are improved if the firm allocates dedicated human and research and development resources to the development process, so that the process can continue unimpeded despite varying resource availability.

During development, the firm must also be able to effectively employ technology to suit the demands of the product being developed. Note that this is separate from whether the product is perceived as technologically sophisticated, which is a matter of consumer perception. Another consideration is how the firm handles the actual launch of the product. This is a nontrivial matter, since the launch (i.e., the commercialization) of a product is one of the most critical points in the product’s life cycle. The importance of the launch phase is amplified by consumers’ tendency to repeatedly purchase the same set of products and the difficulty in convincing customers to expand or replace this set of frequently purchased products.

Internal Considerations: Alignment of Goals and Resources

Also important to product performance is the effective alignment between the goals and resources of the entities involved in the development and manufacturing of a product. One concern during the development process is that the product should adhere to a set of potentially restrictive criteria to ensure that the outcomes of the development process align with the expectations at the start of the process. This control process is often executed through a series of “stage gates,” where the product is periodically evaluated through a series of increasingly stringent assessments. There is an inherent tension between this control process and product performance, however, since too much control over a product’s development trajectory can limit the learning and adaptation that occur through the development process and hurt the ultimate performance of the product.

Another important consideration is that all of the entities involved in the manufacturing of a product have aligned goals and incentives. One such dimension of alignment is the degree of cooperation between the firm producing the product and its component suppliers. Various contextual factors can contribute to the role of supplier-to-firm cooperation in product performance. Under conditions of rapid technological change, for example, sharing knowledge with suppliers improves product performance, because this reduces some of the inherent uncertainties of the product development process, ensuring that the goals of the supplier and the firm are more closely aligned. This process of mutual alignment can be expensive but advantageous. The product performance of radically innovative products, in particular, has been shown to improve when the commitment of the firm’s suppliers is significant. Supplier commitment includes, for example, tailoring the supplier’s operational investments to the production requirements of the customer firm. Product performance can be increased further when the venture itself is committed to the supplier, such as via a long-term alliance with the supplier, or the people and resources dedicated to ensuring production alignment with that supplier.

External Considerations

In addition to ensuring internal alignment between the processes, resources, and entities involved in the product development process, superior product performance also depends on the alignment between the firm’s efforts and numerous factors present in its external environment. An external factor that has been shown to significantly influence a product’s performance is its order of entry into the marketplace. Timing has been shown to play a large role in both the cost and the returns of new product activities. For instance, early entrants have been found to have higher long-term market shares than followers. For some time, the idea was advanced that, in general, first movers are in a much better position to achieve long-term competitive advantages. However, the direct link between entry timing and performance is dependent on a number of moderating influences, such as whether the first mover is an industry incumbent or a newcomer. Industry incumbents, in particular, can benefit by being early followers. In general, early followers incur lower marketing and research and development costs than first movers and are consequently more profitable than first movers. Later entrants can also learn from the first mover’s mistakes and offer a product that is better able to meet consumers’ wants and needs.

At the product level, there are several characteristics of products that have consistently been associated with superior product performance. In general, a product must fulfill one or more of the following criteria: It must be relatively superior to competing products or potential substitutes, meet customer needs, be difficult to imitate, and rely on capabilities and technologies that are easily and readily leveraged by the focal firm.

Much of the external assessments of a product’s superiority or sophistication depend on consumer perceptions, which are not always accurate or precise. When consumers make these subjective judgments about a product, they draw on both relevant information, which is information that is diagnostically useful for making judgments about the product relative to other alternatives, and irrelevant information, which presents no objectively meaningful basis for making decisions about the product’s objective utility. Interestingly, scholars have found that the prevalence of irrelevant information about a product (e.g., the product can be ordered online; product commercials are aired on NBC and CBS) actually weakens consumers’ beliefs in the product’s ability to provide a certain benefit, since this excess information dilutes the importance of the diagnostically relevant information about the product’s capabilities.

Since new ventures often revolve around a single product, product performance is often tied to the performance of the new venture. In the literature, scholars have found that knowledge of, and engagement with, customers promotes a product’s advantage in the marketplace relative to its competitors. However, smaller firms, such as those offering just one product, are often more likely than larger firms to pursue this kind of close customer interaction, ostensibly because the survival and success of the core product greatly influence the fate of such small entities. While firms of all sizes can benefit from customer relationship building, smaller firms are often incapable of the more expensive, large-scale marketing techniques available to larger firms and, therefore, must disproportionately depend on customer relationship building to help drive product performance. Indeed, recent research on new venture performance provides support for the notion that formal processes for acquiring market information, such as information derived from customer visits, trade shows, or trade publications, can improve product performance, especially in established markets.

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