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Return on Design

Companies that receive awards for product design see an immediate uptick in stock price.

Bottom Line: Companies that receive awards for product design see an immediate uptick in stock price.

Superior product design has been widely touted as a competitive advantage. Apple is hailed for the sparse aesthetics and natural functionality of its products; Kimberly-Clark owes its boost in profitability to its more practical diaper design; and Lego’s financial turnaround was fueled by its rededication to making fun, easy-to-use toys. But the discrete value of product design can be hard to quantify.

We don’t have much evidence of whether good design affects a firm’s market value, for instance — even though that would be a sure sign that shareholders reward outstanding design, as they do positive earnings reports or hot new products.

To get around the subjective judgment of what defines excellent design, the authors of a new study decided to trust the experts. A number of professional design organizations hand out prestigious awards for functionality, aesthetics, user interface, creativity, and environmental impact.

By gauging a company’s stock movement over a two-day period following the announcement of an award, the authors were able to quantify the value shareholders place on superior design. (They also controlled for other factors that might color shareholder opinion, such as a firm’s reputation, size, and previous awards record.) The authors examined abnormal stock returns — or the degree to which a firm’s stock price deviated from investors’ expectations — following 264 announcements of design awards for commercialized products from 1998 through 2011.

The analysis showed that shareholders significantly boost the value of firms that are recognized for their effective product design. After controlling for the other factors that might sway investors, the authors found that the increase in stock prices over the period after the announcement ranged from 0.95 percent to 1.02 percent. Investors seem to believe that design honors reflect well on the capabilities and long-term profitability of the firm.

The increase in stock price is higher for smaller firms, which suggests they should consider putting their more limited resources into projects with a high design upside. Consumer-oriented designs also facilitated higher returns than industrial products, indicating that B2C firms should pay special attention to creating relevant and intriguing design dimensions.

The competitiveness of an industry, by contrast, did not have much bearing on market reaction. Nor did the growth potential of a firm. Good design may matter irrespective of business cycles or the cutthroat nature of a particular sector.

Shareholders significantly boost the value of firms that are recognized for their effective product design.

“Because effective product design can lead to higher market value, firms should not consider design as just a technical domain, but rather should leverage it as a strategic tool and invest in design resources and building design capabilities,” the authors write. The trend at many firms to add designers to their top management team is a testimony to the strategic importance of product design in today’s business environment.

Source: “Product Design Awards and the Market Value of the Firm,” by Yusen Xia, Vinod R. Singhal, and G. Peter Zhang, Production and Operations Management, June 2016, vol. 25, no. 6

Matt Palmquist

Matt Palmquist is a freelance business journalist based in Oakland, Calif.

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