How firm innovativeness and unexpected product reliability failures affect profitability

Abstract

This study examines relationships among a firm’s innovativeness, its unexpected product failure costs, and financial performance. When a firm chooses to develop more innovative products and processes, product reliability outcomes become more uncertain. These uncertainties in turn may lead to unexpected warranty claims costs, as well as other costs that can erode the advantages of an innovation leadership position. This study empirically tests these propositions using publically reported warranty and financial data from 2003 to 2013, representing 482 unique firms. Consistent with prior studies, our estimation of the direct effects of firm innovativeness on financial performance shows an inverted–u–shaped relationship. Importantly, we find that more innovative firms also experience more unexpected product failure costs, and, consistent with organizational information processing theory, the negative impacts of these costs on financial performance extend well beyond the direct costs associated with remediating warranty claims. Further, we find that this relationship is robust to differing levels of industry innovativeness. Hence, our study suggests that product failure risks associated with firm innovativeness are significant, and act to at least partially offset the financial benefits of innovation leadership. In addition, standard accounting for product warranty claims may substantially understate the true costs associated with product failures, which appear to generate significant SG&A, fixed asset, and inventory costs above and beyond direct warranty processing costs. Our study also demonstrates a novel usage of warranty claims data. We discuss the implications of these findings for both managers and researchers.

Supplier Innovation Strategy and Performance: A Matter of Supply Chain Market Positioning

“…Finally, in line with the recommendations of Mackelprang et al. (), we averaged all innovation variables across t to t − 3 periods. Taking a four‐year average, with respect to innovation, provides a much more stable perspective of innovation by smoothing out much of the idiosyncratic variability.…”

Supplier dependence and R&D intensity: The moderating role of network centrality and interconnectedness

“…Thirumalai and Sinha (2011, p. 385) argued that “higher R&D intensity may also indicate the firm's innovation orientation with the focus on new product development.” R&D intensity is an indicator of a firm's absorptive capacity to recognize, acquire, and deploy external knowledge for product development (Bellamy et al, 2014; Liu et al, 2014; Tu et al, 2006). Researchers have suggested that a firm's innovativeness should be evaluated by the amount it invests in R&D that leads to novel and new products and increases product appeal for customers (Mackelprang et al, 2015).…”

“…Having access to reliable information is critical to supplier firms that are willing to produce novel products and allocate resources to R&D activities. Unreliable or incomplete information often constrains innovation by increasing uncertainty with respect to the development of a new product (Mackelprang et al, 2015).…”

“…The human genome project, led by the U.S. government from 1988 to 2003, generated $796 billion in economic impact and helped the U.S. economy generate $141 for every $1 spent on the R&D project (Tripp and Grueber, 2011). Investment in product and process innovation indicates a firm's R&D intensity and is a major outcome of collaborations, which involve a risky decision and highly uncertain returns over a long period of time (Eroglu and Hofer, 2014; Lim, 2015; Mackelprang et al, 2015). Understanding some of the factors that motivate suppliers, which are dependent upon major customers to enhance their R&D intensity, is critical.…”

Curvature based sampling of curves and surfaces

“…Fast and reliable inspection of the product has become an important factor due to the market requirements, such as low volume and high customised products (Mackelprang et al, 2015). An efficient sampling method enables the acquisition of small amount of point to reconstruct the surface and verify if the product is within tolerance.…”