R&D Expenditures, New Product Introductions, and Sales Performance with Application to the Furniture Industry

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© Academy of Business & Scientific Research

*Corresponding author: Halim Kazan, Department of Operational Research,

Gebze Institute of Technology, Gebze Kampüsü, Kocaeli, Turkey.

E-Mail: halimkazan@gyte.edu.tr

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R&D Expenditures, New Product Introductions, and Sales Performance

with Application to the Furniture Industry

Halim Kazan

1

* and Mevlüt Baydar

2

1. Department of Operational Research, Gebze Institute of Technology, Gebze Kampüsü, Kocaeli, Turkey 2. Department of Operational Management, Gebze Instiute of Technology, Gebze Kampüsü, Kocaeli, Turkey

Research and Development, new product introduction are considered as important

determinants of overall company performance and most firms allocate great share to these

activities from their budget. Recent studies show that firms with sound R&D strategies

are performing better than those with no consistent R&D strategies. On the other hand,

unless companies offer new and innovative products, they feel in price competition.

Therefore new product introduction and R&D activities emerge as competitive tool to

distinguish companies from its competitors. Purpose of this study is to examine how new

product introduction and R&D activities influence firm’s performance as measured sales

growth with application to the furniture industry. A model developed and analyzed using

Lisrel software, and results yield that both new product introduction and R&D have

positive effect on performance.

Keywords:

Research and Development (R&D) Expenditures, New Product Introductions, Sales Growth, Furniture Industry, Financial Measures

INTRODUCTION

Research and Development (R&D) expenditures have been widely regarded as a growth engine and an important weapon for firms to enhance their overall performance and outperform their competitors. In particular, R&D expenditures have resulted in significant payback for most firms in terms of financial measures. For instance, a report published in Food Institute Report (FIR, 2008) claims that Kellogg’s net sales almost doubled due to the fact that Kellogg increased its R&D investment significantly from $106.4 million in 2002 to $179.3 million in 2007. Further, as pointed out by Johannson and Loof (2008), firms with

persistent R&D strategy generally outperform those with irregular R&D program and strategy. Along with generating obvious business benefits, R&D may also allow firms to enhance or create new products and services, and meet the ever-changing challenges of global marketplace. One would suggest that unless customers are offered new and innovative products, customers often buy lower-priced products. Thus, firms must have the ability to adapt and act swiftly to respond to customer requests and bring innovative ideas and new products. Although the demand for new products can be unpredictable, firm must innovate

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to compete.Thus, firms should recognize that they

need to be forward-thinking, innovate, and develop new products to prosper and survive in the market place. In other words, they can meet the challenges of today’s global marketplace by offering new products designed based on customer needs. As pointed out by [Storey and Easingwood, 1999], most firms introduce new products to develop a market or improve customer loyalty.

This research proposes to examine how a firm’s R&D expenditures and a new product introduction influence the firm’s performance as measured by sales growth with application to the furniture industry. R&D expenditures and new product introductions are expected to influence sales growth in a positive way. The assumption is that R&D spending and new product development efforts are important determinants of sales performance of a firm.

BACKGROUND

Extensive research has been done to study the link between R&D expenditures and firm value. Similarly, a number of empirical studies have been undertaken to investigate the impact of a new product introduction on firm performance. Past studies, however, investigated how R&D enhances a firm’s financial measures such as return on investment, market value, and stock price. Likewise, according to the published research, numerous studies examined the benefits new products bring to a company in various sectors. As argued by Storey and Easingwood (1999) new products produce multiple benefits for a firm.

The Impact of R&D expenditures

The relationship between R&D expenditures and firm performance has been a subject of great interest. For example, Spragia et al., (2003) suggest there is consistent positive association between the amount of R&D investment and the rate of product innovation, and the gross profit of a firm. Similarly, Liu and Tsai (2007) suggest there is also a link between new product introduction and R&D investment. They argue that new product development performance is significant when R&D tendency is higher. A study by Cincera et al.,

(2009) investigates the link between R&D investment and innovation. Their analysis of the performance of 304 R&D investing companies suggests a positive impact of the firm’s R&D investment on its market capitalization performance.

Some studies have focused on R&D expenditures and a firm’s financial measures. For instance, Morbey (2003) finds a strong relationship between R&D spending and growth in sales. He, however; suggests there is little correlation between R&D intensity and growth in profitability. A study by Andras and Srinivasan (2003) reaches almost the same conclusion and suggests R&D spending is positively related to firm profit margins. Regel (2002) analyzes 524 companies and concludes that there is a positive relationship between R&D expenditures and sales per employee and on return on assets. Shin et al., (2009) conclude that firms spending more on R&D have higher gross profit. Krasnikov and Jayachandran (2008) report that R&D and marketing capabilities have a strong association with firm performance.

Various studies suggest R&D expenditures can be vital to the success of a firm. For example, Lin et al. (2006) investigates the impact of R&D on firm’s financial performance and suggest that R&D play an essential role in the process of exploiting the value of technology assets. Some studies point out that R&D spending is imperative to materialize on a new product introduction (Lee and Chen, 2009), and most firms engage in R&D activities to develop innovative new products, to increase productivity, and profitability (Jefferson et al., (2006).

Despite significant R&D expenditures, some studies, nevertheless, suggest R&D investment does not always enhance firm performance. For instance, Holak et al., (2002) argue R&D spending can have either a positive and negative influence on firm performance under various circumstances. Similarly, Jaruzelski et al., (2004) conducted a study to investigate the linkage between R&D investment and firm performance. While the study identifies individual success stories the analysis of the top 1000 global innovation spenders finds statistically no significant relationship between

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R&D spending and measures of corporate success such as growth, and profitability.

The literature on R&D expenditures and firm value further includes references to the impact of R&D expenditures on generating Innovation and utilizing information available in the marketplace (Cohen and Levinthal, 1989), the impact on shares value (Chan et al., 1990), the linkage between R&D expenditures and stock value (Doukas and Switzer, 1992), strategic value of R&D expenditures (Sundaram et al., 1996), value creation through R&D (Kelm et al., 1995), the impact of R&D on reducing cost and creating demand (Levin and Reiss, 1988), and contribution of R&D expenditures to a country’s economy (Brox and Fader, 2006). These studies suggest R&D expenditures can be vital to the success of a firm in the market place.

The Impact of New Product Introductions

The impact of new product introductions has been examined from a number of perspectives. As early as in 1974, Reinmuth (1974) studied the impact of a new product introduction on firm performance. Chaney et al., (1991) carried out a similar study and used traditional event-study methodology to look into the impact of new product introductions on the market value of firms. Some studies focused on a specific industry and investigated the impact of a number of aspects of new product development projects on the success new financial services (Easingwood and Storey, 1995).

Pardue et al., (2000) studied market reaction to new product announcements and found that new product introductions had more favorable reactions in the long run. Debruyne et al., (2003) claim two thirds of new product launches meet reactions by competitors after their launch. They argue competitors fail to respond to radical innovations.

A new product introduction may be critical to the success of a global firm. For example, a study by Lim et al., (2006) demonstrates the importance of new product development for firms which pursue international opportunities.

A study by Lee and Chen (2009) investigates the financial impact of new product introductions on

firm’s stock price. A very comprehensive empirical study by Pauwels et al., (2009) examines the impact of new product introduction and promotions on firm’s financial metrics and stock market performance. They conclude that new product introductions have a positive impact on stock market value, market capitalization and firm value in the long run.

Sales growth may also depend on some other external and internal factors. For instance, Hultink et al., (2000) conclude that feedback provided by the sales manager, new product complexity, sales force’s new product selling experience and output reward are related positively to sales performance. These studies suggest a new product introduction has, in general, a positive impact on various financial measures of a firm.

THEORETICAL MODEL

The relative impact of research-and-development and a new product introduction on firm performance has been examined in terms of various financial measures. In general, the focus has been on market value. Since Introduction of new products and R&D have competitive effects (Hausman and Leonard, 2002), one would suggest that firms engage in R&D to remain competitive and sustain profitable growth.

Firms are motivated to measure the impact of R&D and new product introductions in today’s competitive markets because according to a report by Booz Allen and Hamilton (1982) firms spend a great deal of time and resources on new products that are never successful in the market place. A new product introduction may generate multiple benefits, however; in order to reap the maximum benefits from a new product introduction, firms are advised to be mindful of its timing. Some studies (Vega and Vokurka (2000) suggest being the first to bring a product into the market can generate significant benefits such as greater market share. On the other hand delaying the introduction of the product new products can lead to adverse consequences such as lower margins and lower market share.

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While most leading firms recognize that R&D is a

crucial factor in the survival of a company, measuring or quantifying its benefits is a challenge as R&D does not always guarantee higher profit or a greater market share. Thus, there is a clear need to evaluate the impact of R&D and a new product introduction on sales growth systematically and to make strategic decisions as resources are heavily invested in the development and introduction of a new product. Although sales growth may be considered as a short-term performance indicator, it would allow firm to forecast its contribution to business growth and profitability.

Whether R&D and new product introduction have the expected positive impact on sales growth is a subject of this study. In other words, the goal of this study is to investigate the effect of R&D expenditures and a new product introduction on sales growth (figure 1).

Figure 1. Research Model: The Impact of R&D expenditures and New Product Introductions on Sales Growth

There is large body of empirical literature examining the impact of R&D and new product introductions on firm value. Past studies focused mostly on service sectors and used various financial measures. This study too uses a financial measure in a specific industry.

TABLE 1 HERE

FACTOR ANALYSIS TO VERIFY SALES GROWTH MEASURE

Sales Development Estimate FIGURE 2 HERE

Analysis of structural model yield that factor loads for R&D 0.01 and new product development 0.05 which affect sales growth. According to this result, we could speculate that R&D is not as

effective on sales growth as new product development.

Sales Growth Standard Solution

Latent variables of R & D and new product introduction together with sales development variable are tested. In order to have verification, it should be checked weather the model is supported by data or not. It is possible to understand conformance from Chi-Square value and its significance level. If the proportion of Chi-Square to its degrees of freedom falls between 2 and 5, conformance is considered as good and data analysis shows the value is 3.10 which would be considered good. In addition, since RMSE value is 0.84, data is concluded as supporting the model. R&D’s latent variable loadings are 0.87, 0.92, 0.85, 0.04 and 0.81 for RD1, RD2, RD3, RD4 and RD% consequently. These values are considered as reliable except for RD4. These factors affect sales growth in high level. On the other hand new product introduction’s latent variable loadings are 0.70, 0.83, 0.86, 0.85 and 0.50 for Newpro1 Newpro2 Newpro3 Newpro4 and Newpro5 consequtively. Factors, except for Newpro5 are considered to affect sales growth in high level.

FIGURE 3 HERE Sales Growth T-Value

T values will tell us whether the factor loadings are significant or not. All of the t values for factor loadings of R&D latent variables, except for the one R&D (0.86), are higher than 1.96 and therefore significant. Likewise, t values for factor loadings of new product introduction are greater than 1.96 and therefore they are significant. Consequently, latent variables for sales growth, except for SD1 and SD5, are all significant.

FIGURE 4 HERE Sales Growth Modification Indices

In order to improve the Model, the difference Chi-Square value and its DF should be lowered. If Newproduc and R&D are reversely related both way, it will improve by 52.52 and by 52.52 consequently.

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FIGURE 5 HERE Sales Growth Expected Change

Connecting from Nevproduc to R&D factor and reversely at the same time improve the model by 0.49.

FIGURE 6 HERE TABLE 2 HERE CONCLUSION AND DISCUSSION

Goodness of fit statistics table shows that minimum fit function value is 0.95 which is very good. Root Mean Square Error of Approximation (RMSEA) value is 0.084, P-value for test of close fit (RMSEA<0.05) value is 0.00. Therefore new product introduction and R&D activities have effect on sales growth. Besides, RMR is 0.16, standardized RMR is 0.15, GFI is 0.89 and AGFI is 0.85 in the table, and all these values indicates that new product introduction and R&D factors have effect on sales growth.

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AUTHORS’ BIOGRAPHY

Dr. Halim Kazan received his B.S. from Selçuk University Department of Mathematic, and his M.S Department of Business of Administration Konya, and Ph.D. in Operations Research Social Science Institute from İstanbul University Turkey. Working in the area of Quantitative Methods, he studies concerned with Operations Rsearch. These include mathematical modeling, queuing models, transportation, manufacturing systems, decision analysis, the economic analysis of production systems, the design of cellular manufacturing systems, production planning, and scheduling systems. Before joining the Gebze Institute of Technology School of Business Administration, he held teaching positions at the Selçuk University, Konya, and was an Assistant Professor at Nigde University Nigde.

E-mail: halimkazan@gyte.edu.tr

Mevlüt Baydar received his B.S. from Selçuk University Department of Bussiness administration, and his M.S Department of Business of Administration New Hampshire College, and Ph.D. in Operations Management Gebze Institue of Technology from Kocaeli Turkey; working in the area of Quantitative Methods and marketing techniques.

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APPENDIX

Table 1: List of factors

New Production Research & Development Sales Growth

Newpro1: Number of new product developed in a year

RD1: Expenditures on R&D activities (its proportion in the budget or amount of expenditures)

SG1: Giving priority to customer needs Newpro2: Number of new products

developed and started being sold in stores at the same time period (Not all new products sold in the stores)

RD2: number of employees working for R&D

SG2: Adopting better strategies than competitors. Newpro3: Number of new designs

(fabric) used to develop new product

RD3: Number of exhibition R&D team attend abroad

SG3: Acting upon new product development and research activities Newpro4: Budget allocated / spent

for new product development activities

RD4: Number of exhibition R&D team attend within the country

SG4: Turning customer voice into value Newpro5: Number of hours spent for

new development activities

RD5: Number of hours spent for R&D activities

SG5: Developing and adopting such policies to maximize sales profit and market share

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Table 2: Goodness of Fit Statistics

Degrees of Freedom 88

Minimum Fit Function Chi-Square 273.76 (P = 0.0) Normal Theory Weighted Least Squares Chi-Square 264.78 (P = 0.0) Estimated Non-centrality Parameter (NCP) 176.78

90 Percent Confidence Interval for NCP 131.66 ; 229.53

Minimum Fit Function Value 0.95

Population Discrepancy Function Value (F0) 0.62 90 Percent Confidence Interval for F0 0.46 ; 0.80 Root Mean Square Error of Approximation (RMSEA) 0.084 90 Percent Confidence Interval for RMSEA 0.072 ; 0.095 P-Value for Test of Close Fit (RMSEA < 0.05) 0.00

Expected Cross-Validation Index (ECVI) 1.15 90 Percent Confidence Interval for ECVI 0.99 ; 1.33

ECVI for Saturated Model 0.84

ECVI for Independence Model 5.35

Chi-Square for Independence Model with 105 Degrees of Freedom 1504.93 Independence AIC 1534.93 Model AIC 328.78 Saturated AIC 240.00 Independence CAIC 1604.87 Model CAIC 477.99 Saturated CAIC 799.56

Normed Fit Index (NFI) 0.82

Non-Normed Fit Index (NNFI) 0.84

Parsimony Normed Fit Index (PNFI) 0.69

Comparative Fit Index (CFI) 0.87

Incremental Fit Index (IFI) 0.87

Relative Fit Index (RFI) = 0.78

Critical N (CN) 128.66

Root Mean Square Residual (RMR) 0.16

Standardized RMR 0.15

Goodness of Fit Index (GFI) 0.89

Adjusted Goodness of Fit Index (AGFI) 0.85 Parsimony Goodness of Fit Index (PGFI) 0.65

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Figure 2: Sales Development Estimate

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Figure 4: Sales Growth T-Value

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Figure

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