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Use Your Product Liability Process to Create Value Through New Product Development

Use Your Product Liability Process to Create Value Through New Product Development
In this last segment, we’re going to look at the question, very difficult question, of whether product liability can actually be used to create value. When I discuss product liability and product liability risk management with business executives, I find that they become very agitated and upset. And one of their fundamental attitudes is, how can we deal with customers who are idiots? Why do we have to redesign products for idiots? Why do we have to develop warnings for idiots? Why aren’t people using common sense? And to some extent, I agree with them. I don’t know if you’ve seen some of the warnings that appear on products, but here are some examples.
Caution, the contents of this bottle should not be fed to fish. This is on a bottle of shampoo for dogs. Do not use while sleeping or unconscious, this is on a hand-held massaging device. Do not place this product into any electronic equipment, on a case of a chocolate CD in a gift basket. Shin pads can not protect any part of the body they do not cover on a pair of shin guards made for bicyclists. This product not intended for use as a dental drill, on an electronic rotary tool. Do not drive with sunshield in place, on a cardboard sunshield that keeps the sun off the dashboard. Do not eat toner, on a toner cartridge for laser printer.
Do not use orally, on a toilet bowl cleaning brush. Warning, has been found to cause cancer in laboratory mice, on a bottle of rat poison. For indoor or outdoor use only, on a string of Christmas lights. Now I’m not sure where else you would use the Christmas lights if you’re not using it indoors or outdoors. Wearing of this garment does not enable you to fly, on a child-sized Superman costume. Beware, to touch these wires is instant death. Anyone found doing so will be prosecuted, on a sign at a railroad station. Do not attempt to stop the blade with your hand, in the manual for a Swedish chainsaw.
And Warning: May contain nuts, on a package of peanuts. And I have here a source if you’re interesting in following that up further. So, I understand why executives can be upset. But my concern is that in their anger about product liability law, they might be missing a great opportunity. And more specifically, let’s go back to our hair dryer example where we looked at forseeable uses of the hair dryer. We looked at potential risks and then the need for redesign and warnings. Now if you can overcome your anger and look closely at that system, at that process, what are your customers telling you?
If you look closely at forseeable uses, I think they’re saying look, we have the need for a product like a hairdryer to dry our clothes, to shrink plastic, to thaw pipes, to dust, etc. We have the need for these products. These products are not on the market, so we have to use our hairdryers for these uses. In otherwords what you’re getting when you go through this process of designing a safe product is free marketing research on what your customers want and you can then use this research for new product development. There was a legendary president of General Motors who put it this way once, he said, to discuss Consumer Research as a functional activity gives the wrong impression.
In its broad implications, it’s more in the nature of an Operating Philosophy, which to be fully effective, must extend through all phases of the business. Recognizing that the quickest way to profits, and permanent assurance of such profits, is to serve the customers in ways in which the customer wants to be served. And so here, going through the product liability prevention process, you are getting a lot of free marketing research on what your customers want. And I highly recommend that you use these results to develop new products rather that simply being angry at customers who perhaps are misusing your products. Now, value creation can extend beyond new product development. It can also extend to product delivery.
I teach at the University of Michigan Business School and down the block, about a half block away from the business school, there’s a little restaurant called Dominick’s. And Mr. Dominick started the restaurant many years ago. He actually had two pizza restaurants, one near the business school and another one in a nearby town. He sold the Dominic’s restaurant in the nearby town to a student who dropped out of the University of Michigan. And the student, in order to avoid confusion with the other Dominic’s, changed the name of the restaurant from Dominic’s to Domino’s. And that was the beginning of Domino’s Pizza, which has become a worldwide operation.
Now Domino’s Pizza, a number of years ago, had a guarantee in the United States. I think it still might have this guarantee at a few other countries. We guarantee pizza delivery within 30 minutes. Well as you can guess, this caused legal problems. There were traffic accidents that resulted in lawsuits. Remember our earlier discussion of liability of businesses for the torts of their agents under respondeat superior? So, what is the risk management solution to this problem? If you were a Domino’s executive, what would you do? Please hit pause and write down your answer.
This is the way Domino’s addressed the situation. They, first of all, looked for possible solutions such as better training for drivers, better screening of drivers during the hiring process, or giving up the guarantee. And Domino’s selected the third option, giving up the guarantee after it was hit with a $79 million jury decision in a case with somebody who was hit by a driver. Now this solved the risk management question. But solving that question might result in losing value since this guarantee was such an important feature of Domino’s success. So then they ask the value question. Why did we guarantee fast delivery? What do our customers really want?
And what they came up with in terms of an answer was, customers want hot pizza. That’s why it’s important to deliver pizza quickly. So once they identified the question, then they were able to focus on new product development. They developed a product that kept the pizza warm, a pizza bag containing heating coils. So creating value out of product liability is possible, number one, in new product development. Number two, in product delivery. And then there’s a broader chance to build value that relates to the structure of your company.
We mentioned that subsidiaries are very useful in risk management, because they reduce parent company liability relating to products and services. So that’s the legal aspect of subsidiaries. But, the subsidiary structure can also encourage value creation, and here’s an example. In late 2015, the CEO of Google, Larry Page, who’s a graduate from the University of Michigan, announced the creation of a new parent company called Alphabet. And subsidiary companies, were the so called bets in the alphabet structure. So parent company with a lot of subsidiaries who are bets. And under this new structure, the bet companies operate very independently.
They handle their own hiring, they negotiate their own contracts, they develop their own marketing campaigns, they have their own departments, marketing, legal, etc. And, this structure allows them to act faster, more efficiently and more independently. According to the CEO of one of the bets, the Google Life Sciences company, I act as CEO of an independent company instead of a senior executive emerged within a larger company. This is an example of a structure that enables companies to act in a more innovative way by allowing its subsidiaries greater freedom. So the subsidiary structure, in addition to minimizing liability, is also an avenue to create value. So, this concludes our look at product liability.
Just to summarize, we started with a legal briefing that introduced you to Tort Law, generally. And then, zoomed in on product liability, specifically. We looked at opportunities for product liability risk management, relating to your strategic decisions of whether to manufacture the product. Your structural decisions as to whether to use subsidiaries. And your operational decisions relating to product design and warranty disclaimers. And then finally, we looked at product liability to create value in the form of new product development, new product delivery. And even in terms of corporate governance by setting up subsidiaries that not only limit your liability, but encourage innovation. So that concludes this module.
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