Innovation is very difficult to measure with a single “yardstick”. One of the most popular measures of innovation is a variable measure, “Percent of Revenue from New Products.” This measure is often reported both internally and externally. It is an appealing measure because it is quantitative and it implies a rate of regeneration for the company’s new product portfolio. For example, if a company determines their “Percent of Revenue from New Products” is 50%, it implies that the firm turns over its entire product line every two years.
Many companies that are considered “innovative” use the measure of “Percent of Revenue from New Products”, such as 3M and DuPont. “Percent of Revenue from New Products” is easy to derive from the organization’s ERP (Enterprise Resource Planning) system provided that revenue measured by the firm’s accounting system can be clearly associated with SKUs (Stock Keeping Units) or a specific product.
However, there are several difficulties with this measure.
- What constitutes “new”? Is “new” a change in size or packaging of the product? Is “new” an improved manufacturing process? Is “new” a different application of the same product?
- How long is something considered “new”? Is it “new” one year? Two years? Five years? How long is Revenue from New Products measured?
- What kind of innovation is measured? Marketing (e.g. iPod), Service (e.g. design/build/service models for nuclear plants), Supply Chain (e.g. Dell computers), and tangible products could all be considered “new” innovations, or not, to be included, or not, in the measure.
There are two primary flaws with the “Percent Revenue from New Products:”
- It is a difficult measure to apply consistently, and
- There is a bias toward only one kind of innovation (neglecting marketing or operational improvements, for example).
Shapiro* recommends using this metric only as a measure of the pace at which the company generates new revenue. If the measure uses the half-life of the product life cycle as the time scale for “new,” then “Percent of Revenue from New Products” indicates the rate of product change in the organization.
An additional recommended measure for innovation is “Percent of Revenue from New Platforms.” One primary advantage of this measure, as compared to “Percent of Revenue from New Products,” is that it examines the long-term return, going beyond just the first product or project in the product platform. The concept of “Percent of Revenue from New Platforms” can also fit all types of innovation: product, technology, manufacturing, operations, business process, etc. It is also recommended to use the same time scale as “Percent of Revenue from New Products,” that is the half life of the product life cycle, for consistency across the platform.
“Percent of Revenue from New Platforms” thus is a measure of the quality of “newness”. Plotting “Percent of Revenue from New Products” on the y-axis going from low to high, and “Percent of Revenue from New Platforms” on the x-axis going from low to high, four quadrants can be identified. Each is discussed further below.
First, in the bottom, left quadrant, low “Percent Revenue from New Products” coupled with low “Percent Revenue from New Platforms” indicates a company may lack a clear strategy on how it will renew itself as products age. Generally, firms end up in this position after repeated cost-cutting cycles and are vulnerable to competition. These types of organizations are often ill-equipped to deal with challenges of innovation external to the firm.
Second, firms that exhibit high “Percent Revenue from New Products” but low “Percent Revenue from New Platforms” (upper left quadrant) show they have a capability to react to innovation but are threatened by their own complacency to develop new platforms. These types of companies tend to have a lot of “churn” in their innovation cycles. An example is the fashion industry, where new products are released frequently, but new platforms are not investigated regularly.
The third quadrant (bottom right) is comprised of low “Percent Revenue from New Products” and high “Percent Revenue from New Platforms.” The challenge faced by companies in this situation is how to successfully exploit their innovations. They may suffer from market penetration difficulties or low capital investment needed to expand. Good market planning will often resolve concerns involving “cannibalization” of each new product line within a specific platform.
Finally, the fourth quadrant (upper right) is represented by high “Percent Revenue from New Products” and high “Percent Revenue from New Platforms.” Operating in this regime is highly desirable for success in innovation. This type of company also demonstrates capacity for revenue growth and is what the author terms “enduringly competitive.” These types of firms will routinely replace products in obsolete platforms with new and vibrant sales opportunities.
In conclusion, the use of only a single measure, such as “Percent of Revenue from New Products” may prove effective only some of the time and only for some industries. But, partnering this metric with a measure of “Percent of Revenue from New Platforms” will lead to insight in the patterns of new product/platform renewal yielding competitive guidance for the firm’s innovation and business strategies.
* Amram Shapiro, “Measuring Innovation: Beyond Revenue from New Products,” Research Technology Management, Nov-Dec 2006, pages 42-51.
image of yardstick courtesy of Flickr
image of men and map courtesy of NPS.gov
originally posted 8 July 2010
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