From experience: linking product innovation to business growth

Abstract

Industry pundits often take managers to task for their supposedly myopic approach to planning and decision making. These sweeping generalizations gloss over the complex challenges confronting the managers who must ensure that their firms enjoy ongoing revenue growth opportunities. In place of pat answers, those managers require analysis and planning tools that offer clearer insights into the effects their decisions have on their firms’ continued business success. As Marv Patterson points out, however, determining the effects of product innovation decisions poses a particular challenge for management, because the consequences of those decisions typically do not become evident until long after the decisions have been made. Presenting a conceptual model that links product innovation activities to revenue growth, he identifies three drivers of revenue growth, and explains how these growth drivers are linked by a set of mathematical relationships that can be presented in the form of an enterprise-specific growth table. He applies the model to three types of enterprises, and he discusses the key implications that the model holds for the business leaders who must keep shareholders satisfied. He depicts the relationship between a company and its customers as a closed-loop system in which the company converts labor, parts, and material into products, which it delivers to customers. The company invests a portion of the resulting revenue stream in the resources that generate new products. By effectively and continually applying a sufficiently large investment in this innovation engine, the company creates an ongoing stream of new products. The revenues from these new products more than offset the drop in revenues from products that are approaching obsolescence. He identifies three factors that drive revenue growth from these investments in the innovation engine: the fraction of revenues invested in product innovation, new product revenue gain, and the behavior of revenue over time for a particular business. Using a graph called a product vintage chart, he demonstrates that for a large company, the revenue contributions of a particular new-product year (or vintage) fall into a regular pattern over time, which enables a company to determine mathematical relationships for revenue growth as a function of R&D investment and new product revenue growth. In this way, senior managers can gain clearer understanding of the interplay between product innovation, R&D investment, revenue growth, and profitability over time.