Measuring and improving new-product development performance and practicesMost companies don’t measure and don’t know how well (or poorly) they are doing at product innovation
© Jens Arleth, Stage-Gate.EU ®, 2010
Product innovation – the development of new and improved products – is crucial to the survival and prosperity of a modern corporation. New products currently account for 33% of companies’ sales on average1. And product lifecycles are getting shorter: a 400% reduction over the past 50 years2. Some companies have been incredibly successful at developing and launching new products on the market, while others have had more than their fair share of failures and gone bankrupt. The big question is whether the successful companies have just been lucky and the unsuccessful unfortunate. Over the years, Professor R. G. Cooper3 and his partners have conducted comprehensive research into around 2,000 projects and 500 companies. This research has addressed two main questions:
Through statistical analyses, a number of practices were found to have a significant impact on performance. We call them “best practices”. The most recent study4 identified the 4 main areas of the innovation diamond which in turn consist of 17 topic areas, each consisting of sub-items, so that a total of 113 practices were proved to affect performance.
Huge profit potential by improving new product performance
The best-performing companies (the top 25%) turn 78% of their new products into money-makers. The success rate of the poor performers is only 38%. The best companies also execute their projects much faster and more efficiently. They have a much higher proportion of projects completed on time. We also found that even well-run companies can usually find ways to increase their success rate by 10–30% and reduce the time to market by up to 30% by benchmarking themselves against our database derived from Cooper’s research. This can actually increase overall company profits by millions, frequently by just as many millions as the company’s annual development budget.
But most companies don’t measure and don’t know how well (or poorly) they are doing
Measuring product development performance and practices is one of the most important best practices. But unfortunately it is also one the weakest areas according to Cooper’s research.
Re. 1: a handful of companies now prepare an “Annual Innovation Report”
A handful of companies have started to prepare a special Annual Innovation Report. Contrary to normal annual reports that review the past year; the Annual Innovation Report looks forward. The main contents include:
innovation results of the year: new products and businesses established;
innovation results versus product development goals and strategy; and
expected future results of the development projects in the pipeline.
Re. point 2: post-launch review is critical, but only 22% of the companies do this well
The post-launch review is extremely helpful in finding ways to improve your new-product performance. This is the final measurement of performance that should be done at the completion of each project after the product has been on the market for some time (often 6–12 months after launch). The review typically includes:
financial and operational results: actual versus budgeted sales, market shares and profits compared to the business case that formed the basis for starting the development project in the first place;
organisational learning: identifying the lessons learned from this project and how to improve next time.
Based on the post launch review, the project is declared a success or a failure and enters into the company’s scoreboard and the annual innovation report where the company’s overall success rate and adherence to schedule are measured5 and reported.
Re. 3: Less than 33% of NPD project teams are accountable for business performance
The purpose of a product-development project is to generate new business. The project leader (often from R&D) and his/her team prepare a business plan and a project plan before the development starts. This plan defines the prerequisites of the project in terms of technical challenges and expected business results such as:
A) what will be developed; B) sales and profit from the final product; and, C) development plan and the
resources and investments required.
If management approves the business plan, the project team starts working. Unfortunately, in most companies the project team’s job ends when the product has been technically developed. It is not their duty to ensure that sales and profit develop as assumed. This is solely the job of the sales and production staff. And in many cases the sales are far below budget.6 But this is not the project leader’s problem, even though this could be the result of an overly optimistic business plan designed to get the approval of senior management.
In best practice companies, the project leader and team are responsible right from their business plan until the production process and the marketing plan are implemented and are proceeding normally. So the team is responsible and their results are measured and compared with the original business case. This has proved to lead to more sober business plans and much better interdepartmental project management.
Re. 5: Measure how well your company’s development processes are working
The benchmarking process begins with a questionnaire. Then we analyse the data and produce an initial report. Together, we review the results and prepare an action plan to boost performance. The report is also a productivity report card and a starting point from which you can measure and track the progress of your improvement efforts. You can even continue with annual measurements to further track and document your progress. Read more about ProBE® and Innovation Audit at www.stage-gate.eu/benchmark.
Conclusions and final advice
Most companies have a huge improvement potential. It is not unusual for a company to double its bottom line. Start by measuring your results. You cannot manage what you don’t measure. This article outlines a few important areas for measurement. At first you should try to measure and evaluate your company’s new-product success rate and its ability to stick to time schedules and business plans for new-product development projects. The best-performing companies (the top 25%) turn 78% of their new products into money-makers and keep the time schedules for the vast majority of their projects.
Most companies can significantly increase profits by improving the efficiency of their development processes. ProBE® Innovation Benchmarker maps the present state of your company, the areas in which you can improve, and how much you can improve the profits generated by new products.
References and endnotes