EXPERT INSIGHT – Improving ROI in Innovation & New Product Development
In this Q&A session, Brenda describes how investors and leadership teams can strengthen the new product development process and pipeline by addressing these 6 critical questions:
How can investment in new product development be measured by private equity firms?
What kinds of resources should PE firms provide to help their portfolio companies innovate?
Are there ways that PE firms can facilitate cross-fertilization of good innovation practices among their holding companies?
Is there a standard model for innovation that can be applied across a range of verticals?
How does a private equity firm track return on investment in innovation?
What questions should PE firms be asking their management teams about their product development process?
HOW CAN INVESTMENT IN NEW PRODUCT DEVELOPMENT BE MEASURED BY PRIVATE EQUITY FIRMS?
The typical measure used in the industry is a vitality metric which measures the amount of sales generated by product releases within a set number of years as a percent of total sales. Think about this as a freshness indicator on your product offering. The trouble with this and many other business outcome related metrics is that the feedback is very latent. Development cycles can take months to years before you get even the first feedback point. I found a study from the Corporate Executive Board to be very illuminating on this point. Basically, they separated the great organic growth firms from the rest of the pack and then looked to see if they tended to focus on a different set of metrics.
The results were clear, if you want to get more from your R&D investments the leadership team needs to be looking at the health of your portfolio of projects:
- Do we have a balance of core and growth?
- Do we have a healthy balance across the product lines?
- Are we treating great projects differently than mediocre ones?
- Do we have a healthy stage gate process to weed out those that will waste our resources?
This offers a focus that is not latent, and pays significant dividends in the long term.
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