Years in the making
Innovation requires deployment of the Hierarchy of Product Metrics
By Michael Burkett, AMR Research -- Manufacturing Business Technology, 7/1/2006 6:00:00 AM
You don't need to look far to understand the importance of new products to the long-term success of the business. Markets reward those who do well, and punish manufacturers that don't deliver.
Consider this handful of headlines:
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Motorola blamed a Q4 2003 revenue shortfall on its failure to deliver new products on time. One year later, the successful launch of the RAZR cell phone contributed to a 51-percent sales increase, elevating Motorola to No. 2 in market share, and lifting the stock price 34 percent.
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Eastman Kodak's stock price declined 60 percent between 2000 and 2006 as the company experienced firsthand the impact of disruptive innovation—i.e., the transition from film to digital photography—on a legacy business. Unpredictable profits and revenue continue to affect the company's credit rating, although robust sales last Christmas shows there is hope.
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Microsoft has seen tremendous success with its Xbox 360 game console, yet it struggled to meet revenue forecasts for the new product, blaming a Q2 2006 $100-million revenue shortfall on supply problems during production ramp-up.
Failure to launch
For most companies, the failure to introduce new products doesn't follow from a single reason. In a recent study by Boston-based AMR Research, 32 percent of respondents designated "products late to market/missing demand" as the top reason for new product launch failure. This was followed closely by product pricing, quality, and missing customer needs.
In a separate survey, manufacturers pointed to new product introduction as the top influencer on demand. Companies that sense channel demand in less than a week show double the success rate for new product introductions over companies that take two weeks or longer.
The strategic importance of new product development and launch (NPDL) highlights the need for manufacturers to measure performance and identify improvement opportunities. While the concept of measuring is straightforward, it is difficult to avoid excessive measures while still serving the information needs of those business-process owners charged with taking action.
Despite being used in different ways within an organization, metrics must serve the needs of those empowered to act upon the information. In what AMR calls the Hierarchy of Product Metrics, the measures are divided into three tiers: the strategic benefit to the business, timely response to opportunity, and the foundation of processes in place to execute effectively. Explantions of those tiers are provided here.
Tier 1: Strategic benefit
The true test of new product success is demonstrating the ultimate benefit to the business, and reliability in predicting that benefit for shareholders. This top tier of metrics, which communicates the return-on-investment of product innovation, has these three measures:
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New product forecast accuracy: Identifies how well a business can predict the impact of new products on future revenue and resource requirements, where poor performance leads to missed financial expectations. This may be measured in revenue, market share, units, or other attributes according to the needs of the business.
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Innovation benefits: Defines total value of new products over a defined period. This may include several underlying metrics, such as new product percentage of total revenue or new product profitability. This complements innovation investment to determine the total return-on-innovation.
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Innovation investment: Captures the cost of developing and launching new products. This metric, which can be compared against previous years and industry peers, also is a component for calculating the return-on-innovation.
Tier 2: Time-to-value
The midtier of metrics defines how quickly the organization converts a market opportunity into a profitable new product. Complementing the top-tier benefit metrics, time-to-value enables insight to cash flow, as well as the competitiveness of the new product innovation engine.
There are two primary indicators:
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Time-to-market (TTM)—Usually measured from product concept to commercialization, this metric isolates the time required to make new products formally available for sale. TTM may be further broken down according to product line or process differences, such as a special requirement for regulatory approval.
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Time-to-break-even—An extension of time-to-market, this determines the time required to recoup financial investment from a new product, and isolates issues with supply or market success. Variations of this metric appear across industries, and also may be stated as time-to-peak sales, time-to-take rate, or time-to-planned profitability.
Tier 3: Operational excellence
The lower tier of metrics ensures that a foundation of business processes and best practices is in place to create the positive performance measured at the upper and midtier. The metrics are some of the most commonly used. While identified at a high level, they require additional levels of measures and business processes to ensure the practices are in place.
The metrics may be grouped into these four categories:
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NPDL: Enable visibility to the status of new products in the development pipeline, and monitor the delicate balance of meeting customer requirements within the constraints of resources and supply process capabilities.
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New product detail: Monitor the strategic health of the new product opportunity and readiness to ensure long-term competitiveness. Dashboard subcategories assess the number of new patents, risk balance between disruptive technologies and platform extensions, market attractiveness, strategic alignment, and technical feasibility, among other attributes.
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Cost detail: Product-cost management will make or break profit margins, so detailed planning and monitoring across a product's life cycle is required. This metric captures the success of underlying business processes for strategic sourcing, value engineering, product complexity reduction, and design for lean manufacturing.
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Post-launch: Identify how well a new product achieved predefined market success and supply capability. Poor manufacturing cycle time, excessive engineering changes, or first-year field returns identify problems with product launch readiness, and opportunities for continuous improvement in upstream NPDL processes.
Before deploying metrics
It's easy to become overwhelmed by too many metrics. Care must be taken to assess what needs to be measured, and who will take action on the information. A common approach is to first identify all the measures considered important, and then begin reporting on a few critical metrics before deciding to expand further.
Product-launch dashboards serve different purposes to different roles in the organization:
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C-level executives: Business benefits that new products are delivering.
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Program management office: Status and prioritization of all new products.
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Program manager: Status and performance of a specific program or project.
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Program team: Define tasks and support the process of new product launch.
Manufacturers across industries are deploying product-launch dashboards with metrics based on their own process requirements. Consider these examples of dashboards used at each tier of the Hierarchy of Product Metrics:
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Strategic benefit: Glatfelter, a York, Pa.-based manufacturer of specialty materials, has measured a 40-percent increase in revenue from new products based on its new-product process improvements.
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Time-to-value: Advanced Sterilization Products, a Johnson & Johnson company, New Brunswick, N.J., is seeing a 20-percent increase in throughput and a 40-percent reduction in cycle time. It uses a multi-tier metrics approach to monitor new product development.
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Operational excellence: Honeywell Aerospace, Morris Township, N.J., improved cycle time 60 percent through its Design for Six Sigma program, assessing the risk of new product introductions based on custom, modular, or platform design strategies.
Heed the advice
While the Hierarchy of Product Metrics is based on recent case reviews, it also draws on several years of AMR interviews on managing NPDL, stretching back to 2000. In addition, Robert G. Cooper's Winning at New Products is one of several books offering guidance for new product introduction. The Hierarchy of Product Metrics aggregates these practices into the most common categories manufacturers should consider, which then may be adapted for unique requirements.
The concept of measuring makes sense, but implementation is difficult. Manufacturers offer some lessons to heed when starting down this road:
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Define the executive champion for measuring new product success.
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Avoid too many metrics by deploying the fewest needed to determine status.
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Assign the business responsibility for taking action on metrics before deploying.
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Metrics are only as reliable as the measurement system in place.
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Distinguish between disruptive innovations and platform extension measures.
Consider this guidance as you begin evaluating your existing measurement system for new product launch.
