Using ARG from New Product Metrics

By Trevor Speirs

While the value that the Annual Revenue Growth (ARG) from New Products returns is a good indicator about the success of an innovation program, in conjunction with the other data derived in its calculation it can become a strategic tool.

Here is a suggest best practice on how to use this metric.

1. Evaluate the Health of the Core - By deriving Annual Revenue Growth and  Annual Revenue Growth from New Products, you can calculate Annual Revenue Growth from Core Products (I = G - H from last post’s example). This number will give you an indication of the health of the business’s core product line (often the products that brought you to the dance). There are 3 categories for Core Product health:
   • Growing (>20%) - The core is still in growth mode. Like most growing things, it needs support so focus efforts on enhancing the core products.
   • Hitting Steady State (0%-20%) - Core growth is maturing and heading to a steady state level (often between 0%-5%). Now is time to begin thinking about moving into product or market adjacencies to fuel new growth.
   • Declining (<0%) - Core has begun to shrink usually as the result of some exogenous shock. If not already underway, New Product development into product or market adjacenies should be a priority. If the shock is expected to be permanent other strategies may need to be considered such as harvest/exit strategy or refocusing the core.
2. Determine Your New Product Growth Needs - Once you understand and predict how your core will grow next year, you can set a New Product Innovation Strategy. If your core is:
   • Growing - You probably don’t need much revenue growth from New Products. So focus on building out your core products, but you should be slowly doing research on potential adjacent markets to enter when growth slows.
   • Steady State - Two good options exist: 1) segment your customers; and 2) move into adjacent markets or products. Segmenting your customers allows you to identify which segments are growing and find new needs and uses for your product that you haven’t considered. If your core is well rounded, another strategy is to identify new adjacent markets to offer your existing products or services; or identify new products/technologies to offer your existing customers (customer  segmenting helps identify this).
   • Decline - Not only does your New Product Growth need to be strong, it needs to offset the declines from your core. Note as mentioned above, if this is viewed to be a permanent decline you will need to determine a strategic response such as harvest/exit strategy or refocusing the core.

What Should Your Target ARG from New Product Be?

This will really depend on what stage your company is in. Obviously a more mature company would expect more modest growth rates compared to a new start up. So assuming we’re talking about a mature company, the first question is what is the overall ARG that the company expects to get in a sustainable steady state? Chris Zook in his great book, Beyond the Core, references a US study in the 1990’s that found that public companies that grew revenue by <5% saw a return to shareholders of 4.1% per year; and companies that grew between 5-10% per year, saw a return to shareholders an average of 12.1%! So let’s say our target ARG is 8%.

Next we ask, how do we expect our core to grow in the future. Maybe a healthy company sees a 4% Core ARG. That leaves us with 4% ARG from New Products (note there could be other sources such as acquisitions).  Now we have very visible metric targets for growth from our core and new products. If a company sees that its new product growth is falling to 2%, then it immediately knows that it has an issue with its new product development and should be doing a more thorough analysis. The ARG from New Products is a great metric for innovation because it leaves no doubt to its interpretation.

Innovation Measurement: Annual Revenue Growth

By Trevor Speirs

In my last post, I talked about the common innovation metric Percentage of Revenue from New Products Released in the Past 5 Years and discussed it was a poor metric because it was not actionable or had a common interpretation. I would like to propose a modified metric that will eliminate these problems.

To recap the Juicy Analytics blog pointed out that the four dimensions of a good metric are 1) Actionable; 2) Common Interpretation; 3) Accessible, Credible Data; and 4) Transparent, Simple Calculation.

By taking the data from the percentage of revenue from new products, one can construct a new metric that is Actionable and has a Common Interpretation: Annual Revenue Growth from New Products. What this metric attempts to do is to separate the annual revenue growth that came from new products (released in the past 5 years) and the revenue growth that came from the core (products release more than 5 years ago). The formula relationships is:

% of Annual Revenue Growth (ARG) = %ARG from New Products + %ARG from Core

Let’s review the four dimensions and see how this metric will stack up:

1.  Actionable: While you will need to do some digging to better understand the source, the results are very consistent - if the %ARG from New Products increases that is good and if it decrease that is bad. A definite improvement from percentage of revenue from new products.
2. Common Interpretation: Once people understand the metrics construction, it can be painfully clear what the metric is telling you.
3. Credible, Actionable Data: Data is sourced from your financial system, so I hope that it is good data.
4. Transparent, Simple Calculation: As I show below, the metric is slightly more difficult to construct, but once you understand the concept it is simple to construct.

To construct the metric:

To demonstrate the metric consider this example. A company has the following financial results in 2007 and 2008

Using the ARG from New Products metric it becomes clear where a companies revenue growth is coming from. An added bonus is that you also compute ARG from Core which in the next post on using these metrics can be quite insightful.

Innovation Measurement: Percentage of Revenue

By Trevor Speirs

A common metric associated with measuring innovation is the % of revenue from products released in the past five years. The theory behind the metric is that a company with a strong percentage of revenue coming from new products is innovative. I believe this metric is very dangerous for a company to rely on.

The Juice Analytics blog notes that the four key dimensions of a good metric are 1) Actionable; 2) Common Interpretation; 3) Accessible, Credible Data; and 4) Transparent, Simple Calculation.

*Source: Juice Analytics Blog

The problem with the percentage of revenue from new products is that it is not actionable and doesn’t have a common interpretation. Let’s say a business that moves from value of 10% to 20% over the course of a year, most people would say that this company improved it’s innovative capacity over the past year.

This is not necessarily true. What if, over that year, the companies revenues dropped by 20% and revenues from the new products dropped by 5%. In this case the Percentage of Revenue from New Products would increase, but I doubt we would say the company is improving innovation. Therefore, if the metric goes up or down, it is not clear if this is good or bad. That is why this is a dangerous metric to use to evaluate innovation efforts.

In our next post, I will propose a slight variant on this metric that will eliminate this common interpretation weakness.

Transparency Is Not Optional

By Trevor Speirs

I am continually surprised to see companies try to control marketing messages in today’s open internet world. It may not be a huge problem (although you are missing a huge opportunity) if the message you are trying to control is close to the truth, but it will be a disaster if your message is not true. Just ask Belkin.

The Daily Background alleges that a Belkin Business Development Representative paid people to post 5 star product review ratings on Amazon.com when it was receiving poor reviews. The report appears to do a good job tracking Belkin’s efforts. It is not shocking that companies would try to cover up bad ratings - for better or worse this is a tactic many companies use (see the sham of video game reviews). What is shocking is that Belkin obviously never thought they would get caught! Are they not familiar with today’s internet environment.

My advice to companies is to shape, not control the message. Accept you will no longer be able to control the message. Instead work with your audience to shape the message. Think what would have happened if Belkin would have contacted those who posted poor reviews and said, “Hi, we are very sorry you had a poor experience with our products. We strive to make this product X and Y. Can you help us understand why we didn’t meet those promises?” It is alright to admit your product may have fell short of your goals - whether you admit it or not the internet will know.

If you release a dud, show people you care to fix it. Engage in a conversation with customers. It may be painful at the start, but if you remain true it can deliver incredible returns to your brand. If you can’t engage in the conversation or remain true, I predict your products will move towards low value commodities (with low margins) or you will go out of business. In today’s internet environment, transparency is not an option.

Challenges Faced By the Video Game Industry

By Trevor Speirs

Despite the fact that people are saying that video games is a recession proof industry, the big companies are struggling. Take 2, THQ, and EA announced disappointing results. There are alot of takes on what is wrong with the industry such as Om Malik’s belief that they are too focused on blockbuster hollywood-style games. I think Om is right, but the industry’s problems go deeper.

The video game industry challenges:

1. Growth demands of a public company

It is one thing to lead a company past $10MM; it is another to lead it past $100MM; it is a whole different ballgame leading it past $1B. What we have are the management of the big video game companies learning it is completely different growing beyond $1B. Stockholders of public companies demand steady double digit growth. That means a $1B company must grow revenues by at least $100MM (more likely by $200MM). What you will see is that this is a tough requirement for this industry.

2. The structure of the video game industry 

First, that steady revenue growth is based on the previous year’s revenue. Now keep in mind that most of the video games that form these companies’ revenue bases have development times of 18 - 24 months. That means the sequels to games that delivered the bulk of revenues in year 1 won’t be released in the following year. So think of it this way - the games that will support this year’s revenues targets will be a whole new group of games than those that supported last years $1B in revenues. That’s alot of hit games!

3. Insufficient infrastructure to support growth needs

So those two cycles of games that are needed to fuel the video game company’s growth demand - they require game concepts, producers, project managers, developers and artists. Analysts and reporters like to harp on the cost of developing blockbuster games ($15-25MM); big video game companies have plenty of cash - what they lack are the people to develop the games to fuel the growth. Remember, video games is a young industry and they have not done a great job developing quality studios to fuel that growth. For those of you pointing out that video game companies have recently closed studios, I suggest that the quality of the studios is the real reason. Studios that are able to consistently put out top quality games are fine, the studios that are closing are those that struggle to meet deadlines or produce sub-standard products. If you don’t have the people to build the products, you will never meet your growth targets.

4. Failure to recognized need to address, smaller, faster growing segments

Finally, this ties in with Om’s point that the large video game companies are over-focused on hollywood blockbusters at their peril. It is hard for video game makers to not stay focused on blockbuster titles because the hardcore gamer market is still growing strong (although slowing) and it is what they know how to do. However, the companies are ignoring other faster growing customer segments such as casual gamers, online gamer, and social gamers. The problem is that from the perspective of the large video game developer these markets are still relatively small to the core gamer market, today - therefore not a dependable, significant source of revenue growth in the short term. However, in a few years these markets have the potential to be a substantial source of growth.

The other problem is that these new segments present new customers and new business models for big video game companies. To tackle these segments they will need to set up independent groups who are focused solely on these markets in order to learn about the market and build capabilities to develop those types of games (different from core gamer games). Of the big video game companies, only EA is attempting to address this market.

So to sum it up, big companies require big money growth, the video game industry demands two cycles of games, and they are not developing the infrastructure to support these demands. Lastly, they are ignoring the new emerging gaming markets because it is not a reliable immediate source of big revenue which will haunt them in a few years when one or more of those markets become huge.

5 Sites I Want to See Integrated With Facebook Connect

By Trevor Speirs

On Nov. 18, Citysearch.com announced it was launching a beta site that used Facebook Connect as an optional identity system and immediately became relevant again in its competition with Yelp and Yellowpages.com. Facebook Connect allows websites to give site visitors the option to login with their FB credentials rather that keep a unique profile for that site. Going forward we will see alot more of this.Why is it important?

1.  1) Single Identity - Site visitors have spent alot of time building their identity on Facebook. Why shouldn’t they be able to contribute to that identity on other sites?
2. 2) Facebook Integration - FB Connect is more than an identity system, it will allow tie backs into Facebook. For example, when a FB user leaves a review on Citysearch it will create an entry on that person’s FB timeline allowing the user to inform his network.
3. 3) Network Contextual Information - Interested in reviews from a local restaurant? A site with a large number of reviews of that restaurant is great, but a site that gives you the reviews by your FB network, the people you trust, is awesome! No more asking people what they think of this place; you can find their opinions on Citysearch.
4. 4) More Visitors! - This is the bottom line for any web site trying to get traffic. FB Connect integrated sites create a compelling value proposition for FB users to use the site over competitors and, more importantly, tell their friends about it. This means more traffic.

The sound you hear is Yelp scrambling to integrate FB Connect before Citysearch steals their visitors.Citysearch is just the tip of the iceberg, the power and possibilities are endless. Here are some of the FB Connect integrations that I want to see.

1. 1) SKYPE - Do I ever want to see my Skype account be linked to my Facebook account! That way I can see all of my FB Network in my Skype Contact list (with their profile photos). Even better, integration gives us a better chat utility and adds voice and video communication to my FB network. Yes please!
2.  2) AMAZON.COM - When shopping I want to know about the reviews of my FB network on specific products.
3. 3) TICKETMASTER/LIVE NATION - Concerts are a big part of my leisure time and it would be great when I buy a ticket that my network is immediately notified that I am going to a certain concert (and vice versa). Furthermore, I would be more likely to give reviews of those concerts that I saw.
4. 4) LOCATION BASED SOCIAL NETWORK - Another service slow to take off due to another login and identity. If I was a mobile social network I would integrate this yesterday, buy a swath of Facebook banner ads, and suddenly have a massive new audience for my location-based network. Imagine being notified that your FB friend with a GPS phone is having coffee down the street. That is relevant information that I want to know.
5. 5) DELICIOUS - Delicious is difficult to expand beyond early adopters precisely because people don’t want another login. Social Bookmarking could be huge if it could come to the masses; FB Connect may do this. If it takes off, it could create a real competitor to Google search.

A Plea For a Strategic HR View

By Trevor Speirs

I asked one of my mentors who built his company from a single store to a $100MM+ company, “what was the best thing you did to ensure the success of your company?” He responded that there was a crossroads where he needed to decide if he wanted to maintain a comfortable annual $10MM business, or take it to the next level. After deciding he wanted a $100MM business, he built an organization chart of what his organization needed to look like to sustain that scale. In his quest to reach this goal, the first person he hired was an HR specialist. That was his best move.

He shared with her where he wanted to take his business. She was then tasked with building the HR plan to achieve that goal. First step…before anything else! It is an incredibly perceptive view of HR as a strategic partner that is too often overlooked.

It seems that HR in most companies is modeled after the industrial revolution-manufacturing model. We need X employees to build Y widgets. Make sure we have the required headcount. Sure, it has evolved into some training, retention and policy roles, but headcount is still the foundation. And not very applicable to today’s knowledge economy where human capital is the most valuable resource.

I propose that HR should be involved in long term strategic planning at the earliest stages. They should be relied upon to give frank assessments of the capabilities of the workforce and identify where capability gaps lie with the long term vision of the company. They should give a frank assessment of the company culture and how it meshes with the long term vision. They should be relied upon to develop a strategy on how the company will bridge those gaps. They should be given adequate resources to achieve those goals. And they should be held accountable for executing their part of the strategic plan.

There are stages that a new company goes through; each with their critical contributors (the right and left hands of the CEO). Here is how I see it.

Start-Up: Product guru (Left Hand)  and a Hunter-type salesman (Right Hand)

Established (enough sales and a core product to legitimize the company): Marketer (Left Hand) and HR Strategist (Right Hand) - the product guru is still at the table, along with a CFO and a sales manager.

Main Stream (Achieved mass market success - maybe 1st or 2nd in a key market) : CFO (Left Hand) and HR Strategist (Right Hand) - with product guru, sales manager, and product managers at the table.

I think the HR Strategist as the right hand in two of the stages may be questioned, but lets think about it: Consider that the reason most businesses stall or falter is due to human resource gaps; often product, implementation, or cash flow issues are rooted in human capital shortfalls. Consider the power of corporate culture in driving the success of a business or orchestrating a business’s demise.

When your business begins to take off, think about the HR Strategist. And empower them to make a difference in your organization.

Blockbuster: A Cautionary (but repeated) Tale

By Trevor Speirs

Blockbuster’s stock isn’t doing very well these days. That decline coincides with the rise in popularity of Netflix and its disruptive business model. As MG Siegler from Venture Beat observes that it is cheaper to buy Blockbuster stock than it is to rent a movie. Unfortunately, Blockbuster is one of those oft-repeated cautionary tales that public company CEO’s seem to forget.

Blockbuster was the dominant movie rental business of the 90’s and early 2000. There business model was simple, build national brand by locating a brick & mortar rental store near every major North American neighborhood. Their strategy was speed. No other franchise was able to execute as quickly as Blockbuster and thus they were destined to be market followers.

This strategy worked great until improvements in web technologies brought a threat to their business. First, the internet enabled new entrants like Netflix to offer a wider catalog rentals to consumers. Second, it automated the regular routine of renting movies by allowing consumers to create a queue of the movies that they wanted to rent and immediately mailing a new movie when the renter mailed back their current one. Later, the spread of broadband would allow Netflix to offer streamed videos to its customers. Together, these factors combined to offer a compelling value proposition to Blockbusters most profitable customer group: Avid Movie Renters.

This threat did not come out of nowhere. Netflix was founded in 1997. It really doesn’t impact Blockbuster’s share price until 2004. Coincidently, 2004 is the year that Blockbuster finally decided to enter the online video rental business. So for a full seven years Blockbuster ignored this threat to their business! Why? Ask Kodak when digital photography was introduced into the 80’s. Blockbuster was trapped by their business model that cultivated a myopic view of their industry.

It took them  seven years to acknowledge the threat of online rentals. The good news is that their brand name and market position afforded them the ability to enter late and still win the market. Unfortunately, they did not learn their lesson and continued to make mistakes in this new competitive market. After aggressively building an online customer base by using their brick&mortar stores to attract customers, they began to raise online pricing and removing benefits when they saw revenue and profits shrink as their brick&mortar business was being cannibalized by the lower margin online business.

This short-sighted response had a double wammy effect of pushing the remaining regular customers it had just introduced to online rentals into Netflix waiting hands who had a more competitive offering. In other words, they had just moved their loyal, profitable B&M customers into their online business. Then, they changed their online offering to make it less competitive to Netflix thus pushing these good Blockbuster customers to their competitor.

Netflix, understanding that the market is moving to on-demand video streaming, introduced a streaming service. Rather than trying to charge separately for each movie, netflix made it part of its subcriptions. This had the effect of improving their capabilities to stream movies (learning through doing) and introducing its audience to this technology at no risk to them. Blockbuster responded by acquiring a video streaming service of their own. However, they were slow to integrate into its online offerring. Why? Because their executives built their company on the previous decades of renting by the movie - “Customers must want to do this”. They did not know how the online business fit into their business model, so how could they know how would video streaming? Blockbuster is now moving to integrate streaming with its online rental business, but the damage is done.

Netflix did not necessarily win the war as much as Blockbuster lost it because they could not adapt to the new market realities. So what lessons can we take away from Blockbuster?

1. Raise Awareness: Every few years conduct an exercise on how can new trends disrupt your business.
2. Shift Your View: Take the time step outside of your business to understand how the disrupters view your business. Dedicate a team to represent that point of view in the company.
3. Build a New Industry View: Accept that the industry that your core dominated is or will soon be changed. Ask yourself what business will dominate this new industry.
4. Accept the Impact on Your Core: Your core business will be destroyed by this disruption and you have two choices: 1) do nothing and harvest as much profit as you can until your core is destroyed; or 2) build a business to survive in the new market with full permission to destroy the core business.

I agree not the most attractive choices for multi-billion dollar, market leader and you can definitely ignore them. Of course, then you can be another cautionary tale like Blockbuster and Kodak.

Measuring Innovation?

By Trevor Speirs

Measuring innovation presents a conflict of interest. If you build a measurable process around innovation are you not destroying the openness needed to fuel innovation? Maybe so, but when trying to instill a culture of innovation in a large, successful corporation it will be hard to change anything that isn’t measured.

So a CEO has two options: 1) Let the final performance of a business unit be the ultimate judge of successful innovation or 2) Find some metrics that will provide indications of how well a business unit is executing in all phases of innovation.

The first option demands that business units meet a threshold level of Revenue and profitability growth (GE sets it at 8% per year) . The problem is that a CEO will never know there is a problem until they miss their numbers. After heads roll, getting the business unit back on track will be a 2 - 4 year process. I know of few CEOs who could survive such a setback.

The second option tries to find a delicate balance of measurement without dictating process. Measuring innovation provides a second challenge that most innovation will take multiple years to come to fruition (often with losses in the front end). As Robert Louis Stevenson said, “Don’t Judge each day by the harvest you reap, but by the seeds you sow.”Any interpretation of innovation metrics must keep this statement as the overriding context.

A fair innovation metric exercise should try to incorporate a balanced scorecard approach - there is no dominant innovation metric. Try to look at innovation in multiple phases. I propose Inputs, Process, Execution, and Value Creation.

• Inputs - Are you putting sufficient resources and generating enough ideas to fuel your target growth (see my post on innovation math)? Track the number of ideas you generated, how much resources you had dedicated to innovation (not evolutionary product developement), and what types of opportunities do you have in your pipe (is your pipeline evaluating enough ideas of a sufficient market opportunity).
• Processes - How quickly are you processing ideas through each stage of your pipeline from early evaluation through to launch?
• Execution - How many launches have you had this year? How many launches attack large market opportunities? How accurate have your forecast efforts been?
• Value Creation - What is the contribution margin of your recent years’ launches? What percent of revenue growth is contributed by innovation projects?

You can find the best measures for the four headings based on your company environment. The goal of these metrics is not to judge the success or failure of a business unit. It needs to be a collaborative effort to help business units identify any red flags in their innovation processes so that they can course-correct before it becomes a big problem.

Forget the Economy - Buy Low/Sell High

By Trevor Speirs

This most recent week has caused businesses and consumers to react with fear. The stock market is down 44% from its peak, the credit system appears to be locked, and companies are laying off workers. Please remember that while the specifics of this downturn is unique, downturns are regular occurrences. They are natural as our up-cycles although not as pleasant. The strategic CEO must understand that the current economic climate presents opportunities as much as it presents challenges, but these opportunities are created by a drop in prices.

Everyone recognizes the simple rule of buy low and sell high, but it is funny how so many of the greatest companies, led by incredibly intelligent business people forget this rule. They spend like druken sailors in up-cycles and slash spending in the down-cycle. Great business people ignore the immediate financial crises and live by those simple rules. This down economy presents some great opportunities for the strategic CEO.

• Strategic Aquisitions - Look at your long term strategic plan and identify your gaps. What capabilities do you need? Is there a company out there that could fill that gap? You should explore an acquisition. It is always better to bring out the check book in a down-cycle rather than paying premium prices that are part of an up-cycle.
• Acquire Talent - Does your strategic plan need some talent.  I can’t think of a better time to hire them. Some short-sited companies are laying off key talent in order to meet financial targets. This creates a nice pool of talent from which to recruit at wages lower than they would be in an up-cycle.
• Evaluate Product Lines - A strategic CEO should be doing this all the time, but we often forget in the up-cycles. Evaluate how much each individual product contributes to the bottom line. Even if they are profitable, the question should be “Is it profitable enough to justify our resources?” Plan how to exit the weak performers, so that you can reallocate your resources to more promising opportunities.
• Evaluate Customers - Market share is great, but profitable customers are better. Evaluate the profitability of your customers. Review the terms of your discounts. Is the customer still meeting their promises. If not plan how to get them in compliance and profitable.
• Advertise Your Brand - Times may be tough, but advertising is going to get cheap. Your advertising dollars will go much further now than in a boom period and with less advertising noise out there your message has a better chance to stick with the consumer. As consumers are likely going to be buying less in the short term, focus on advertising that reinforces your brand rather than make specific offers to customers. By brand building in the bad times, it will make your company top of consumer mind when the up-cycle starts.

Now, I am not saying spend indiscriminately. I am saying you should always spend strategically and this environment will allow you to important pieces to your long term success at great prices.