Where’d the Money Go?

Volume 4 Letter 6

In the late 1990’s Polaroid pumped millions into their R&D department to come up with innovative new products. Likewise, Maytag, the dependable washer and dryer people, invested heavily in 2001 into new product innovations. The unfortunate result of both strategies was that Polaroid went into Bankruptcy in 2001 and Maytag’s sales continue to slip to this day.

In another example Levis Strauss, the San Francisco based jeans manufacturer, made new product innovations their number one priority in 1999. The then new CEO who had made his mark at his previous company by launching the Pepsi One cola pumped money into R&D dispatching designers to Europe and Asia looking for new clothing designs for Levis. New products like Dockers Mobile Pants with pockets for PDAs, cell phones and anything else that could connect couldn’t connect with the market. Proving again that throwing money at product development doesn’t work, Levis in 2003 lost $40 million out of a hole in their jeans pocket in the first half year alone.

A study done in 1997 called “The Innovation War”1 looked at 30 top global companies and found almost no correlation between R&D spending (as a percentage of sales) and improvement in profits. The same study noted above showed that within a company the Return on Investment (ROI) from new products is fairly consistent over time. However, in high performing companies the ROI from new products was often twice the industry average and up to ten times greater than that of poor performing companies!

Before one can develop a high performing new product development strategy one must first understand the effectiveness of R&D by measuring the ROI. Begin by plotting the ROI of products launched within the last three years.

Once the ROI from R&D is calculated the next thing to do is to increase it. To do this a good strategy is needed that covers the four stages of product development; idea creation, product selection, product development and commercialization. Let’s look at each.

1. Idea creation: there must be a direct link between idea creation and business strategy. The job of any manager is not to have all the good ideas but rather to ensure they are captured. Ideas come from anywhere – externally from customers and researchers and internally from sales, R&D, marketing etc. Managers must cultivate these resources to keep the ideas flowing.

2. Project / Product selection: Selecting ideas in which to invest is where many companies drop the ball. Investing in the wrong ideas, too few ideas or too many all generate the same poor result. It is imperative that project selection be objective and transparent. Tools like Conjoint (Trade off analysis), Portfolio mapping and Risk analysis bring objectivity to the decision making process.

3. Product development: Once a project has investment money allocated to it the clock is ticking. Time to market is key. Successful companies tend to have cross functional teams and run processes in parallel to rapidly move selected projects through the development stage to commercialization. Studies show that being late to market is often devastating.

4. Commercialization: In heavily siloed companies there is often a disconnect between R&D and marketing and it is most apparent in this stage of a product’s life. Top companies involve marketing early and commercialization is a seamless part of the product’s development. New products need to be promoted intelligently and rolled out to the market properly. In engineering oriented companies I’m often astounded by the millions spent in R&D only to see the new product die in commercialization because there is no money to roll it out or inexperienced people are given the responsibility of launching the product worldwide.

In contrast to the earlier examples, Steve Jobs has been a master at launching and managing new product development. Apple, under his watch, moves smoothly from idea creation, to product selection, product development and commercialization. Since his return to Apple in 1997, Jobs has launched numerous new products including the iMac, the iBook and the iPod. Each was a successful product launch into a difficult market. What is amazing is that he’s done all this without increasing R&D spending. Profits at Apple were up 36% in the fourth quarter of 2003 – quite a testament to an effective product development strategy. If you’re an investor in Apple – where did the money go? – into your pocket.

Recent Posts