Evaluating R&D Performance Using the New Sales Ratio

Abstract

Many R&D organizations use this metric to set specific goals for the contribution of product innovation to their business and to monitor their performance against these goals. Here's how to apply it in your business. OVERVIEW: The sales (NSR) provides a useful metric for measuring the contribution of products to the profitable growth of the business. It is considered by many companies to be a strong indicator of the health and vitality of the business. How one defines NSR depends on its purpose. For benchmarking against other companies, a common auditable definition is desired. For internal monitoring of performance, the definition of NSR is more dependent on the strategic interests and competitive environment of the company. There is a strong interest today in the use of metrics to compare the relative effectiveness and efficiency of the R&D function of industrial firms, and to use metrics to monitor the changes in R&D performance and practices within a firm over time. The Metrics Subcommittee of the Research-on-Research Committee of the Industrial Research Institute (IRI) has identified more than 50 metrics that U.S. industrial firms currently use to monitor the R&D function (1). These metrics are described briefly and categorized according to their application on the IRI's Technology Value Pyramid (1,2). This article is the first of a series being developed by the Metrics Subcommittee about the use of specific metrics that are frequently used by the members of the IRI. The next article, Using the R&D Cost Savings Metric, will appear in a forthcoming issue of Research Technology Management. Defining NSR The sales (NSR) is the ratio of the current annual sales of products to total annual sales. New products are those products that are to the firm or to the world and were commercially introduced by the firm during the preceding X years. As a measure of R&D performance, they should also be directly linked to the efforts of research and development. New products and X can be defined in a variety of ways by different companies, depending on their strategy and competitive environment. This may be appropriate for tracking the performance and efficiency of that individual company's own product efforts over time. But, to benchmark product innovation performance against other companies, NSR should be determined based on a common definition as described below. Benchmarking Against Competitors In benchmarking performance against industry competitors, it should be recognized that product definitions and performance norms may vary significantly from industry to industry. Thus, what is a new or significant product in one industry may not be new or significant in another. Moreover, the selection of a single value for X, may overstate or understate the sales contribution of products for firms in industries with widely different product life cycles (e.g., computers vs. primary metals). Nevertheless, valid comparisons between firms within an industry or across all industries require that a common definition of the NSR be applied to all firms within the designated set by defining products in auditable accounting terminology and selecting a value of X that recognizes the average product life cycle of all industries within the set. For a broad cross section of manufacturing firms, a value of X equal to 5 seems appropriate. Accordingly, a value of NSR useful for benchmarking against other competitors can be determined by taking the following steps: 1. Identify and list all R&D projects that have culminated in the commercial introduction of or significantly improved products over the preceding five years. 2. Identify and list each product that is truly distinctive and the date of its first commercial use. Retain only those for which the date of first use is within the preceding five-year period. …