New Product Vitality Index.

What is New Product Vitality Index (NPVI)?

Vitality Index is a common metric used to measure the effectiveness of an R&D organization's innovation efforts. The Vitality Index is calculated as the percentage of new product revenues generated by the company over a given period, typically a year, divided by the company's total revenues over the same period. The higher the Vitality Index, the greater the proportion of a company's revenues that are generated from new products.

The Vitality Index (new product revenues as a percent of total revenues) is a common metric used to show the innovation effectiveness of an R&D organization.?

A high Vitality Index indicates that a company is effectively using its R&D resources to develop new products that are driving revenue growth. This is important because innovation is a critical driver of long-term success in many industries. Companies that are able to consistently generate revenue from new products are more likely to maintain their competitive advantage and stay ahead of their rivals.

However, it's important to note that a high Vitality Index doesn't necessarily guarantee success. It's also important to consider factors such as the quality and marketability of the new products being developed, as well as the overall health of the company's business operations.

NPVI = New Product Revenues/ Gross Revenues?

Overall, the Vitality Index serves as an important tool for companies looking to prioritize innovation and stay competitive in their respective markets.

The Benefits

Creating a new product vitality index (NPVI) offers several benefits for businesses. Firstly, it simplifies the measurement of innovation revenue in relation to the overall revenue of a company, providing a clear and traceable metric that can be used to analyze, project, and improve upon innovative activities. This helps bring innovation out of the vague and mystical realm and into a concrete form that can be easily understood and acted upon.

Secondly, the establishment of an NPVI can aid in aligning a business with the markets it serves, helping it to better understand the efforts required to maintain its relevance within those markets. Failing to invest in innovation can lead to stagnation over time, making the NPVI a valuable tool for keeping companies on track.

Finally, the use of an NPVI can also help to clarify objectives within an organization, ensuring that teams are aligned around decisions related to advancing or killing a project, and providing a clear understanding of existing and potential revenue streams. By using an NPVI to measure and evaluate the success of their innovative efforts, businesses can gain valuable insights into their performance, improve their decision-making processes, and ultimately achieve greater success.

Let’s review some of the pros and cons of NPVI.

There are several advantages to using NPVI as a metric for innovation:

• It provides a simple, single number that reflects the percentage of revenue obtained from newer products, making it easy to understand and communicate.
• NPVI is easy to measure, as it involves tracking innovations launched within the last 5 years and quantifying innovation revenue as a percentage of total revenue.
• NPVI is a commonly used metric in large B2B companies, which means it can be useful for benchmarking and comparing against other companies.
• The fact that NPVI is summarized in a percentage makes it easy to interpret and understand, even for those without a deep understanding of innovation metrics.

There are several limitations and challenges associated with using NPVI as a metric for innovation:

• NPVI provides only a partial view of the revenue picture, as innovation revenue is only a percentage of the total revenue. To fully understand the interplay between revenue components and their growth contribution, one needs to consider all revenue components.
• The percentage can be market-dependent, meaning that markets with shorter replacement cycles may have higher NPVI than markets with longer adoption cycles. This can make comparisons across markets difficult.
• The percentage can also depend on market and technology maturity, with mature markets or technologies having little innovation potential.
• NPVI definitions vary across companies, making comparisons challenging. For example, minor product iterations or ingredient changes may be counted as innovations in one company but not in another.
• NPVI can be gamed, as companies may focus on incremental innovations to proliferate the number of products, leading to added manufacturing and supply chain complexity.
• Innovation revenue is a generic metric that does not provide insight into the innovation portfolio components. For example, not all innovation revenue has the same growth potential. Revenue from adjacent markets may be accretive, whereas revenue from core innovations may cannibalize other products and have little to no growth potential.
• NPVI is typically reported on an annual basis and is not used to continuously improve the innovation ecosystem's performance

Measure Appropriately

When measuring performance in an organization, it is important to use the appropriate type of indicator. Result Indicators (RI) are useful for looking at overall efforts but are not helpful in identifying the responsible team or fixing problems. Financial measures like NPVI and innovation revenue fall under this category.

Performance Indicators (PI), on the other hand, are team-based and have clear accountability. These indicators allow management to determine which team is responsible for the performance or non-performance. Examples of PI include the number of customer discovery projects completed or coaching hours booked.

Key Result Indicators (KRI) are past measures that provide a view of how the organization is progressing. They are typically reviewed monthly or quarterly and shared at high-level meetings. However, they do not provide guidance on how to improve results. Examples of KRI include NPVI or portfolio revenue expected in 3 years.

Key Performance Indicators (KPI) are critical for current and future business success. They are non-financial, team-based, and measured daily or weekly. KPIs have a significant impact on the organization's well-being and should not be linked to pay for performance to avoid undesired behaviour. Examples of KPI include the number of customer interviews in the discovery phase or the number of innovation engagements with customers in the launch phase.

Conclusions

To effectively implement NPVI in a company, it is essential to first establish a clear and comprehensive definition of what innovation means to the organization. Additionally, the NPVI metric should be aligned with the company's future goals and potential disruption threats, while also accounting for portfolio attrition and fade.

NPVI serves as a valuable self-benchmarking indicator of a company's innovation performance. However, it should not be viewed solely as a company-wide aggregate, but rather in the context of different types of innovation to avoid stagnation and the proliferation of similar products.

It is not recommended to tie NPVI to individual or management reward systems, as this may incentivize undesired behavior

While NPVI is a useful tool for measuring innovation, it should be used in conjunction with other performance indicators. This is because NPVI has three significant limitations: it is not predictive, does not provide guidance on how to improve, and lacks precision as it may be unclear whether a product constitutes as "new" if it only involves a minor change, such as a color variation.

Overall, the NPVI is a useful metric for companies to track innovation revenue, but it should be used in conjunction with other metrics to fully understand the company's revenue streams and growth potential.