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.