A company’s ability to innovate can be witnessed by studying the firm’s ability to develop and commercialize new products. Accordingly, select financial analysts look quantify innovation by identifying the new product revenue contribution to a company’s total revenue. “New products” is generally defined as products created and distributed for the first time in the past 3 years.
Using this quantitative framework, a company’s product innovation can be quantified as:
(Revenue from products created over past 3 years) / (Total Revenue)
According to McKinsey, the most innovative firms have a stunning 33% of their revenue from new products.
By definition, nearly all start-ups achieve 50-100% metrics within this calculation. The key is keeping this innovation of new products alive as a company matures. What is most impressive is when mammoth companies like Microsoft achieve >20% success by launching new cloud products that meet a customer need and can be sold through their existing distribution channels.
Many energy and industrial firms fall between 5-15% in this calculation. These lower levels are due to:
1- Asset turnover is when new product sales opportunities become available. But industrial products and energy generation tend to be in operation for decade(s). Changes in generation are accelerating now, though!
2- Hardware distribution is very different than software distribution. And we now know that software has a faster ability to iterate and create new products for customers. 90% of industrial sales tend to be hardware although the core industrial tech firms are looking to change that balance to more software-driven.
3- Systems interoperability requirements of the physical environment act as a breaking mechanism on accelerated product development
As a result, many energy and industrial firms are now looking to startups to infuse new product innovation and software distribution into their organizations. Tomorrow I will begin reviewing the top industrial partners that are looking to inject technology and software innovation into their future cycles.