New product development drives growth, sustainability in a family firm
These days, growth is at the top of every business leader’s to-do list. For family business owners, growth carries an even higher priority because of families’ focus on future generations and the legacy they leave behind. In recent decades, acquisitions have been a popular driver of family companies’ strategy. As competition for targets across markets has tightened and prices have increased, however, expanding by acquisition alone has become less viable as a strategy.
A path to growth that’s often overlooked by family business owners is new product development. Investing the time and money to create a pipeline of products can mean the difference between an economically sustainable legacy and a business that ends with the current generation.
Launching a few new products each year can spark significant expansion over five to 10 years and typically carries a much lower financial risk than acquisitions do. But for second- or third-generation owners, this strategy can seem overwhelming. Successor-generation business leaders are generally accustomed to managing the successful entrepreneurial ventures of the founder rather than being inventors or innovators themselves. But new product development can open up significant growth opportunities and rekindle the entrepreneurial spirit your company was founded on.
In our work with privately owned businesses, we often hear that new product development is “messy, too risky and expensive.” Everyone seems to have a horror story of a new product that went bad. An objective analysis of these failures usually finds the cause was a lack of process and operating discipline.
The good news is that there are some easy steps you can take to overcome these issues and get started in product development.
Five steps to drive new product growth
1. Dedicate a cross-functional product development team. Studies show that shifting as little as 15% of your marketing and technical staff to new product development or exploration is enough to drive significant growth. This team should include a few of your most experienced and talented employees.
You must ensure the team is focused exclusively on product development efforts. Their job is to fill the pipeline with innovative ideas and conduct target market research to move the best of these ideas through the development process. It is also the team’s responsibility to reject projects that don’t meet the business strategy and the vision of the owners. They should be analyzing and refining only those products that would result in new sales to existing customers, or new sales to new markets.
The team should report frequently to an experienced senior executive who serves as the product development leader or chairperson. The team’s progress, setbacks and challenges should all be shared with the chair, so he or she can provide oversight and support for the team as needed.
One of the chair’s critical roles will be to step in, as needed, to protect the team’s time so it remains dedicated to product development and growth of the business. Because the team contains high performers, other departments will make demands on their time, especially in times of perceived crisis. This will be one of their biggest challenges. Insist that the other 85% of your marketing and technical teams handle such disruptions and continue your successful “business-as-usual” practices on their own.
2. Implement product development metrics. If you measure it, you have a better chance of improving it. Start with one simple metric. Studies have shown that a healthy, growing family business that leads in many of its markets will generate at least 25% of its annual sales from products launched in the last five years. Depending on your industry, this number might be somewhat higher or lower, but using this metric is a best practice among many industry leaders.
Add this metric to your quarterly and annual updates, and build it into your annual goal planning for your organization. Make sure you are measuring only those new products that are bringing in new sales from existing customers or from new markets. Don’t include products that simply get “refreshed” and replace existing sales. That activity is important and should be captured, but it does not belong in a growth metric. For example, changing the color or viscosity of an adhesive may warrant a new SKU or be considered a product line extension, but it does not constitute a new product. Be rigorous with your metric.
3. Adopt a product development framework or process. Implement a project-management technique called a phase-gate process. This process divides a project into stages or phases, separated by decision points (called “gates”).
At each gate, decisions are made by a team of senior executives who support and guide the project team. The executive decision team has the power to provide additional resources (people and money) as needed to the product development team. In order for those resources to be released, the product development team must have developed a compelling business case that fits the family business owners’ strategic growth plans. A phase-gate process ensures limited allocation of resources until the executive team fully understands and accepts the risks and potential rewards of the new product opportunity. A phase-gate system typically is very data-driven.
Here’s how it works: An idea is refined, analyzed and ranked against other ideas for market attractiveness and development and manufacturing risk. A business case is made. Sometimes proof of concept is required to determine whether a critical part of the idea is viable. Based on these data, the product development team presents a development plan to the executive decision team. This plan should include estimated costs and timelines, risk and abatements, and forecasted sales over time. There is a decision point after each key phase. Then the executive decision team decides whether to commit resources, abandon the project or recycle it.
4. Focus on markets, not single customers. Target developing products to key markets — not individual customers — that support the strategic direction of your family business. Avoid tying up resources to develop one-off products that will bring only incremental returns. The revenue from a one-off product may look attractive in the short term, but sales will plummet when that one customer’s business strategy changes. Many companies have fallen into this trap.
Focus instead on growing markets. We call this targeted innovation. It involves focusing on broad markets that you can win and that you have the capability to support and grow as they do.
5. Think big, but start small. If you are new to product development, take baby steps at first. Start with a small project that has a clearly demonstrated need in the marketplace — one that is well within your capabilities but new to you. At first, avoid products that are too complex or expensive to develop. Save the big ideas for when your teams and processes are up and humming.
To be successful, this kind of homegrown, organic growth and exploration requires leadership support and an operating discipline at the very top levels of the family business. It can require a significant change in culture — a move away from a culture that fears failure to one based on trust and communication. The culture must encourage tolerance of ambiguity and calculated risk taking. It must foster innovative, entrepreneurial thinking.
Such a cultural shift can be difficult to implement. It starts with the owners identifying and ensuring alignment on their values and the mission and vision for the family business. The owners must decide that the risks are well worth the rewards.
Acquisitions will no doubt continue to be a part of the growth strategy for most family businesses. But many are starting to realize that in today’s competitive market, acquisitions offer limited results. New product development, on the other hand, can provide a whole new path to growth, often with less risk and greater returns on investment. In addition, developing a new product pipeline provides family businesses an opportunity to rediscover and nurture the entrepreneurial spirit of the company’s early days, and to provide a continued legacy for future generations.
Ken Foster, Ph.D., is president of Green Oak Technology Group LLC, a Southeast Michigan consulting firm focused on new product development and innovation (www.greenoaktechgroup.com). Wendy Ulaszek, Ph.D., is senior associate of Lansberg, Gersick and Associates, a consulting firm that specializes in the continuity of family enterprise and family philanthropy (www.lgassoc.com).
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