Reading a recent article published by Harvard Business School, it occurred to me that executives allocating R&D funding could take a lesson from financial institutions’ experience in 2008.
One factor in accelerating the economic collapse was that financial firms had put themselves on a treadmill of short term debt. The attraction of short term debt was low interest, but short term financing requires firms to “roll” their debt, continuously selling new bonds to repay maturing ones. When the crisis hit, bond investors bolted for the exits, so firms could no longer sell new bonds, forcing them to sell assets to repay maturing debt. Suddenly everyone was trying to sell assets at the same time, and asset prices plummeted, quickly pushing firms toward insolvency or government bailouts.
What does this have to do with new product strategy? Executives balancing R&D funding among product lines should avoid putting their companies on a treadmill of short term returns.
The temptation to invest in short lifecycle products is that they can produce faster revenue growth for a given level of R&D productivity (new revenue per R&D dollar). However, over-investment in short life products puts the new product program on a treadmill. As revenue from one product generation matures and declines, it must quickly be replaced with even more new revenue to sustain growth: A decline in R&D productivity can lead to a frightening drop in revenue growth.
Among other strategic considerations, executives should carefully consider the treadmill effect when allocating R&D funding among product lines and avoid the risks of over reliance on short term returns.