I’m very intrigued by John Shave’s piece on the Revenue Replacement Rule. I don’t remember seeing anything about this before and yet the more I think about it the more it seems to show a simple and powerful truth.
When I was an R&D manager I often used to face the situation he describes in his introduction when I was asked to approve projects that didn’t seem to be an adequate use of the engineers’ time, and yet I didn’t have a persuasive answer.
The RRR (Shave’s law?) is so simple that it’s easy to dismiss: if a company spends a sum of, say, one twentieth of its sales on R&D per year then the R&D projects must on average generate products whose sales will be twenty times the project cost – a demanding ratio. This has to apply in aggregate but it’s not a bad rule of thumb to apply to all projects.
It comes, I think, from thinking of R&D as the pipeline through which all future products come. If it’s not wide enough there won’t be enough sales in future. Just as a factory has to deliver today’s sales, so R&D has to deliver tomorrow’s. If the factory output is not large enough then you have to give it more resources, or ensure that they are used more effectively; so too with R&D.
Of course, Shave’s Law doesn’t have to apply to every technical project that involves R&D engineers: there will always be a need for other tasks, such as fixing problems or making modifications for particular customers. But there should be a separate budget for these so that the main new product pipeline still has enough capacity to do its job of generating the future business.
Shave’s Law seems to apply straightforwardly to businesses in a competitive market with fairly short product lifetimes.
For commodities such as sugar, or very long-lived products such as chocolate bars, R&D’s role may be only to generate growth. In this case the relevant rule of thumb would be the ratio of R&D cost to the planned growth in sales, a much less stringent requirement.
There must be many complications to John Shave’s thesis but for me it is a new and compelling insight.