Linking R&D Spending to Revenue Growth

OVERVIEW: A recently proposed model for revenue growth clarifies the linkage between R&D intensity and the annual revenue growth rate. A key assumption is that the lifetime revenue generated by a group of products launched in a particular year is proportional to the total R&D investment in that year. In practice, the product-related R&D investment occurs over several years preceding the year of product launch. By decomposing the total R&D into product-related investment streams, distributed over the years prior to launch, the link between the revenue growth rate and product development schedule can be modeled. The extended model yields a formula that links the growth rate, R&D intensity, and shapes of the revenue and investment streams. Management can use the simulation method as a planning tool, to quantify potential ramifications of their R&D decisions.