Measuring Innovation, Part 1/3: Why is Innovation Important, and How do we Measure it Today?

This article is the first in a series of 3 articles discussing measuring product innovation. This first part discusses the importance of innovation, and how it is measured today. Part 2 will discuss the criteria for a new and effective innovation index, and Part 3 will discuss a proposed such index.

Peter Drucker wrote that “the business enterprise has two–and only two–basic functions: marketing and innovation.”

Several studies showed that innovative companies enjoy 3 times the market share, 6 times the revenue, and 3 times the profitability (albeit lagging indicators) of their peer, less innovative companies, and that if the profitability of two companies were normalized at the first year, the innovative company will have five times the profitability of its less-innovative peer.

A 2008 Boston Consulting Group report indicated that 66% of senior executives responded that innovation was one of their top three priorities, and 23% stated it was the single highest priority. In 2015, KPMG surveyed CEOs, 66% of which were worried about their companies’ products/services relevance in three years, and 72% were worried about keeping current with new technologies. However, a 2010 McKinsey survey of 2,240 executives revealed that while more than 70% of corporate leaders tout innovation as a top three business priority, only 22% set innovation performance metrics.

Companies put innovation on top of their priorities, but without a proper innovation metric, they are not really improving. At the same time, they have a plethora of metrics to measure everything else in the company from profitability, to inventory turnover, to return on capital, and more.

The purpose of this article is to propose a new index to measure company product innovativeness. The term innovation is broad, and includes products, services, processes, and business models. Most companies only innovate in one area, and whenever they use metrics to measure innovation, they only use metric appropriate to their business. After some experimentation and development, it was concluded that attempting to create a single metric to measure all four types is impossible, and possibly irrelevant.

As a result, this article and the work leading to it focused on one type of innovation: product innovation. In the future, this work may be extended to include different innovation domains, although not necessarily using the exact same methodology and/or equations. This article reviews and critiques existing product innovation metrics, establishes criteria for the proposed index, and finally offers the Balanced Innovation Indexâ„¢, a new metric for product innovation.

Existing Innovation Metrics

There are different metrics described (and used) today. Some are academic and theoretical, while others are more practical and used by companies on a regular basis. Some are too complex, while others are too simplistic. Different metrics measure different aspects of product innovation, such as the novelty of the product itself, the creativity level of employees, and the effectiveness of the idea-generating process. In general, those could be categorized into two groups: input metrics, and output metrics. Input metrics are more predictive in nature, as they measure the idea generation process effectiveness, as well as the creativity of the people who participate in it, along with the organizational culture that increases (or reduces) employee creativity. However, those do not describe the actual level of company innovation, which is an output metric. The following is non-comprehensive list of such metrics.

There are several different metrics used by different companies. They are not applied consistently, and are mainly aimed at outsiders, as a public-relations figure.

One of those metrics is the number of patents filed (and issued) by the company. However, the quality of patents can vary dramatically, and while some patents protect dramatic innovation, others can protect relatively minor, easy to circumvent ideas. Another metric is the number of ideas (again, unqualified by how novel, useful, or feasible those areas are). Yet another is the mere number of new products, leaving the word “new” somewhat abstract. Other metrics focus on financial metrics, such as the percentage of sales that are reinvested in research and development, of the Balanced Scorecard Institute’s RoPDE (Return on Product Development Expense) metric.

Perhaps the most famous metric is 3M’s NPVI (New Product Viability Index), which measures the percentage of sales generated by products that did not exist 5 years ago. This metric is problematic for several reasons. First of all, it does not really define what “new product” means. Is the iPhone 6S “new?” It certainly didn’t exist 5 years ago. In fact, it didn’t exist before its launch in September 2015. But 5 years earlier that iPhone 4 existed. How innovative is the iPhone 6S compared to the iPhone 4? Or even compared to the first iPhone, introduced in 2007? Should you look at the iPhone 6S as an innovative product, and “count” it towards the 3M new product viability index as a product that didn’t exist 4 years ago? Or as a product that was incrementally improved over a 9-year period?

The innovation metrics used by companies today do not really reflect a positioning towards a future of innovative products. Time for a new innovation metric?

image credit: thinkwithgoogle.com

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Dr. Yoram Solomon is an inventor, a creativity researcher, coach, consultant, and trainer to large companies and their employees. For his Ph.D. he studied why people are more creative in startup companies than in mature ones. He also holds an MBA and LLB. Yoram was a professor of Technology and Industry Forecasting at the Institute for Innovation and Entrepreneurship, UT Dallas School of Management; is active in regional innovation and technology commercialization; and is also a speaker and author on predicting the technology future and identifying opportunities for market disruption.