Measuring Innovation, Part 2/3: The Criteria for a Good Innovation Index
This article is the second in a series of 3 articles discussing measuring product innovation. The first part discussed the importance of innovation, and how it is measured today. This second part discusses the criteria for a new and effective innovation index, and Part 3 will discuss a proposed such index.
The following discussion addresses the criteria that a good innovation metric should meet.
A good innovation metric should allow users to measure current innovation performance with prior years’ performance, as well as with competitors’ performance. The ability to compare to prior years’ performance will support company improvement. The ability to compare against competitors performance will support increasing the company’s competitiveness, market share, revenue, and profitability relative to its competitors in the market.
Allows setting targets
Typically a numeric/quantitative metric allows setting targets. If, for example, the metric shows a performance of 0.175 (on a 0-1 scale) last year (for the company, or for a competitor), the company management could set a target of 0.25 for the following year. A subjective, “soft,” qualitative metric might not help management set targets for the following years, or against competitors.
A metric that details a relatively simple relationship between input parameters that are measurable and quantifiable themselves allows the company to “do something about them.” Setting the target to 0.25 for next year is not enough if there is no clear way to improve different factors affecting the index. However, knowing that the 0.24 is the product of one factor that ranks 0.8 out of 1 by another factor that ranks 0.3 out of 1 might indicate that work should be done on the second factor, for example.
Feasible and Practical to Measure
Some parameters are impractical or very hard to measure. All parameters in the new index should be readily available, already measured, or easy to measure. They should not require significant research and effort to retrieve and calculate. In order to be able to compare company innovation performance to competitors’ innovation performance, those factors should be relatively easy to determine “from the outside.” Otherwise, only company longitudinal (over time) performance can be compared. The equations used to calculate the index based on the input factors should be relatively simple and not require significant efforts to calculate, either.
Some of the existing metrics are lagging indicators. For example, measuring the financial performance of innovation, or the RoPDE™ (Return on Product Development Expense) will only show improved performance once products passed the growth stage. The same applies to “X% of revenue from products that didn’t exist Y years ago,” as those products may have already been in development Y years ago, yet were not counted. On the other hand, measuring the percentage of revenue invested in Research and Development is a leading indicator. It indicates how innovative will the company be in the future, when the current R&D effort will finally bear fruit. The innovation index should show current innovation level of the company, and how it will support future growth.
A good innovation index should measure the innovativeness of products along all dimensions of innovation: novelty, usefulness, and feasibility. Simply stating that the product did not exist 4 years ago, and thus the revenue from it should be counted towards the innovation index is not enough. The iPhone 6S did not exist 4 years ago, but how different is it from the iPhone 6? 5S? 5? 4S? 4? Furthermore, is 4 years the right timeframe? Should it be 10? or only one year? The comprehensiveness of the innovation index should be balanced against the complexity of obtaining the input data and calculating it.
Balance revenue-generating (actual) with pipeline (future) innovation
“% of revenue from products that didn’t exist X years ago” also fails to show how the company positions itself into the future with current ongoing projects. On the other hand, R&D expense as a percentage of sales indicates only future innovation positioning, but not current innovativeness of existing products. A good innovation index will show both, and include the balance between them. A company that has very innovative products currently generating revenue is not as well positioned into the future as a company that has a strong innovative product pipeline. At the same time, a company with a strong innovative product pipeline should not be considered as innovative as one that already generates impressive financial performance from innovative products.
In the third and final part, I will discuss such a proposed innovation index (the Growth Innovation Index) and measure it against the criteria listed above.
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.
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