by Peter Merrill

In 50 Words Or Less

To be successful innovators, organizations need leading indicators focused on people and processes.
There must be a balance of different types of people who touch the innovation process.
Organizations must also measure their innovation management system’s process inputs to ensure efforts will bear fruit.

Companies with the fastest profit growth emphasize innovation twice as much as those that don’t, according to an IBM CEO survey two years ago.1 Companies with radical innovations generate 10 times more shareholder value in an initial public offering, data from Morgan Stanley reveals.2

Companies that commercialize patents fast outperformed the market by 1,000% over a 10-year period, an Accenture survey reports.3 With a strategy of open market innovation, Proctor & Gamble created 100 new products in two years, and its share price doubled. 4 Apple saw its share price move from $10 to $140 in five years through the launch of its iPod.5

These are exciting numbers and certainly make a case for innovation. When it comes to financial measures, however, these are lagging indicators. To become successful innovators, you need leading indicators focused on the people and process aspects of your organization.

You must know the various strengths of your people so they can focus on areas where they make their best contribution. You need to know the weaknesses of your processes so you can focus on areas for improvement. Before uncovering these leading indicators, you must first understand the innovation process and how to decide where these leading indicators can be applied.

The innovation process

Phil Crosby said, "All work is a process."6 Innovation is the process of converting new knowledge into new products, services and processes. Innovation in an organization can take place at a system, process or product level.

The activities that must be performed in an innovation process are shown in Figure 1.

Many think innovation starts with a cool new idea. In truth, innovation starts with identifying a customer or market need. Importantly for the innovator, neither the customer nor the market might recognize that need. Henry Ford said, "If I had asked my customers what they wanted, they would have said faster horses."7

Creative thinking is required at this first stage. This is the search for new knowledge. I have had a fortune cookie note on my office notice board for years that says, "The secret of a good opportunity is recognizing it."

Once the customer opportunity has been identified, finding the solution is where most people recognize innovation as taking place. Breakthrough innovation comes from finding solutions that are truly radical. This is where connecting a product or process from totally different environments often leads to that exciting "aha!" moment. This is the application of new knowledge. Henry Ford’s idea for mass production came from seeing a meat processing plant and applying its method to production of motor vehicles.

After this second stage, however, you have only a concept. You now must develop a working solution. This is where developers take over. The third stage in the process of making the solution work is where so many organizations lose momentum, stumble and give up any advantages they’ve gained in stages one and two. Speed to market is essential. Discipline becomes vital. Borrowing from a saying coined by Thomas Edison led to the saying, "Innovation is 1% inspiration and 99% perspiration."8

If you want a long-term and continuous innovation process, the production, service delivery and salespeople must be involved in the earlier stages. By stage four, they must be able to run for the line.

Every advantage you can give them is essential. Time and advance notice is their biggest advantage. Too many companies wrap their development activities in excessive secrecy. Then, suddenly, sales and operations people are presented with a challenge for which they have no knowledge.

Measuring Innovation: A Story

For years, the president of a manufacturer of kitchens for pre-built homes had been saying, "We need new ideas." The turndown in the housing market finally made the situation critical.

Seeing the need to look critically at how it created (or didn’t create) new ideas, this fictitious company, IVG,1 conducted an innovation gap analysis to identify where it needed to strengthen its organization. Company leaders also encouraged their staffs to evaluate their personal innovation aptitudes.

The organizational assessment revealed IVG needed to take action, such as defining its innovation process more clearly and strengthening the lessons-learned activity at the end of each project. Communities of innovation were also developed using the knowledge gained from the self-assessment.

There were a number of other areas, however, in which it was clear IVG needed to drill deeper and take measurements to gain more knowledge—collaboration, risk taking and new market entry in particular. Within the innovation process, IVG also determined the need to measure the number of opportunities generated and solutions produced.

The latter two items provided success measures for the new communities of innovation IVG had developed. The measures were highly valuable because they provided output measures for early stages of the innovation process.

The measures adopted by the communities of innovation changed over time. Initially, they were simply opportunities and solutions. Over time, they were refined into new market opportunities and practical solutions.

The areas of collaboration, risk taking and new market entry needed much more thought when it came to suitable measures.

Collaboration with business partners was measured in terms of number of ideas exchanged, but each idea also was scored on merit.

Financial measures were carefully avoided here, and a lot of attention was paid to understanding partner organizations before measures were developed further. Given the experience in risk measurement elsewhere in the organization, measuring risk turned out to be relatively easy.

New market entry ultimately was the most elusive measure, and it took one year before satisfactory measures were found.

In its first year of measuring innovation, IVG learned that leading indicators afforded the company time to act on the knowledge it gained. Also, measures needed to be revisited. If a measure did not provide learning, it needed to change.

IVG benefited from measuring innovation by changing its company behavior to a culture that seeks and embraces new ideas. New ideas did not come easily, although IVG scored an early win by finding a new market (Japan) for one of its existing products.

The real breakthrough, however, came after a year. Using its strong brand in the housing market and driven by its well-managed innovation process, the manufacturer broke into the low-cost end of the kitchen refurbishment market with a radical new kitchen design. —P.M.

Reference

IVG is a fictitious company. This example is based on the experiences of two companies the author has worked with.

Measuring innovation aptitude

Innovation measurement starts by focusing not on the process just described, but instead on the aptitudes of the people who are required at each stage in the process. Successful innovation comes from the collective knowledge of the people in your organization. You must first measure "people strengths" so people can focus on the areas where they can make their best contribution. Table 1 can help you assess where you will make your own best contribution.

It is imperative to maintain a mix of all types of people as you move through the innovation process. On the other hand, it would be fatal to operate the development stage of the process, for example, without a majority of people who measured highest in that category, as determined by Table 1.

The key roles in an innovative organization and in the innovation process match the stages in the process. This self-measurement will show you where you will make your best contribution, whether it’s by:

Linking ideas to solutions (connectors).
Implementing solutions and getting things done (doers).
Generating opportunities (creators).
Turning ideas into practical solutions (developers).

Connectors are the green thumbs who nurture the seed of the idea and find the answer. They are the design, R&D and strategic planning people. They are a rare breed and learn by thinking.

Doers get the job finished and take things to market. They are project managers, salespeople or folks from production. Doers learn from practical experience.

Creators, or gold diggers, typically find the opportunity and open it up. If you do this, you are likely an artist, marketeer or researcher. You are practical and learn from practical experience.

Developers also learn by thinking, but they make the idea work. They are engineers, systems developers and accountants.

Don’t look at the column with your lowest score and try to improve that score. Focus on your strengths and do what you do well.

Measuring the system

Once you know the strengths and aptitudes of your people, you must then step back and evaluate your innovation management system. Figure 2 shows the three levels of measurement you must address: system, processes and product.

The ultimate, or system-level, measure of whether your innovation management system works is whether people buy your product or service. Unfortunately, that is a seriously lagging indicator. You must measure the system by evaluating each of its elements and identifying opportunities for leading indicators.

Table 2 is a simplified organizational assessment that will help evaluate your innovation management system. The assessment asks five basic questions in each assessment area. A maximum score of 20 points is possible in each section. Note that the term "product" is interchangeable with "service."

With knowledge gained from the answers to the questions in the organizational assessment shown in Table 2, you will be in a position to focus on the areas where you have a low score and drill down for more insight. You then can measure where you want to improve.

Looking at your organization from a system perspective presents a series of required actions that can be developed into a measurement plan. Some measures will be binary, and others will be more numerate. This is where you now move to a process level of measurement.

Measuring your process

People usually go wrong by measuring the product, which is the outcome of a process. Examples of this type of product measurement are the number of new products or patents produced. These are lagging indicators.

You want leading indicators, which come from measuring process inputs. Naturally, the essential rules of measurement apply. Measurement means collecting data and analyzing it to gain knowledge. The following protocol captures the stages in the measurement process:

Data is just numbers.
Information is patterns in the data.
Knowledge is information that can be acted on.
Innovation is produced from new knowledge.

Stages one and two of the innovation process (see Figure 1) are where your measures are more difficult to establish and where you need to focus on process inputs. From the system level assessment (Table 2), you first identify where you are weak or the risk of failure in your processes is greatest.

An example of where to focus your measurement might be on your ability to get to market fast. Other measurement areas might be the performance of your relationships with inventors, partners or suppliers and the number of opportunities you develop. Measures in these areas can help you understand and improve the process that supports innovation.

There is also a cruel twist for the innovator. One of your most important measures must be designed to enable the innovator to "learn how well you learn" or understand how effectively the learning process in the organization is functioning.

At the opportunity stage of the innovation process, you also need to monitor megatrends and market trends. Your market research people should do this. You need to measure customer and market opportunities identified, and the impact of those opportunities in terms of time and money.

Cost of quality is a great tool for doing this. Taking the earlier example of Henry Ford and his horses, research has shown he would need to make the automobile 10 times more cost effective today in terms of running costs and people’s time before there would be significant uptake of his automobile idea.9

At the solution stage, you must measure the number of potential solutions for each opportunity, the behavior change required by the user for a given solution and the risk attached to each solution. Risk measurement should focus on partner risk and delivery chain risk.

In particular, risk requires careful measurement. This might be the risk of a supplier failing to deliver or the risk of a distributor failing to take up a new product. If you have four key suppliers—three of them at 90% probability and the fourth at 40% probability of delivering, then the joint probability of your supply base is:

0.9 x 0.9 x 0.9 x 0.4 = 29%.

You certainly wouldn’t move forward with an internal risk at that level of 29% without serious mitigation.

As companies grow, they use measures as a way to evaluate performance. What starts as a few key measures might lead to a mountain of measurements. This mountain can lead to a focus on completing the list or being obsessed with just filling in boxes on a data sheet instead of using measurement for improvement.

Measures are fun to create and difficult to destroy. Review measures quarterly and see if they are still relevant. If they’re not, eliminate them. Measure where you are weak. Drill down with your measures. You measure to learn about something you need to better understand and then improve. Where your high-level measures don’t tell you enough, go deeper. An initial measurement plan for your innovation process might look like Table 3.

Measuring your product and service

Measuring the latter stages of your innovation process—where you develop the solution and get to market—is much easier. You might well be performing many of those measures already. Software developers and IT technicians are in familiar territory when measuring things like first-time fix and errors per line of code.

The same concepts apply at the development stage of any new product. At the execution stage, sales and production people are familiar with measuring speed to market, speed of acceptance, production errors and service errors.

Your measurement strategy

Remember, you are measuring process inputs to ensure your innovation efforts will bear fruit. If your process inputs are not performing as you require, you need to act. Innovation measurement is about improving your ability to innovate.

Start by having your people measure their innovation strengths. Your people’s knowledge is your primary tool as you initiate your innovation process. Identify the areas of your organization in which innovation is weak. Remember you measure to improve. Drill down in those weak areas and focus on measuring weak inputs to your innovation process. Measuring your outputs is useful, but only to validate whether your innovation process is working.

References and Notes

"Expanding the Innovation Horizon: The Global CEO Survey 2006," IBM, 2006.
Bart Stuck and Michael Weingarten, Innovation and Profitability, Signal Lake, 2004.
Jane C. Linder, Measuring Profitable Growth and Innovation, Accenture, January 2006.
Larry Huston and Nabil Sakkab, "Connect and Develop—Proctor and Gamble Model for Innovation," Harvard Business Review, March 2006.
Peter Merrill, Innovation Generation: Creating an Innovation Process and an Innovative Culture, ASQ Quality Press, 2008.
Phil Crosby, Quality is Free, McGraw Hill, 1979.
Wikiquote, http://en.wikiquote.org/wiki/Henry_Ford (case senstive).
Thomas Edison’s direct quote is "Genius is 1% inspiration and 99% perspiration." Wikiquote, http://en.wikiquote.org/wiki/Thomas_Alva_Edison (case sensitive).
John T. Gourville, "Eager Sellers and Stony Buyers: Understanding the Psychology of New Product Adoption," Harvard Business Review, June 2006.

This article is adapted from the author’s book, Innovation Generation: Creating an Innovation Process and an Innovative Culture (ASQ Quality Press, 2008).