The document discusses challenges with measuring and managing innovation. It provides definitions of innovation and outlines a framework that includes defining innovation objectives aligned with strategy, selecting appropriate metrics, and linking innovation processes and outcomes. This framework can help organizations more effectively manage innovation through performance measurement and management.

1. Measuring & Managing Innovation Ed Barrows, Lecturer Babson College Babson Executive Education March 18 th , 2009

2. Discussion topics for today Survey results on measuring & managing innovation External Findings Our Own Findings Understand challenges with measuring & managing innovation Defining Innovation Consider the Innovation Process Present a framework for managing & measuring innovation Test the framework with our own organization Seven barriers to effective innovation measurement

3. Most organizations claim innovation is critical to their future success… Source: JustElite.net , www.eons.com blogs.smh.com.au … sadly many fail to achieve their innovation goals

4. Perhaps the problem has something to do with the management system Survey Good Not Good … but more than 50% rated their performance measurement system for innovation as poor or less than adequate. … but only 30% have confidence in the organization’s ability to achieve results. … but 72% believe their organization has failed to meet its innovation objectives. 1 Frigo, M. and Littman, J., Strategy, Business Execution and Performance Measures , Strategic Finance, 2002. 2 Jonash, R and Donlon, B., Connecting the Dots: Using the Balanced Scorecard to Execute an Innovation Strategy, Balanced Scorecard Report, March-April, 2007 In a 2001 survey by the Institute of Management Accountants 1 60% of respondents indicating that innovation was a key feature in their company’s mission… In a 2005 Monitor Group Innovation Survey of senior business executives 2 89% recognize the importance of innovation…. In a 2006 Palladium/Monitor survey BSC Online members 2 79% of respondents believe innovation is important or critical to achieving long-term strategy…

5. How do we compare? 1. Overall our organization believes innovation is critical to our future success. 2. Our senior leadership supports our organization’s innovation efforts. 3. Our innovation is clearly linked to our competitive strategy. 4. Our performance measures effectively measure our innovation efforts. 5. Our performance management effectively monitors our innovation efforts. Question Responses (N=18) - Strongly Disagree Disagree Somewhat Disagree Neither Strongly Agree Agree Somewhat Agree - - - 11% 28% 61% 6% - - 11% 28% 22% 33% - - - - 50% 28% 22% 22% 17% 6% 6% 28% 22% - 11% 28% 17% - 33% 11% - Please indicate the response that best represents you answer to the following five questions:

6. What are your challenges in measuring & managing innovation? ?

7. There are many definitions of innovation from the simple to complex Source: Yahgi, Bassil, The Moderating Effects of Performance Measurement Use on the Relationship between Organizational Performance Measurement Diversity and Product Innovation, Unpublished PhD Thesis, Cranfield University, 2006. Author Study Knight, 1967 An innovation is the adoption of a change , which is new to an organization and to the relevant environment. Innovation process is a special case of the process of change in an organization. They differ only in the novelty of the outcome. Thompson, 1967 The generation, acceptance and implementation of new ideas, processes, products, or services . Meyers & Marquis, 1969 A technical innovation is a complex activity which proceeds from the conceptualization of a new idea to a solution of the problem and then to the actual utilization of a new item of economic or social value. Zaltman, Duncan, & Holbeck, 1973 Innovation refers to any idea, practice, or product that is perceived as new by the potential unit of adoption. Utterback & Abernethy, 1975 Product innovations are new outputs or services that are introduced for the benefit of customers or clients. Burgelman & Sayles, 1988 Innovation refers to a company's efforts in instituting new methods of production and/or bringing new products or services to market. Drucker, 1998 Innovation is the effort to create purposeful change in an enterprise’s economic or social potential. Burgelman, Christensen, & Wheelwright, 2004 Innovations are the outcome of the innovation process , which can be defined as the combined activities leading to new, marketable products and services and/or new production and delivery systems.

8. Regardless, innovations themselves are a result of an innovation process A simple model of the innovation process Adapted From: Davila, T. , Epstein, M., and Shelton, R., Making Innovation Work, Wharton School Publishing, 2006 Inputs Tangible Resources Intangible Resources Systems Networks & Partnerships Process Creative Process Project Execution Development & Selection Platform & Portfolio Management Outputs Technology Leadership New Product Introductions Marketing Positioning Business Improvement Outcomes Revenue / Profit Growth Customer Mix Change Long-Term Value

9. But the innovation process must be managed as part of an overall business strategy The strategy map depicts and organization’s competitive strategy Shareholder Value New Revenue Sources Increase Customer Value Improve Cost Structure Improve Asset Utilization Price Quality Timeliness Relationship Service Brand Innovation Process Customer Management Process Operational Processes Social & Environmental Processes Skills & Competencies Technology Culture Leadership Financial Customer Internal Process Learning & Growth Customer Value Proposition Adapted From: Kaplan, R. and Norton, D. The Strategy-Focused Organization , HBSP, 2002 Inputs Process Outputs Outcomes

10. The key is to select the right innovation objectives and measures to support the strategy The strategy map depicts and organization’s competitive strategy Shareholder Value New Revenue Sources Increase Customer Value Improve Cost Structure Improve Asset Utilization Price Quality Timeliness Relationship Service Brand Innovation Process Customer Management Process Operational Processes Social & Environmental Processes Skills & Competencies Technology Culture Leadership Financial Customer Internal Process Learning & Growth Customer Value Proposition Adapted From: Kaplan, R. and Norton, D. The Strategy-Focused Organization , HBSP, 2002 Inputs Process Outputs Outcomes

11. And innovation can take specific forms within the strategy map Source: Jonash, R and Donlon, B., Connecting the Dots: Using the Balanced Scorecard to Execute an Innovation Strategy, Balanced Scorecard Report, March-April, 2007 Financial Objectives Customer Objectives Process Objectives Learning & Growth Objectives The strategy map innovation template

12. Let’s begin with Financial objectives and measures Adapted From: Davila, T. , Epstein, M., and Shelton, R., Making Innovation Work, Wharton School Publishing, 2006 Financial Stock Price/ROE/ROI Sales Growth Residual Income Revenue from Innovation Percentage Sales from New Products Financial Innovation Budget Product Mix Margin by Product Product Vitality Market Share

13. Next Customer objectives and measures Adapted From: Davila, T. , Epstein, M., and Shelton, R., Making Innovation Work, Wharton School Publishing, 2006 Customer New customers gained from innovation Sales per customer Customer satisfaction with innovation Customer attrition / retention Average Prices Paid by Customer Customer Customer Profitability New segment penetration/share Customer Conversion Brand Perception Share of total spend by customer

14. Internal Process objectives and measures Adapted From: Davila, T. , Epstein, M., and Shelton, R., Making Innovation Work, Wharton School Publishing, 2006 Internal Process Project Performance R&D Productivity Patents Granted Internal Process Development Time/Cost Mix of Innovation Projects Number of New Partners/Productivity

15. Finally Learning & Growth objectives and measures Examples of Innovation Measures Adapted From: Davila, T. , Epstein, M., and Shelton, R., Making Innovation Work, Wharton School Publishing, 2006 Learning & Growth Individual Obj. Linked to Innovation Free Time to Innovate Leadership Support of Innovation Innovation Competency Rate Learning & Growth Culture Climate for Innovation Job Application Rate % Compensation Linked to Innovation Cross Functional Initiatives

16. Create an innovation strategy for your organization Learning & Growth Internal Process Customer Financial Objectives / Measures Infuse Creativity into Workforce Build Innovation Process Skills Establish Platform for Innovation Partner with Experienced Patent Holder Build Innovation Pipeline Price Perception Product Newness Perception Sales from Products < 1 Year Old Gross Sales Gross Sales ($) Sales from New Products ($) Customer Newness Rating Customer Price Rating Number of Products per Pipeline Stage Status of Partnership Agreement Innovation Platform Readiness Number of New Ideas Innovation Process Training Complete

17. Some final thoughts… If the strategy’s flawed, so too will be the innovation efforts Don’t measure the wrong things Objective measures are useful, but some things are inherently subjective Use the best information available IT is helpful, but not necessarily the answer Using the management system incorrectly will lead to perverse consequences The wrong data is the wrong data Adapted From: Davila, T. , Epstein, M., and Shelton, R., Making Innovation Work, Wharton School Publishing, 2006

18. For more information Ed Barrows www.edbarrows.com 508 400 1775 [email_address]

19. 1. Overall our organization believes innovation is critical to our future success. 2. Our senior leadership supports our organization’s innovation efforts. 3. Our innovation efforts are clearly linked to our competitive strategy. 4. Our performance measures effectively measure our innovation efforts. 5. Our performance management effectively monitoring our innovation efforts. Question Response Strongly Disagree Disagree Somewhat Disagree Neither Strongly Agree Agree Somewhat Agree Please darken the response that best represents your answer to each of the following five questions: