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Monday, July 05, 2004
Making Innovation Work - Day 4
Overcoming Obstacles to Innovation

The most successful companies say that organizational alignment is a minor problem for them, but 75 percent of companies reporting low success rates see this as a major impediment. The highest ranking concern for successful companies, chosen by 50 percent of high achievers, is lack of the proper resources needed to encourage innovation.

Although 75 percent of the most successful companies have been emphasizing innovation for over ten years, this is also true of 50 percent of the least successful companies. The latter firms appear to be struggling with culture, strategy, and leadership issues. Some of the more successful firms continue to have strategy and resource issues, but overall they appear to be fine-tuning a working innovation process.

Although 70 percent of the firms participating in the Conference Board Innovation study say that their senior management has made a firm commitment to innovation, there is obviously much work still to be done. To understand what these firms have achieved to date, and where they hope to go in the future, participants were asked:

"What measures do you use to chart your progress and examine results? What have been your greatest recent successes? What are your priorities for the near future?"

Charting Progress and Setting Priorities

The Metrics Challenge

Many executives start with specific innovation goals derived from their firms' annual strategy-setting process, and their self-assessment is based on comparing their performance to these goals.

Thomas Kuczmarski, whose firm specializes in innovation consulting, suggests that companies start with a standard macro measure of return on innovation investment (ROII). This is calculated by dividing the total net profit from innovation by R&D costs plus incremental production costs plus initial commercialization costs. Depending on specific needs, a company might then go on to develop a reasonably sized battery of metrics that would help its management diagnose problem areas, allocate funds, and communicate and set future goals. For example:

--Cumulative profits and revenues for a set period
--Growth impact
--New product success and survival rate
--Speed to market
--R&D emphasis over a set time span (how much total expenditure and how much on new products?)
--New product portfolio mix
--Innovation process pipeline flow (number of new product concepts in each stage of development)
--Innovation revenues per employee devoted to innovation initiatives

Although outcome measures are highly important, experts suggest that companies need to consider a wide range of indicators of innovation performance, including metrics that gauge:

1. Activity: What is the overall level of activity (internal and external) and the rate of change across key phases—ideation, conceptualization, development, rollout, and value in the after-market?
2. Build up of ideas, the robustness of the knowledge network, and other "softer" activity metrics.
3. Management: How large is the innovation network in terms of people, partnerships, and dollars invested? How much is flowing through and at what rate?
4. Performance: What is the yield in terms of revenue growth, income, market positioning, brands, and shareholder value?
5. Results: How do the metrics roll up in terms of business growth and shareholder value? How does this compare to the results from the company's standard business portfolio?

When respondents are asked to name the innovation metrics they found most useful, they list measures that can be divided into four broad categories:

1. Measures specific to innovation,
2. Financial/market performance indicators,
3. Business process metrics and
4. Measurements of employee performance.

Determining Levels of Innovation Achievement

When survey respondents were asked to benchmark their innovation standing against other leading innovators in their industry, 67 percent judge themselves to be above average, 15 percent rate their company as average, and 18 percent view their operations as below average.

Despite their confidence when benchmarking against their competitors, most participants are uncertain about their success in achieving their self-imposed goals. Measured against company goals, 56 percent of respondents say they are only "moderately" successful.

This opinion may be linked to the finding that, when participants are asked to list their three most significant achievements, 57 percent point to such tangible outcomes as financial success or the creation of new products, services, markets, or capabilities.
The other responses, which point to successful changes in strategy and alignment or improved business processes, suggest that many companies are still struggling with guiding and implementing innovation in their organizations.

(Source: Conference-Board Report "Making Innovation Work: From Strategy to Practice" by Kathryn Troy.)

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