Recently, Professor Rosabeth Moss Kanter published an article entitled Innovation: The Classic Traps in the Harvard Business Review (subscription or purchase only). A good executive summary can be found on the IACCM site. Since innovation is one of my favorite topics, I’m going to summarize the salient points and expound on their importance.

Existing corporate structures, controls, and incentives work against out-of-the-box thinking.

Innovation springs from creativity, not from stifled mindsets.

The search for new ideas must go broad and deep throughout the organization.
As I’ve indicated in my Purchasing Innovation series over on e-Sourcing Forum [WayBackMachine] and in my Sourcing Innovation series here on Sourcing Innovation, new ideas can come from anywhere, especially from where you least expect. The key is that you open your mind to the possibilities.

Innovators must be kept connected to the mainstream business.

Otherwise, they will be no more effective than their counterparts in the ivory tower. Although all innovation is good, the reality is that you need innovations that you can profit off of on a regular basis to sustain your business and sustain crucial R&D. Moreover, the best research is that which has a visualizable application (even if it will take time to apply).

You should look for small innovations as well as blockbusters.

A consistent stream of small innovations can often be as profitable as a single blockbuster, and when you consider that blockbusters don’t come along everyday …

Make sure you have Processes and Controls.

Although free thinking needs to be encouraged and supported to get the innovation ball rolling, at the appropriate point in time, each idea needs to be evaluated and a go/no go decision made from a business and ROI perspective.

Select the right leadership.

Your leadership needs to inspire your team to new heights, not drive them to the competition. If you don’t know what I mean, then you need to read more Dilbert.

As part of my recent innovation week, I posted Measuring Innovation which provided you some metrics that you could use to measure your innovative progress – since you can’t manage what you can’t measure is as true with innovation as it is with any other business activity. But the importance of measurement goes deeper than you may recognize, as pointed out by recent articles in the Supply Chain Management Review and Knowledge @ Wharton.

According to Wharton, supply chain measurement is a mission critical element but many companies lag when it comes to measuring how well they are doing when implementing new supply chain initiatives. Considering that procurement and supply chain departments are under continual pressure to get better results without increased resources, it’s vital that you use metrics that identify how the strategic needs of the company are being met.

Wharton recommends using the “efficient frontier” to gage capability where you plot points along a trade-off curve between multiple the performance metrics and look for a position that protects your interests and those of your customers simultaneously. For you technical folks, you’re finding the optimal point on a multi-objective pareto curve based upon the relative weightings of the metrics you are using.

However, as the SCMR points out, there are many challenges in supply chain measurement that you have to solve to effectively manage your supply chain and find the optimal point on that multi-objective pareto curve. Old data, too many metrics, constantly changing metrics, and endless debate over metric definition are just some of the difficulties you need to overcome.

The key is to know what to measure, decide on some industry standard metrics to measure it, and have a program in place to measure it that focuses on quality and not quantity. This program should be based on best practices and avoid the common pitfalls of excellence addiction (constant improvement is good, but you need to take it one step at a time), missing data (the right stuff isn’t enough), ingrained inertia (resistance to change), and analysis paralysis (don’t overanalyze or fail to act on the results).

The metric definition best practices outlined in the article are great:

• design different metric portfolios for different goals
• keep it small (avoid the “mushroom effect”) as each portfolio must be of a manageable size
• address the basics: balanced, cross functional, and practical (with respect to cost, quality, time, & effectiveness)
• align execution and strategy
• understand the interdependencies
• balance the need for standards versus customization (every chain should measure demand-forecast accuracy, perfect order, total chain costs, and cash-to-cash cycle time)

Finally, remember to set targets, work hard to achieve them, and retain them once you have reached them.

One of the results of the Boston Consulting Group’s “Innovation 2006” survey and report that determined that 72% of executives consider innovation a top-three strategic priority was that only 52% of the respondents considered their company’s innovation capabilities to be superior to that of their competitors. This is probably correlated with the fact that only half of the respondents said their companies use metrics to assess the performance of their innovation processes. After all, how can you judge what you can’t measure? (Furthermore, Boston Consulting Group found that among companies that do use metrics, most use only a handful.)

This could be because many companies find it difficult to manage the innovation-to-cash process. There are ways to do this, and one methodology, as provided by the report, is the cash curve of an innovation (which depicts the cumulative cash investments and returns for an innovation over time). The information that goes into the curve isn’t perfect, but it does bring out the many implicit choices, assumptions, and decisions that management teams make out in the open and fosters discussion. Furthermore, it forces you to collect and maintain data, which is necessary for the development of metrics.

What metrics should you use? The Boston Consulting Group also produced a companion report, “Measuring Innovation 2006”, that provides some insight. According to the report, the three metrics that the executives considered most valuable were time-to-market, new product sales, and return-on-investment, but these are only good for measuring the end result, not the intermediate artifacts of the process.

Fortunately, the report also provides you with other possibilities that you can use. Breaking innovation down into inputs refined by a process that produces outputs, the report suggests the following metrics.

For Inputs:

• Financial resources committed
• People and Utilization
• The number of ideas generated and expected payback for each
• Key capabilities

For Processes:

• Resources extended per individual project and on-average
• Cycle times for the entire process and specific parts
• The number of ideas moving from one stage to the next
• The difference between the initial expected value of an idea and the actual realized value

For Outputs:

• The number of new products or services launched
• Incremental gains in revenues and profits
• Cannibalization of existing product sales by new products
• The ROI of your innovation activities

In other words, you have options beyond the basics, and you should use some of them. The report indicates that the ideal number of metrics across all three elements of innovation is between 8 and 12, and I would bet that 9 would be a sufficient starting point. As for what metrics you choose, it’s really not that important. What gets measured, gets improved – and more importantly – understood. As time goes on you can adjust the metrics based on your experience if need be, but the sooner you start trying to measure your innovation efforts, the sooner you will see them improving. The right metrics are important in the long run, but in the short term, it’s about getting there – and without effort, you probably won’t get there at all.

Yesterday we listed ten characteristics of innovative companies. These were:

• Innovative Business Model
• Continuous Investment in Innovation
• Skillful Blend of Design and Technology
• Steady launch of “paradigm shifting” products
• Lengthy track record of successful innovation
• Institutionalized Capabilities
• Ongoing and successful expansion into new areas
• Speed
• Products that allow “lock-in”
• Staying Power

Now we are going to discuss each of these in turn.

Innovative Business Model

Not everyone can be a Google. And even if you could, would you want to? Yes, Google looks very good now – but do you remember Netscape? They were the most innovative company around in the internet space with a new business model, and look at where they are now. It’s hard to succeed on the foundations of an entirely new business model and maintain that success – and at any given time, there can only be a few successful companies operating on an entirely new model.

That being said, without innovation, you’re not going to survive. So we’ll look at Toyota and 3M – more traditional companies in more traditional markets – and see that the innovation in the business model is the focus on the continual development and launch of innovative products for an innovation hungry marketplace – you don’t need a completely new business model, but your business model needs to be based on innovation.

Continuous Investment in Innovation

All of these companies invest significantly in R&D. Without a significant R&D investment, your potential for reward is limited. The reality is that innovation takes smart people – and in today’s economy – it takes lots of them as few products can be designed without a broad interdisciplinary team where each individual member has deep (PhD) knowledge in a relevant area and each area is covered by more than one person. (It’s hard to make progress in a vacuum, which is why the best research is usually produced by research groups, be they academic, industrial, or joint, with multiple experts in the common research area.) In other words, you’ll need a good team that is educated, experienced, and capable, and they’ll need tools and resources to support their research. It’s not cheap in the short term, but when you look at the payoffs the top five companies have achieved on their innovation investments, it’s a pittance in the long run.

Skillful Blend of Design and Technology

Good products are user friendly and appealing. Why else would someone shell out $400 for an iPod when other manufacturers offered high-end MP3 players with the same storage and sound quality for half the price? Make sure you include usability experts in your interdisciplinary team and that hardware, software, and marketing all work on, and off of, the same specifications.

Steady launch of “paradigm shifting” products

Innovative companies are always innovating – and always launching new products. This includes better versions of existing products as well as new products. It doesn’t even have to be a totally new product, just a product that is new-to-you and enhanced to add value that wasn’t there before to the market-place. If you need help managing your innovation, look to invention-on-demand, a modification of the TRIZ problem solving methodology.

Lengthy track record of successful innovation

Innovative companies have a good track record. Launch the right product at the right time with the right features and interface, and the market will come to you if it is bundled with the right message at the appropriate cost point, provided it is a quality product. The last factor is key. To build a track record, your products must be high quality. They must be easy to use and do what they are advertised.

Institutionalized Capabilities

Innovation is institutionalized in market-leaders, as well as knowledge and processes. You should use technology to help you manage the process. In particular, you should employ PLM (Product Lifecycle Management) and Innovation Management technologies. (Some examples of innovation management technology can be found in my post Innovation Matters.)

Ongoing and successful expansion into new areas

Innovators are never complacent about their position in the market. They are constantly looking to not only improve it, but to expand into other related markets, and, occasionally, to create a new market (based on a new breakthrough). Always be on the look-out for new opportunities and enhance your marketing capabilities to break into new markets when the time is right.

Speed

Innovators are fast. Their cycle time is usually half that of the industry average. They work in unison to take a product from conception to completion as efficiently as possible. There is no political infighting or unnecessary roadblocks. There is one team with one goal. When a milestone is reached, the product simply moves on to the next one. Schedules are accelerated when time permits and, more importantly, they are lengthened if required to achieve the desired level of quality. After all, the sooner an issue is addressed, the less impact it has to the overall cycle time.

Products that allow “lock-in”

Innovators develop easy-to-use products suitable for the mass-market at a price point that allows majority adoption and usage around common standards. This gives them the ability to effectively lock-up a significant portion of the marketplace, which they can continue to support and sell to with newer, better products in the future.

Staying Power

Innovators are in it for the long haul. That’s what gives them their staying power. They realize that innovation is not a quick-fix or a one-shot endeavor. It is a continual process.