P E T E R  S. C O H A N  &  A S S O C I A T E S

Most firms would love to become more innovative.  The problem is that innovativeness is difficult to define and thus difficult to manage.  By using the concept of the Four Sources of Advantage as a management tool -- The Innovation Scorecard -- executives can move their organizations in the right direction.

The Innovation Scorecard is a way for managers to set goals and measure progress towards achieving those goals.  The Innovation Scorecard details financial and operational goals the intent of which is to enable the firm to generate higher levels of return on innovation -- the cash generated by investments in innovation.  Such investments could include R&D expense, hiring new people, or developing new business processes.  And the cash generated by such investments might include the profit contribution of new products or processes.

To set goals for return on innovation, firms should agree on a specific set of measures which could include:

Profit and revenue per employee relative to competitors;
Internal rate of return from investments in innovation; and
Profit from new products and processes divided by investment in innovation.

Firms should set goals for these measures and link compensation of responsible managers to achievement of the goals.  To make this process valuable, executives must carefully identify those individuals with the authority to be held accountable for the goals.

At the same time, executives should set goals for the way their firms perform the four activities that drive return on innovation.  The four sources of advantage and some suggested performance measures are listed below.

Entrepreneurial Leadership can be measured by conducting an independent survey of employees.  The results of such a survey could be used to assess how well a company attracts and maximizes the productivity of entrepreneurs.  Topics covered in such a survey might include:

Percent of employees who can improve the company's competitive position without interference;
Percent of employees whose compensation and career opportunities will reward them for doing so; and
Percent of employees whose bonuses are tied to improvements in customer satisfaction scores.

Open Technology
can be measured by interviewing a company's technologists and product developers.  The results could help determine how vulnerable a firm is to new technologies that could undermine its competitive position.  Topics covered in such interviews might include:

Percent of current revenues derived from products introduced in the last two years;
Percent of current revenues from products developed outside your company's R&D labs; and
Number of individuals responsible for monitoring new technologies..

Boundaryless Product Development
can be measured by interviewing a cross section of product developement teams.  Such interviews could help executives streamline time-to-market and improve the rate of successful product innovations.  These interviews might cover topics such as:

Number of new products developed with cross-functional teams;
Reduction in time-to-market for new products over the last three years; and
Number of teams getting fast feedback from early adopter customers on new product prototypes.

Disciplined Resource Allocation
can be measured by conducting interviews of participants in the resource allocation process for new products.  This work could help identify flawed investment decision-making as well as best practices the sharing of which could help companies improve their return on innovation.  The interviews might include questions such as:

Percent of new product introductions accompanied by rigorous post-mortem analysis;
Number of forums for sharing best practices and learnings from "worst practices" across the company; and
Percent of new product resource allocation decisions based on portfolio grid and stage-gate processes.

The initial analysis of these four drivers of return on innovation can help companies pinpoint opportunities for improvement.  In order to make the best use of the Innovation Scorecard, companies should compare their results to their industry and must also embed the Scorecard into their performance measurement and compensation systems.


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