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Innovation Measures
By Dave Ramsey

A quick review of our website will show you that we are a firm that is focused on the power of innovation and the value of intellectual property.  At the same time we seek to maximize the value and competitive advantage gained from a business organization that plans for and executes a robust innovation strategy. As a result of our focus on innovation, we are constantly scanning a variety of sources for information on new and interesting product, processes and methods.

Over the past several years, there has been a heavy emphasis on increasing the operational effectiveness of the business operation.  Starting in the automotive and electronic manufacturing operations, this emphasis has spread throughout the business world and now includes all industry sectors.  It has spawned a variety of methods and techniques for improving and increasing the effectiveness of anything that may contribute to the dollar value of the organization.  Methods and techniques used in the implementation of operational effectiveness programs include Six Sigma, Balanced Scorecard, Lean Management, Total Quality Management, Shainin and a variety of hybrid methods that contain elements of many of the more formalized techniques. 

One of the places that are often overlooked for improvement is the R & D functions and process.  As a result, when the crunch hits (as it always does sooner or later) the process is one of the first to be downsized and/or eliminated.  This is because it is a unique business activity that perhaps carries the highest risk for excess cost and/or failure.  This uniqueness causes a difficulty in measuring its effectiveness.  As a result, the default measure most often seems to be either dollars spent or something that is easily manipulated like “time to market.”

Most business measures are tied to the dollar and are based solely on outcomes. Some examples include both the number and value of patents and copyrights; the number of patents per employee; and RoI of innovation.  A more valuable method of measuring might be using the measure that best signals desired behavior and that can be used to shape decision making leading to continued improvement and thereby then leading to outcome and increased revenue.

An excellent discussion of the concept of measuring product development occurred in Kaplan and Norton’s text The Balanced Scorecard .  They cite the account of the pharmaceutical company’s development process as being a sequential process involving the screening of large numbers of compounds, evaluating promising ones in detail, moving from lab testing to animal testing, shifting animal testing to human testing and then submitting the compound to complex governmental review and certification processes. Each stage is measured in ways that characterize that stage such as cycle time, cost and yield.   Each measure in turn is not a simple value but a derived value stemming from calculations such as the number of compounds that pass on to the next stage divided by the number of compounds that entered the stage.

In another instance that was noted an electronics company became aware of the fact that there new product development process was longer and more expensive than the processes at other competitor companies.  The number one cause was the number of products that failed to function properly the first time that they were designed and had to be redesigned and retested, often several times.  The company retained the traditional time to market measure, but added a performance driver measure – the percentage of products for which the first design of a device fully met the customer’s functional specification.  Additional behavioral measures included the number of times the design needed to be modified before it was released for production.

A third example that Kaplan and Norton used is the example of HP and their use of break-even time(BET) to measure the effectiveness of the product development cycle.  The measure brings together three critical elements.  First, in order to break even on the R & D process, it must recover the initial investment in the development process itself; so the measure incorporates not only the outcome from the process, but also the cost. 

Second the measure focuses decision making on profitability.  All managers involved in the process; marketing, engineering, production all are encouraged to work together to develop a product that meets real customers needs at a cost that allows the company to make adequate sales (profits) that will repay the development cost.

Third, BET as HP defines it is measured in time.  It is structured to give premium to launch of new products faster than the competition.  Faster launch means increased sales which means faster repayment of development costs.

As one examines the details of the metric, it becomes evident that by itself, the metric could lead the product development teams to introduce only incremental products instead of breakthrough products.  While incremental products are useful and can be quite valuable for a product line-up, it is a proven fact that periodically companies benefit from the creation of breakthrough products.  An example of this is the automotive industry.  A new car model is introduced with a variety of improvements that make it a breakthrough model.  Each successive year incremental improvements are made to correct flaws, keep the design fresh and to spark continued interest.  However, usually after 3 to 5 years, the particular model is completely redone with radically different styling, motor, suspension and interior -- the breakthrough product is introduced.

Because of this potential for introduction of incremental line extension products the BET needs to be balanced by a measure of the innovativeness of the product.  Measures that can be used for the measure of innovativeness include gross margin from new products and product lifecycle.  Product lifecycle can be used because incremental products will likely have only a few years of product life while breakthrough products routinely have longer life cycles with higher ratio of sales in future periods when compared to initial periods.

For Aptimise, product development is a unique business activity that carries a higher risk than something like production or sales activities.  At the same time however, it carries the opportunity for high reward to those who are able to perfect the development process and minimize excessive costs related to repeated failure during the trial and error stages of the product development process.  This combination of high risk and potential high reward create what is almost a requirement that those companies who engage in research and development create accountabilities and therefore measures that lead to an effective innovation process.

Aptimise is focused upon the creation of competitive advantage through effective innovation processes and intellectual property (patents, copyrights and trade secrets) creation and management.  To facilitate our client’s efforts, we utilize a wide range of tools: 

• To shorten the innovation and product development process and increase the innovation level of the designed products we use advanced innovation and problem solving tools such as Directed Evolution, Innovation Workbench and Anticipatory Failure Determination. 
• To increase the effectiveness of the process we use Lean Product Development and Six Sigma techniques.
• As the final tool, we use the expertise of our staff for intellectual property creation and management who, when combined own over 50 patents and have been instrumental in assisting in the creation of hundreds more for our clients.

For more information on innovation, innovation management or to have any question answered, please contact Dave Ramsey at dramsey@aptimise.com.