The Metrics of Innovation
Executives face increasing uncertainties in growing their firms. They run the gamut from threats from new startups to changing customer habits to the rapid proliferation of new technologies.
For every product that a company is selling, a startup somewhere in the world is unbundling it and developing a new value proposition to sell it in a more compelling way. Those startups are connecting products, services, and technologies in ever-creative ways that are leading to new markets.
Further, the economy could shift unpredictably or regulatory changes could cause costly unintended consequences.
These uncertainties create a dilemma. Executives need to compete with known competitors and deliver profits now, while at the same time they need to prepare for uncertainty and unknown futures. We call this the Executive’s Dilemma.
Perhaps the most important factor in the Executive’s Dilemma is time. Executives need to balance immediate profits with sustainable long-term growth. They need to frame expectations with their boards of directors, shareholders, employees, customers, partners and communities in terms of dollars and cents as well as in terms of time and vision and long-term outcomes.
The Executive’s Dilemma and Three Horizons
In The Alchemy of Growth, Mehrdad Baghai, Stephen Coley, and David White developed a visual model that illustrates this Executive’s Dilemma, called Three Horizons. The Three Horizons are:
Horizon 1 (H1, the short term): defend and extend core business
Horizon 2 (H2, the medium term): build emerging businesses
Horizon 3 (H3, the long term): create viable options
The problem executives face in this dilemma is that the immediate focus is almost always on Horizon 1, the short term. This is the core business where all current revenue is generated.
While Horizon 1 creates revenues and wealth, Horizon 2 and Horizon 3 are investments in the future. At the same time, they are expense centers with no immediate tangible value. They will take ongoing investment over extended time periods to yield positive returns.
Three channels are used to develop Horizon 2 and Horizon 3 opportunities:
Mergers and acquisitions (M&A)
Corporate venture capital
Innovation (incubators and accelerators)
The most common approach to Horizon 2 growth is to purchase existing, reasonably mature companies through M&A. The main advantage of M&A is that it can impact the bottom line immediately and expand a company’s core capabilities.
Corporate VC is a less-expensive form of M&A, investing in early stage companies. These companies may be fully acquired in the future, and the investment gives the firm a front-row seat to new technologies and new business models. Corporate venture investments can lead to H3 growth. The risk, as with any startup investment, is that only a few of these startups will survive or deliver a lasting value proposition.
Innovation programs (incubators and accelerators) are similar to corporate VC investments, but they can churn through many more ideas and innovations at a much cheaper cost.
Insurance
Executives take out insurance by investing in long-term (Horizon 3) innovation. This is a hedge against unknown futures and market instability.
We know markets are ultimately unstable in the long term. They emerge, grow, and eventually die. So, investing in innovation is a good, justifiable bet for any mature firm.
The challenge for the executive is making the right long-term investments and then determining how to evaluate those investments from the present time frame facing uncertainty in the future of unknowns.
Executives Need to Measure Innovation
Innovation and technology are the differentiators in developing and delivering value propositions to customers that are cost effective, functional, and sustainable.
There’s often a disconnect between innovating technology and the business model. Many firms adapt digital and technology innovations as best practices, but best practices rarely lead to organizational growth. Best practices amount to treading water with everyone else.
Innovation Isn’t R&D
One of the biggest mistakes an executive can make is to equate innovation with R&D. They are not the same.
R&D is the execution of a product or service development.
Innovation, on the other hand, is a strategy to adapt to changing markets and customers. This strategy may include R&D product development, but it also needs to include some or all of the following facets:
Evolution of a business model
Convergence of corporate, customer, and employee values
A process that leads to a better understanding of the customer and customer experience
Development of new talent and leaders
Increasing engagement of stakeholders inside and outside the firm
Delivery of new value propositions
New products and services that aren’t born from this process aren’t innovations and are more apt to fail.
Measuring Innovation
There are four core elements to successful innovation. Combined, these make up an innovation strategy. The success of this strategy can be measured with a core set of metrics, which we’ll discuss in the final section. These aren’t the same old metrics that consulting firms use. These metrics can give an executive insight and understanding of where the innovation process is and what progress it’s making toward long-term sustainability.
ELEMENT 1
Corporate, Customer, and Employee Values
These values provide a starting point for a firm to develop an innovation strategy and also provide a benchmark to the process along the way.
ELEMENT 2
Networks and Talent
The innovation network serves both as a talent development channel and a means to engage stakeholders, experts, and customers throughout the innovation process.
ELEMENT 3
Business Model Evolution
Breakthrough innovations don’t appear out of thin air. They are the result of the evolution of the business model.
ELEMENT 4
Speed and Feedback Loops
Speed is more important than quality ideas in the incubation phase. Speed is the pace of frequent engagement with customers and internal stakeholders during the iteration process.
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