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Innovation Balanced Scorecard (Step2/5): Defining the Innovation Metrics & Goals

15 Aug

In the previous post of this series I discussed how to design strategic objectives in a strategy map canvas, in this post I want to talk about the criteria that we need to consider when defining our metrics and goals.

Indicators are intended to measure whether we are on the right track towards our strategic objectives. Therefore its composition must assure that we receive the right information at the right time, this is critical because it will help us to identify deviations from our strategic route and make the decisions needed to correct them.

The first step is to understand that there are different type of metrics, according to Jimmy Feldborg, who is R&D Manager at Grundfos in China pointed out that according to their timing there are three type of indicators:

• Lag indicator. The results are lagged with weeks, months or years and cannot be changed. Some examples are rewards and the number of patents.

• Current indicator. The results happen right now giving you some possibilities to act and change and thus affect the future results. Some examples are the number of ideas generated and ongoing projects.

• Lead indicator. The results are predictive for the future. You can make radical change in your approach and thus affect the results. Examples are pretty hard to give here.

Once we understand the type of indicators that we can use, the next step is to analyze the objectives of each perspective in order to translate them in metrics that best support its definition.

In the financial perspective we need to use indicators that let everyone clear the growth we are looking for in innovation. The tricky part comes when we have to decide our efficiency indicators, if we intend to pursue radical innovation the cost is not that relevant because first we need to make sure that we strength the value proposal first. When we pursue an incremental innovation, cost will be relevant because the value gap is minor than in the radical innovation.

In the market perspective we need to create a combination of metrics that show our source of incomes: income from new products to current customers, income from new products to new customers, income from new segments, income from new geographical markets, etc.

According to Jeff Murphy , an Executive Director at Johnson & Johnson, suggests that innovation metrics (internal processes) need to be dynamic by design. He continues:

1) Initially, metrics should focus on engagement, training and participation of individuals.

2) Then, as you begin to build a critical mass of capable individuals, the focus of your metrics shifts to your innovation pipeline (active projects by stage, flow of projects through concept, development, launch or kill…) and early wins. This is in addition to item 1 metrics above.

3) Finally, as your organization’s initiative begins to mature, your focus shifts to the end goals – return on investment, successful new products or services launched, revenue from new launches, etc. as well as optimizing your development and commercialization process. This is in addition to the item 2 metrics.

If an organization gets ahead of itself in the metrics area, it can lead to unrealistic expectations during the early stages. On the other hand, if it gets behind on implementing the appropriate metrics it leads to under performance, and activity without business results.

The learning and growth perspective should measure the competences we look in the people in order to generate ideas, creativity and carry out the innovation processes.

A good practice is to broken goals down from a range of years to yearly and monthly goals so we can keep track of them. Some companies build a financial map using all the indicators of the BSC and project them to represent the vision of the company.

Innovation Balanced Scorecard (Step1/5): Design your Innovation Strategy Map

25 Jul

The innovation strategy map is the graphical representation of your innovation strategy, the idea behind this tool is to see all the links between the strategic objectives and how are aligned to the ultimate goal of the organization.

It is important to note that prior implementing an innovation scorecard, first the company need to clarify its innovation scope and a time frame. This is a complex task that requires extend research and analysis regarding the company´s future position in the market.

Draw the Innovation Strategy Canvas

When drawing your strategy map have in mind that the BSC it´s divided in four perspectives: financial, customer, internal processes and learning and growth. The financial and customer perspectives contain strategic objectives that are external to the organization, therefore we call them “result oriented. The internal process and learning and growth perspectives are internal to the organization, contain objectives that are within the boundaries of the organization, therefore we can act upon them. The performance in these objectives will determine to results in the two upper perspectives.

Define the Strategic Objectives

The financial perspective should contain an objective that represents the “innovation premium” intended for the company. This perspective should have a balanced number of objectives associated financial outcomes between those ensuring the revenue growth and those promoting cost savings.

The customer perspective conveys the unique and differentiated customer value proposition and associated market outcomes, such as market share and customer loyalty. The customer perspective objectives comprehend the market mix that will lead to the financial outcomes, such as whether our incomes will come from selling new products to our existing customers, new products to new customers, if innovation will detonate new segments or facilitate entry to new geographical markets.

According to Jonash and Donlon in the Balanced Scorecard Report of March – April 2007 state that the internal process perspective contains three key strategic themes: Growth and Innovation Platforms, Portfolio/Pipeline, and Sourcing and Partnering.  In another approach some companies place the objectives that seek to excel at the innovation process from idea management to scaling them to the market.

The learning and growth perspective articulates the employee value proposition and related enablers of innovation success— objectives such as “Build innovation competencies and skills.” This perspective should identify the set of innovation competencies and make sure that are brought to strategic level.

The Leverage Test

Once we have our set of objectives we need to run a test in order to make sure that our innovation strategy map is aligned to the innovation premium. This test consist in taking the growth and costs objectives and walk through the map identifying those objectives that leverage them and their result contributes to the performance of the growth objectives. If we have an objective that does not sustain any of these we should consider deleting it from our map.

Now that we have our strategy map the next step is to work in the design of our set of innovation metrics, more about this in our coming post of this series: Innovation Metrics.

Jesus Mascareno

Jesus.mascareno@innovationbeats.com

Measuring Innovation with Balanced Scorecard

24 Jun

Must of the complications in reaching innovation´s benefits is the lack of alignment between the overall organization’s strategy and the actual innovation department activities. The innovation department is sometimes seen as a dream factory disconnected from the firm´s reality.

The BSC  allows senior managers to align innovation departments to the overall organization’s strategy by keeping track on four different dimensions: customer, internal business, learning and growth, and financial. The four dimensions view allows everyone in the department to identify how its activities feed up the strategy of the organization.

Considering the problems arose in the management of innovation in respect of measuring the inputs and outputs of this type of activity, there are two reasons why it would be useful to implement BSC to aling innovation efforts. The first arises from the difficulties found in the employment of some of the indicators traditionally utilized in measuring the success obtained by companies in their R&D activities; the other arises from the lack of consensus in their choice of the dimensions that should be included in reports prepared for the strategic management of this type of activity, as well as from lack of alignment of the measurements of the returns from these activities with the strategy of the company; the BSC is one of the instruments for the measurement of these returns recommended in the literature on management of R&D (Bremser and Barsky, 2004; Kerssens-van Drongelen and Cook, 1997; Pearson et al., 2000).

In order to implement balanced scorecard in a innovation department of a production organization a deeper understanding of the tool’s four dimensions is needed, as well the specific characteristics of R&D departments that must be take into consideration in order to formulate the measures needed to enhance its performance.

Balanced scorecard relies on four areas for managing activities to achieve long term objectives or strategies. Balanced scorecard provides an opportunity to incorporate financial information into non-financial areas i.e. companies relationship with customer, internal process and learning and growth. When performance measures for these areas are added to financial metrics, it would not only provide companies’ overall performance but also a robust organizing framework.

The financial perspective determines whether company’s implementation and execution of strategies are contributing to the bottom line improvement of the company. Some of the common measures in financial perspective are profitability, growth and shareholder value through EVA, revenue growth, costs, profit margins, cash flow, net operating income etc. This perspective when implemented in production organizations’ R&D departments helps to measure value creation throughout R&D at the stage of innovation, and what percentage of sale from new development and value creation of development at commercial level.

The customer perspective defines value proposition of companies that involve time, quality, performance and service to satisfy the desired customers and to translate company’s mission statement on customer service into specific measures that reflect the factors that really matter to the customers. The main focus is to measure the value delivered to customer and result of value proposition. Customer response provides R&D department an insight into ongoing and new product initiatives. It also provides the impact of new R&D on capital employed, customer profitability and revenue growth rate which subsequently used for market potential and client retention.

The internal business process is concerned with processes, decisions, and actions of the organization that create and deliver the customer value propositions. It focuses on critical operations of the company that need to excel in order to satisfy customer needs. Main areas deals under internal business process are operations management, customer management, innovation and regulatory. In this dimension R&D could be measured according the efficiency in the development cycle time, time and cost taken by a development. Internal business dimension measures should have into consideration the accuracy of pricing and subsequent profit planning according to pricing policy and also consider new product development after having customer satisfaction index.

The innovation and learning perspective measures the company’s ability to develop and improve the performances focusing on the internal skills and capabilities that are required to support value creating process. It is concerned with the jobs, systems and climate of the organization. In R&D department this area can be very useful in measuring employees performance and their trainings e.g. employee retention and development. It also should be used for measuring the balance within the level of innovation in R&D as compared to competitors and its level of competence.

The previous analysis to each one of the balanced scorecard four dimensions, allows to identify the diverse opportunities that the tool present us to measure R&D performance. García-Valderrama, Mulero-Mendigorri and Revuelta-Bordoy (2008) made an extensive bibliographic and field study research in order to identify from the previous publications and managers perspectives which are the most relevant measures in R&D that must be taken into consideration for the elaboration of a balanced scorecard. Based on this research and the previous analysis throughout this paper the most relevant measures for each one of the four balanced scorecard dimensions are presented in the following table:

Financial Dimension Customers Dimension
Increased financial profitability Improved positioning against competitors
Increased profits Increased customer satisfaction
Internal Processes Dimension Increased market share
Effort in R&D Learning and Growth Dimension
Manuals of procedures Personnel hostility to new technology
Coordination in activities, and match between objectives and budget Personnel aptitudes/attitudes
Quality Training and experience
alliances with partners in R&D Degree of involvement and participation of R&D personnel
Degree of influence of external regulation on R&D Performance evaluation applied to R&D personnel and identification of competences and training needs in R&D
Innovation in products and process

The above mentioned measures pretend to give a more detailed performance management system for R&D department in production organizations, each one of the measures allow managers to keep on track of all the components of the R&D strategy and how well it is aligned with the overall strategy of the company. These measures provide a broader understanding of the research and development processes and give the baseline for judging its performance.  It is relevant to mention that each dimension and its measures are interlinked by a cause and effect component, the improvement in the internal processes measures increases the learning and growth dimension, by doing so customer satisfaction and value can be enhanced, which ultimately is  transformed into financial benefits for the organization as a whole.  In other words he proposed balanced scorecard for R&D departments in productions organizations (see figure1) promotes innovation and eases its adoption, constructs know-how, places new and better products into the market and ultimately assures a financial return, it sets the basis for competitive advantage creation.

The adoption of the balanced scorecard in R&D departments can bring three major benefits to this department, the first one is the congruency of the department’s activities to the overall strategy of the organization, this is the cause and effect element where each one of the dimensions are connected with each other and the sum of the dimensions is directly connected with the overall strategy of the organization. Second is the efficient and effective connotation of the activities performed, this means the tool assures that the most relevant activities are performed and they are performed in accordance with the established standards. The third benefit is the flexibility the tool has, since allow managers to design its own combination of measures taking by reference the ones above mentioned in order to fits to their individual characteristics.

Despite all the benefits mentioned, they all are related to improve and enhance the performance of product development in the R&D department, but excellent performed developed products can have a catastrophic market impact and have a negative impact on the financial dimension of the balanced scorecard. This awakes the necessity for measuring the potential of success in product development. Balanced Scorecard for R&D departments therefore requires further analysis and development to identify measures or dimensions in how new R&D projects are selected since they can be excellently measured but the whole process can be nothing but producing excellent mistakes.

Jesus Mascareno

jesus.mascareno@innovationbeats.com