Innovation is the elixir of life in capitalism. Trying to survive on the market for decades with the same methods and the same products is more like gambling. Experience suggests that far more companies fail because they were unable to innovate than because they dared to innovate too much.
But innovation per se does not mean success. It must also be measured. This happens far too rarely, especially when action is taken under duress. Either because external pressure comes from the market or because a new manager has to assert himself. Both end in actionism. There is little room for well thought-out plans. Valid key figures that could be used to assess success from the outset are not developed. But the fact is: every innovation can be measured. Therefore, in this article we will answer the questions “How to measure innovation in a company?”, “How to measure innovation capability?” as well as “How to measure innovation culture?” In this article, we have created a guide for this purpose.
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Innovation object - What is being innovated?
The first challenge on the path to the metrics goal is relatively easy to solve. Pick a few metrics from the large bouquet of possibilities. These should fit your business and your innovation management. The combination of the following four metrics has already proven successful in practice for many companies, so let’s introduce them in more detail:
Innovation rate = revenue share of innovations/total revenue * 100.
This rate represents your innovation activity in relation to your sales. And it also shows whether your new developments are successful on the market or not, because it measures the sales you have already achieved with the innovations. You cannot use it to measure how many new developments you successfully place on the market.
Innovation ratio = number of innovations / number of all products * 100
This number shows how important innovations are to your company, because it relates their number to your total product range. However, it says nothing about the success of your new developments. Together with the innovation rate, however, you get a pretty good picture of your own innovation activities and their success. However, both key figures do not answer the question of what you mean by an innovation.
Degree of innovation
Degree of innovation = degree of novelty of the purpose-means combination
With this formula, developed by the renowned German economist Jürgen Hauschildt, you can now specify how new your development is. According to Hauschildt, the novelty of an innovation must first be perceptible. The end and the means must be combined in an unprecedented way. The purpose could stand for the drive of a car, the means for the fuel used. If both are noticeably different from the known, then it is a breakthrough innovation. If the difference from the existing is only noticeable to the innovator himself, then it is at best an incremental innovation. Or it is only a product improvement – think of the facelift of a car model.
This is not a key figure in the narrower sense, but a precise analysis of your product range. How old are your products? How much does each one contribute to the overall result? This analysis can already show exactly which and how many products you need to redevelop in order to defend or expand your market position.
Prerequisite: Define your variables precisely
However, the practical application of these key figures is not so easy: Because, as already mentioned, the variables require an exact and coherent definition so that the formulas also provide meaningful figures for your company.
How do you calculate the revenue your innovations generate?
If you have determined the definition of innovation for your organization, then you should think about another important variable. Because the revenue that new developments generate is also a stretchable variable, despite a watertight definition of innovation. The revenue that innovations contribute directly to a company’s bottom line is easy to measure. But how would the revenue of your existing portfolio have developed if your company had not brought the innovations to market?
To illustrate this issue with an example: A car manufacturer launches a successor model for its most successful model. This successor model makes its predecessor look old in the eyes of buyers, but cannot match its sales figures. The manufacturer has indeed launched an innovation, because the new model has at least recouped the costs of development and launch. Nevertheless, the innovation did not contribute positively to the company’s earnings because it stifled the sales of the predecessor model.
Advanced indicators for innovative capability
The measurability of the innovativeness of companies or business models remains a major challenge. Various indicators, which can be collected from the business model described as well as the annual financial statements, are used to measure innovative capability.
The following categories are available for the indicators as examples:
- Absolute indicators, such as: Research and development (R&D) expenditures; R&D employees; number of patents.
- Ratio indicators, such as: Proportion of cash flow from products in recent years
- Growth indicators, such as: sales growth from products in recent years; growth in number of patents; growth in number of customers
- Input indicators, such as: R&D expenditures; marketing expenditures
- Output indicators, such as: Number of new products; Number of new customers.
If these indicators are combined with each other, correlations can be identified that allow conclusions to be drawn about the innovative capability of the business model. If a company’s business model is able to convert R&D expenditure into patents, new products and cash flow with new products more quickly and with a higher value than competitors within the industry, then this company has a higher innovative capability.
Case study: Mobileye
Mobileye was founded in 1999 with the aim of developing advanced innovative technology to reduce car accidents and avoid collisions. Two indicators (R&D expenditures and sales growth) can be used as examples to determine the company’s ability to innovate.
In 2004, the first product went into series production, the EyeQ®1, a warning system for collisions and lane departure. The aftermarket was tapped as early as 2006, with sales to fleets and dealers respectively. In 2007, Goldman Sachs invested $130 million and volume production with original equipment manufacturers, OEMs, (General Motors, BMW and Volvo) followed. In 2011, more than 80 percent of sales were invested in R&D. In 2012, the one millionth chip was sold and in 2013, sales quadrupled since 2011. In 2014, the company went public on the New York Stock Exchange (NYSE) and in 2015, it sold its ten-millionth chip and had collaborations with more than 25 automakers. In 2016, sales were 18 times since 2011.
This paper has shown that innovation, and especially business model innovation, continues to play an important role in the success of companies. In this context, the innovation capability of companies is also of particular relevance, as it can provide a statement about future success.
Innovative capability can be measured on the basis of various indicators that can be determined from the business model and the annual financial statements. In particular, the correlation of different indicators in comparison with competitors allows a statement to be made about the innovative capability of companies.
How to measure Innovation in a Company?
Companies are constantly forced to differentiate themselves from their competitors due to the increasing homogeneity and transparency of products and services. In addition, stagnating or shrinking markets and increasingly intense competition are leading to growing price pressure. Innovation is one way of adapting to the changing market conditions.
Innovation literally means ‘innovation’. In the narrower sense, innovations result from ideas only when they are transformed into new products, services or processes that actually find successful application and penetrate the market. Frequently used means of differentiation are product, service and process innovation, although in many cases these can be quickly imitated. In our blog article on the types of innovation you can find out more about each innovation type.
In recent years, business model innovation has instead become the focus of theory and practice. A business model is geared to customer needs, combines different elements of a company and thus creates customer value. Innovative business models are usually complex (for example, due to a service infrastructure) and enable strong customer loyalty (for example, by means of coupling to a system); in addition, innovative business models enable better differentiation from competitors.
From an investor’s point of view, it is not only innovative business models, as the result of innovative business activity, that are important. The innovativeness of business models and companies also plays a role, as this says something about future results.
Requirements to measure Innovation in a Company
Deepen your KPI system step by step
To build up a system for innovation KPIs in your company, it is advisable to start with the four basic KPIs mentioned above. Once you have defined and implemented these well, you can gradually expand your KPI system. The following key figures are suitable for this purpose:
- Time to Market: How long do your innovations need in the innovation process from the first idea to the finished product on the market?
- Innovation time per employee: How many resources can your employees devote to innovation activities? What potential does this create for innovations?
- Idea quota: What is the number of ideas submitted per employee?
- Kill Rate: How many innovation projects are abandoned? How many ideas do not make it to market?
- Innovation climate: What is the attitude of your employees regarding innovation? What potential for improvement do your employees discover with regard to your company’s innovation capability?
How to measure innovation culture?
Spontaneous question: How many of your employees are continuously engaged in innovation and improvement?
Five percent? Ten percent? Thirty percent? This number is significant. Only when innovation is driven by everyone will continuous improvement and digital transformation succeed.
Let’s assume you have 100 employees. Every month, you receive twenty suggestions for process optimization, product development or service innovation. Which is better?
- If these twenty ideas come from only two employees?
- Or if they were submitted by twenty employees?
In the first case, you would have two highly creative talents in the company, and the rest would do business as usual. In the second case, 20 percent of your workforce would already be actively engaged in innovation.
6 Dimensions to strengthen your innovation culture
Enable agile implementation
The first dimension is agility. Innovation leaders are characterized by agile and adaptable approaches when it comes to handling innovative ideas and projects. The eleven cultural practices included in this dimension are therefore primarily aimed at how companies become, or remain, agile. For example, the innovation pipeline should not be clogged up by too many innovation projects – in line with the “kill projects” approach.
Inspire employees with a high diversity of perspectives
The second dimension is inspiration. It ensures that employees actively broaden their horizons and gain new insights to inspire new solution principles. This includes not only the right working environment, but also the right people and fields of activity. How about an “inspiration kit” for employees, for example?
Motivating employees to go the extra mile
Dimension number three is the motivation. Being innovative should inspire joy, because nothing is more natural than having fun learning and being creative as a child. Prizes like an “Innovation Award”, or an “End of Project Award” are ways to motivate employees and show appreciation. If you want to get employees out of their daily routine and get them excited about innovation, an “Innovation Week” is a good idea, during which they are allowed to work on a previously defined challenge.
Align the teams in order to to achieve the goals together achieve the goals
A healthy innovation culture also leads to all employees pulling in the same direction, which is the core of dimension number four the alignment. Innovative behavior should be internalized by all participants and thus also have an effect on action. Subcultures and communities can certainly emerge in the process. Small symbolic signs such as T(eam) shirts are already helpful in this regard.
Create transparency so that all employees can contribute optimally
Dimension number five is transparency. Employees must know which innovation topics are strategically relevant at any given time. In addition, innovation-related decisions must be communicated in such a way that they are comprehensible to individual employees. Problems should not be covered up, but actively addressed, because they are also part of an innovation culture, just like failures. One approach can therefore also be to celebrate failures.
Empowerment of employees so that they can realize their innovative potential
The sixth dimension is empowerment, the last dimension needed for a successful innovation culture. Employees need the freedom to generate innovative contributions. This means that they must be trusted and given the necessary autonomy.
Conclusion on how to measure innovation
Numbers are popular and helpful as a basis for decisions in innovation strategy and strategic innovation management. However, you must always question how these numbers came about and what they ultimately measure or don’t measure. In order to use KPIs to control your innovation management and measure your innovative strength, you must first answer many questions for yourself and your company. Also keep in mind that innovation metrics from different companies are not comparable with each other. Because every company defines “innovation” differently. Only the number of patents registered is an objective measure. However, this says absolutely nothing about whether or not a company’s innovations are actually reaching the market.
So work with key figures, but don’t rely on them completely. As Mark Twain said, “A man with a new idea is a crackpot until the idea proves successful.” Sometimes it takes a little longer, as James Dyson proved: It took him 5,127 prototypes to develop the bagless vacuum cleaner for which the company is now world-famous.