Amy Wong

Web design and development by:

Page 1

Innovation and Performance Management

Innovation is the source of competitive advantage. It can serve as the impetus for start-up companies to bring new products or services to market, or established organizations looking for ways to improve processes. Decreasing cycle times for new products (automobiles used to take 10 years from concept to production; now they are down to three years) and the proliferating variation of current products (how many different toothpaste varieties does one really need?) indicate that the pace of innovation is accelerating.

The increasing pace of competition across industries points to a need to develop and guide innovation, rather than relying on flashes of brilliance. Systematizing the innovation process requires measuring it. However, simply implementing a list of metrics to measure various aspects of innovation is insufficient. To systematically leverage innovation as a source of competitive advantage, innovation must become an integral part of an organization’s strategy and activities.

The Balanced Scorecard is the answer. It provides a foundation for developing metrics that connect strategy to action. This framework enables innovation within a strategic context, consequently integrating innovation metrics in activities throughout the organization. The Balanced Scorecard looks beyond the traditional financial metrics, adding three additional inter-related perspectives. It (1) reflects how financial results are affected by customer satisfaction, (2) which is determined by the execution of processes, and (3) which relies on the organization’s learning capabilities. It is this cause and effect link between the four perspectives that make the metrics coherent, instead of just a list. The Balanced Scorecard relates strategic initiatives (cause) to the how the firm does business (effect).

Traditional performance management frameworks assume that the basic strategy is correct. They measure how well management performs in executing that strategy, but don’t address whether the strategy is correct to begin with. When performance results begin to drop below target, alarms are sounded and management takes corrective action to bring results back to plan. Such a simplistic response can blind executives to critical changes – changes in their customer base, their industry, or new competition from outside the industry. Likewise, when numbers come in above target, many firms simply focus on meeting the increased demand, missing opportunities to leverage new markets, where their competitors swiftly move in.

Figure 1. The traditional performance management framework assumes the strategy is correct, and manages to that strategy. Performance results outside the metric range are considered warnings and alerts, and corrective action is taken to bring the results back within expected ranges.

Successfully integrating innovation within the performance management framework requires a broader view of performance management. Instead of just managing operating performance, the framework needs to address the over-riding strategic issues. This innovational performance management framework adds two perspectives: attention to external events, and performance "surprises" (both favorable and unfavorable) outside the projected range. These "out of tolerance" results are not necessarily a call for corrective action, but may signal an opportunity or change. External events and/or performance surprises represent a call to revisit the strategy. Some organizations that use a red/yellow/green convention to communicate status have added another category (such as a "blue light") highlighting the need to consider strategic changes.

Figure 2. The Innovational performance management framework uses performance results to assess two additional layers: revisit strategy, and as a signal of external changes and/or opportunities.

Defining Innovation

"Innovation is an economic or social rather than a technical term…it can be defined in demand terms rather than in supply terms, that is, as changing the value and satisfaction obtained from resources by the consumer…to create new and different values and new and different satisfactions, to convert a "material" into a "resource," or to combine existing resources in a new and more productive configuration.

- Peter F. Drucker
Innovation and Entrepreneurship

For innovation to be an ongoing, systematic part of the organization requires two things: that the cause and effect of ideas and results be visible, and that the broad definition of innovation be made specific for the organization. Without this, efforts and investments towards innovation become haphazard and will fail.

The definition of innovation can be divided into two perspectives: changes/opportunities to exploit, and changes/opportunities to explore. Opportunities to exploit are those where most of the parameters are known. One example would be improving an ongoing process: reducing cycle time, increasing throughput, or reducing cost. These are incremental improvements. Opportunities to explore are those areas, both inside and outside the organization, where ideas and solutions can be applied in new ways or to solve new problems. You may not know all the parameters, but this creates the environment for transformational innovation.