Amy Wong

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Another way of looking at it is by asking the questions:

1. Exploit: Are we doing things right?
   
2. Explore: Are we doing the right thing?

The Exploit perspective implicitly assumes that "we are doing the right thing." But markets change, and those products or processes may no longer be the right thing to do. For example, processes may start out with an internal perspective, with innovation focused on improvements. New knowledge or technology eventually renders that process obsolete, so periodic assessment as to whether a process is still the right thing must be done. If it is no longer the right thing to do, then how well you do it becomes irrelevant. Improving the throughput of buggy whips and gaining market share will not help you survive if your competitors have switched over to making fan belts for automobiles.

Typical innovation metrics for Exploit can be the number of ideas generated for process improvement, or number of variations of a product. Techniques such as Kaizen enable Toyota to solve the challenge of how to produce cars that offer increased functionality, lower cost, and higher quality. Competitive advantage then comes from the focus of constantly refining processes and products, leading to lower costs and faster turnaround times.

"Are we doing it right?" also means developing the process that shepherds ideas to fruition. Once ideas have been created, the organization needs a process that systematically evaluates them, allocates funding for development, and then brings them to market (internally or externally). This process, filling the pipeline and managing the funnel, enables the organization to integrate innovation with its own process and as a product. Targets set for these metrics take into account that all ideas generated (the pipeline) will not become implemented processes or products. At each stage of development, the idea may become unfeasible or not cost effective (the funnel).

The second question, "are we doing the right thing," represents the more classic view of innovation: a solution in search of a problem. This is an open-ended question, since there is often more than one "right thing." The answer ultimately depends on assumptions and perspectives regarding industry, customers, changes and opportunities.

"Are we doing the right thing" addresses the learning perspective of the Balanced Scorecard, which is the most difficult to quantify due to its "warm and fuzzy" nature; issues and perspectives of learning relate directly to an organization’s culture and the qualitative aspects of its strategy.

An example of the second perspective is an R&D effort that seeks to create new solutions rather than incremental improvements. It is here that competitive advantage comes from developing new technologies or applying existing solutions in unexpected ways.

Both Exploit and Explore perspectives are important, but the organization can focus on only one at a time. Trying to do both concurrently simply causes chaos and confusion. (Of course, it can be entirely appropriate for one part of the organization to focus on Exploit, while another part focuses on Explore). By clarifying which of these two perspectives takes precedence in any given situation, an organization can develop a cohesive innovation metrics portfolio that relates directly to strategy and competitive advantage.

These two questions also address the different perspectives of the Balanced Scorecard with varying emphasis. The Exploit focus leans towards the processes perspective, while the Explore focus leans towards the learning and customer perspective.

Figure 3. Critical Success Factors categories by Exploit/Explore and the four perspectives of the Balanced Scorecard framework. Establishing cause and effect relations is critical across the categories.

Figure 4. Examples of high level metrics for the Critical Success Factor categories. It is important that an organization’s metrics be developed within the context of the Balanced Scorecard framework. A general distribution of metrics between the categories of Critical Success Factors is neither implied nor recommended.

How a firm develops and selects metrics within which categories depends on how management views the role innovation plays in their organization and industry. Companies such as 3M, which define innovation as part of its very identity, will implement innovation metrics as a major part of their performance management program. Companies such as Cisco, which innovates by acquisition, may have a separate innovation scorecard for separate divisions. Industries that are mature or with long timelines, such as pharmaceuticals, will place more emphasis on the pipeline. The dot-coms found their answer to "are we doing the right things" in constant redefinition.

These metrics focus more on knowledge development and application, such as the number of scientists with particular sets of knowledge, or the number (range) of product developments in the pipeline. A weak yet reusable adhesive inadvertently invented by 3M was an innovation in search of a use. After being developed into the Post-It note, the focus switched to first perspective, creating the size, color, and shape varieties that enable this product to command a whole section at the local office supply store.

Summary

The metrics of innovation cannot be reduced to a list of the "top ten", nor even a single comprehensive list. The importance of innovation is that it not only supports the execution of strategy but influences its very definition, passively as well as actively. Assumptions and perceptions determine how an organization views and measures innovation. Integrating innovation with a Balanced Scorecard approach leads to more effective and valuable innovation throughout the organization.