Learning from the best: Thoughts on how to measure innovation

It feels like every other manager currently is putting on his son’s sneakers, removes his tie and heads onto a pilgrimage to the Silicon Valley. There he tries to understand the cultures of innovative companies and when he comes back his company will buy some funky furniture, create breakout rooms and offer its employees free smoothies just as Google does. Innovation challenge: CHECK!

So why is everyone trying to do that?

After many discussions, I have seen that a lot of German companies are aware of the challenges they face with digitization, but somehow really struggle to assess if they still are innovative or not. In the last decades innovation was basically equal with monetary success: if your company is making money it is innovative and vice versa. However in the age of digitization, the measures of innovation have changed: Why for example is Tesla widely seen as a more innovative company as e.g. a Daimler or a BMW? In my opinion it is time that we actually start to ask ourselves: how should we measure innovation?

I am in the lucky position to be a Student Fellow for the Future Leadership Series, for which we interviewed 15 Thought Leader in the area of innovation. One of the questions we asked them was exactly that: How should we measure innovation?

Very First insight: Innovation is a fuzzy topic.

First we need to distinguish between different kind of innovations: I like the view on incremental innovation and disruptive innovation. An incremental innovation is something, which German or Japanese companies have been excelling in over the last decades: bringing a specific product from 99% perfection up to 99.01%. Increasing the efficiency of a combustion engine or decreasing the time of how long a car needs to be manufactured.

However the innovations, which everyone is talking about, are these so-called disruptive innovations: the iPhone, the Tesla Model S or Snapchat’s Bunny Ear Filter.
Wait what? Did I just describe Snapchat’s silly filter as a disruptive innovation?

By definition it is, as an innovation consists of two major parts:

Innovation = Invention + Market Success

Clearly Snapchat did not make the world a better place with their innovation, but they were the first company that made one specific technology (facial recognition) widely available in the Western World. The invention originally came from Japan 15 to 20 years ago, but Snapchat found out what the users in the Western World wanted (funny looking bunny ears) and made it a tremendous success. Of course we can argue if Snapchat’s filters are a truly disruptive innovation, but you can see that innovation is a quite fuzzy area, which often means different things to different stakeholders.

During the interviews with our thought leaders, I came across 5 big lessons, which helped me to understand the key elements and challenges of measuring innovation:

  1. Lesson Learned: Understanding that really disruptive innovations can only be measured after they have been a success.

Lin Kayser, a serial entrepreneur based in Munich, pointed out a very interesting fact during the interview. “If we talk about disruptive innovations, they can only be measured after they have been a success, because by definition nobody understands the impact of a disruptive innovation upfront”.
You often can only tell after a product has been on the market, if it truly is an innovation or not. Only then you understand if there actually is a value created, which people are willing to pay for. So measuring and predicting real disruptive innovation upfront is incredibly hard, or to prove it with Gottlieb Daimler’s Words in 1901: “The worldwide demand for motor vehicles will not surpass 1 million, considering alone the lack of chauffeurs!”.

  1. Lesson Learned: Define an innovation strategy, only then you can measure.

Looking at where Daimler’s company is heading within the next years, they clearly laid out what their strategy is: CASE. Connected, Autonomous, Sharing and Electric. After talking with Ralph Rettler from Amplify, who has long experience in consulting companies in the area of innovation, laying out a clear innovation strategy is the first step towards measuring innovation. He said that only if you have a defined innovation strategy, then you know which KPIs you have to track to see if your company is innovative or not. Most German companies do not lack the capability to measure, but to name what their innovation strategy exactly is. In the CASE of Daimler it by now is clearly laid out where they want to head to….which is surprisingly close to the ACES Strategy of BMW.  It would be interesting to see if they defined the same innovation KPIs to measure if they are successful.

  1. Lesson Learned: You only can measure innovation, when you expose yourself to the market.

As earlier described, innovations are always a combination of an invention and a market success. Therefore Prof. Henzler, Honorary Professor at the LMU in Munich, laid a strong focus on the customer’s willingness to pay. “[Innovation]…does not happen with an individual wise man or woman sitting in a far away place in the mountains or near the sea, waking up one morning saying ‚Heureka, I have found the solution for all the bold men who would like to have a cream and on grows hair‘„.

Instead you need to go out to the market and test if people actually pay for the solution your company thought about in their fancy innovation labs. In order to be exposed to the market, you need to have an approach, which is best described by the “Lean Startup Methodology” by Eric Ries. Compromised to four words his methodology is Build, Measure, Learn, Repeat. The more often you cycle through these stages and expose your idea to the market, the more precisely you know, if your invention is actually an innovation or just an idea your CEO thought looks fancy on the companies webpage.
However if you approach innovation with that mindset, you will hit walls often. That is the reason why the often-cited “failure culture” needs to be adopted when operating in that mode. A topic, which has led me to the next lesson learned:

  1. Lesson Learned: Define Innovation KPIs, which allow failures.

One of the most impressive insights we got was from Max Viessmann , who can be seen as a rebel in the German Mittelstand, as he tackles the digitalization challenge for a German company, which has a heritage of 100 years. He laid out that within Viessmann there has been a long history of innovation, but the perception of how to innovate has changed dramatically with the rise of digital means: faster prototyping cycles with a higher tolerance of showing non-perfect products to potential customers, which obviously leads to potential failures.

At Viessmann that “failure culture” is being reflected by one interesting KPI.
Successes for projects are always quantified by their Return on Investment OR Return on Failure: no matter if a project is successful or fails, there is always a monetary benefit given to the project. In the case of success, it is quite easy to calculate the ROI, but in the case of a failure it is always asked: “What did the company learn from that project and how much money did we save through these learnings?”. If you want to have examples, where this approach has been a success, I can highly recommend the following article.

  1. Lesson Learned: Patents are a mechanism of defense, but not a measure of innovation.

One number, which often is being taken as a measure are the number of patents a company has filed in a certain area. However I see that critically: a patent only fulfills 50% of the requirement of an Innovation. There is no guaranteed market success if you have filed a patent. Want to have proof? Which company in your opinion currently is the most advanced in autonomous driving? You probably think something around the areas of Waymo (aka Google), Tesla or if you are close to the industry Bosch. Surprisingly worldwide the company with the highest numbers of patents in the Autonomous Driving Space is Toyota. However they have no intention to bring out anything self-driving in the near future.
To support my point, none of the thought leaders we interviewed even mentioned the word “patents” as a success criterion, but only referred to it as a defense mechanism for companies.

My conclusion: There is no one-solution fits all approach. 

So if I have to summarize in one sentence of how companies should measure innovation, I would say “it depends on the company”. Innovation in my opinion is not about which company has filed the most patents, has the biggest R&D spending’s or has the most creative spaces to work in. Innovative companies for me have repeatable processes of how to combine ideas and technologies they have with the wishes their customers have. And if you want to have one measurable KPI: for me that would be the speed you are able to cycle from an idea to a ready to test prototype.

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