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BW Businessworld

Book Extract: Measuring Innovation

Defining an innovative organization is not as easy as it may seem. A good definition requires objective and preferably quantifiable indices or metrics, but identifying these is not a simple task

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Defining an innovative organization is not as easy as it may seem. A good definition requires objective and preferably quantifiable indices or metrics, but identifying these is not a simple task. Some corporates use a single index—percentage of revenue derived from products or services introduced in the last three years. This has the advantage of being objective, as also of being easily quantifiable and comprehensible to all. One pitfall is the time period: many innovations take a long time to translate into sale and revenue and so a three-year horizon may be inadequate. On the other hand, a longer time period could result in one—possibly stray or accidental—blockbuster product, indicating strong innovativeness for many years, even if no other new product is developed. To avoid such misleading distortion, one could add a second factor: the number of new products or services commercialized in the last three (or five) years. This two-factor index is certainly a better indicator of innovativeness.

One difficulty in this methodology is in identifying ‘new’ products or services. In any ongoing venture, there are always continuous improvements being made to the products and services it offers. Therefore, it is not always easy to differentiate what is merely a tweaking of an existing product or service from one that marks a radical departure. Thus, while the final index is two objective numbers, they are based on a subjective judgement of what is ‘new’.

The second and more fundamental problem lies in the very definition of innovation. The above approach takes a narrow view of innovation, limiting it to new products or services.

It ignores innovations in the process, or fundamental changes in the business model. These, as discussed in earlier chapters, can be game changers that are potentially at least as important as a new product or service.

Clearly, measuring the innovative-ness of an organization is not as simple or straightforward as it may seem. It needs a wider range of indices and at least a few of them will be subjective. At the extremes, it may be easy to categorize organizations as innovative or non-innovative, but in the vast area between these opposites, it is far more difficult. Thus, there is a general consensus, based on its phenomenal track record, that Google is innovative, and that Kodak died because it did not keep up with innovations, but the overwhelming majority of organiza-tions lie in between, and judging their innovativeness is not a simple task.

One view is that inputs which are more amenable to measurement can provide a reasonable index of innovation (many country assessments follow this approach). These input indicators include expenditure on research and development, number of scientists/technologists and the proportion of space dedicated to research and development/innovation. This, of course, assumes a clear demarcation of the research and development/ innovation activity, so that one can identify the budget, people and space dedicated for this. In many cases, such a neat separation does not exist. In fact, there is a strong argument that a lot of innovation emanates from those directly involved in the business, and not from an independent research and development facility. In any case, it is questionable as to how much of the input translates into actual innovation. A high level of inputs does not necessarily result in many innovations. On the other hand, a highly innova-tive organization may well produce many innovations even with low inputs. The efficiency with which inputs are converted into innovation is a good way of identifying innovation-efficient organizations. The extent of input (as a percentage of revenue or profit or, in the case of a country, of GDP) is an indi-cator of the leadership’s commitment to innovation, with input being the budget, people and space dedicated to research and development or innova-tion.

Despite some difficulties (people who work part-time on innovation, or shared space and facilities), this is amenable to quantification. On the other hand, output in terms of innovation is not easily quantifiable. There are, in some cases, simple indices like number of patents filed or number of research papers published. However, apart from the inadequacies of these in capturing the full extent of innovation or its quality and significance, these do not cover innovations in business models or non-patentable process changes. Also, a patent does not indi-cate the extent of impact: a patent for a razor has significance that is vastly different from one for a life-saving drug. Despite these difficulties, if one is able (even judgmentally) to assess the innovation output of organizations relative to the inputs for them, it would be possible to map out those that are innovation-efficient. One could then rank them on this basis, somewhat along the lines of what the Global Innovation Index does for countries. Such an effort is beyond the scope of this work, and is not attempted here.

It is a task that academic institutions might like to take forward. However, even without an explicit ranking, one can identify a few innovative organizations and seek out the factors that make them more innovative. This is what is explored here. The first and most important, as also the most obvious factor, is the organization’s viewpoint: does it encourage innovation? On the face of it, there would be few organizations that do not claim to do so; but reality belies such assertions. Many organizations do not want disruptive change (which is, inevitably, what innovation causes) and often for good reason. An assembly-line factory depends on a fixed process and any change would require high investments in time and money in order to be valid-ated for quality, reliability, repeatability, cost and time. It would, therefore, be resistant to suggestions for change, leave alone the radical change that innovation results in. Such an organiz-ation’s culture is, quite naturally, focused on following rigid procedures, which is what ensures quality and repeatability, and deviations are not welcome. This is the mindset of most organizations in traditional industry. It is also seen in other long-standing institutional structures. Government is a good (or bad!) example: bureaucracy depends on fixed and known procedures, time-tested and ingrained over decades. Being a large system, the risk of a perturbation caused by something new is high. Change is, therefore, a slow and incre-mental process, with each step being small and carefully tested before it is accepted and integrated into the system. Obviously, the (often unstated) policy is passive discouragement of innovation. In general, large organiz-ations with much at stake work on the basis of a risk-reward matrix, which is heavily skewed towards risk minimization. In such organizations, continuity, stability and predictability are virtues. As a result, innovation is uncommon.

Recognizing this, many of them try to separate and firewall smaller units, dedicated to innovation or research and development. Newer organizations—start-up ventures—do not have to worry about these factors, given their lack of legacy and history. This makes them more likely to be innovative. In a sense, the basic ‘DNA’ of the two are different. An organization that has grown rapidly is sometimes able to retain its innovation gene. One might argue that this is the case with Google. Even so, it too has set up a separate entity (Google X) to innovate and create new products. In August 2015, Google went a step further. It created a holding company, called Alphabet, thus separating new, start-up and innovative activities from its bread-and-butter operations which continue to be called Google.

This organizational ringfencing of innovative initiatives from routine business is clearly aimed at fostering entrepreneurial and innovation activities. Another challenge for large organizations—even comparatively younger ones—is the result of their size. A big organization necessarily requires a degree of uniformity in procedures and systems. It needs reporting structures, hierarchy and checks and balances. Sooner rather than later, these become rigid (especially since predictability becomes important) with little leeway for flexibility or judgement. This is the essence of the bureaucratic system, with its focus on curbing arbitrariness, on being fair and equitable and on efficiency. Undoubtedly, this has many advantages in an organization engaged in routine and well-defined tasks.

It is, however, a major constraint for innovation. Large organizations have tried to get around this in different ways. One approach, as mentioned, is to create a separate unit dedicated to innovation. Another is to decentralize, so that virtual small organizations are created. Some have systems to encourage entrepreneurship within the organization (‘intrapreneurship’), while others fund such internal entrepreneurs and give them a few years to create a start-up, which is then folded back into the mother organization. A few just acquire promising start-ups. Unstated—and often unintentional—signals are a deterrent to innovation. A perception that the organization greatly values stability and continuity may well discourage innovation. Countering this requires an explicit policy that promotes new ideas.

Many organizations do this through internal contests and recognition or rewards for the best innovations. This does promote innovation, especially if a message is sent that the top management is strongly behind such a contest and values innovation. A few organizations go further. Recognizing that fear of failure is a major barrier to innovation, they not only recognize the most successful innovations, but also reward selected failures. Typically, these are ideas that were potentially gamechanging but, for one reason or another, did not quite work out. Such acknowledgement of the risk of new ideas, that not all of them will culminate in success, conveys well the message of innovation. It encourages people to come up with truly out-of-the-box and radical ideas, and not limit themselves to safe, incremental ones that have a high probability of success. Strange as it may seem, rewarding failure is a good way to encourage innovation! Such an approach—of rewarding even failed ideas—is particularly important in India, given the conventional mindset of looking down on failures. Given this, in organizations and in society, few are willing to undertake a venture that may well fail, and even limited success is seen as better than the chance of a failure. In a status-conscious society, peer recognition is very important and no one wants the lowering in esteem that comes from failure. Organizational reward for a ‘grand failure’ is therefore an attempt to change attitudes and ensure peer respect for a person who had a great idea, even though it might have failed.

With permission from Rupa Publications