“More often than not, failure in a radical innovation project is rooted in not having asked an important question, rather than in having arrived at an incorrect answer.”
C Christensen, S Kaufman, W Shih
Silicon-germanium, a highly efficient semiconductor alloy and one of the best performing technology platforms for computer chips, nearly didn’t see the light of day. IBM’s radical innovation project had to be protected from the scrutiny of the company’s R&D organisation as the business model used initially nearly killed the project.
This is one example quoted in the paper ‘Measuring radical innovation project success: why typical metrics don’t work’ by JN Kristiansen and P Ritala. The authors observe that applying traditional product development metrics in the early stages of a radical innovation project can be very damaging.
The use of discounted cash flow (DCF) and net present value (NPV) to evaluate investment opportunities can underestimate the real returns and benefits of proceeding with radical innovation, as these metrics are rooted in the assumption that the alternative to not investing in radical innovation is the status quo. However, a more realistic scenario is a deteriorating competitive and financial future.
Commonly used ‘key performance indicators’ for incremental innovation focus on value created. The authors argue that the front-end radical innovation should instead be viewed as being a learning experience for value creation.
Co-author Paavo Ritala comments: “Innovation managers should consider the overall portfolio and adopt metrics that are appropriate to the maturity and type of project.”
Life cycle of a radical innovation project
Radical innovation projects are characterised by higher uncertainty, absorption of new knowledge and the exploration of new markets, technologies or business models.
As the project progresses, learnings gained from the exploration and experimentation will challenge assumptions and new opportunities may emerge.
This unpredictability, particularly in the early stages, mean that metrics commonly used for incremental innovation – market size and time to market and finance such as net present value and adherence to a plan – provide little value.
Gina O’Connor outlines three core functions needed for strategic innovation: discovery, incubation and acceleration.
Discovery can be thought of as the business concept development phase. Incubation turns the concept into a business proposal. Acceleration is the competency of scaling the emerging business as it picks up steam in the market. These three organisational competencies lay the foundation for strategic innovation and breakthrough innovation.
The plan is to learn and test as quickly as possible, at low cost, to determine if there is a case for continuing development.
Different metrics needed
To investigate alternative metrics the authors conducted case-studies in three large, international firms that are global leaders in their established fields.
They identified a number of issues:
- time horizon too short – annual evaluations are based on results – but to gain a good outcome may take longer
- focus on financial outcomes – early stage projects are about learning not sales
To enable the team to set a budget and attract resource, a different approach is needed that looks forward and consolidated the knowledge that has been gained.
- Market orientation – many technologically novel products fail the market test, so the benefit of
- potential of the market – attractiveness, trends
- existing links to the market – can uncertainty be embraced by networking
- finding new market needs – degree of novelty
- real benefits to the customer – significant value to customer
- Learning and future opportunities
- Leads to other opportunities – creates chance to diversify or can be used in different settings
- Gives opening for growth in existing business segment – can it be bundled with existing solutions
- Leverage of core business activities – can it be embedded in the core of the firm
- Resource dedication
- Potential for resources to be shared with external partners
- Keeping resource allocation low in the initial stages and then increasing with greater certainty
- Does the firm have existing in-house market and technology know-how – right competences and absorptive capacity.
Paavo Ritala concludes that these metrics are not a ‘silver bullet’ but are designed to be part of a more holistic and effective assessment of radical innovation projects.
Measuring radical innovation project success: typical metrics don’t work, Jimmi Normann Kristiansen, Paavo Ritala; Journal of Business Strategy ISSN: 0275-6668
Further reading
Armasu, L. (2015), “IBM beats Intel to 7nm process thanks to silicon-germanium transistors, EUV lithography”, available at: www.tomshardware.co.uk/ibm-7nm-silicon-germanium-transistors,news- 50713.html (accessed 30 August, 2017).
Christensen, C.M., Kaufman, S.P. and Shih, W.C. (2008), “Innovation killers: how financial tools destroy your capacity to do new things”, Harvard Business Review, Vol. 86 No. 1, pp. 98-105.
Griffin, A. and Page, A.L. (1993), “An interim report on measuring product development success and failure”, Journal of Product Innovation Management, Vol. 10 No. 4, pp. 291-308.
