If what gets measured gets managed, how do you measure product innovation?

We explore three key questions to understand the what, why and how of measuring success in product innovation.

In brief

• What is success in product innovation?
• Why should you measure product, package and services innovation?
• How do you measure product innovation and what are the challenges?

The management guru Peter Drucker once said: “What gets measured, gets managed”.

This idea is at the heart of why you should measure, track and manage product innovation within your organization. As we discussed in our recent article, innovation is about generating great ideas, using them to strategically solve consumer needs and executing them brilliantly to deliver irresistibly superior products and services to the consumer. However, simply defining innovation is not sufficient to reap the full business benefits. It is also essential to measure its effectiveness.

This article poses three key questions that shine the spotlight on why it’s so important to define success in product innovation, how to cultivate critical success factors, which metrics can help track success and which hurdles to watch out for.

1. What is success in product innovation?

Essentially, the success of product innovation is a company’s ability to consistently deliver superior products and services.  When you offer consumers what they want – faster and at better value than the competition – they will come back for your products, increasing your profit.

This profit growth is attributable to sales growth and an improved margin, which – alongside asset efficiency – also leads to cash flow growth. When cash flow and profit improve, you’ll see a positive impact on your operating total shareholder return (O-TSR) – a key objective of most companies’ innovation excellence programs. That’s why O-TSR lends itself as an indicator of success in product innovation. But it’s not the only positive outcome. Successful product innovation also protects your business from quality and compliance risks related to safety, efficacy and regulations.

2. Why should you measure product, package and services innovation?

Most organizations say they want to be an industry leader. However, they often lack knowledge or commitment when it comes to measuring product, package and services innovation. The desire to lead must be accompanied by action: committed and successful innovators define and implement their measurement system(s) and review them on a continuous basis.

There are three key advantages to measuring innovation:

1. It enables organizations to objectively quantify where they stand exactly (internal performance vs. external benchmarks). This in turn has a positive effect on resolving gaps compared to business targets. It can also guide you in making the right investments, driving the right action plans and learning from experience – leading to tangibly improved outcomes over time.
2. It allows agile strategy adjustment and pivoting based on measured outcomes to work more effectively toward business and functional targets.
3.  It promotes a continuous improvement mindset within the culture of your company, supporting consistent and sustainable long-term results for all stakeholders.

Once you have committed to measuring product innovation, it’s important to identify and apply the right metrics, i.e., those with highest impact on innovation success. At the same time, the focus should remain on innovation outcomes, and innovation teams should avoid distractions from too many secondary, non-essential metrics. This means investing time to define appropriate processes, resources, tools and technologies to measure and drive innovation in the market where it matters most, enabling you to gain and grow market share and maintain your competitive advantage over time.

3. How do you measure product innovation and what are the challenges?

Given the wide variation in needs across industries and business objectives, there is no silver bullet when it comes to measuring product innovation. Below, we showcase some of the many possible approaches. The list is not exhaustive and may serve as inspiration for any organization starting out in the process of measuring product innovation.

• Measure the percentage of total sales and sales growth coming from new product development (NPD) and compare this to industry average or benchmarks. This reveals the contribution of innovative products to overall performance compared to the competition.
• Use research and development (R&D) conversion metrics such as R&D-to-product (RDP) conversion and new-products-to-margin (NPM) conversion. The first metric, RDP, is computed by taking the ratio of R&D spend (as a percentage of sales) to sales from new products. This allows you to track how well R&D spend translates into new product sales. The second metric, NPM, takes the ratio of gross margin of new products compared to existing products, which provides an indication of the contribution new-product sales are making to uplift the margin.
• Integrate a balance scorecard (BSC) within the performance measurement system. The BSC measures several perspectives rigorously and includes innovation across financial, customer, internal company, program, market, R&D, supply chain and marketing.
• Apply an outcome-oriented approach, enabling the company to be laser-focused on generating revenue and returns, and managing the product portfolio by means of net-present-value (NPV) based on the cumulative 3-year or 5-year NPV.

Organizations also need to be aware of challenges and limitations, including:

• Data availability
• Data quality
• Complexity – and a lack of understanding by leadership/management
• Additional effort involved in regularly compiling data in the absence of automated/standardized processes
• Lack of visibility on key influencing factors (i.e., not able to create best-practices and lessons learned)

Another limitation is that while the percentage of total sales coming from NPD indicates whether the business can create new products, it doesn’t tell you how profitable these efforts are, e.g., whether the gross margin on these sales is also increasing.

Given that total shareholder return is a key target of product innovation, you should be mindful to include all elements of the O-TSR in measuring product innovation. Doing so ensures that you truly create value for the business and delivers a sustained competitive advantage.

Need for action

To create significant incremental business value and deliver better, efficient, and faster innovation to customers, you should strive to combine the right data with the right work processes, resources, tools, models and technology. This can be an overwhelming task, especially as it requires considerable collaboration and overlap between internal teams.  Organizations can benefit from a fresh perspective. An external partner can orchestrate an integrated approach by providing the people, processes and technology needed to accelerate innovation excellence.