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Measuring Your Return On Innovation

How should companies measure Innovation? Is the ROI formula sufficient?

10Feb

Netflix has transformed and disrupted the video distribution industry, leaving a path of destruction in its way. Blockbuster, which had been one of the industry's most successful players, was one of Netflix's victims, despite the former giant having the opportunity to acquire the video streaming service in 2010.

To add to this, companies such as Uber and Space X have also created niches for themselves, marking a shift in the way innovation is approached and ultimately implemented. The presence of these disruptors has meant that the model of disruptive innovation has had to reinvent itself against a backdrop of unprecedented change.

Large, successful companies find themselves in the most difficult situation. Half caught between executing on their current business model and half between attempting to disrupt to make what they already have, better. Measuring the return on such endeavours can be rather conceptual, measuring long-term and less set-in-stone targets, which are often difficult to quantify with hard-line facts.

For example, organisations often measure the impact of unknown, unlikely to succeed projects, as well as less-known technologies and unspecified business models. This adds little in terms of measuring Key Performance Indicators and rarely helps to create an innovation culture. It's also common to see the ROII formula used (that is the Return on Innovation Investment) to determine how successful a project was, and although undeniably useful, it fails to actually measure how a company achieved a result.

In the 1920s, return on equity was measured to determine how a company was performing until DuPont, the American chemical company, identified that an approach that included, profitability, operating efficiency and financial leverage was more likely to provide an accurate picture of how a company was performing, quickly diagnosing their strengths and weaknesses.

With this in mind, the Harvard Business Review identified that DuPont's formula could be applied to measuring innovation.

The Harvard Business Review sub-divided the ROII into three separate categories, including innovation magnitude (financial contribution divided by successful ideas), Innovation success rate (successful ideas divided by total ideas explored) and Investment efficiency (ideas explored divided by total capital and operational investment).

By separating the ROII formula, it allows for discrepancies to be measured and attributed to success. In the Harvard Business review article it stated, 'This split would highlight different innovation strategies available to companies. Companies that played it relatively safe could have a high success rate, low magnitude, and high efficiency. A company could achieve the same returns by compensating for lower success rates with higher efficiency or magnitude.'

This would give companies a much more efficient method for measuring innovation. With disruptive innovation elevating companies to such a level that they're hitting billion dollars in revenue, the measurement of innovation should be seen as a real priority in the quest for disruption. 

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