Every day brings a new press release or corporate statement extolling the virtues and importance of innovation to a corporation's future. But aside from mom and apple pie concepts of being a world leading product company, do stakeholders in the business really understand the tangible value that best-in-class innovation practices can bring? We focus so much on the strategic value that we forget to calculate and articulate the financial returns that are achievable from relatively minor improvements in how effective innovation is managed. This in turn makes it harder to justify making the investment to get to those improvements. Yet the potential payback from good process improvements can often be calculated in terms of months, and longer term measures like net present value (NPV) can be even more dramatic.
I believe that the financial benefits of better innovation can be broken down into four interconnected value dimensions. These dimensions also guide us on where we should focus our improvement efforts. As is often the case in business, process improvement can lead directly to performance improvement.
- Product Value – Better control of the innovation portfolio, and of idea generation processes, can help a company to select a more high-value blend of products to bring to the market. 79% of companies say they lack high value ideas.1 Value isn't just about an ability to charge more or sell more. Cost savings can also make a crucial contribution, as well as ensuring products are designed to minimise cannibalization of existing lines. Having the processes to keep your arms around all these issues at the portfolio level can make a big impact on the value-mix within your portfolio. Without this visibility, it is hard to track whether your new product pipeline has diverged from your strategic goals.
- Time to Market – 56% of projects miss their launch deadlines.1 Bringing launch date forward can mean the difference between being a market leader or a follower. Just a few additional weeks of product life means more time on the shelf, which in turn improves the total revenues earned by the new product. Better monitoring of the process and the ability to holding teams to deadlines can add those few weeks.
- Success Rate – How do we define success in this context? Fundamentally, the clear-eyed question to ask is whether the new product is achieving the financial goals projected. Roughly half of new product launches are deemed failures. When starting from such a low baseline, small improvements in the number of projects that are successful can deliver significant improvements in value. Rigorous process and evidence based decisions will help to ensure that we are promoting the best projects and killing the weak ones.
- Throughput – The more new products we can pump out of the innovation pipeline while holding the investment constant, the more revenue and margin we can generate. Clear process and more efficient execution will help maximize the number of projects our teams can handle.
The relative importance of each value dimension will vary from business to business, depending on factors like size, industry sector, competition and more. However this shakes out for a particular company, once the company-specific metrics for the different factors are worked out, it's a relatively simple matter to calculate the financial effect of each and then combine into an overall financial return. The impact of small improvements in each can then be compounded over the average product life cycle, resulting in a financial impact that can be startling and highly persuasive.
1 Consumer Goods Technology Research 2011