Thursday, December 02, 2004

Fast Company Innovation Awards - December 2004

It seems like Fast Company and Monitor Group have joined forces to come up with an Innovation Scorecard with which to rate companies' innovation past and present to find out what are the top innovation companies in each industry. This series of reports (published once every 3 months) will look at one industry at a time, and for its inaugural version, has chosen the Telecoms industry to look at.

As Monitor's CEO says, "Competitive advantage roots best in soil nourished by disciplined, sustained innovation -- in assets, their configuration, the offerings they make possible, and the business models that support them, but such discipline is impossible to sustain without rigorous -- and relentless -- efforts to measure and improve performance along all relevant dimensions." - an admirable, and totally correct, statement.

It's a shame then, that having understood the importance of measurement to innovation, that they've developed and applied such a badly thought out and sloppily applied scorecard.

According to the article, they (presumably Monitor Group) assessed 119 public companies on "three 'crucial' criteria":

1) How they fared over the past five years?

2) How do the next five years look?

3) How have companies invested in R&D? and what are expectations for growth?

oh yes - and 4) What is their capacity for innovation?

Now, besides the inability to count criteria, there are several problems with the above statements. For starters, Financial performance bears little direct correlation to innovation capability and capacity, neither past nor future. Although innovations in themselves can affect a company's bottom line in profound ways, financial measurements alone can be too easily affected by one-off blips, accounting treatments, lucky accidents, and external factors. For example, US companies that are have significant presence in Europe, are currently getting a nice rise in their expected earnings from the weakness of the dollar in comparison to the Euro. A sale over there is counting for far more than it used to. Seeing as the dollar seems unlikely to regain strength any time soon, financially, things would look pretty good for these companies too. Now does this mean that these companies are more innovative all of a sudden? Of course not, yet financial results and forecasts dominate the Scorecard's criteria..

Their other main criteria is R&D Spending as a % of Revenue. The problem with this is that it assumes that R&D will provide all the innovation, and as such, is a very blinkered view of innovation within a company. It ignores a company's ability to innovate around it's marketing, packaging, business models, internal processes, etc.

For example, Apple, although occasionally innovative on the product side (which would be reflected in the R&D spend), it is far more innovative on the marketing side, where it bulges its biggest muscles. Dell, hardly innovative in products nor marketing, has exhibited most of its innovations in the area of Business Model Innovation. For both commpanies, their true innovation capacity and capability would be totally underplayed by a simplistic look at its R&D spend.

There's a train of thought that used to pervade in the Knowledge Management market that says "it doesn't matter if it's not 100% accurate, it's more important to at least get started just measuring something" - it seems like this scorecard has embraced that concept in full...

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