Measuring Innovation Strategy – Innovation Accounting Book
Our product launch has failed, our competitors opened in five new locations, and we’ve missed our targets. Where should we place the blame?
Was it a bad launch by the marketing team? Bad luck that the competitor is moving fast? Bad numbers from market research?
Or could it be the innovation strategy?
We rarely measure the strategy behind the launch. Instead, we often go to the default excuses like poor execution, bad luck, or flawed market research?
If our innovation strategy remains unmeasured and unaccountable, it will never improve. Without metrics to measure strategy, we will never know where the responsibility lies. All we will know is failure.
There are two main things that can go wrong with an innovation strategy — either it’s a strategy we’re unable to execute, or it’s simply a bad strategy. Both of these things are the responsibility of the strategist.
Measuring the Ability to Execute
To successfully execute a strategy, even if it’s a bad strategy, we have to make sure three things happen:
This gives us some specific things about our strategy that we can quantify and measure, starting with whether or not we even have one.
Do You Have a Strategy?
There has to be a strategy, which is different from a plan.
A plan might tell you to start left, then fake right, then go straight to the goal. This is the kind of thing you see in American football — a pre-scripted play for each time they hike the ball.
Those are directions, not strategy. In situations where the environment doesn’t change regularly, a strategy and a plan can look a lot alike. But when it comes to innovation strategy, change is guaranteed, so we have to rely on a flexible strategy rather than an unalterable plan.
The truth is that most companies don’t even have an innovation strategy, just ambition. “Be the most innovative company in our sector” is at best a desire, and at worst a reliable path to failure. No sports team defines their strategy as “Win more games than the other teams.”
At a minimum, an innovation strategy requires a few basic components to be considered a viable strategy:
“Be the most innovative company in our sector” does not provide any of this. There is no vision, a vague goal, no clear contested space, no account of capabilities, and no metrics. It is an affirmation of a desire, not a strategy to help you accomplish it.
This list might not exactly work for your situation, but you can use different elements. The point is to define your strategy. You can tell you’ve done it properly if it gives your team members the information they need to make decisions on their own.
After hearing the strategy, every team member should know what to do. Not because they have a step-by-step plan, but because they know the situation and the goal and what their role is on the team. They should know how to make decisions in real time without consulting the strategist. They should not require constant management, because they understand what progress looks like and what they can do to move forward.
If your team members don’t have the information to make decisions in their own domain, you do not have a strategy.
Do People Understand Your Strategy?
If no one knows what they are supposed to be doing, then no one is doing it right.
Conveying your strategy through a 61-slide PowerPoint with a 37-slide appendix will not help your team remember it, let alone understand it. For a company to successfully execute a strategy, everyone from the individual teams to the innovation board needs to understand it and the part they play in it.
If you’ve ever seen a navy-themed show or movie (yes, Star Trek counts), you’ve probably noticed that crew members do not immediately execute a Captain’s order. Instead, they repeat the order back to the captain first, sometimes even waiting for the captain to confirm that the crew heard the order correctly through an imperative like “Execute” or “Engage.”
This simple act of repeating the order to the captain is a comprehension test. By hearing the order repeated, the captain knows that the order was understood.
These crews — these icons of efficiency and effectiveness — practice repeating back even simple orders to ensure comprehension. So how do you expect a thousand employees in your company to understand your PowerPoint opus? If your team can’t repeat your strategy back to you in their own words, it’s too complicated.
Your strategy must be simple enough for people to understand, remember, and repeat back to you. This gives us two easy metrics:
If the first metric fails your comprehension benchmark, the problem is that the strategy is unclear. If the second fails, the strategy is probably too complex. Either way, running comprehension tests of your strategy (sometimes called back briefing) can help you avoid strategic misalignment.
Some assume that a strategy no one understands is a bad strategy, but often it’s an issue of communication. A few comprehension tests and some good wordsmithing can fix this issue without changing the fundamental strategy at all.
Can You Measure Progress?
The strategy will define its own execution metrics. This is the art of innovation accounting.
By making the vision and goal clear, every team member should know how to execute their roles according to their capabilities. This makes progress relatively easy to measure. Without that clarity, it becomes impossible to measure progress.
If the top-level strategy is clear to everyone, then each department and team member will be able to define their own KPIs or OKRs.
Let’s say part of your innovation strategy is to invest 70% of all operating funds into the core business model, 20% into adjacent innovation, and 10% into transformational innovation. Your measurement is self-defined. If after 6 months your executives have invested 90% of their budget into the core business model, then we know exactly where we are failing at executing the strategy.
Granted there may be a good reason for this shift, but if it’s because everyone just likes to focus on things they know how to do well, then we know exactly where we are failing to execute on our strategy and how to fix it. In this instance, we would either need to push people to learn new skills or higher additional team members to fill the skills gap.
Measuring Strategy Quality
Once we know that the strategy can be successfully implemented, we can begin measuring whether or not the strategy itself can result in success.
Decision Points
A good strategy delays decisions to preserve optionality, to pivot when new information becomes available. Deciding too early limits your options to pivot down the line. Deciding too late makes those pivots tougher to execute.
Ideally we want to be as nimble as possible, delaying those decision points until the right moment where our information and our capabilities intersect in a way to make the pivot desirable. But we must define the metrics that will mark that intersection in advance so we are ready to make these critical decisions quickly and decisively when the moment comes.
A good strategy must be explicit about those decision metrics, what information will trigger a new strategic direction. That’s why we have watchtowers.
A watchtower is any form of monitoring system that tracks external events or metrics that might impact our strategic direction. Where OKRs or KPIs help determine if our organization is executing our strategy, monitoring the outside world is the only way to know if the world is behaving as our strategy predicted. Watchtowers are used to determine if the underlying assumptions of the strategy are valid, and to alert us when they are no longer so.
In defining our strategy, we must identify our anticipated future state and any trends that lead us to believe in that future. This ranges from competitor behavior to market reactions to a host of other external events — anything we don’t have control over.
If we run a food truck, we want to pay attention to parking regulations, but also new commercial construction that might affect those regulations in the future, or influence foot traffic you need to acquire customers, or indicate competing businesses moving into the area.
If we run a cryptography company, we may want to monitor advances in quantum computing that might have sufficient processing power to break our encryption.
If we’re a government, we need an array of watchtowers to cover everything from economic inequality, to climate change, to the price of a carton of milk, to increased chatter among opposition groups.
The data we gather from our watchtowers should tell us whether our initial predictions of trends are correct and help us update our predictions with the latest information. New data might lead to decisions such as reformulating the strategy because our prediction is incorrect or doubling our investment because of increased certainty in our strategy.
Watchtowers are designed to continuously evaluate how our strategy aligns with the real world so we can update it based on new information. If the watchtowers reveal data that indicates our strategy was based on flawed predictions, then we need to update our prediction based on that information and form a new strategy.
But if our strategy hasn’t set up any watchtowers at all, that is the true sign of a bad strategy. A bad strategy doesn’t adapt to the facts on the ground.
Tomorrow’s Strategy
Tomorrow’s strategists cannot just hide behind an “unmeasurable” strategy and blame others for executing poorly. Too often, strategy is assumed to be the province of a small class of big-brained, white-collar workers who rotate out of their strategy positions long before the results of their strategy are visible. This makes them not only unaccountable, but lacking a coherent feedback mechanism to improve their own strategic abilities.
Company results are often a mix of strategic abilities, execution, competitor actions, and outright luck. But the strategist only takes credit when the team wins, and can easily blame other factors when they lose.
Even though we can’t predict the outcome of a strategy, we can look to leading indicators that must be there if our company is to succeed:
Strategy is challenging to measure, but it’s not impossible, and doing so not only holds the strategists accountable for their decisions, in the long run it makes them better strategists.