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Measuring Innovation Pipeline Strength
Many businesses manage to stay ahead of their competitors by engaging in a continuous process of innovation. This may not lead to dramatic improvements in products and processes but is often innovation of an incremental nature that involves small improvements and adaptations to products and designs. Such innovations often suffice to keep a company in the lead in its industry and maintain high levels of customer satisfaction. These companies need to pay attention to their innovation pipeline strength.
The research and development within a large company will often be managed by a Chief Technology Officer (CTO) who will be concerned with allocating the research and development expenditure to the right projects and ensuring that the staffing needs are met. The ongoing research projects will then need to be tracked and an assessment made of the likelihood that viable products can be brought to market within a specified timeframe.
A business operating in an arena where there needs to be continuous innovation will have a number of innovations in the pipeline at any particular time. Some will be a number of years from implementation in new products or services while others may be close to inclusion in the sales offering. If a company is to know the likely effect on future sales there must be some way of measuring the contents of the innovation pipeline and measuring the likely effect on future sales of products and services. Not only does this give an indication of the future sales growth of the company but it can also be used to calculate the amount that can usefully be spent on research and development of further new products or processes.
Businesses often have surprisingly little information about the innovation pipeline even thought this is crucial to the future development and growth of the enterprise. This may be a result of the difficulty of measuring the profit potential of innovations that may need some years of further research before they come to the market. Companies often have information on those aspects of innovation that are easier to measure, such as the percentage of sales or expenditure that is spent on research and development. This however does not say anything about the profit potential of the results of that research and development. Although the calculation of the profit potential of the innovation pipeline may require some assumptions and estimates the results of the calculation are valuable to the business in planning its future strategy.
Calculating Innovation Pipeline Strength
The innovation pipeline strength can be measured by calculating the future revenue potential of each major innovation project and finding the total future revenue potential from the total number of projects. The profit potential of a particular innovation project may need to be adjusted for the likelihood that the expected profits will be realized, especially if it is a long way from completion. Many businesses will also want to add a proviso that the only profits taken into account in the calculation are those that will be realized within a few years of the launch of the innovative product or process. Predictions after that period of time may be too inaccurate and uncertain.
The period for which innovation pipeline strength is measured will depend on the innovation cycle within the particular industry. For example, the innovation pipeline in the pharmaceutical industry is longer than in many others. Normally the innovation pipeline strength would be measured at intervals of around three months. The calculation would clearly need to be based on a number of assumptions about the effect of the innovation on sales, the uptake among customers and the effect of other changes in the economic environment on the future sales.
The company may prefer to deal with the uncertain outcomes by calculating a range of possibilities including a best and worst case scenario. This calculation may take up the time of internal analysts within the company and the information would therefore be gained at the expense of significant compliance costs. The results could therefore be presented to management as a series of lines on a graph showing projections of income into the future, clarifying the uncertainties while still providing useful data on which management strategy can be based.
Setting Innovation Targets
Although many performance indicators may give rise to general industry targets, the targets for the innovation pipeline strength will normally need to be set within each individual business. The innovation cycle, product cycle and level of research and development expenditure will combine to affect the strength of the innovation pipeline. The management must assess the strength of this pipeline by comparing the state of current research projects to the needs for future product innovations and new product launches. Where the pipeline is characterized by considerable uncertainty and a number of assumptions need to be made about the future the innovation pipeline strength will need to be regularly reviewed and assessed.
The measurement of the innovation pipeline strength is an important factor in managing research projects and ensuring that the company’s whole research and development strategy is on course. Measurement of the innovation pipeline strength can be combined with other aspects of innovation management to ensure the right balance between long and short term innovation projects. By doing this the management can ensure that the innovations come to market at the right time. The calculation is part of the process of producing a road map for future product launches that can keep the enterprise at the forefront of its industry. This joined up management of research and development and the innovation pipeline can lead to an ongoing advantage over the competitors as the products and services are subject to a continuous incremental improvement.