Increasing Innovation through Management and

Measurement

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Workshop

OUR MODERATOR Kip Krumwiede, CMA, CPA, Ph.D.,

Director of Research , IMA

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Integrate to innovate!

Learning Objectives:

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• Making innovation part of strategic planning and budgeting

• Establishing processes and control systems for generating and pursuing innovation ideas

• Developing leading and lagging measures for innovation success

• Making innovation governance a strategic priority for executive management.

• Building an innovation culture throughout the organization

Innovative Agenda

Part 1: Laying the Groundwork

1.Importance of innovation and integration

2. Role of Senior Finance Leaders

3. Innovation Governance

Part 2: Measuring Innovation

4. Measuring Innovation Success

5. Creating an Innovation Culture

Conclusions, Recommendations, Q&A 5

Rapid Change

• In1958, the lifespan of a company in the S&P 500 was 61 years.

• In 2011, it was 18 years

• By 2026, it is forecasted to shrink to 14 years

• IMA survey: 75% said their organizations must significantly evolve or reinvent their business value propositions at least every five years

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1. Importance of innovation and integration

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Importance of innovation and integration

Innovation is a competency that determines the ability of a company to create value for its customers, which, in turn, enables the company to achieve profitability and growth. • Value-creating reinvestments build capabilities that extend

competitive advantage. When companies fail to reinvest in the business, they tend to fade and ultimately can fail

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IMA® research survey: 271 accounting and finance leaders around the world Over 50% of respondents’ firms do not measure innovation at all. But almost all felt their organizations should measure innovation success

Must Integrate to Innovate

• Multiple innovation channels including partners and customers

• How can management control systems support innovation? – Performance goals – Funding in the budget and capital plan – Operational reviews – In-house tournaments or competitions. – Balanced Scorecard Approach

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Top Sources of Innovation Ideas & Inputs

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0% 10% 20% 30%40%

50%60%

Key suppliers

Competitors (fast follower strategy)

Customers

External agencies, consultants, or institutions

Employees via idea suggestions

Key employees charged with idea creation

2. Role of Senior Finance Leaders

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Increasing Role of Senior Finance Leaders

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Senior Finance and Accounting Leaders Asked to Support Innovation Efforts

CFO Traits Needed to Encourage Innovation

• Innovation minded: – Understands how value is created

and constantly looking for ways to encourage it

• Strategic thinking: – Think, act, and communicate

strategically – Can make the connection between

(1) the strategies of the company, (2) Investments in innovation, and (3) how these will create future value.

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Operational Knowledge: Ability to be a valuable business partner to operational units outside the accounting/finance department

Systems Knowledge: Help evaluate, install, and maintain new information technologies

How would you split your innovation resources and time?

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Median

Incremental: Continuous improvement efforts driving efficiencies and improvements. 40%

Distinctive: Innovation projects that will add to your competitive advantage and value proposition (e.g., new products, offerings, etc.).

30%

Breakthrough: New markets, big bets on new products, investments, etc. 20%

3. Innovation Governance

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What is innovation governance? CFOs are in an excellent position to help lead innovation governance in their organizations.

• Making innovation part of strategic planning and budgeting,

• Establishing processes for generating and pursuing innovation ideas

– “Be analytical and dig into someone’s idea, not to say ‘No’ but to find a way to get to ‘Yes.’” (Patrick Stroh, “Advancing Innovation: What’s Your Role?” Strategic Finance, September 2015)

• Also keep innovators within relevant boundaries so they remain focused on the ultimate goal of developing an idea into a profitable value proposition.

• Developing leading and lagging measures for innovation success

16 Keep innovation governance on the agenda for executive management.

Custom Home Builder

Customer happiness with project 15-point survey

Experienced workforce Employee turnover by job category

Cost control (standardized bid format) Bid vs. Actual cost

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Key Success Factors/Measures:

Nitschke Sampson Dietz, Columbus, OH

Producer of Fresh-cut Vegetables for Supermarkets

Fresh Product Age of fresh product measured from date of harvest, date

of receipt, and date of use On-time delivery of incoming product Sanitation scores

Customer satisfaction Customer ratings on fill rates On-time departure rates Business retention

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Key Success Factors/Measures:

Club Chef, Cincinnati, OH

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Let’s apply these ideas to your organization

• Workbook: I. Making innovation part of strategic planning

and budgeting (p. 4) • Breakout session

• Return and report

Let’s take a break!

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Part 2: Building an innovative company

4. Measuring Innovation Success

If you don’t measure innovation, you don’t get it! Examples Workbook Breakout session Return and report

5. Creating an Innovation Culture

Ways to “galvanize” the culture toward innovation

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4. Measuring Innovation Success

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Measuring Innovation Success • If you don’t measure innovation, you don’t get it!

• 67% of CFOs said that innovation is a key focus in their organization’s overall strategy

• 57% do not formally measure innovation success.

• For those firms that do measure innovation success or value, the most common measures that firms use to gauge innovation success or value are: Number of new products, services, and/or patents (16%) Percentage of sales revenue from new products (14%) Customer retention (8%)

• But these types of measures do not apply evenly across industries and are very limited lagging measures of innovation.

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Measuring Innovation Success (cont.)

• High-performance companies use a disciplined and balanced approach to innovation and growth, including organic growth and business development.

• Find out how value is created • Determine ways to measure innovation value created

and activities that lead to innovation on a regular basis. • Compare progress internally or within an industry and to

align innovation value creation with business strategies.

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Clothing Design Firm

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Balanced Scorecard Approach • Innovation is a competency that determines the ability of a company to

create value for its customers • Goal: create a measurement and management system for innovation • Identify action steps that can be taken to drive more innovation value based

on a company’s strategic intent. • Capture, store, and report on innovation data and benchmarks. • Organizations that may benefit most from using a balanced scorecard

approach to managing innovation: – Use innovation measures in performance reviews – Have accounting and finance leaders comfortable with providing

innovation governance leadership – Place greater emphasis on and devote resources to “breakthrough”

innovation ideas

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Scorecard for Silicon Chip Manufacturer

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Goals Measures

Financial: Survive Cash Flow Succeed Quarterly sales growth Operating income by division Prosper Market Share Customer: New Products % of sales from new products Responsive supply On-time delivery (defined by customer) Preferred supplier Share of key accounts’ purchases Internal Business: Technology capability Mfg. Geometry vs. competition Operational Excellence Cycle time Unit cost Design productivity Silicon efficiency New product intro. Actual vs. plan Innovation & Learning: Technology leadership Time to develop next generation Production Learning Process time to maturity Product focus % of products that equal 80% of sales

The Monnalisa Strategy Map

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Hospice Center Strategy Map

Training Hours per caregiver

Patient Loads

+ +

Employee Satisfaction

Patient Satisfaction +

+

Employee Turnover

Patient Complaints −

−

Patient Retention

Rate

Feeder Unit referral Rate

Patient Census (Profit)

Fundraising for Facility

Improvements

+

+ +

−

Financial

Customers

Processes

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Relationship between strategic planning, the balanced scorecard, and budgeting

Source: Enterprise Risk Management: Frameworks, Elements, and Integration, Statement on Management Accounting, © 2014 Institute of Management Accountants

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Let’s apply these ideas to your organization

• Workbook (p. 9) II. Create a scorecard of key measures to

monitor progress towards meeting the strategic objectives.

• Breakout session • Return and report

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5. Creating an Innovation Culture

Innovation Culture Survey Results

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Creating an Innovation Culture • When innovation is critical to success, it’s essential that the company

culture is focused on it. • Ways to “galvanize” the culture toward innovation include:

– Training and education to achieve cultural readiness – Develop innovation language – Establishing leadership responsibilities – Fostering an excitement to innovate – Set innovation goals – Everyone in organization has opportunity to innovate and get

rewarded for doing so

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Example: Johnson & Johnson

• Largest most diversified healthcare company in world • Approximately 70% of its sales are from #1 or #2 global market share

positions, and approximately 25% of sales are from products launched in the past five years.

• J&J has shown the ability to achieve superior and sustainable value creation.

• Focused on research and science to bring innovative ideas, products, and services to advance people’s health and well-being.

• 32 consecutive years of operating earnings increases

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J&J’s “Startup” Innovation Strategy • Strategy is to create business value ethically by first

creating customer value. – Established companies can create greater value by acting more

like startups. – Requires a balanced approach to organic growth and business

development.

• The “startup corporation” model uses the principles of the startup ecosystem to design a breakthrough innovation process within established companies.

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J&J’s “Startup” Innovation Strategy (cont.)

• A clear innovation objective • Innovation Centers in Menlo Park, Calif.; Cambridge, Mass.; London;

and Shanghai. • Compatible needs • A strategy focused on Pipeline Value Creation • A sound value-creation definition • Value-Creation Pathways:

– The value J&J creates for shareholders is a reflection of the value that we bring to patients.”

– By getting involved in collaborations earlier, they play a bigger role in the value creation for patients and, as a result, get a big share of the economics upon success

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J&J’s “Startup” Innovation Tips • Create a compelling case for action—something that motivates the

organization to make innovation a clear priority and overcome internal skepticism

• CEO and CFO were champions at the top • Innovation not just for products; should apply to all areas of your

business and all functions. • Ask: does your finance organization deploy innovative solutions?

– It’s much harder to enable innovation elsewhere in the organization if your own area is lagging behind.

• Be willing to take calculated risks, make mistakes, and learn from them in order to make any real and meaningful progress. 38

Example: Haier Corp. • Creating “win-win value-added ecosystems” with partners and customers

– Motivates partners to provide products that will benefit them and Haier

– Exploits Internet economy by generating partner traffic from product sales

• Internal “Win-in Value-added Table” reports value created for its partners

• Encourages and funds entrepreneurial startups throughout the organization (similar to a Venture Capital company)

• Transformed finance department into a shared service center within organization

– Individuals must bid on jobs and rewarded for good performance

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Identify revenue-generating drivers

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Haier Game Console Revenue Drivers

One Idea: “Tournament Controls” • Some companies use in-house “tournament controls” to encourage and

reward innovation. • Rewards are based on differences in relative performance rather than absolute

performance. According to tournament theory, in these situations a rank-order tournament is an efficient way to determine and reward performance.

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One Idea: “Tournament Controls” • Some companies use in-house “tournament controls” to encourage

and reward innovation. • Rewards are based on differences in relative performance rather than

absolute performance. According to tournament theory, in these situations a rank-order tournament is an efficient way to determine and reward performance.

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• Example: Organization that funds scientific projects Projects go through a competition to get financing. Funding parties decide who to fund (most innovative scientific work). Researchers are evaluated primarily based on new projects that are

funded by external parties Other KPIs include the number of the projects, amounts of grants, number of patents and publications.

Participate in “Technology Roadmaps” for your industry

43 For more information, see IMA’s The CFOs’ Guide to Technology Roadmapping

Conclusions

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• Must integrate to innovate • Learn how value is created and constantly look for ways to encourage

it • Make innovation part of strategic planning, budgeting, and

performance reviews • Establish processes for generating and pursuing innovation ideas • Develop leading and lagging measures for innovation success • Try innovative solutions in the finance organization • Be willing to take calculated risks, make mistakes, and learn from them

IMA Resources

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http://www.imanet.org/insights-and-trends/operations-process-management-and-innovation/innovation-management

http://www.imanet.org/insights-and-trends/ima-books

More Articles from Strategic Finance

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• “Why Innovation Should Be Every CFO’s Top Priority” (October 2016)

• “Advancing Innovation: What’s Your Role?” (Sep. 2015)

• “Control vs. Creativity” (August 2012)

• “How CFOs can drive Innovation” (July 2010)

• “Managing Innovation Risk” (April 2008)

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THANK YOU!

Kip R. Krumwiede

Director of Research

IMA® (Institute of Management Accountants)

+1 (201) 474-1732

kkrumwiede@imanet.org

Get out of your comfort zone!

Questions?

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• Differences between US and KSA

• Potential Research Topics

• IMA Resources

• Needs of CFOs

• How can MA make a difference?

• How to start?

• Leading and lagging measures for innovation success

• Innovative solutions in the finance organization

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Thank you.