CH. 6, INNOVATION THROUGH MEASUREMENT

1
CH. 6, INNOVATION THROUGH MEASUREMENT

• By Stephen M. Shapiro

2

• I. FOCUS ON RESULTS, NOT MEANS
• A. MEASUREMENT FOSTERS CREATIVITY
• Innovation emerges when
• Give free rein
• Within simple set of rules
• Like musicians and melody
• B. MOST FIRMS WANTBETTER MEASURES
• 96 of firms
• 100 of dot.com companies

3

• II. THE PURPOSE OF MEASURES
• A. 7 BASIC USES
• 1. To communicate performance targets
• 2. To compete successfully decisions based on
  facts
• 3. To compare performance with others
• 4. To compel corrective action
• 5. To comply with law
• 6. To complete projects within deadlines
• 7. To commit employees to priorities thru
  rewards
• B. WHAT DO WE NEED TO KNOWTO SEE HOW WELL
  THEBUSINESS IS DOING?

4

• III. WAYS THAT MEASURES DRIVE INNOVATION
• A. POINT 1 FOCUSING ON THE OUTCOMES
• Start with objectives of strategy
• Design measures of those objectives
• Your being innovative enough when you meet your
  objectives
• Example Koch Industries
• With outcome based approach, employees decide
  what to do
• Rule turn valve at certain pressure
• Rule change employee turns valve based on
  judgment
• Performance improves
• Targets and simple structures
• Measure performance, too
• Measure should tell employees what they need to
  achieve, not how to do it. (Shapiro)

5

• B. POINT 2 SHOOTING FOR STRETCH PERFORMANCE
• Set ambitious targets, then stretch to meet them
• Even if you fall short, you may still exceed
  achievable targets
• Electrabel initially wanted delivery within 5
  working days
• Found best practices were 48 hours
• Shot for overnight delivery
• Greeting card company
• Wanted to reduce 18-24 monthidea to shelves
• Wanted 12-months, idea toshelves
• Employees said it couldntbe done
• Actually, did it in 4-months

6

• C. POINT 3 MEASURING THE RIGHT THING
• Dont focus on what can be measured
• Focus on what must be measured
• Various models can be used for measurement
• But they dont measure innovation as an effect of
  the measures
• Bench-marking is one-off, short term exercise
• You get what you measure
• If measure right thing, get innovation
• In changing environment, change what you measure

7

• IV. THE PERFORMANCE PRISM
• A. MODEL FOR MEASUREMENT
• 1. Stakeholder satisfaction on one end
• Should be focus of strategy
• Customers, employees, suppliers,community
• Out-sourcing leads to moredependence on
  suppliers
• Boeing manufactures on 3components on 777 jets
• Satellite launch failed 3 levels of suppliers
  launch company, rocket supplier, software firm
  inside rockets, insurance paid
• Interdependency
• Complementors alliance partners that provide
  add-on prod./serv.
• Regulators
• Pressure groups Greenpeace and Friends of the
  Earth

8

• 2. Strategies set of steps to achieve
  competitive advantage, goals
• 3. Processes process quality judged by output
  quality
• 4. Capabilities combination of elements that
  create value
• 5. Stakeholder contribution what stakeholders
  need to provide
• US utility
• CEO gathers 50 managers, complains of revenue
  shortfall and their lack of interest
• They didnt know
• Need to communicate
• V. AVOID SQUEEZING THE BALLOON
• A. IMPROVE 1 PART, DECREASE ANOTHER PART
• Example financial advantage to keep
  vendingmachines after depreciated, but generates
  manycustomer complaints

9

• Auto repair center
• Reward for volume alone
• Customers billed for repairs that werent done
• Should have rewarded customer satisfaction
• Computer store rewarded employees for add-ons
• Pushing add-ons didnt improve profits
• Add-ons had little profit margin
• Should have rewarded profits not revenue
• Purchasing department looked for lowest-cost
  items
• But paid higher costs in long lead times, less
  frequent deliveries
• Had to pay for housing inventories
• Paid more overall
• Had to learn to balance low cost with better
  delivery schedules
• Reduce cost of filling potholes
• Used cheaper materials
• That didnt last as long
• Overall cost went up

10

• B. IMPROVEMENTS HERE, CAN INCREASE EXPENSES THERE
• HMO hyperefficiency at call center
• Can lead to higher expenses when patient sees
  doctor
• Phone calls cost 1/10 of doctors time
• VI. FOCUS ON THE FUTURE
• A. HELP DETERMINE WHAT SHOULD HAPPEN
• Measures should focus on what is supposed to
  happen
• Balance forward-looking and backward-looking
  measures
• Example HMO
• Instead of measuring only numberof procedures
• Measure costs/member and betterhealth for
  population

11

• B. FUTURE-ORIENTED MEASURES
• Can identify new opportunities
• Can spot trends
• SUVs, beef to chicken, home vacations to
  traveling vacations
• Capitalize on trends before competition
• VII. LINK INCENTIVES TO OBJECTIVES
• A. ALIGN REWARD SYSTEM TO MEASURES
• 100 commission paid to sales take the money
  and run
• 50 paid at sale, 50 paid when customer paid
  bill
• B. COMPENSATION LINKED TO WHAT EMPLOYEE CAN
  CONTROL
• Airline on-time performance goalwhole team got
  reward
• Worked individually to get reward
• Helped each other to get better performance

12

• VIII. THE RESULTS AT PPL
• A. HAD TO CHANGE PERFORMANCE
• While operating, while serving 4.4 million
  customers
• Did it in 3 phases
• Had structure, rewards, and feedback in each
  phase
• Used customer feedback to guide changes
• B. FIRM CAN ONLY CHANGE SO MUCH