Beyond Product Viability Index - Measuring Innovation Outcomes in Consumer Industry

Innovations has always been a key element for sustainable growth especially in the Consumer industry. With insurgent brands chipping away on the market share, this has become more important than ever. And established companies are spending serious sums in designing and launching new products in the markets. The question for them is: How can you measure the effectiveness of their innovation ecosystem for delivering sustainable organic growth?

Product vitality index (PVI) is often too abstract to provide actionable insights:

Many companies track the share of sales coming from innovation using a simple metric such as product vitality index (PVI). The calculation is derived from totaling the revenue of new products and services over the last five years against the overall revenue of the company. Unfortunately, many companies with a strong vitality index do not end up growing their top line.

Unfortunately, organizations’ simplification of innovation performance measures to just PVI does not produce sufficient learning and continuous improvement.

An innovation ecosystem has many components including multiple innovation types that require different innovation processes each with many phases and views necessary at the portfolio, pipeline and project. Therefore, a more comprehensive approach to innovation measurement is key to ascertain the product innovation vitality of a company.

Measuring the innovation mix is as important as measuring the overall innovation focus:

Different innovation types serve different purpose in a company’s portfolio.

“Sustaining” innovations, such as line extensions and repositioning:?By launching close variants of an existing brand, the company can provide marginal incremental benefits to the consumer thereby keeping brand vitality and keep competitive superiority.

“Efficiency Innovations”?help the company sell mature products at lower prices and improve productivity and profitability. These innovations would maintain the value proposition but deliver the same

“Disruptive Innovations”?tap into a latent need that has not been met so far, or fundamentally create a new need in consumers’ mind, thereby creating a brand-new market

Each of these innovations have a place in the overall innovation strategy. Companies that are too focused on Line-Extensions may end up on a treadmill of portfolio proliferation and may get blindsided by sudden turns in the market. Similarly, as exciting as the big disruptive innovation programs may be, they have longer gestation and more unpredictable results. Therefore balancing the innovation portfolio is important. Companies need to constantly track the ratio of different types of innovations in their innovation portfolio and make sure they strike the right balance.

Measuring different innovation types differently:

Since these investment types serve different purpose and need different lead times to produce outcomes, it is critical to measure each type of innovation against different standards of performance and over varying investment horizons.

For example, while line extensions may generate significant revenue over the years, much of the revenue may come at the expense of the business that was cannibalized. It is therefore important to measure incrementality, or the portion of innovation volume that comes from new buyers and additional usage occasions. This is estimated by netting out cannibalization from a brand’s existing buyers. Similarly, efficiency innovations may not produce any net incremental revenue whatsoever and therefore their contribution will be underrepresented in PVI calculations. Measuring overall margins improvements may therefore be the right metric.

Time horizon for the measurement may be very important too. Disruptive innovations take much longer to nurture and may not produce outcomes for longer period. They may therefore need to be bucketed and compared depending on the gestation stage they are at.

Supplementing with Leading Indicators:

Since PVI is a lagging indicator, it is important to keep an eye on the performance indicators for the innovation process itself. While these leading indicators may in themselves not assure outcomes, they will allow an opportunity for course correction and not just constantly look at the rear view mirror. Metrics such as number of ideas generated, learning velocity, time spent at each stage and percentage of ideas progressed from one stage to next are some of the important leading indictors that can predict the outcomes of the innovation efforts.

In summary, while using a simple metric to measure the overall company’s product portfolio vitality may be tempting, it over-simplifies the challenge of measuring innovation. Having a more comprehensive innovation dashboard not only provides relevant insights that can be actioned, but can also be tuned to be in lines with overall innovation strategy of the company.