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Tesla Motors: A case study in disruptive innovation

Senior Director, Cost Benchmarking Services, IHS Markit

Associate Director, AutoIntelligence, S&P Global Mobility

Tesla Motors broke the mold. Then reinvented it. Not only did Tesla Chief Executive and Chief Product Architect Elon Musk demonstrate that convention could be defied, he did it in an industry with 100-year-old traditions, norms, and processes. Of course, the auto industry has innovated in the past, but Tesla, which was founded in 2003, has pushed the envelope beyond what most automakers thought possible. The company's Silicon Valley-style "techpreneurship" enabled it to move faster, work more efficiently, and create groundbreaking new ideas around sustainable mobility and automotive technology.

After all, this is Musk's modus operandi. In 1998, he disrupted e-commerce by creating a widely deployable and secure payment platform called PayPal. And in 2002, he launched SpaceX, a company that designs, manufactures, and launches rockets and spacecraft. The company's goal is to enable people to live on other planets. Musk, himself, wants to "die on Mars" and wholeheartedly believes it will be possible.

He is also a lightning rod in the debate around mass transit with an idea some critics refer to as vaporware. Dubbed Hyperloop, Musk's idea is to create a high-speed transportation system that is immune to weather, impossible to crash, uses little energy and recaptures most of what it uses, and travels twice the speed of today's commercial aircraft. He believes the concept could move people from Los Angeles to San Francisco in just 35 minutes. Oddly, he has no interest in making the Hyperloop a reality but, rather, is putting his ideas out there for others to take and improve the human experience.

With Tesla, Musk is focused on disrupting mobility. As of mid-June 2014, the company has released all of its patent holdings, claiming that open-source innovation is more powerful than anything one company could do individually. While IP lawyers cringed, Wall Street applauded, sending Tesla's stock price up 14% to $231 a share. This radical approach to innovation runs deep, as evidenced in the technology and design approach of the company's flagship Model S, its $69,900 luxury car.

In August 2014, the IHS Technology Teardown Team purchased a used 2013 Model S and took it apart to see what made it tick. The team dismantled 12 systems and cataloged every part within each system. The teardown included both the electronics systems inside the car's interior and the drivetrain (see sidebar "What's inside the Model S?").

Technical differences

The teardown confirmed that the Tesla Model S is unlike anything else on the road. A massive plot of real estate in the center stack is dedicated to a 17-inch touch screen infotainment system, which became—since its production launch in 2011—an instant industry benchmark for automotive display integration. There is room left for only two physical buttons on the console—one for the hazard lights and one for the glove compartment release (see sidebar below).

The technical specifications are impressive. The 17-inch screen is a Chi Mei Optoelectronics display with 1920 x 1200 WVGA resolution that includes a projected capacitive touch screen—the same technology employed in many smartphones and tablets. The system runs on a Linux-based operating system, offers Garmin navigation with Google Earth overlays, and computes at speeds still besting most other systems available today with its NVIDIA Tegra 3 processor combined with 2 GB of DDR3 SDRAM.

The system includes an embedded 3G modem from Sierra Wireless that runs broadband data off AT&T's network. It can receive software updates over the air and controls all of the functions of infotainment, audio, navigation, Bluetooth phone, HVAC, and even vehicle settings like windows, door locks, sunroof, trunk release, traction control, headlights, steering, and suspension settings.

In addition, a 12.3-inch fully digital instrument cluster sits directly in front of the driver with its own NVIDIA Tegra 2 processor, which it uses to handle the diverse array of graphics, content, and redundant outputs for the driver. About the only "familiar" driver components are the steering wheel, pedals, and transmission shifter—the latter actually borrowed from the Mercedes-Benz parts bin.

Manufacturing differences

The system is clearly in a class of its own. However, with all of these high-end specifications, how can Tesla sell this as a standard feature in every Model S? More disruption.

The company chose to change up the supply chain and borrow from the electronic manufacturing services (EMS) model of production that is standard practice in the consumer electronics industry. In this respect, Tesla is closer to being a technology company than a traditional automobile maker. Much like how Apple designs the iPhone and then employs Foxconn to build it, Tesla contracted with a leading EMS provider to build its center infotainment system, instrument cluster, and several other systems in the Model S. This model required Tesla to internalize much of the hardware and software development, as well as the systems integration work. Given that Tesla has hired its engineers from all over Silicon Valley and beyond, this was not a problem.

The Silicon Valley culture and the EMS approach to manufacturing were a clear advantage for Tesla at one time but no longer make it unique. The EMS model is expanding in the automotive industry, and the likes of Compal, Flextronics, Foxconn, and Jabil are working with brands including Chrysler, Daimler, Ford, General Motors (GM), Jaguar, and Volkswagen.

However, the transition to the EMS model can be problematic. Ford outsourced the entire infotainment architecture for the development and deployment of MyFord Touch in 2011 to an EMS provider. The initial system had technical software problems that required Ford to issue several software upgrades. This cost tens of millions of dollars, contributed to a poor customer experience, and caused perception problems for Ford, from which the company has only recently recovered.

Development differences

In the last decade, virtually every automaker has relocated portions of vehicle and vehicle technology development to new R&D facilities in the San Francisco-to-San Jose tech corridor. In fact, some early innovators predate Tesla: BMW, Daimler, and Volkswagen set up shop in the Valley in the mid-1990s, and Honda opened its first office in 2003, the same year Tesla was founded.

The reasons for doing so now go beyond manufacturing. Automotive OEMs are co-locating with the likes of Apple, Cisco, Facebook, Google, HP, Intel, NVIDIA, and Oracle to help speed the pace of innovation. This involves accelerating the pace of hardware, software, services, and applications development but also rethinking the process of design.

The development speed of a typical mobile device is often six months or less. Compare that with the design-to-production timing for a new vehicle of approximately four years and it's no wonder car-buying consumers have been underwhelmed by standard in-vehicle electronics. Even today, consumers can find navigation and infotainment systems designed in 2008 for sale in model-year (MY) 2014 vehicles. To give an idea of how ancient that is in "tech-years," BlackBerry held more than 50% market share among smartphone users in 2008. Remember BlackBerry?

Tesla has had a competitive advantage over auto industry rivals in design innovation since day one. Located in arguably the center of the world for technological innovation, Tesla was able not only to construct its vision of mobility in Silicon Valley, but also recruit its employees from many of the leading technology companies to design and build the car there as well. All other OEMs grasping for automotive technology leadership had to learn the culture of Silicon Valley, figure out how to adapt to it, and dissolve the century-old "way of doing things." Tesla was born into it.

Service differences

With Tesla's technology come some very important services. Perhaps at the top of the list is the convenience of over-the-air (OTA) software updates for vehicle recalls, which Tesla has made free and standard for Model S owners. This functionality has, in turn, created plenty of positive press for the company.

It all starts with the connection. The 3G connection in the Tesla infotainment system is already providing this solution via relatively old wireless technology. Since the modular and flexible hardware architecture of its infotainment system allows for mid-cycle technology enhancements, IHS expects Tesla will soon debut true 4G LTE connectivity in its vehicles. The added bandwidth will further enhance the OTA update service, as well as the rest of the services the Model S offers.

IHS forecasts a 60% global penetration rate on embedded cellular connections in cars by 2022, with 4G LTE bandwidth comprising roughly 60% of that market. GM and Audi have actually beaten Tesla to market on this specification as both OEMs already have 4G LTE cars on the road now.

One central purpose of this mass-market vehicle broadband adoption is to accommodate FOTA (firmware over the air) and SOTA (software over the air). Tesla has already deployed this function in part because it allows the company to provide vehicle service without needing to charge (or possibly pay) for service bay labor.

Consider Tesla's recall of the Model S for overheating charger plugs in January 2014. The day the recall notice came out, Tesla had all 29,222 Model S vehicles updated wirelessly and running the new safer version of the software. Ironically, around the same time, GM had a similar fire-related safety recall issued that also required a software update. Despite all of its vehicles having standard OnStar telematics, owners were required to take their cars into a dealership for the software update, costing GM a warranty labor expense on all 370,000 recall service appointments.

While far from a sure thing, nanotechnology offers significant business opportunities for companies willing and able to take the long view. One avenue is to identify a sizable opportunity in an existing market where a nanotech product can displace an existing inferior solution, e.g., a coating for an automobile that keeps itself clean, clears mist from side mirrors, or self-repairs scratches in the automotive paint.

Volume aside, Tesla paid much less on a per-vehicle basis than GM, simply by providing a software update procedure that has been on personal computers for more than two decades and mobile phones since before the BlackBerry.

IHS sees the OTA software trend continuing strongly. With vehicles like the new Mercedes-Benz S-Class claimed to have over 65 million lines of code—10 times that of the Boeing 767 Dreamliner—the automotive industry stands at a crossroads. Software recalls are about to become a major problem, one that will be expensive if this type of technology is not broadly deployed.

As of February 2014, over 530 software-related recalls had been reported since 1994 (see figure below). Among these, 75, or 14%, were issued for MY 2007 alone, with over 2.4 million vehicles affected. Numerous questions arise from the variation in volume by model year—not the least of which is, why have recalls for MY 2007 been so numerous? There are likely several reasons for this spike:

MY 2007 had the last large-sales volume before the economic recession plunged US car purchases from approximately 16 million to 10 million in 2010.

Many new electronics systems were added in MY 2007 for infotainment, advanced driver assistance systems, and core auto control systems, which increased the amount of software in the typical car.

MY 2007 involved recalls of 75 vehicles, the most of any model year. Many automotive OEMs had multiple model recalls with software updates. Toyota had especially high recall rates that included software updates.

It is in this context that IHS expects FOTA and SOTA to be enabled in over 22 million vehicles sold worldwide in 2020 alone, growing from approximately 200,000 vehicles in 2015. Major deployment will begin in 2017. In the meantime, Tesla will continue to leverage its first-to-market status with FOTA and SOTA to help lower overall costs to the end user and improve unit margins on each additional Model S sold.

Powertrain differences

The heart of Tesla's Model S is its electric propulsion system, which includes a battery, motor, drive inverter, and gearbox. The battery is a microprocessor-controlled lithium-ion unit available in two sizes; spending more buys more range and more power. The induction motor is a three-phase, four-pole AC unit with copper rotor. The drive inverter has variable-frequency drive and regenerative braking system, while the gearbox is a single-speed fixed gear with a 9.73:1 reduction ratio. The battery of each Model S is charged with a high-current power inlet, and each vehicle comes with a single 10kW charger and mobile connector with adapters for 110-volt and 240-volt outlets as well as a public charging station adapter.

This powertrain package allows Tesla to deliver a longer driving range than any other EV maker—about 200 miles versus just under 100—plus acceleration and driving performance similar to or better than a traditional gasoline-powered vehicle. While several automakers offer EV powertrains—Nissan's Leaf and Chevrolet's Volt, for example—none matches Tesla's commitment to EV development. And as a clean slate company, Tesla has had the advantage of developing an entirely new powertrain and supply chain without the hindrance of existing dealerships, physical plants, or inventory.

Other EV products use lithium-ion batteries, but in lower kWh and using fewer, but larger, battery cells. For example, the Nissan Leaf uses a 24kWh battery, with 192 cells and EPA-estimated range of 84 miles. The Model S' 85kWh battery has more than 7,100 cells, allowing it to move greater weight faster and with longer range.

To address range anxiety, Tesla has made a significant investment developing charging stations in the US (112 to date, according to the Tesla website), Europe (63), and Asia (17). These supercharger stations can swap out the battery in less time than it takes to fill a tank of gas. Owners must come back and swap again for their original battery. Nonetheless, this helps alleviate drivers' worries about becoming stranded on long trips.

Tesla is working to drive battery costs down in anticipation of the launch of its mass-market, $35,000 Model 3 EV sedan, which is slated to debut in 2017. To that end, the company recently announced a new $5 billion "gigafactory" battery plant in Nevada in partnership with Panasonic. It will reportedly handle all elements of battery cell production, from raw material to battery pack, rather than only battery pack assembly. And Tesla intends to sell its OEM batteries for non-automotive applications, which will enable it to increase production volume and reduce unit cost.

What does the future hold?

• Created a fun-to-drive electric roadster. Check.
• Leveraged the lessons to scale-up to a full-luxury sedan. Check.
• Disrupted the luxury car market and, according to IHS Automotive data, attracted "conquest" buyers from the likes of BMW, Mercedes, and Lexus, not to mention Toyota and other volume brands. Check.
• Diverged from entrenched supply chains to develop technology in-house and lowered per-unit development costs for an industry-leading infotainment platform. Check.
• Addressed a software-related vehicle safety recall in one day for almost 30,000 cars. Check
• Created a company destined to influence the industry as a whole and did so while pleasing Wall Street. Check.

Tesla has established benchmarks for infotainment system hardware, software flexibility, and manufacturing supply chain. The company innovated powertrain design, which has proven both robust and viable for everyday use. And it has received plenty of accolades for aesthetic design from the automotive media. The result is that "made in Silicon Valley" is no longer roundly dismissed as an option for an automotive OEM.

So what's next for Tesla? How does it maintain its leadership in technology development? Has it created a sustainable competitive advantage? Can it deliver on promises of a new luxury crossover with the Model X and a new high-volume EV competitor with the Model 3? Will Tesla be able to steal market share from not only luxury marques, but also from higher-volume brands?

Going forward, Tesla faces five distinct challenges:

Consumer demand. Perhaps the most significant is consumer acceptance of electric vehicles. In the first eight months of 2014, EVs accounted for only 0.7% of the 11.2 million light-vehicle sales in the US. Even Renault-Nissan CEO Carlos Ghosn, a staunch supporter of EVs, last year acknowledged Renault-Nissan would miss its original 2016 target of selling 1.5 million EVs by four to five years.

Dealerships and service. Today, Tesla's direct-sales model is illegal in most US states. As Tesla attempts to go mainstream, it will need the legal restrictions lifted or be forced to adjust its model. Further, as vehicles age and the numbers sold increase, there will be maintenance issues that cannot be handled by OTA software updates. Tesla will need to build out an after-sales service network that is robust enough to handle the demand.

Marketing. To date, demand for the Model S exceeds supply. But as the company targets the mass market with the Model 3 and aims for 500,000 units sold in 2020, it will need to beef up its marketing. Tesla's Apple Genius-bar-inspired dealership model has worked for the affluent early adopters, but can it be scaled up to meet its sales targets?

According to IHS registration data, 51.8% of all Tesla buyers have annual household incomes over $150,000. By comparison, the percentage of Chevrolet Malibu buyers with a household income higher than $150,000 is only 6.5%. Tesla will need to create a marketing strategy that targets economy-car consumers, who are notably different than those who buy the $80,000 to $100,000 Model S.

Production Boosting output will likely mean growing pains for Tesla as it transitions to a high-volume production model. How the company manages the transition will determine Tesla's near-term future. Of course, many automakers have had difficulties ramping up new plants or launches and yet overcome the challenges in the longer term. While growing pains are to be expected, there is no reason to believe Tesla does not have the capacity to become a volume manufacturer.

Innovation. Tesla has already made a name for itself around technology adoption and innovation. But it will be challenged, as all first movers are, to maintain that lead and continue to push the boundaries with future products. Assuming the gigafactory and its supply chain allow Tesla to make a mass-market offering and keep its infotainment stack as an industry benchmark, the company's next move will be automated driving. Musk has already stated that Tesla will "hit the market" by 2017 with a partially self-driving vehicle. With many other OEMs targeting this time frame as well, Tesla might not be as disruptive in automated driving as it has been in infotainment design and sustainable mobility

But then again, it might surprise the market and break loose another game-changing product or technology before the rest of the automotive industry is ready—because that's how Silicon Valley works.

Tesla's user-experience focus sets it apart

We live in an era of smartphone ubiquity. So we are routinely disappointed when we get into our cars and are forced to make do with resistive touch screens (if we are lucky) or LEDs and vacuum fluorescent displays controlled by dials and buttons (if we are not). Tesla understands the importance of smartphone ubiquity to modern life, so it's no accident the transition is seamless when one climbs into a Model S

That is not the case with the majority of comparably priced vehicles from other auto manufacturers. Indeed, many of the recent automotive infotainment systems that the IHS Teardown Team has analyzed feature relatively small displays (typically 7-inch diagonal size or less) and low resolution (typically 800 x 480 WVGA or less).

Then there's the touch technology. Many of the touch screens IHS tears down in automotive head units are using resistive technology. Combine these legacy technologies with often underpowered processing chips and proprietary software and you often end up with a user experience that is unfamiliar, not intuitive, and has a lot of "latency" issues (meaning it's slow).

At the center of the dashboard in the 2013 Model S is the Tesla Premium Media Control Unit, which blows away all of the head units we have seen in specs, not to mention sheer size. The 17-inch diagonal display with touch screen makes for a very large assembly when removed from the dash. Inside the unit are many subassemblies, which are all modular, giving Tesla numerous design options for future models.

Several of the printed circuit board (PCB) assemblies, including the main assembly, feature Tesla Motors logos and copyrights, meaning that they are all designed and controlled by Tesla. In and of itself, this is unusual, as we find that most automotive OEMs entrust and outsource the bulk of their head unit designs to third parties such as Harman

Automotive, Panasonic, Alpine, Denso, Pioneer, and others. Tesla is thus designing and controlling the bill of materials down to the component level. This is closer to Apple's design-and-build model than it is to other automakers.

Such an approach affords Tesla leverage in the supply chain, more direct control over the finished product, and ultimately more control over the user experience. It also gives Tesla a potential performance and technology edge that others might find difficult to quickly emulate, as so much of the design is done in-house at Tesla rather than by the head unit suppliers.

Many other PCB assemblies are modular and come from third parties, such as the processing PCB, which is a turnkey solution from NVIDIA, and the air interface module, which is from Sierra Wireless.

All told, there are 10 PCB assemblies in Tesla's media control unit. The modularity of this design is not unusual for automotive electronic systems and allows Tesla many options. If Tesla wants to upgrade the processing power or change the air interface module, it may be possible to achieve this more easily and with less redesign than if all of the functions were integrated into fewer PCB assemblies. In this sense, modularity of design, rather than aggressive integration, has always been an automotive electronic standard. Not only does modularity give automotive designers many upgrade options, it improves reparability.

The center console of the Tesla Model S is dominated by a 17-inch touch screen infotainment system, which is an industry benchmark for automotive display integration.

What's inside the Model S?

In August 2014, IHS bought a second-hand 2013 Tesla Model S. The Los Angeles-based IHS Technology Teardown Team set to work pulling it apart to examine all primary systems inside the car. The team has cataloged every component and developed a detailed bill of materials for each system that includes the technical specifications, cost, and manufacturers of the components. In addition, the team estimated the labor and manufacturing cost of each system.

The 12 systems analyzed by the IHS Teardown Team comprised the following:

• Premium Media Control Unit
• Instrument Cluster
• EV Inlet Assembly
• High-Voltage Junction Box
• Battery Charger
• Thermal Controller
• Liftgate Left Hand Taillight
• Power Liftgate Module
• Body Control Unit
• Sunroof Control Unit
• Passive Safety Restraints Control Module

Mark Boyadjis, Senior Analyst, Infotainment and Human-machine Interface, IHS Automotive Andrew Rassweiler, Senior Director, Teardown Services, IHS Technology Stephanie Brinley, Senior Analyst, Americas, IHS Automotive Posted 7 October 2014

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Managing Radical Innovation — Corporate Case Studies

Cite this chapter.

• Gaston Trauffler 2 &
• Hugo P. Tschirky 2  

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Today it is no longer sufficient for companies to merely concentrate on continuous improvement of existing technologies by following proven incremental innovation patterns (see Chapter 1). Henceforth, it is more and more necessary for companies to also master discontinuous technological evolution and radical innovation in addition to the more common incremental innovation. Thus, this book provides answers to understanding the processes, structures and methods required for the successful management of both radical and incremental innovation and how these processes, structures and methods can be implemented.

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Trauffler, G., Tschirky, H.P. (2007). Managing Radical Innovation — Corporate Case Studies. In: Sustained Innovation Management. Palgrave Macmillan, London. https://doi.org/10.1057/9780230597716_3

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Measuring radical innovation project success: typical metrics don’t work

Journal of Business Strategy

ISSN : 0275-6668

Article publication date: 27 July 2018

Issue publication date: 8 August 2018

Firms frequently struggle with measuring the performance of their radical innovation activities. Due to the uncertainty and ambiguity involved, key performance indicators (KPIs) used for incremental innovation projects are often not useful in this context. The purpose of this paper is to explore suitable KPIs particularly useful for radical innovation projects.

Design/methodology/approach

This study first reviews commonly used measures for innovation projects, which is then followed by case-study evidence from three industry-leading international firms. This study includes 13 in-depth interviews with innovation managers and directors in these firms, providing insights on how they measure the progress and performance of radical innovation projects.

KPIs used commonly in incremental innovation showed lackluster results in the case firms and were problematic for radical innovation context. A key finding was that radical innovation project performance should be evaluated based on the process rather than on the expected outcome. Concurrently, based on the literature review and the cases, three sets of KPIs with 13 specific KPIs useful for radical innovation projects are proposed.

Originality/value

The paper addresses a core challenge in using established KPIs in a radical innovation context. The paper gathers and synthesizes a range of measurement points suitable for radical innovation projects and provides specific suggestions for appropriate metrics that innovation managers can use.

• Project management
• Key performance indicator
• Radical innovation
• Strategic innovation

Kristiansen, J.N. and Ritala, P. (2018), "Measuring radical innovation project success: typical metrics don’t work", Journal of Business Strategy , Vol. 39 No. 4, pp. 34-41. https://doi.org/10.1108/JBS-09-2017-0137

Emerald Publishing Limited

Copyright © 2018, Jimmi Normann Kristiansen and Paavo Ritala.

Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode .

An important part of large firms’ radical innovation competency is tied to an appropriate managerial mind-set and a system that facilitates experimentation. Accordingly, organizational setup, culture, processes, launch strategies and top management involvement have a major effect on the success of radical innovation. From a management viewpoint, radical innovation projects are characterized by higher uncertainty and absorption of new knowledge for the firm, as well as exploration of new markets, technologies and/or business models. Therefore, suitable managerial practices to support these projects vary substantially from those supporting incremental innovation projects.

Throughout the radical innovation project life cycle of Discovery (exploration), Incubation (experimentation) and Acceleration (development) ( O‘Connor et al. , 2008 ), suitable key performance indicators (KPIs) (metrics) must be applied. During the Acceleration phase, radical innovation projects are matured to a point, where they should be measured in line with established metrics for incremental innovation within firms. However, in the innovation front-end (Discovery and Incubation), both the process and expected output have a much lower degree of predictability than in incremental innovation projects. Because radical innovation projects have distinct features differing from incremental innovation projects, commonly used metrics such as time to market and net present value provide little use and may even be harmful for project progress.

Illustrating the above, O‘Connor et al. (2008) discuss IBM’s project for silicon-germanium alloy for integrated circuits (from the 1990s). Here, the radical innovation project led by Bernie Meyerson had to be bootlegged and protected from the rest of the R&D organization to survive. The initial business model was misaligned, and subsequent sales growth and market expectations showed lower than expected fiscal returns. This nearly killed the project. A modification of evaluation metrics had to be made to represent the nature of the project. Silicon-germanium, a highly efficient semiconductor alloy, is still among the best-performing technology platforms for computer chips today. It currently competes with, and possibly outperforms, Intel and their pure silicon-based chips in the computer-chip efficiency race ( Armasu, 2015 ).

Radical innovation projects are uncertain, long-term investments that often target new business areas for the distant future (5+ years). Therefore, metrics should be adjusted to meet demands and criteria of success suitable for this type of project, as commonly used metrics fit poorly if firms are to move beyond an incremental innovation strategy ( Christensen et al. , 2008 ).

Previous research has emphasized the importance of using suitable metrics for incremental and radical innovation ( Henttonen et al. , 2016 ; Joh and Mayfield, 2009 ; Paulson et al. , 2007 ; Griffin and Page, 1996 ). There is, however, a need for a clearer understanding of the damaging effects incurred by using “traditional” product development metrics in the early life cycle of radical innovation projects. Moreover, a further discussion of suitable metrics for the early stages of radical innovation projects’ life cycle is called for. In this paper, frequently used metrics in innovation management are examined and discussed in terms of their usability with respect to the contrast between incremental and radical innovation projects. This is followed by a presentation of challenges with innovation project measurement in three industry-leading global firms. This leads to a discussion of suitable metrics for radical innovation activities.

1. Frequently used metrics for innovation projects

The term “key performance indicator” has been widely used in the management literature and refers to identifying key activities of a value-creation process in the firm and generating a way of measuring those activities ( Kaplan and Norton, 1996 ). For the innovation management literature, key performance indicators have been researched mostly in relation with non-radical innovation projects. The popular measures used to gauge success are either firm- or product-related, which often target markets (e.g. market size and time to market) and finances (net present value or similar) and whether the pre-established plan is followed ( Blindenbach-Driessen et al. , 2010 ; Henttonen et al. , 2016 ).

These measures very rarely target specifically radical innovation projects. One implication is that evaluations will be largely focused on fiscal output and expected market performance, rather than the process itself. Frequently used metrics for innovation projects, their applicability and their implications for radical innovation projects are given in Table I .

The metrics mentioned in Table I , covering both pre- and post-launch, either will constitute a poor fit if used or simply will not be applicable because of the different time horizons in project life cycle periods in incremental innovation projects compared to radical innovation projects.

For radical innovation projects, the technological route or market feasibility assessment may deviate from the preexisting assumptions, and new opportunities may occur during the course of five or more years of development. A key challenge in measuring progress in radical innovation projects is, therefore, firms’ inability to follow pre-set goals and measure project performance according to these goals during the project period. Challenges may also arise post-market launch, as new market learning may be needed for successful adoption and impact ( Feiereisen et al. , 2013 ).

To further investigate the challenge of finding appropriate metrics for radical innovation, the authors conducted case studies in three large, international firms that are global leaders in their respective fields. All three firms employ more than 5,000 people and have an annual turnover exceeding US$2bn. The firms spend between 6 and 13 per cent annually on R&D, and all of them have a proven track record in incremental innovation (two of the firms spend three times the industry average on R&D, and the third firm is on par with the industry). Pseudonyms of GreenCO, HeavyCO and MasterCO are used. A total of 13 in-depth semi-structured interviews with managers and directors of innovation were conducted at the firms. All interviews were recorded, transcribed and coded. This was further supplemented with documentation from project tools, strategy workshops, seminar work and publicly available information.

2. Understanding the measurement challenge: case evidence from three large firms

As radical innovation projects have different characteristics from incremental innovation projects, and frequently used metrics, such as net present value, introduced challenges once applied in a radical innovation context. According to their innovation director, HeavyCO was experiencing signs of low performance when using their established metrics:

It is flagged as a low net present value project. Senior management can deliberately say, this is a strategic project. But at every point, they will be told, this has no money, this has no money.

Even though firms are following the suggested management practices of radical innovation, metrics stemming from incremental innovation activities provided substantial challenges for HeavyCO. Another example was given from MasterCO:

What really will resonate in 90 per cent of the rest of the organization is: “How much have you sold? What is the bottom line?” “Yes, but we have a strong portfolio…”, or, “Sure, but how much have you sold?” And that is the name of the game.

Applying commonly used metrics for radical innovation projects has created challenges in the case firms especially because the initial focus of radical innovation project management is to conceptualize and experiment and, through this, gradually reduce the uncertainty affiliated with the project. Both the expected financial outcomes and projected time-to-market provide challenges for radical innovation project activities when compared to incremental innovation activities. The time-horizon also created issues in GreenCO, as the cycles of how often projects were measured using the commonly used evaluation criteria were too short:

If I have to choose a radical or an incremental project, it depends on what you gain and what you lose. But the difficulty is, we do these annual evaluations based on results. And if you do something really well, it may take a longer time to see that.

To resolve measurement challenges, the MasterCO respondent argued that they would prefer to use forward-looking rather than backward-looking metrics. MasterCO consolidated the information on what the organization had learned throughout their work with radical innovation. This enabled project managers to improve legitimacy toward sponsors in senior management. A concluding remark from a manager in MasterCO was related to the need for metrics for radical innovation projects:

In the beginning, we said, “Well, we shouldn’t have key performance indicators; we shouldn’t be measured. We cannot create a budget because there is too much uncertainty”. And I think that is nonsense. I think that it is an entirely different perspective than if you look into a factory making 10 million units per year with some well-defined variants. In reality, we need just as much structure to be able to attract resources. We have to find other ways of getting structure out of chaos to be able to communicate with our surroundings.

The illustrative examples above are a part of a larger case study with these three firms. As it is arduous to use commonly used metrics for radical innovation projects, there is a crucial exercise in developing replacement metrics for these projects.

3. Metrics for radical innovation projects

Based on a review of the literature and case study insights, we suggest three applicable sets of KPIs for assessing radical innovation project performance.

3.1 Market orientation

A commonly discussed feature of radical innovation is technological novelty. Certainly, the technological progression radical innovations can introduce may have a breakthrough nature. However, many technologically novel products fail the actual market test, and firms should therefore pay attention to how they are oriented toward the market for their radical innovation activities ( Table II ).

3.2 Learning and future opportunities

Radical innovation projects are often a part of a larger platform investment in firms. Here, firms have the possibility to cross-fertilize learning and investments across opportunities and business segments. Firms should therefore encourage opportunities that ensure positive conditions for new opportunities to emerge and even to foster growth in existing business segments.

Another aspect will be to go/terminate decisions. In case of project termination, firms should make high-quality termination reports to de-brief key learning from the process.

Finally, firms should also be able to assess how they use and grow core competencies, including the increase in the relevant knowledge base of the firm. Examples of firms that have been actively working with innovation as a holistic innovation system to boost the knowledge base are 3M[3], General Electric and Coca-Cola ( Alsever, 2015 ) ( Table III ).

3.3 Resource dedication

Radical innovation activities may need to compete for resources from the firm, and it is therefore crucial to have a project overview with a description of resources required to support projects. HeavyCO had been focusing on keeping the proportion of financial resources allocated to their radical innovation projects low. However, these projects involved substantial intangible resources in the form of highly skilled, cross-functional teams. In addition, these employees had contact with the existing resource base of the firm, enabling them to efficiently and quickly gain access to key stakeholders of the firm.

When radical innovation projects mature in the pipeline, they will eventually require an increased allocation of financial resources to get to market. Firms should ex ante decide whether the resources will be available when they are needed. For areas of higher uncertainty, resources can be shared among firms. This includes sharing of the knowledge base but could also represent a pool of test equipment. For example, GreenCO had been sharing resources with external partners on test equipment for a project for a substantial period. Access to these external resources enabled GreenCO to vastly accelerate planned pilot tests, not to mention saving the firm millions of dollars, as they did not have to build a pilot plant ( Table IV ).

4. Conclusion: measuring value creation rather than value created

Established companies across industries have developed comprehensive toolsets for managing innovation projects and portfolios. Most of these tools and approaches are well suited for incremental innovation, but not for radical innovation. Highly uncertain radical innovation projects demand toolsets that are unlike those that perform well in the realm of incremental innovation.

Building on the radical innovation literature and the case studies of three global firms, three sets of metrics for radical innovation are proposed: market orientation, learning and future opportunities and resource dedication.

KPIs for radical innovation projects deviate from the traditional R&D project measures and should be adapted to fit an uncertain environment. The proposed metrics are targeted for the front-end, i.e. before the commercialization phase. In the commercialization phase, commonly used metrics have better usability. Therefore, innovation managers should pay close attention to the overall portfolio and adopt an appropriate set of measures for different projects depending on their maturity and type.

The findings are based on the literature and a case study on three firms that have been actively working with radical innovation for several years. It is not expected that the metrics presented here are fully exhaustive or provide an immediate “silver bullet” for radical innovation project success. The benefits of adoption of any type of measure depend on who is using the measures. Different kinds of managerial biases (e.g. group thinking, pet projects and confirmation bias) can hamper the potentially useful information available. Nevertheless, the study does discuss immediate and pertaining issues with using established metrics for radical innovation. The study provides useful metrics that can be part of a more holistic and effective assessment of radical innovation projects.

Commonly used metrics for innovation projects

Source: Based on literature review and the case studies in this paper

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Henttonen , K. , Ojanen , V. and Puumalainen , K. ( 2016 ), “ Searching for appropriate performance measures for innovation and development projects ”, R&D Management , Vol. 46 No. 5 , pp. 914 - 927 .

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Kaplan , R. and Norton , D. ( 1996 ), The Balanced Scorecard , Harvard Business School Press , Boston, MA .

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Paulson , A.S. , O’Connor , G.C. and Robeson , D. ( 2007 ), “ Evaluating radical innovation portfolios ”, Research Technology Management , Vol. 50 No. 5 , pp. 17 - 29 .

Further reading

Cooper , R.G. ( 2013 ), “ Where are all the breakthrough new products? Using portfolio management to boost innovation ”, Research Technology Management , Vol. 56 No. 5 , pp. 25 - 33 .

Winterhalter , S. , Weiblen , T. , Wecht , C.H. and Gasmann , O. ( 2017 ), “ Business model innovation processes in large corporations: insights from BASF ”, Journal of Business Strategy , Vol. 38 No. 2 , pp. 62 - 75 .

Corresponding author

About the authors.

Jimmi Normann Kristiansen is Assistant Professor at Department of Business and Management, Aalborg University, Aalborg, Denmark.

Paavo Ritala is Professor at the School of Business and Management, Lappeenranta University of Technology, Lappeenranta, Finland.

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