Performance measurement of innovation capability

In the sub-question 2b, How can the relationship between innovation capability and performance be measured? was examined. This issue was mainly examined in publication V—A conceptual framework for the measurement of innovation capability and its effects.

Publication V

BACKGROUND AND OBJECTIVE

The objective of publication V was to present a framework for innovation performance measurement. It is also clarified how innovation measures should be linked to actual performance measures and be part of innovation performance measurement. There is a common agreement that performance measurement is not contradictory within innovation (Neely, 2000). However, the current approaches and frameworks do not give instructions on how SMEs in particular can develop their innovation capability. There have also been few attempts at using a performance measurement approach to generate a framework of the development of innovation capability within SMEs. However, SMEs could benefit from innovation performance measurement when improving their innovation capability.

Performance measurement is today seen as a comprehensive process, which means that all things happening in the organization are considered to have an effect on the performance of the organization. Thus, innovation performance measurement can rather be used as a tool for developing innovation capability.

MAIN FINDINGS

The nature of innovation capability as a future oriented and mainly intangible construct leads to a situation where innovation capability cannot usually be measured directly. Innovation measures have to be designed so that they also measure things closely related to innovation capability, meaning the determinants of innovation capability. They can be measured by objective or subjective measures, or both.

The most important objectives of innovation capability depend on firm-specific contextual factors, such as size and industry. There are also enabling factors without which firms will not be able to innovate (Laforet, 2011). These include, for example, financial resources and workforce. Also, vision and strategy that support innovation capability and its development may act either as enablers or obstacles of innovation capability. These things are prerequisites that have to be taken into account when developing innovation capability, although they are difficult to change.

Innovation capability may not be a homogenous collection of factors, but different kinds of innovations (Francis and Bessant, 2005) and different kinds of firms (Silva et al., 2012; Kallio et al., 2012) may require utilizing and developing different determinants. One determinant can affect a range of other determinants. A firm can develop and affect the determinants through its own behavior. Although the determinants do not follow each other in a certain order, it is probable that certain determinants should be developed before others. Smith et al. (2008) discussed how organizational culture is a factor that affects all others and is itself also affected by changes in the other factors. In the present research, the work climate and well-being and leadership culture are regarded as those that should be improved first. After that, developing the other determinants is more likely to lead to success.

In addition to the determinants of innovation capability, their effects—innovations—have to be measured. These innovation measures can be linked to performance measures. The basic idea of innovation performance measurement is that innovation measures are linked into performance measures, because it is not enough to get the output of innovation—also the outcome of innovation is needed. Because innovation capability is expected to affect operational performance and in the long run also financial performance, innovation measures and performance measures need to be linked to each other. This means formulating causal linkages between innovation measures and SME performance measures. These causal linkages can help SMEs to follow how the development of innovation capability assists their

attempts to achieve performance goals. If the state of the measure (concentrating on development of innovation capability) changes, changes are also expected in the performance measure. This cause-effect relationship can be either direct or indirect, meaning that improvement in the innovation measure can be seen directly in some specific performance measures or indirectly through another measure.

Innovation measures cannot be the same in every case, because innovation capability also varies between different types of organizations. As Neely et al. (2000, p. 1120) argued, performance measurement frameworks often fail to account for the diversity and requirements within individual organizations. To avoid this, they suggest that the frameworks should be “a set of design guidelines designed to inform the development of a process for performance measurement system design.” Thus, the objectives and their performance measures are case-specific, and goals are set considering the organization’s starting points and characteristics.

Previous research has presented many positive effects of performance measurement. As pointed out by Neely et al. (2000), performance measurement must not be seen as obtrusive and contradictory within innovation. When performance measurement has been conducted in a proper way, it can boost innovation capability. Especially in the context of innovation, innovation measures should be dynamic and changeable, and continually reviewed and developed during the transitional process of developing innovation capability (Neely et al., 2000; McAdam and Keogh, 2004). It is also emphasized that measuring innovation capability must be given more strategic and operational importance and a wide range of measures should be adopted, reflecting the diversity within innovation capability (McAdam and Keogh, 2004).

In this way, innovation measures can be used as a management tool in the everyday context when aiming to guide and direct innovation capability as part of the firm strategy.

Innovation performance measurement is thus important for increasing the competitiveness of SMEs through innovation capability (McAdam and Keogh, 2004). Innovation performance measurement should be systematic to enable the development of innovation capability and to be able to make proper decisions based on measurement information. Neely (2005) stated that organizational focus should be redirected from performance measurement to performance management. Similarly, as regards innovation performance measurement, the focus should be on evaluating and reacting to the changes in innovation performance measurement information in a way that performance improvement is possible. The problem of current innovation performance measurement is the lack of measurement where innovation measures are aligned with each other and with the firm strategy (Adams et al., 2006). Innovation performance measurement is needed along multiple levels and phases. Thus, measurement

should be realized in each phase of the process of turning capability into a firm asset.

Innovation measures should be complementary to each other. Innovation capability, as well as its enablers, should have their own measures that are linked to each other.

Answer to the research question

As SME innovation capability cannot usually be measured directly, innovation measures have to be designed so that they measure the determinants of innovation capability. As regards innovation performance measurement, the focus should be on evaluating and reacting to the changes in innovation performance measurement information in a way that performance improvement is possible. The innovation performance measurement should be systematic to enable the development of innovation capability and to be able to make proper decisions based on measurement information. Innovation performance measurement is needed along multiple levels and phases. Thus, measurement should be realized in each phase of the process of turning innovation capability into better performance. Finally, innovation measures and performance measures need to be linked to each other to cover relevant aspects of innovation performance measurement. This means formulating causal linkages between innovation measures and SME performance measures.