strategy+business is published by PwC Strategy& Inc.
or, sign in with:
strategy and business
Published: November 25, 2008


The Metric behind the Slogan

The creative challenge posed by formulating innovative metrics shouldn’t be confused with “unique selling propositions” that proclaim a product’s unparalleled character­istics to convince a customer to switch brands. The purpose of in­novative metrics is not to “sell” the innovation but instead to empower customers to calculate for themselves whether the innovation represents good value — along dimensions the innovator has defined. Ideally, these dimensions reflect the special competences of the innovator.

Sometimes an innovative metric is a fungible concept that can evolve as rapidly as the technology it seeks to market. For example, in the early 1970s, semiconductor pio­neer Intel declared MIPS — millions of instructions per second — the high-performance standard. Within a decade, Intel had upped the ante and embraced a new, faster innovative metric: “clock speed” — the rates, usually in megahertz and gigahertz, at which processors execute instructions.

But Intel’s emphasis on clock speed led to a problem that the company was slow to recognize: The chips got too hot too fast and consumed an exorbitant amount of energy. Finally giving in to customer complaints — and after having lost some customers to rivals who had more energy-efficient chips — Intel recently changed the innovative metric again, this time to “performance per unit of energy.” And upon doing that, Intel positioned its “multicore” architecture, which es­sentially stacks two or more pro­cessors on the same single integrated circuit, as providing the best balance of computational performance and energy use. In other words, chips, previously defined by speed and performance, are now measured by performance and power — and, as important, by energy efficiency.

When innovative metrics prove unreliable, they may end up discouraging the very innovations they sought to promote. That could indeed be the situation that financial-services firms now face. Many lenders adopted innovative metrics such as “value at risk” and “extreme value theory” — ostensibly to better manage their multibillion-dollar portfolios of innovative financial products such as collateralized debt and subprime mortgages. These metrics would also provide institutional investors and traders a variety of ways to assess their exposure to risk. Yet as the subprime mortgage financial meltdown stunningly af­firmed, these models cre­ated more risk than value. With the enormous losses sustained by so many “inno­vative” lenders, inves­tors are likely to think twice before they trust the metrics offered by some financial-services firms to sell their novel products and services.

Emerging trends typically in­vite innovative metrics. For example, a large number of companies worldwide are currently seeking innovative metrics that let them assess — and communicate — the environmental impact of new products or services that they bring to market. Consequently, in­novative metrics concerning recyclability and reuse seem destined to become contemporary counterparts to Procter & Gamble’s late-19th-century “99−44/100% Pure” innovation branding.

An intriguing example of a possible “greenovation” metric is the nascent shift from “miles per gallon” to “gallons per 100 miles.” Duke University researchers Richard Larrick and Jack Soll argue that “miles per gallon” metrics make it too easy for consumers to miscalculate comparisons between automobile mileage performance. They found most people surveyed ranked an improvement from 34 to 50 mpg as using less gas over 10,000 miles than an improvement from 18 to 28 mpg over 10,000 miles — even though the latter saves twice as much fuel. (Going from 34 to 50 mpg saves 94 gallons; but going from 18 to 28 mpg saves 198 gallons.) These mistaken impressions were corrected when fuel efficiency was expressed more directly in gallons used per 100 miles. Viewed that way, 18 mpg becomes 5.5 gallons per 100 miles and 28 mpg translates to 3.6 gallons.

Follow Us 
Facebook Twitter LinkedIn Google Plus YouTube RSS strategy+business Digital and Mobile products App Store