Measuring innovation: Why ROI alone can hold innovation back

Innovation initiatives need to demonstrate economic value. Sooner or later, the same question arises: What will this idea actually deliver?

It is an important question. The problem is that it is often asked too early, or with the wrong expectations. At the beginning of an innovation initiative, future revenue, development costs, demand, and actual customer value are rarely known with any degree of certainty. Yet innovation teams are often expected to present a precise return on investment from the outset.

This creates a fundamental problem: The more novel and ambitious an idea is, the less reliable its financial projections tend to be. Incremental improvements to existing products are usually much easier to calculate. As a result, they often appear more attractive on paper, even when their long-term potential is limited.

Organizations that want to measure innovation effectively should therefore avoid applying the same criteria at every stage.The key is to assess which insights and outcomes can realistically be expected at a particular point in the innovation process.

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An Example from the Packaging Industry

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A packaging manufacturer wants to develop a recyclable mono-material solution for sensitive food products. The new packaging is intended to replace conventional multi-layer structures without compromising shelf life, product protection, or processing speed.

The concept appears promising. However, it is still unclear whether the required barrier properties can be achieved with a single material, what adjustments customers would need to make to their filling lines, and whether food manufacturers would be willing to pay a premium for a more sustainable packaging solution.

A traditional business case would already require assumptions about revenue, margins, development timelines, and market share. The calculations might appear highly detailed, but they would still be based largely on speculation.

At this stage, the company should not focus on the ROI the project might generate five years from now. A more useful question is whether the team is investigating the right issues and systematically reducing the most critical uncertainties.

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1. Strategic Innovation and Business Agenda

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Innovation does not begin with an individual idea. It begins with a clear strategic direction. Organizations need to define where they want to innovate and how innovation should contribute to the broader business strategy.

At this early stage, the focus should be on strategic alignment:

• Are the innovation objectives clearly defined?
• Are they aligned with teh company's overall strategy?
• Have relevant opportunity areas been defined?
• Are responsibilities and decision-making processes clear?

In this example, the packaging manufacturer sets a goal of significantly increasing the share of recyclable packaging solutions in its portfolio over the next several years. At the same time, the company wants to reduce its reliance on multi-material structures that are difficult to recycle and respond early to changing customer requirements.

Whether the planned mono-material packaging can ultimately deliver on these goals is still uncertain. What matters at this point is that the idea fits within a clear and credible strategic framework.

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2. Innovation Needs and Gaps

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The next step is to determine where a meaningful need actually exists. This requires an analysis of markets, customer requirements, technologies, competitors, and regulatory developments.

Organizations that want to measure innovation at this stage should focus primarily on the quality of the insights generated. A high number of presentations, workshops, or trend reports does not necessarily mean that the organization understands its market environment any better.

More meaningful questions include:

• Which customer problems have been validated?
• Which assumptions have been disproven?
• Which market or technology areas are most relevant?
• Where are there clearest gaps between the current offering and future demand?

The packaging manufacturer speaks with food producers, equipment manufacturers, recycling companies, and material suppliers. These discussions reveal that manufacturers of sensitive food products are actively looking for recyclable alternatives, but many available solutions still fail to provide sufficient product protection or shelf life.

This insight is more valuable than an early revenue forecast based on limited evidence.

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3. Developing the Innovation Strategy

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The insights gathered must then be translated into clear strategic priorities. No organization can pursue every promising opportunity at the same time. Leaders need to decide where to focus their resources.

At this stage, useful criteria include strategic alignment, existing capabilities, and the skills or technologies that still need to be developed.

The packaging manufacturer deliberately chooses not to develop a universal solution for every food category from the outset. Instead, it focuses on one product segment with demanding oxygen and moisture barrie rrequirements and a clearly identified need among several existing customers.

This turns a broad idea into a clearly defined strategic initiative.

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4. Ideation and Search Field Analysis

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Once the opportunity area has been defined, the organization can begin developing potential solutions. Success at this stage is often measured by the number of ideas submitted. While this is easy to track, it is rarely especially meaningful.

A large idea pipeline is not automatically a sign of strong innovation performance. What matters is whether early concepts are developed into concrete, testable options.

More relevant measures include:

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• the quality and level of details of the ideas,
• the number of critical assumptions tested,
• the diversity of perspectives included,
• the speed at which ideas can be evaluated.

For the new packaging solution, the team develops several material formulations, coating methods, and structural concepts. Some are rejected after initial laboratory testing because they fail to achieve the required barrier performance or cannot be processed on existing production equipment.

Eliminating an idea is not a failure at this stage if it prevents the company from investing further time and resources in a weak concept.

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5. Concept Shaping and Innovation Portfolio

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As an initiative matures, comparisons become more reliable. The organization can now assess market potential, customer value, technical feasibility, strategic relevance, and resource requirements together.

Initial financial estimates also become more useful. However, they should not be treated as precise forecasts. Ranges and scenario-based assumptions are generally more appropriate.

In the packaging example, three concepts remain after the initial evaluation. One offers particularly strong barrier properties but is expensive and difficult to process. Another can be manufactured easily on existing equipment but does not yet provide sufficient shelf life. The third offers a balanced solution and could be tested with a pilot customer after a manageable level of process adjustment.

The decision is not based on expected ROI alone. The company also considers technical risk, strategic value, scalability, and the impact on the broader innovation portfolio

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6. R&D Execution

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During development, the appropriate performance measures begin to change. The organization now has access to more concrete data. Technical maturity, schedule performance, budget, quality, and progress against defined objectives become increasingly important.

The packaging manufacturer produces initial sample rolls and tests them under real-world conditions. Together with a food producer, the company evaluates how the packaging performs on an existing filling line. At the same time, the team tests shelf life, seal integrity, material usage, and recyclability.

The company can now measure whether the solution achieves the required barrier performance, how reliably the production process operates, and which technical challenges still need to be resolved.

Financial forecasts also become more reliable as new evidence emerges. ROI can therefore play a progressively larger role in decision-making.

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7. Innovation Performance Management

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Once the product has entered the market, its financial impact can be assessed with far greater confidence. Revenue, margins, market adoption, and actual costs can now be compared with the original expectations.

In this example, the company can evaluate how many customers adopt the new packaging, whether it can be processed reliably on existing equipment, and whether it can be produced profitably. It can also assess whether the promised benefits are being realized: less reliance on hard-to-recycle multi-material structures, consistent product protection, and improved recyclability.

At the same time, the organization should learn from the project itself. Which assumptions proved correct? Where was the team wrong? Which decisions were made too early or too late?

Measuring innovation therefore involves more than reviewing a final financial result. It also means capturing lessons that can improve future innovation initiatives.

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Conclusion

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ROI is an important metric. It is simply not equally meaningful at every stage.

At the beginning of an innovation initiative, the priority should be to assess strategic relevance, understand customer needs, and reduce uncertainty. During development, technical progress, quality, timing, and cost become more important. Only after the product reaches the market can its economic impact be evaluated with confidence.

Organizations that demand a compelling ROI from every idea at the outset will naturally favor the familiar. They will choose initiatives that are easy to calculate, rather than those with the greatest long-term potential.

To measure innovation effectively, organizations do not need a single metric. They need a measurement approach that evolves along with the initiative.

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