By MICHAEL SCHRAGE
From Strategy+Business (www.strategy-business.com)
Although history celebrates James Watt as the mechanical genius whose steam engines launched the Industrial Revolution, Watt's most enduring innovation reflects an even greater penchant for marketing. He invented horsepower -- the metric and meme that effectively defined his industry. Watt's neologism has outlived every engine he designed or built.
The term horsepower represented clever rhetorical engineering by Watt and partner Matthew Boulton, whose business had prospered by charging mine owners only one-third of the cost savings achieved by replacing less-efficient Newcomen steam engines with their own.
Seeking to broaden their market, the collaborators thought brewmasters might find value in this new production technology. But 18th-century British breweries used horses -- not steam -- to power the turning of their mills' grindstones. So it behooved Boulton and Watt to recalculate their steam engines' appeal accordingly. After a period of equine observation, Watt determined that the typical coal-mine pony could pull 22,000 foot-pounds per minute. To extrapolate this finding to a large horse, Watt increased these test results by 50 percent -- i.e., 33,000 foot-pounds of work per minute -- and called it horsepower.
Watt's comparison of steam engine output to a team of horses working together proved to be a remarkably persuasive marketing metric for prospective purchasers, whether brewers, millers, or mine owners. Horsepower became a global standard that helped build the Boulton & Watt brand and business.
By creating fresh language for the way people calibrate the worth and efficacy of a particular idea, innovative metrics have the potential to be so intrinsically compelling -- or at least so creatively marketed -- that they become, like horsepower, the overriding identity of a product or brand.
Devising innovative metrics can be a remarkably low-tech endeavor. In the 1880s, Harley Procter, a son of the co-founder of Procter & Gamble, merely examined a laboratory analysis to add up the ingredients in Ivory Soap that didn't fall into the category of pure soap; he learned that taken together these ingredients equaled 56/100 of 1 percent of Ivory. He subtracted that number from 100 and wrote the slogan "99-44/100(percent) Pure." That metric became an integral ingredient of the soap's brand equity.
By contrast, Willis Carrier -- the entrepreneur most responsible for the commercialization of air-conditioning -- chose a far more sophisticated path to an innovative metric. He conducted elaborate studies examining the complex relationships between moisture in the air and ambient temperature and studied the effectiveness of various types of cooling technology on them. Carrier's technologies were particularly eye-opening because they not only managed humidity levels but did so with the accuracy of a thermostat controlling temperature. Based on Carrier's calculations and his new equipment born of this research, prospects were persuaded to pay large sums not only to cool overheated factories but to, for the first time, "condition" -- remove unwanted moisture from -- their fetid air in hopes of improving production quality.
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.
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. 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. 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 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.
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. 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.
The measure of the success of innovative metrics is how clearly they convey the value -- and risks -- of the innovation. Watt's steam engines, P&G's soap and Intel's microprocessors might well have dominated their markets without novel metrics. But for these businesses and many others, innovative metrics made selling their products to a large number of customers a much less difficult prospect. Indeed, as many innovators are learning, oftentimes the best way to take the measure of a new market is to create a new measure for the market.
Michael Schrage, a contributing editor of strategy+business, holds appointments at MIT's Sloan School of Management and London's Imperial College. He was previously a Washington Post reporter and a columnist for Fortune and the Los Angeles Times.