In a series of studies, A.T. Kearney is examining the drivers of sustained innovation success. In our last study, we focused on innovation management and found that leading companies place three times more emphasis than followers on the front end of their innovation funnels—developing an innovation strategy, generating ideas, and screening ideas. And these same leaders place six times more emphasis than followers on developing an innovation strategy.
In this study, we analyze a cross section of companies and interview executives to understand how to build a successful innovation strategy. Based on the media attention given to innovation, you might expect that the path to success would involve something like a unique brainstorming process that generates unique ideas or a Jobs-like leadership figure who can predict what customers want and shepherd this vision to fruition.
However, the primary findings of our current study are far more fundamental:
- Leaders have an explicitly defined and tested innovation strategy and governance process
- Growth, not profits, is the primary reason to pursue innovation
- Innovation is too often led by business unit leaders who may compromise the needed firewall between today’s needs and tomorrow’s plans
- Sustainable innovation requires identifying and monitoring specific success metrics to enable corrective action
A sound innovation strategy ensures that innovation doesn’t get subjugated to the pressures of today’s business needs. In simple terms, great innovators do not permit the present to crowd out the future. The leaders in our study create separate engines for managing today’s business versus planning for tomorrow—pursuing an immediate impact while expecting to capitalize on a longer-term growth advantage. For example, longtime innovator IBM dedicates three teams to drive the company’s innovation agenda by focusing separately on innovation strategy, technology trends, and innovation operations. To ensure an emphasis on both current and future priorities, IBM organizes business opportunities across three different time frames: short-term core business opportunities, medium-term growth opportunities, and long-term emerging opportunities. IBM made a conscious decision to maintain a set portion of funding (about 10 to 15 percent) for longer-term opportunities so they are not sacrificed to immediate priorities—or the infamous fire drills.
Do We Really Need an Innovation Strategy ?
As expected, the findings of our study, which is an expansion of A.T. Kearney’s European Best Innovators competition, illustrate the benefits of an explicitly defined strategy. Most executives with a defined strategy (86 percent) view their innovation performance as meeting or exceeding their expectations, while just 50 percent of those without a strategy say the same (see figure 1).
However, a defined innovation strategy alone will not improve performance. Equally important is defining other components of success, including accountabilities, resource commitments, and performance metrics. Governance and mechanisms to drive implementation are critical. Procter & Gamble (P&G), for example, has a dedicated innovation organization with a dotted line to each of its businesses. Each business has dedicated personnel in R&D responsible for driving innovation and interfacing with external partners, such as suppliers, to connect internal needs with outside ideas.
Committing investments and resources for use in executing the innovation strategy is an even greater challenge. Most executives fail to separate today’s and tomorrow’s needs when developing their business plans; as a result, when resources are limited, acting in today’s business interests takes priority over innovating for the longer term. This amounts to triage. When it comes to committing resources, innovating for tomorrow often becomes a casualty of managing for today.
A handful of companies have removed the resource roadblock. Consider Google and 3M, where flexible employee work policies encourage the pursuit of innovative ideas. Google’s well-known 20 percent time policy has allowed its engineers to spend one day a week pursuing projects outside of their area of responsibility. Similarly, 3M has a 15 percent rule to allow scientists to explore ideas that could lead to new business opportunities.
Although executives generally agree that innovation objectives must be aligned with corporate strategy, most believe they achieve that goal even when no explicit innovation strategy exists. They say an explicit innovation strategy is not needed as their efforts are guided by external factors: customer needs and mega-trends, such as the emergence of social media. Additional (though lesser) inputs to the innovation strategy process include intelligence on competitors, technology requirements, and internal competencies.
Our study reveals the following :
- A majority (70 percent) of companies use simple scenarios to test their innovation strategies, and the rest use no scenario planning at all. In our experience, it is a mistake not to deploy sophisticated scenarios developed through a combination of external variables, industry dynamics, and company-specific elements.
- Only half of companies refresh their innovation strategies annually or more frequently. The other half refresh every two to three years, on an ad hoc basis, or only in response to external events.
- Refining the innovation strategy is three times more likely to be driven by near-term events (financial performance, current economic conditions, leadership changes, or competitor moves) than by long-term factors (long-term economic outlook or the imminent end of a product life cycle).
Given the importance of innovation to growth, and the well-known fickleness of consumers and trends, is it wise to rely on overly simplistic methods to develop and test your strategic direction? If the purpose of an innovation strategy is to set the course for tomorrow, shouldn’t that strategy be tested using thorough scenario planning, refreshed on a regular basis (at least once a year), and driven by long-term factors? Otherwise, some innovation strategies really are innovation tactics aligned to the overall corporate strategy.
Growth or Profits ?
Top-line growth is invariably the main goal of an innovation strategy. Respondents state that they are three times more likely to focus their innovation strategy on growth versus profitability. In other words, innovation strategies are far more likely to yield more product introductions, faster time to market, or increased sales than to reduce costs or increase the efficiency of operations.
When seeking top-line growth, the customer is king. Our study reinforces this maxim, as most executives say that meeting customers’ demands is the leading criterion used to prioritize innovation efforts—besting all other criteria, including the ability to increase financial returns and fit with existing capabilities (see figure 2). For example, 3M’s first step in pursuing innovation is connecting a customer need with a technology that can address the need. Many of 3M’s successes stem from scientists having a direct relationship with customers and sometimes identifying customer needs before the customers recognize that they have that need. P&G is known for capturing customer comments in real time to gain feedback on how a product is performing, which enables continuous improvement and leads to repeat purchases and product loyalty.
Who Leads Innovation ?
Most companies see innovation as being led from near the top, though not from the top, of the organization. Figure 3 shows the breakdown. In two out of every three companies, business unit heads have a leading role in innovation activities. Leadership from business units rather than CEOs is likely to complicate the separation of today’s and tomorrow’s priorities.
Innovation stars P&G and IBM separate those leading an innovation initiative from those running the business. The head of innovation at P&G reports to the chief technology officer, and IBM’s second-highest ranking executive is specifically charged with creating and maintaining innovation programs across the company.
Open innovation, the kind P&G is known for, which involves collaboration with outside parties such as suppliers, is not systematically practiced. Only 9 percent of executives say they collaborate with value-chain partners, and 45 percent say that procurement does not have a significant role in innovation. (The only function with a lower score is information technology.)
We are not surprised by this result despite the allure to imitate leaders such as P&G and Google. P&G’s innovation strategy strives for more than 50 percent of its innovation to come from suppliers, individuals, or even competitors. Google has a hybrid model: It typically encourages open collaboration but is closed at times to surprise the market. For example, mobile device operating systems Android and Chrome OS were the results of collaboration between Google and the outside community. Chrome was based on Chromium, an open source environment and the LINUX open source operating systems. To obtain feedback about its early version of Chromebook, a personal computer running Chrome OS as its operating system, Google gave away 60,000 to testers, reviewers, and developers.
Nevertheless, open innovation is so leading edge that it’s not something we necessarily recommend for the average company—because it won’t be sustainable. In part, open innovation requires a sophisticated procurement function with a seat at the CXO table, which is a challenge for many companies. More fundamentally, it requires procurement to augment its sourcing capabilities with collaboration skills, an investment that few companies have made.
Where Are the Innovation Metrics ?
Measuring innovation effectiveness with metrics and key performance indicators (KPIs) is the most often cited challenge. It beats most other obstacles—including innovation expertise, resource commitment, and executive sponsorship—even as measurement is considered the least important component of an innovation strategy, likely because it is viewed as too difficult. This presents a chicken-and-egg problem: A lack of metrics deprives companies of the ability to measure progress and drive corrective actions—knowing exactly what’s needed in the competition between innovation capabilities and today’s business needs. The IMProve initiative in Europe is one way companies are addressing this issue, as it provides an online innovation bench-marking tool for enterprises.
KPIs don’t always need financial performance targets. For example, although IBM defines business performance targets for its core business and growth opportunities, it does not set financial targets for emerging opportunities. Instead, it ensures that clear milestones are defined to track the progress of riskier projects to signal that they are on the right track.
Today and Tomorrow –
Although different company situations and cultures will define different innovation strategies, they lead to success only with a commitment to pursue both current and future goals— separately. However, tomorrow’s success through innovation requires investment today.
This can be difficult to understand and do. It requires commitment to keep resources applied to innovation even as near-term crises arise. It requires creativity to grasp and implement metrics that help innovators defend against compromise and ensure a continuity of effort. It also requires a methodical approach to governance that establishes and maintains the firewall between today’s needs and tomorrow’s plans.
Developing an innovation strategy is a difficult process that requires addressing industry-specific variables, company-specific cultures, and in some cases (such as open innovation) approach-specific capabilities or alliances. “How should my company innovate?” might seem a daunting question. Yet our findings show that when companies falter, it’s not because they can’t answer that question. The biggest obstacle to successful innovation is not a faulty or misbegotten strategy, but something more fundamental: commitment and will.