When Innovating for impact to improve business outcomes, metrics are provided in other sections of www.cail.com/BI and be difficult to measure.
Further, from a McKinsey report, Executives view business risk and innovation as follows –
Not surprisingly, studies have proven successful innovative companies grow faster, are more profitable, and realize above average returns as follows –
For enterprises looking to continue being relevant and to grow, being good at innovation is crucial for long-term performance, opportunities, viability, etc.
Further, with half of the S&P 500 forecasted to be replaced in the next 10 years, it’s imperative enterprises meaningfully innovate to have a future by creating value and stakeholder wealth.
Innovation Challenges / Issues
Innovation is frequently challenging because –
1. for Business Executives and Company Board Members since innovation is about – ” the new “, is heavily technology centric, and delivering a great User experience
…. With in-depth knowledge and experience in these areas typically outside enterprise leadership expertise, how do they prudently make important decisions, determine strategy, identify and prioritize opportunities, allocate resources, set budgets, etc. ?
2. the bets get bigger over time, the returns frequently become marginal, and managing risk becomes more difficult – with a historical perspective of the business and the industry
…. While recognizing this is a common situation in enterprises, the need is still to look beyond the traditional context and include people with the above expertise in corporate decision making to expand the options and improve returns going forward
This is confirmed by a McKinsey Global Innovation Survey that says only 6 % of Enterprise Executives are satisfied with their innovation performance !
In conjunction with this, HBS Professor Clayton Christensen indicates 95 % of product innovations fail and the Startup Genome report advising 92 % of startups fail.
What’s more, according to a PWC Innovation Benchmark report, 54 % of innovating organizations have trouble with perceiving and managing the risks associated with effecting change as well as bridging the gap between innovation strategy and enterprise business strategy. As a result, there is lots of room for improvement to be successful when you’re fighting the odds –
Further, from a BCG Global Innovation Survey, the top obstacles to successful innovation relate to developing an entrepreneurial, results oriented, responsive and accountable organization –
When combined with a Deloitte Global Board Survey, the areas where the Company Board of Director’s understanding is weakest are talent management and innovation / R&D strategy. From this, it appears the root cause for the challenges with innovation and change in enterprises is at the very top. Very similar results were also found in the SpencerStuart 2016 Global Board of Directors Survey. The Accenture Survey also found 82 % of organizations run innovation in exactly the same way as they would go about achieving any other new initiatives or projects for incremental performance gain in operations. This leads to many issues, such as 72 % of Executives admitting to missing crucial growth opportunities and 60 % struggling to learn from past mistakes ! For anyone with business innovation or venture investment experience, this is very tell tale why innovation in enterprises is problematic and very difficult. And why enterprises need to collaborate with outside parties knowledgeable about business, innovation, technology and effecting change. Anything less, or thinking ” we’re good “, is a sure sign the only way anyone is going to benefit going forward is to short the company stock !
To meaningfully improve business outcomes from innovation, there is a need to get a lot of things right. This includes being good at coming up with new ideas, evaluating and choosing the most promising ideas, successfully developing and commercializing the best ideas into new products and services (having high value to Users), being very competent in effecting change / monetizing value creation / managing risk, etc. Further, being good at business innovation is all the more challenging when there is an ongoing need to evolve the corporate culture, develop new business and technology skills, address internal and external challenges, having the right business and innovation strategy, be an agile organization (that can pivot as well as scale / terminate projects fairly quickly, etc.), can attract and retain top talent, etc. Since these capabilities are needed to innovate for impact and are very different than the skills needed to run core operations on a daily basis, is why enterprises need external innovation partners. In the end, it’s about results and enterprise leadership making sure their plans, strategies, tactics, etc. have a high probability of success. And they recognize the need to have a brain trust with different and complimentary skills that is on the same page and can get the job done – on a sustainable basis.
Innovation in enterprises is also tough because there is no “ silver bullet ” – the nature of innovation going forward is different than in the past, there are challenges with effecting culture change, moving to a new business model, monetizing value in new ways, the need to look at risk from a future perspective – versus historically, confidence in look ahead, getting past the high failure rate with innovation etc. In addition, many enterprise Business Executives have little knowledge or feel for technology, or experience with digital platforms and delivering a great User experience. For these reasons and people either trivialize the unknown or simply don’t know what they don’t know, it’s easy to appreciate why meaningful innovation in enterprises is very difficult.
Success factors for innovation
To get past these challenges and issues to make innovation more rewarding, important success factors are –
1. Measure Innovation Holistically – with a Bias for Action
The best performing innovators emphasize outcomes, employ meaningful incentives, reward fast learning / improvement / pivots, encourage innovation from feedback / engagement as well as by inspiration, vision, and process, etc. – with relevant metrics and support for corporate strategic direction to make good on new business or technology enabled opportunities important to the future of the organization.
2. Need Entrepreneurial or Seeker Mentality
In a Booz & Co. Global Innovation Report, 60 % of the top 10 global innovators were entrepreneurial with a “ Need Seeker ” mentality where their organization focused on engaging customers and on being early to market. This is very much in line with the “ Lean Startup ” and “ Jobs to be Done ” schools of thought. The other innovator archetypes identified was “ Market Readers ” and “ Tech Drivers ” that are more focused on external trends, such as market trends like wearable devices and emerging technologies like AI, IoT, Blockchain, etc. They identified 30 % of Need Seekers to have highly aligned business and innovation strategies compared to only 8 % for others. In addition, 41 % of Need Seekers were reported to have very pro-innovation cultures, as opposed to an average of 10 % for others.
3. Aligning business & innovation strategies and a pro-innovation culture
The Booz & Co. study also investigated the effects of having a highly aligned innovation strategy with the overall business strategy and pro-innovation culture on the growth of enterprise value. Organizations with both highly aligned business & innovation strategies, as well as a pro-innovation culture, have 30 % higher growth on their enterprise’s value. While not surprising, it’s quite evident that the small portion of organizations that are able to master both of these qualities are best equipped for long-term success, in large part thanks to their innovation capabilities.
4. Have a Portfolio approach to Innovation
The best performing innovators measure the whole process and outcomes for innovation with metrics for their entire innovation portfolio. This is important to determine the appropriate overall balance for corporate objectives, strategies and risk tolerance. While it can be hard to gather comprehensive data on innovation initiatives in enterprises, there’s much more data regarding the success of Venture Capital investments in building up their portfolios with startups. While recognizing there are differences between the two models, both have the same goals – leverage innovation to create shareholder value and prudently manage risk. Venture Capital firms have long taken a portfolio approach to supporting innovation and entrepreneurship. Since VCs know the vast majority of startups will fail, they need to get large returns on the successful ones to drive value of the portfolio and justify the risk as follows –
As Alexander Osterwalder, the creator of the Business Model Canvas, recently wrote, enterprises need to learn that when it comes to innovation, it’s usually impossible to pick the big winners from the losers early on. This simply means that for an organization to drive significant long-term growth, they need to invest in a large number of new initiatives. Since most will fail, it’s critically important to fund the few to pay for the rest, to make a good overall ROI, and have innovation meaningfully impact business outcomes.
5. Have an Ambidextrous Organizational Structure
Ambidextrous organizations are enterprises that have structurally different teams for existing and emerging businesses, both of which are linked to the existing management hierarchy.
According to research led by HBS professor Michael Tushman, ambidextrous organizations succeeded in breakthrough innovation 90 % of the time, whereas any other type of organization didn’t succeed at a rate above 25 %. Further, the 2017 BCG Global Innovation Survey identified that the best innovators used this kind of an organizational structure 77 % of the time, whereas the weak innovators did so only an average of 25 % of the time. This is important for successful disruptive innovation in business – like hitting a home run in baseball – which is crucial to winning.
6. Open Collaboration
The same BCG survey also found open collaboration to be a significant factor separating the best from the rest. The best reported to supporting open collaboration 77 % of the time, compared to just 23 % for the weaker performers. In this context, “open” meant having organizational structures that enabled easy collaboration – with both internal stakeholders and external partners. This is needed for innovation to meaningfully improve business outcomes and align with corporate strategy.
7. Have Guidelines for Innovation Initiative Approval
Another finding from the BCG survey was that best performers rarely based innovation initiatives approval solely on future revenues. However, it is recognized there is a need to monetize value creation in new ways at some point to justify the investment as well as to make innovation a sustainable activity over time. Since innovation periodically leads into a new business or business model, this becomes an opportunity to expand relevance and revenue to grow current markets as well as successfully entering new markets.
For many reasons, metrics for Measuring innovation vary considerably within an organization as well as from organization to organization. The main metrics are –
What’s interesting here is that the organizations seem to prefer simple output metrics (labeled as “O” in the image) over input metrics (labeled with “I” in the image) or performance metrics, such as time to market or process efficiency – which could be an important factor explaining the actionability gap. The high satisfaction rate for innovation metrics combined with the very low scores for actionability of said metrics together with the very low satisfaction rate for innovation in general would point to many organizations using vanity metrics to measure innovation. While some of the most widely used metrics are effective for looking at the big picture, there is a need to measure and monitor things that actually improve business performance. So, make sure that the set of metrics being used to measure innovation is designed to be actionable and helps the enterprise get better at innovation.
As indicated here and the insights available at The World’s 50 Most Innovative Companies of 2019 | Fast Company, improving business outcomes from innovation is very achievable. It’s science and art that includes becoming comfortable outside your normal comfort zone, finding a balance between process and inspiration, etc. While meaningful innovation is challenging for enterprises, the overriding need is to become a more entrepreneurial organization with new capabilities. To do this, there is a need for – strong look ahead skills, be able to imagine the future, and be able to effect change. To facilitate this occurring is why many Enterprise Innovation Teams include internal personnel as well as external Partners with the requisite entrepreneurial experience, skills and drive with very strong business, technology and venture investment expertize.
Feb 28, 2019 – McKinsey / CAIL Innovation Commentary