Even though innovation is a highly researched topic, the majority of the work has been conceptual, which in practice means that the researchers have looked at innovation and have tried to classify and explain it, as well as to find ways to best succeed in it. As such, there’s surprisingly little quantitative research on the topic, perhaps due to innovation often being difficult to measure.
Innovation and strategy
According to McKinsey, 80% of executives think their current business models are at risk to be disrupted in the near future. In addition, 84% of executives say that innovation is important to their growth strategy. The Accenture 2015 US Innovation Survey tells a similar story: 84% of executives considered their future success to be very or extremely dependent on innovation. Even back in 2010 the McKinsey Global Survey revealed that only 4% of executives have not defined innovation as a strategic priority and have no plans to do so in the future. Innovation clearly seems on the strategic agenda of most large organizations, which makes sense as it would seem to be the leading cause of economic growth over the long term according to a number of sources, such as the OECD report on Innovation and Growth. In addition, Booz & Co. (now Strategy&) 2011 Global Innovation 1000 report found a clear difference in both revenue (11%) and EBITDA (22%) growth in favor of the more innovative organizations. Innovation sometimes has a bad reputation among executives and board members who’ve been burned by unsuccessful innovation initiatives in the past. However, as the numbers show, innovative companies grow faster and more profitably than the rest. While innovation is crucial for the long-term performance of any organization, it’s especially important for large corporations looking to grow – or even looking to keep their current market position – with half of the S&P 500 forecasted to be replaced in the next ten years. And most organizations already understand this. If your organization doesn’t have innovation among your strategic priorities, you might want to revisit your rationale for doing so.
Innovation is, without a doubt, challenging. According to HBS professor Clayton Christensen, 95% of all product innovations fail, and according to the Startup Genome report, 92% of startups fail. While the accuracy of the previous numbers can be debated, according to the aforementioned McKinsey Global Innovation Survey, only 6% of executives are satisfied with their innovation performance. What’s more, according to the 2017 PwC Innovation Benchmark, 54% of innovating organizations have trouble bridging the gap between innovation strategy and the larger business strategy.
As such, it’s quite safe to assume that there’s plenty of room for improvement when it comes to innovation. The interesting part is figuring out why that is the case. While we’ve heard talk about R&D investment driving innovation on both the micro and macro-economic levels, there would seem to be more to the puzzle than simply throwing cash at the problem. For example, based on both the 2017 PwC Innovation Benchmark and the 2011 Global Innovation 1000 reports mentioned earlier, the best innovators aren’t usually the ones with the biggest R&D budgets. According to the BCG 2015 Global Innovation Survey, the top 6 obstacles for innovation performance would seem to be mostly related to choosing and executing the best ideas, but also to a certain extent, the company culture.
When combined with the fact that, according to the Deloitte 2016 Global Board Survey, the areas where the board of director’s understanding is weakest are talent management and innovation/R&D strategy, it would seem quite likely that the root cause for the challenges in many organizations could be at the very top. Very similar results were also found in the SpencerStuart 2016 Global Board of Directors Survey.
The 2015 Accenture Survey we mentioned earlier found 82% of organizations to run innovation in exactly the same way as they would go about achieving any incremental performance gain in their regular operations. This seemed to lead to quite a few different challenges, such as 72% admitting to missing crucial growth opportunities and 60% struggling to learn from past mistakes.
To succeed in innovation, an organization has to get a lot of things right. They have to be good at coming up with new ideas, evaluating and choosing ideas, as well as developing and commercializing those ideas. And to top it all off, they need to fit all of that within the context of the organization, meaning sources of competitive advantage, the available resources and chosen strategy. Many of these areas require capabilities and expertise that are very different from both one another, but especially from the core operations of the organization, which poses interesting challenges for the leaders. In the end, it’s always the responsibility of the leadership to make sure that their plans, in this case related to innovation, are successfully executed. Thus, boards that are serious about innovation should put emphasis on understanding these issues and in putting the right people in charge.