Friday, January 23, 2009

Achieve True Corporate Growth using Innovation. Five Fundamentals for dramatically boosting Innovation Efficiency.

Everyone knows that true corporate growth, not just agglomeration—springs from innovation. And the common wisdom is that companies must spend lavishly on R&D if they are to innovate at all. But in these fiscally cautious times, where every line item of every budget in every company is under intense scrutiny, many organizations are doing just the opposite. They tighten their belts, subject nascent product-development programs to rigorous screening, and train R&D staffers to think in business terms so the researchers will be better able to decide whether an idea for a product or service is worth pursuing in the first place.

Such efficiency measures are commendable. But frugality is not a growth strategy, they point out, and, in truth, there is very little correlation between corporate performance and the amount spent on innovation. Companies like Southwest, Cemex, and Shell Chemicals have shown that businesses don’t have to spend a fortune on R&D to reap the benefits of innovation.

To produce more growth per dollar invested, companies must produce more innovation per dollar invested. Businesses can dramatically improve their innovation yields bu using these five imperatives: Increase the number of innovators among existing employees (whatever their job titles) by involving them in innovation processes and events. Focus on developing truly radical ideas—ones that change customers’ expectations and behaviors and industry economics—not just incremental ideas. Look for innovation sources out- side the organization, as well as inside. Increase the learning from small, low-risk experiments. And commit to long-term, consistent development efforts.

Real Growth depends on innovation. Oh sure, a big acquisition can inflate a company’s top line, but it’s hardly fair to call this growth; agglomeration would be a better word. Deal making of the sort that was used to jack up revenues at companies such as Tyco, Vivendi, HealthSouth, and DaimlerChrysler is unlikely to produce above-average growth for more than a few years at a time. Study a company that has delivered strong revenue growth over a decade or more, and you’re likely to find evidence of world-class innovation. Maybe the company invented a new industry structure, like Microsoft did when it “de-verticalized” the computer industry. Maybe the firm pioneered a bold new business model, like Costco did with its upscale warehouse stores.

We live in an age of austerity. Every line of every budget in every company is under perpetual scrutiny. Innovation budgets are no exception. Increasingly, R&D units are required to negotiate their budgets directly with key operating divisions, in hopes of tying their research spending to real-world customer problems. Companies like IBM are sending their R&D professionals into the field to interact directly with customers. Organizations are subjecting nascent development programs to ever more rigorous screening with the goal of focusing their resources on a few big-win projects. Additionally, companies are training their R&D staffs to think in business terms so the researchers will be better able to decide whether an idea is worth pursuing in the first place.

These efficiency measures are commendable, but they don’t go far enough. A company can’t outgrow its competitors unless it can out-innovate them. And in these austere times, that is only going to happen if a company is capable of substantially raising the yield on its innovation investments. Achieving such a step function improvement requires more than just a bit of R&D belt tightening. It demands a fundamentally new way of thinking about innovation productivity, as well as a set of strategies that have the power to deliver a whole lot more bang for every innovation buck.

To dramatically improve innovation yields, companies must believe that innovation outputs (new processes, products, services, and business models) are less than perfectly correlated with innovation inputs (cash and talent). This assumption is more unorthodox than it first appears. When we recently asked more than 500 senior and midlevel managers in large U.S. companies to identify the biggest barriers to innovation in their respective organizations, the number one response was “short-term focus” followed by “lack of time and resources.” In this view, innovation is highly dependent on investment, and it is senior management’s presumed obsession with near- term earnings that most limits a company’s innovation productivity. We think this view is wrong.

Use this five imperatives for dramatically boosting innovation efficiency, each of which can be encapsulated in a simple ratio:
 Raise the ratio of innovators to the total number of employees. The greater the percentage of employees who regard themselves as innovators, whatever their formal job descriptions may be, the greater the innovation yield.
 Raise the ratio of radical innovation to incremental innovation. The higher the proportion of truly radical ideas in a company’s innovation pipeline, the higher the innovation payoff.
 Raise the ratio of externally sourced innovation to internally sourced innovation. The better a company is at harnessing ideas and energies from outsiders, the better its return on innovation investments.
 Raise the ratio of learning over investment in innovation projects. The more efficient a company is at exploring new opportunities, learning much while risking little, the more efficient its innovation efforts will be.
 Raise the ratio of commitment over the number of key innovation priorities. A firm that is deeply committed to a relatively small number of broad innovation goals, and consistent in that commitment over time, will multiply its innovation resources.



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