Research & Surveys
July/August 2013, eSide Supply Management Vol. 6, No. 4
A cautious approach to innovation is prompting some businesses to renovate rather than innovate, which may leave them lagging behind competitors that have established a formal system to address innovation risk.
Innovation efforts, long considered the backbone of successful businesses, are falling short of business leaders' expectations, despite increased investment. Many companies today are taking a "low risk" approach to innovation, focusing on renovation in place of breakthrough ideas, according to an Accenture study, Why "Low Risk" Innovation is Costly.
Accenture surveyed 519 executives in large U.S., U.K. and French companies in an effort to identify the state of innovation today. The survey revealed that innovation remains a top C-suite priority, with 70 percent of those surveyed ranking it among their top five priorities — 18 percent putting it atop the list. Despite difficult economic times, 51 percent report an increase in funding that leads to new products and services, in contrast with 10 percent whose funding has declined.
The manufacturing sector leads the way with funding for innovation with 74 percent reporting increased funding while the sectors least likely to increase their innovation funding were retail, 32 percent and consumer goods, 34 percent. The study also notes that 60 percent of the respondents say their organization has a chief innovation officer or comparable position. This contrasts with 54 percent in a similar survey in 2009.
Despite increasing commitment and funding for innovation, may executives say they are disappointed by the ROI from their investments. As a result, many are scaling back expectations, explains Wouter Koetzier, managing director for innovation and product development for Accenture.
"Instead of the disruptive products, services and business models that were anticipated several years ago, many initiatives have become considerably more limited in scope," he says. "Rather than offering 'the next big thing,' innovations coming to market today are more typically line extensions."
Koetzier says a "cautious approach" to innovation is understandable, but warns that incremental innovation could cause companies to lag behind their competitors. The study identified two major obstacles that participants say stand in the way of driving higher returns for innovation. The first is the focus on line extension renovation and the second is the "innovation trap."
There is a danger in relying too heavily on renovation rather than seeking a portfolio that also includes bold ideas, Koetzier explains. "Renovation can limit innovation to small incremental improvements and fail to result in significant step changes and revenue opportunities," he says.
The invention trap, he notes, is the over-reliance on the invention process to produce success and a relative lack of systematic, enterprisewide processes capable of commercializing inventions into products or services, bringing them to market in a timely manner to reap expected returns.
The study cites Kodak as an example. "Kodak found in digital photography that it is sometimes not enough to have a great idea or invention; the enterprise must be equally able to bring its brilliant idea to scale, supported by a robust business model, a unique customer experience and an eco-system which further expands the market potential," the study states.
The gap between expectations and results has widened in recent years, the Accenture study notes. In 2009, the objective for innovation for 30 percent of companies was to disrupt existing markets. In 2012, the proportion dropped to 26 percent. Fewer than half of the respondents in the newly released study believe they have an effective approach to new product development or are seeking innovation effectively.
"In the 2009 study, executives were confident their organizations possessed the capacity to conceive and introduce new products and services so powerfully attractive to customers that they would disrupt markets to the competitive advantage of the innovator," Koetzier says. "Today there is considerably less certainty."
Specific challenges to innovation cited by survey respondents include:
The study respondents reported they have become more risk-averse in considering new ideas — 46 percent — while 45 percent say they envision their company will pursue a portfolio of smaller, safer opportunities rather than seeking the next breakthrough.
Koetzier says companies with a "holistic, formal system" in place for innovation realize better outcomes and higher levels of satisfaction from their innovation investment. Forty-three percent of companies with a formal system report they are very satisfied with the "initial idea generation" for innovation, compared to 24 percent of those without a formal system. Also, 38 percent of those with a formal system say they are very satisfied with the return of investment or profits from innovation versus 22 percent of those without a formal system.
"Furthermore, companies with formal innovation systems may be less likely to pursue line extensions at the expense of more significant breakthrough innovation and less likely to miss developing new markets due to lack of an organizational home to nurture them," Koetzier says.
The critical distinction between companies that are satisfied with their innovation efforts and results and those that are not appears to be a formal system to address renovation and invention risks, the study finds. Such a system includes five key aspects.
Establish innovation as a business discipline, emphasizing speed and flexibility. Speed is critical to successful innovation as product life cycles shrink and consumer preferences become more volatile. Lateness to market was cited as one of the top reasons for innovation failure by 28 percent of the executives surveyed. Flexibility can be one of the enablers of speed, Koetzier says. "In the context of innovation, flexibility can be enhanced by an open approach to R&D, which looks beyond the enterprise for skills, know-how and expertise to support the development process," he explains.
Move from product to business innovation. Innovation that drives sustainable revenue integrates elements of product with service, technology and personalization, the study says. No longer is the "new thing with neat features" enough. "It must be accompanied by a business model that builds upon the product to provide a unique, personalized consumer experience and a service element that maintains connection with the consumer and supports an ongoing revenue stream," Koetzier says. He points out that 87 percent of survey respondents indicated that personalization is a major part of their company's innovation strategy.
Apply risk management practices tailored to innovation. The goal of such tailored practices should be to identify future opportunities and to properly evaluate a company's innovation portfolio. Driving bigger and more disruptive innovation requires more advanced capabilities to identify, measure and manage risk, the study says. Survey results indicate that companies are less comfortable taking on bold initiatives. "Innovation-centric risk management identifies future opportunities and evaluates the value of entire portfolios informed by the different categories of initiatives," Koetzier says. "By applying these mature refinements of risk, companies can be better able to avoid the renovation trap and to enhance the future value of their portfolios."
Leverage big data and social media to integrate the voice of the customer into development processes. Digital analytics can provide real-time access and insight into consumer trends and preferences. The study finds that the majority of respondents invest in cloud and mobility technology to enhance innovation capabilities, but less than one-third invest in social media. Koetzier says it is "imperative that social data be exhaustively mined in order to optimize consumer experience."
Pursue frugal innovation. The study suggests pursing frugal innovation to capture middle-class consumers in emerging economies and to disrupt markets in developed economies. Basically, frugal innovation is the ability to generate more business and social value while significantly reducing the use of scarce resources. While the importance of frugal innovation in emerging markets is well known, the study says it is equally important to pursue it in developed countries for speed, cost reduction and the capability to disrupt markets.
Companies understand that change is the new normal. The challenge for business leaders is driving higher value from innovation efforts, Koetzier says. Frustrated with past results, many companies pursue a low-risk approach to innovation that produces only incremental improvements. By instituting a formal approach to managing innovation, leaders can help protect their companies from innovation risk. "But more importantly, they can position themselves to seize control of change and become its master rather than its victim," he says.
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