Innovation has once again become a hot topic in the executive suite. That's because of a growing recognition that operational effectiveness alone can't deliver the results today's shareholders demand. A 2005 survey by the Boston Consulting Group, for example, found that 90% of executives believed that their company's growth and success requires true innovation.
Unfortunately, my research suggests that is easier said than done.
The problem isn't bad management, as I explained in The Innovator's Dilemma. In fact, many companies get into trouble precisely because they follow the principles of good management. They listen to their best customers, innovate to meet those customers' needs, charge higher prices, report record profits and miss a transformational change innocently incubating at the fringes of their respective markets.
My subsequent research, summarized in The Innovator's Solution and Seeing What's Next, and field work with my consulting company, Innosight, has convinced me that companies can address key elements of this dilemma. The first step to recovery is almost always admitting that there might be a problem. Therefore, I suggest that any executive who is seeking to assess their company's innovation capabilities ask the following three questions:
1. Do I have a balanced portfolio with different types of growth strategies?
Most investors know the value of balancing their financial portfolios across different classes of assets, like stocks and bonds. But it is amazing how many companies forget this principle when building their "innovation portfolios."
When many companies actually sift through such portfolios, they discover that the overwhelming majority of their efforts focus on what we call "sustaining" improvements. These are better products that a company hopes to sell for higher prices to current customers. Think about Procter & Gamble creating a version of its Tide laundry detergent with a new scent.
If existing products or services are not yet good enough, sustaining approaches typically promise attractive returns. Sustaining strategies are the bread and butter of most established firms. A balanced portfolio, however, augments those strategies with different approaches to branch away from the core business.
My research suggests the best way to succeed in these new markets is to take a "disruptive" approach. Proctor and Gamble, for example, has created the "clean small spills" market with its Swiffer brand, and the home-based teeth whitening market with WhiteStrips. Generally, disruptive innovations are simple, onvenient, affordable solutions that make it easy for individuals to "do it themselves." Remember, the goal is to create a portfolio that balances core-sustaining investments with those intended to create new growth businesses.
2. Have I allocated resources to achieve a balanced innovation portfolio?
Just saying you have a balanced portfolio isn't sufficient. You need to allocate resources appropriately to create different types of innovation. Executives often think it's strategy that determines how they should allocate resources.. But it's the other way around: It's how a company allocates resources that should determine strategy.
To innovate, a company must master the resource allocation process. Doing that requires investment in multiple strategies. Companies that simply pour all their resources into a single pot often find that they are investing in the status quo. While close-to-the-core, sustaining initiatives are less risky, they also provide lower returns. What's worse, such initiatives may actually crowd out the development of truly innovative products and services that could provide greater returns in the long run.
There's good news for cost-conscious companies just starting their innovation journey. Early on, the biggest investment that companies need to make is time, not dollars. Don't spend too much on a new venture too soon, otherwise you risk locking into a failed strategy before you really know the right approach. The best advice is to "invest a little to learn a lot."
3. Do I have a distinct screening and shaping process for different types of opportunities?
Processes, by their very nature, are designed to be inflexible. A process that is good at doing one thing is almost always bad at doing something else. Many companies have adopted stage-gate processes that impose rigorous discipline on their innovation efforts. New proposals must meet certain financial metrics--such as net present value or return on investment--before they're given the green light. This effectively streamlines the development and commercialization of sustaining innovations.
Financial metrics are ill-suited, however, for disruptive projects that charter unknown territory. Instead, companies should develop a checklist of qualitative measures to which a new product should conform.
Start by looking at previous innovation efforts and assess what worked and what failed. Successful disruptive solutions, for example, might be simpler, do-it-at-home versions of a previously complex product. Often they have low overhead costs and high asset utilization, which allows companies to offer low prices or serve small markets. And in many cases, the pattern you identify can point the way to high-potential opportunities more reliably than financial metrics.
By asking these three questions above, executives can begin to get a sense as to whether or not their organizations are properly positioned for growth. Taking action against identified weaknesses can help companies create capabilities that make the pursuit of growth more predicable and repeatable.
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