The innovation process will get stale and unproductive if it relies solely on R&D. Innovation processes should be linked to business strategies to transform everything from operations to product and services development.
— By Debra Jenkins
Big spend on R&D is always justified as the path to innovation and improved financial performance, but is it? Financial performance of investments in new products and services is a key metric for measuring the validity of the level of R&D investment, but how does a company know whether it could do even better by disrupting the current process and implementing new innovation strategies?
In many cases, R&D remains a siloed process not aligned with business strategy. Businesses need a more inclusive innovation ecosystem that embraces the people who are responsible for developing and implementing business strategies, employees, and external stakeholders. Too often, R&D is one silo, and strategy development is another, and never the twain shall meet.
Disrupting the innovation process means breaking down the silos or barriers, adopting new innovation models like design thinking, and encouraging open innovation in which people internal and external to the organization participate.
PricewaterhouseCoopers (PwC) researched the gap between innovation processes and business strategy. The results offer important guidance about business innovation and transformation.
There are more companies adopting new and more creative and inclusive business models over traditional R&D. Open innovation design thinking, and co-creating with customers, suppliers, and partners are significantly outpacing traditional approaches like R&D, internal incubators, investing in startups with corporate venture capital, innovating in emerging markets, and taking risks that fail fast and trying again.
The new models are more collaborative, and that is where business strategy is wedded to innovation. For example, early ideation can emerge from a customer engagement strategy and a collaboration strategy that brings people together from across the organization to participate in innovating. This results in the formation of partnerships with technology companies, channel partners, supply chain vendors and suppliers, market members, entrepreneurs, and research organizations.
PwC found that most innovation starts with employees, and they are driven by an innovative culture, encouragement to be fresh thinkers, and strong C-suite leadership. Tech innovation enters as the enabler of creating new markets for novel products and services and new customer needs.
Challenge of Reinventing
Compare these ideas for disrupting innovation to the R&D division off to the side, churning out new product designs with little input from outside. One business challenge in moving toward continuous innovation that engages multiple stakeholders is apparent when considering the PwC research is similar to research published a decade ago.
In "Reinventing Innovation," author Arkadi Kuhlmann talks about the importance of continuous innovation and that few companies have found a way to make it a sustainable process. The recommendations include creating the right corporate culture and ensuring every employee understands that creative destruction (change) is good and innovation is never finished. The business may be making a great profit on products and services right now, but the future innovations are the drivers of sustainable profits.
Business leaders must always be looking ahead and recognize the importance of getting people to think and behave as innovators. This is precisely why business leaders today need to adopt new business models that leverage the internal and external people – employees, customers, suppliers, and others.
Another challenge is innovating with business models to continuously generate innovations in products and services that continuously lead to profit. Using the traditional formula of investment, the traditional manufacturing company invests 95 percent of its resources in improving current products, 4 percent on adjacent innovation, and 1 percent on breakthrough disruption. Using this investment formula over and over again leads to complacency. If the company shifts to a 70-20-10 investment formula, investment returns will dramatically increase. This is due to the increase to 10 percent in breakthrough disruption that focuses on true customer needs.
Once again, it is suggested that companies fall into a rut. They use an ideas-led approach in which a lot of ideas are suggested, and one is chosen for development. More productive is an ecosystem approach that calls for collaborating with employees, suppliers, and customers to identify a real problem the business is experiencing and find a commercially viable solution.
New Ways to Measure
Measuring disruptive innovation is a process for assessing the elements of the value chain, and it is more difficult than measuring sustaining innovation (improvements in existing technologies and capabilities). A true innovation process is not a straight-through process with specific milestones.
Innovation is also not just the generation of a specific product or service; it includes improving processes or optimizing costs. Multiple stakeholders are involved, as discussed, so measuring each contribution is difficult.
There are various strategies for measuring disruptive innovation ecosystems. For financial institutions, innovation efforts are prioritized based on factors like the level of direct contribution to customer centricity, technology capability improvements, risk mitigation, and financial impacts. Assess employee participation in the process and if they believe they are encouraged to participate.
Metrics also consider things like the number of strategic partnerships, entry into new business segments, creation of new business models, strength of the innovation pipeline, and process outcomes. R&D and marketing can offer input into an innovation management group that drives the innovation strategy in alignment with business strategy. Metrics include the return on product development expense, return on innovation investment, risk-adjusted net present value of the innovation pipeline, number of new products launched, and so on.
Building an Innovation Ecosystem
Though R&D continues to play an important role in innovation, the function must be fully integrated into an innovation ecosystem and not remain a silo. It is challenging to change processes which is why so many companies fail to adapt.
It is just as challenging to leverage linked innovation processes and business strategies for goal attainment. Disrupting the innovation process itself is necessary to remain competitive.
It is not about just pushing out new products and services. Innovation can transform everything the business does, including its operations. The successful companies will always be looking ahead and staying ahead in a dynamic marketplace.