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Why “Low Risk” Innovation Is CostlyOvercoming the Perils of Renovation and InventionBy Wouter Koetzier and Adi Alon
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Innovation is not working out the way many companies expected. Despite increasing commitment, funding and organizational accountability, many companies are disappointed by the returns they are deriving from their investments. Correspondingly, they are scaling back expectations. Instead of the disruptive products, services, and business models that were anticipated several years ago, many initiatives have become considerably more limited in scope. Rather than offering “the next big thing,” innovations coming to market today are more typically line extensions.
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This cautious approach to innovation is understandable, given the relatively disappointing results. At the same time, however, it is a potentially perilous strategy. Enterprises that are able to successfully innovate at a breakthrough level can increase the likelihood that they will dominate and prosper in new markets that they create. Enterprises that restrict themselves to incremental innovation, on the other hand, risk unknowingly entering a vicious cycle in which they lag ever farther behind.
Accenture recently sought to identify the state of innovation by surveying 519 executives (vice presidents, directors, managers) at large U.S., U.K., and French organizations with revenues greater than $100 million. They represented a wide spectrum of sectors, with the largest samples drawn from Banking and Capital Markets, Retail, Electronics and High Tech, Health Providers, and Consumer Goods and Services.
A consistent theme emerged from this study, revealing two dominant obstacles that respondents say stand in the way of driving higher returns from innovation.
The first challenge is a conservative approach itself, focusing on individual line extension renovation rather than developing a broader portfolio
that also includes bold, big ideas. Renovation can limit innovation to small incremental improvements and fail to result in significant step changes and revenue opportunities.
The second challenge is the “invention” trap. By this Accenture means over-reliance on the invention process itself to produce success and relative lack of systematic, enterprise-wide processes capable of commercializing inventions into products or services at scale, bringing them to market in a sufficiently timely fashion and reaping the expected returns. As Kodak found in digital photography, 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.
How can companies overcome the renovation and invention challenges? A key part of the answer is to introduce something new on a scale where it has sufficient impact to re-define a market while still not “betting the farm.” How? By pursuing a prudent and disciplined investment approach that specifically addresses innovation risk management.
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Increased Commitment to Innovation
Survey respondents are aware of the importance of innovation.Seventy percent ranked innovation among their top five priorities, 18 percent put it at the head of the list (Figure 1). A third of the sample—52 percent in the communications sector, 44 percent in manufacturing—called innovation “extremely important” as a key enabler facilitating their company’s successful response to persistent change.
Companies have also committed to investing resources and organizational capacity to drive innovation. Despite economic volatility, 51 percent report an increase in funding that leads to new products and services in contrast to 10 percent whose funding has declined (Figure 2). Amongst sectors investing in innovation, manufacturing leads with 74 percent reporting increased levels; those least likely to have increased investment are retail (32 percent) and consumer goods (34 percent), where investment levels in innovation is already high.
Furthermore, companies are implementing managerial responses intended to facilitate innovation. 60 percent of respondents now have a Chief Innovation Officer (or comparable position), in contrast to 54 percent in a similar survey conducted in 2009 (Figure 3). Such a position is most prevalent within utility companies (73 percent), electronics and high tech companies (71 percent), and manufacturers (70 percent). Moreover, innovation is increasingly being measured, with 87 percent of respondents “formally evaluated on innovation activities” (up from 64 percent in 2009).
Figure 1: Two thirds of responding organizations depend strongly on innovation for their long term strategy success. Around one in five (18 percent) rate innovation as their top strategic priority.
Figure 2: Companies have committed to investing resources and organizational capacity to drive innovation.
Figure 3: Companies are implementing managerial responses intended to facilitate innovation.
Increased No Change Decreased
Changes in funding for innovation initiatives due to market volatility
51% 38% 10%
67%
Extremely dependent
Very dependent
Dependent
Slightly dependent
Not at all dependent
Top priority
Top 5 priorities
Top 10
Important but not a top priority
Not important
Dependence on Innovation
To what extent is your organization’s strategy dependent on innovation for its long term success?
Where is innovation ranked among your company's strategic priorities?
26%
6%
43%
24%
23%
6%
52%
18%
Strategic priority
1% 1%
Do you have a Chief Innovation Executive (or similar title) primarily responsible for innovation? (percent with "yes" response)
++54%
2009 Global
Are you formally evaluated on your innovation-related activities?
2009 Global
64%
36%
No
Yes
2012 Global
60%
2012 Global
87%
13%
4
5
New product or service
New process or business model
Improvement or modification of an exising service
There has not been a significant innovation over the past two years
2012 Global (Agree + Strongly Agree)
2009 Global
50%
30%
17%
My organization tends to pursue product line extensions rather than developing totally new products or services
For your organization’s most successful innovation brought to market within the last two years, please indicate the type of innovation?
My organization has prioritized short-term financial results over investing for the long term
-
Please indicate the extent to which you agree with the following statements regarding innovation in your organization?
64%
53%
2012 Global
48%
26%
24%
2%
Disappointing Results
The vast majority of executives, 93 percent, continue to regard their company’s long-term success to be dependent on its ability to innovate but at the same time less than one out of five (18 percent) believe their own innovation strategy is delivering a competitive advantage.The divergence between expectations and results, moreover, has widened in recent years. In the 2009 survey, executives were confident that 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. Today there is considerably less certainty.
In 2009, the objective of innovation for 30 percent of companies was to disrupt existent markets; in 2012 the proportion has shrunk to 26 percent (Figure 4). Correspondingly, the approach currently pursued by the majority of respondents, 64 percent, is not transformative in pursuit of totally new products or services but rather can be defined as renovation—more limited incremental line extensions (Figure 5). Most tellingly, confidence that expectations can be met in the future is waning. Fewer than half the present-day respondents believe they have an effective approach to new product development or are seeking innovation effectively.
Figure 4: Fewer companies are seeking to disrupt existent markets with innovation.
Figure 5: Companies are pursuing a more cautious approach to innovation.
Initial idea generation
Realizing profits and-or positive return on investment from innovations
Concept development
Idea management
Product development
Manufacturing & testing
Converting ideas into market-ready products, services or business models
Improving operations by eliminating redundant processes and lowering operating costs
Commercialization & launch
2012 (Very satisfied)2009 (Very satisfied)
How satisfied are you with your company’s performance in the following innovation areas?
36%
32%
37%
37%31%
30%40%
28%39%
29%36%
28%36%
32%
32%
38%
38%
30%38%
27%38%
38%
Achieving consistent innovation performance
Developing new processes-business model
Developing pipeline
Growing portfolio
Commercial portfolio optimization
End-of-life
26%35%
24%
21%
32%
32%
32%25%
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Figure 6: Companies feel they have a sluggish innovation processes.
Figure 7: Companies are seeking to innovate but are increasingly less satisfied with the results.
We are typically first to market with most innovations-new products or services
We effectively seek breakthrough innovation opportunities
Our organization has a well-defined innovation strategy
We have an effective process for capturing ideas from outside our company
Which of the following statements apply to your company's approach to innovation (includes a new product, service or business model)?
45%
45%
34%
21%
When it comes to rating their own organization’s innovation performance, the respondents are severe critics. Only 34 percent believe their company has a well-defined innovation strategy (Figure 6), 46 percent say they have become more risk averse in considering new ideas, 45 percent see their company pursuing a portfolio of smaller, safer opportunities rather than seeking the next breakthrough. On a variety of measures—initial idea generation, product development, manufacturing and testing, commercialization and launch, portfolio optimization—executives are less satisfied today than in 2009.
Respondents also cited specific challenges to innovation that include predicting future trends (30 percent), achieving cost containment (27 percent), securing on-going budget support and leveraging new technology (26 percent respectively) and transforming new ideas into marketable goods and services (24 percent).
In particular, “commercialization and launch” and “achieving consistent innovation performance” experienced the sharpest drop in executives’ assessment of their company’s performance. Those two areas are indicative of the challenge that many companies experience in scaling innovation by moving from good idea stage to large scale market deployment (Figure 7).
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Figure 8: Organizations that have a holistic, formal system in place for innovation, report better outcomes and higher levels of satisfaction from their innovation investment.
Formal system in place
Informal system in place
No system or process in place
Extremely dependent Innovation delivers a competitive advantage Agree
We intend to transform our business in the next 3-5 years primarily with innovations
31%
17%
13%
0%29%
21%50% 51%
17%
42%14%25%
To what extent is your organization’s strategy dependent on innovation for its long term success?
Which of the following statements describe your organization's innovation strategy as it relates to services, products or business models?
We are typically first to market with most innovations – new products or services
Going Forward
What can companies do to improve disappointing performance and overcome the obstacles to innovation? Part of the answer may be provided by the survey respondents themselves.
Those organizations that have a holistic, formal system in place for innovation, consistently report better outcomes and higher levels of satisfaction from their innovation investment. For example, in terms of “initial idea generation,” 43 percent of the companies with such systems in place report they are very satisfied in contrast to 24 percent with only an informal system; 32 percent are very satisfied in the “analysis of data to inform R&D decisions” vs. 21 percent; 36 percent are very satisfied with “product development” vs. 25 percent; 32 percent are very satisfied with “commercialization and launch” vs. 22 percent; 38 percent are very satisfied at the return of investment or profits from innovation vs. 22 percent.
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 a lack of an organizational home to nurture them. Not surprisingly, as compared with respondents who have only an informal innovation system in place, these companies are 138 percent more likely to indicate their organization’s strategy is dependent on innovation for its long term success (31 percent vs. 13 percent), 50 percent more likely to define their innovation strategy as delivering a competitive advantage (21 percent vs. 14 percent), 100 percent more likely transform their business in the next 3-5 years with innovation (50 percent vs. 25 percent); and 20 percent more likely to indicate that they are typically first to market with new products or services (51 percent vs. 42 percent) (Figure 8).
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The implication is clear that having formal systems in place to address renovation and invention risks, while overcoming execution challenges, is the critical distinction between companies that are satisfied with their results and companies that aren’t. We believe that such a formal system approach to innovation entails five key aspects:
Run Innovation as an end-to-end value chain emphasizing speed and flexibility.
As product life cycles shrink and consumer preferences become more volatile, speed becomes absolutely critical to successful innovation. Lateness to market was cited as one of the top reasons for innovation failure by 28 percent of the sample. It is imperative that innovation be run as a business discipline organized to prioritize speed. Flexibility can be one of the enablers of speed and, in the context of innovation, 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.
Move from product to business innovation, integrating elements of product, service, technology and personalization.
Innovation that drives substantial revenue integrates elements of product with service, technology, and personalization. A “new thing with neat features” is necessary but not sufficient. It needs to 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 on-going revenue stream. Indeed, fully 87 percent of the survey respondents indicated that personalization is a major part of their company’s innovation strategy; it is a first step in the right direction.
Apply risk management practices specifically tailored to innovation to identify future opportunities and to properly evaluate your innovation portfolio.
Driving bigger and more disruptive innovation requires more advanced capabilities to identify, measure and manage risks. There is a 33 percent drop from 2009 to 2012 in companies that see the primary goal of their efforts being to disrupt current markets or to introduce entirely new product categories. This indicates that enterprises have become less comfortable taking on bold initiatives. As a result, their portfolios consist of renovation – incremental, low value initiatives. Innovation-centric risk management identifies future opportunities and evaluates the value of entire portfolios informed by the different categories of initiatives. 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 the digital power of Big Data and social media to integrate the Voice of the Customer into the development processes and drive a high level of personalized experience.
Digital analytics can provide unprecedented real time access and insights into consumer trends and preferences. The majority of our respondents invest in cloud and mobility technology to enhance their innovation capabilities (60 percent and 50 percent respectively). However, less than a third (31 percent) invest in social media, with retailers and electronics and high technology leading (with 43 percent and 41 percent). With personalization emerging as a decisive factor in the success of innovation, it is imperative that social data be exhaustively mined in order to optimize consumer experience.
Pursue frugal innovation both to capture middle class consumers in emerging economies and also to disrupt markets in developed economies.
Fully 56 percent of respondents identified frugal innovation as either critical or very important to their innovation strategy (manufacturing at 74 percent, communication at 66 percent, and banking at 62 percent are the leading sectors). The importance of frugal innovation in serving middle classes in emerging markets is well established. Equally important, however, is pursuing frugal innovation in developed countries for the sake of speed, cost reduction, and the capacity to disrupt markets.
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Conclusion
The recognition has never been greater that technology, social transformation, and economic volatility will continue to roil business models.
Companies understand change is the new normal and with it the importance of continual innovation. At the same time, many are unclear how to drive higher value from their innovation efforts. Frustrated with past results, they tend to pursue a low risk approach that produces only incremental improvements while exposing their core business to disruptors within and outside their industry.
Conventional wisdom and traditional risk management may well counsel such cautious innovation. What this conservative approach can fail to protect against, however, are the renovation and invention traps that await down the road and which can entail a high price.
By putting formal systems in place to manage innovation, companies can protect themselves from these lurking if often under-appreciated dangers. Even more importantly, they can position themselves to seize control of change and become its master rather than its victim.
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About the StudyThe results cited in the article come from a survey of executives conducted by Accenture in November 2012.
519 executives (vice presidents, directors, managers) at large organizations (revenues in excess of $100 million or the equivalent) in the USA (254), UK (230), and France (35) answered a 28-question, 15-minute survey administered on-line. The respondents came from the following sectors: Banking and Capital Markets (81), Consumer Goods and Services (39), Chemicals and Natural Resources (17), Communications (21), Electronics and High Tech (68), Energy (21), Health Providers (40), Insurance (32), Manufacturing (43), Retail (75), Travel and Transportation (20), Utilities (15), Other (47).
Trend results and comparisons were drawn from a comparable survey conducted by Accenture in 2009 that sampled 639 respondents from the U.S. (330) and U.K. (309).
About the AuthorsWouter Koetzier is the global Managing Director of Accenture’s Innovation and Product Development Consulting practice. He is an expert in business strategy and transformation, with a special emphasis on commercial and innovation performance in the Consumer Goods and High-tech industries. Based in Amsterdam, he can be reached at [email protected].
Adi Alon is a Managing Director in Accenture’s Innovation and Product Development Consulting practice. His work focuses on supporting clients in upgrading their innovation execution capabilities, reduce time to market and aligning their operating model and processes with their innovation strategy. Mr. Alon has served clients in Energy, High Tech, Life Sciences, Financial Services and the Consumer Goods industries. Based in Boston, he can be reached at [email protected].
About AccentureAccenture is a global management consulting, technology services and outsourcing company, with approximately 261,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$27.9 billion for the fiscal year ended Aug. 31, 2012. Its home page is www.accenture.com.
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Accenture, its logo, and High Performance Delivered are trademarks of Accenture.
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