Some 170 of the world’s largest companies (as measured by revenue), have a declining return on investment for their innovation projects, according to research.
Why? Many companies under pressure to show that they can disrupt a market (or starve off disruption) are pursuing innovation haphazardly. Many of their investments end up being non-strategic, poorly linked to the business, and undermanaged.
The companies bucking this trend, however, according to the study published in the Harvard Business Review, strive to innovate in ways that have a significant impact on their markets and society. The companies that were successful with innovation revamped how their organizations pursued innovation and brought their capabilities together in what the authors call a single organizational architecture. That is, they developed comprehensive, well understood approaches to pursuing innovation and integrated their capabilities to be innovative.
Innovation does pay handsome dividends when companies are strategic about it, create a comprehensive approach for it, and invest in innovation. The companies in the HBR study that increased their spending on innovation by more than 50% between 2012 and 2017 saw a handsome financial return from their innovation initiatives. For these companies their market capitalization grew at a 6% compound annual rate, more than double the growth rate of global GDP for that period.
What did they do differently?
They aimed high and focused on solving big problems. For them, innovation was a means to an end, not the end goal. In contrast, less effective innovators focused their innovation investments on incremental improvements to existing products and services.
The successful innovators put greater emphasis on developing unique technological advances with the potential to create entirely new markets. They also deliberately targeted consumers’ “higher needs” such as autonomy, happiness, and social connections.
These better innovators applied a single comprehensive approach to pursuing innovation. By encouraging everyone in the organization—across their legacy businesses, new ventures, functional areas, continents, and hierarchical levels—to draw on the capabilities of their centralized innovation capability, effective innovators got the most from their innovation efforts.
According to the HBR study, the more effective innovators:
- Placed their trust in small, cross-disciplinary teams
- Invested more to develop the capabilities of senior leaders who had the job of overseeing innovation-led change and to build the skills of the entire workforce to keep up with the pace of technological change.
This research matches the research of other studies and that of InnovationOne. We have found that culture is a main determinant of innovation success and that there are six traits of highly innovative companies:
- As with the HBR article, their innovation is directly linked to their business strategies and addressing customer issues. The executives of these companies treat innovation as a strategic imperative, often speak about their innovation strategies, and encourage the participation of all employees.
- They invest in the time and infrastructure for innovation, including organizational learning and digital technology. The investment that has the highest return on investment is organizational learning and improving employee skills.
- They encourage employee questions, the generation and experimentation with ideas, failing forward, analysis, measurement, and fast decision making.
- They have well-known processes and approaches to move ideas forward that are well understood, and they delegate decision-making to cross-disciplinary teams
- Their operations are aligned to the innovative goals and projects of the company so that innovations can be quickly commercialized.
- Finally, they have changed their performance management and rewards systems to promote and encourage collaboration and innovation.
The companies that take these steps have better innovation and improved financial results.
Innovation is always challenging and has no guarantees. However, not innovating is much riskier.
Innovation should focus on the big bets for the company that address customer and emerging social needs, are disruptive, and are pursued with a common approach and cross-disciplinary involvement.