Fix your culture to drive innovation
My most frequently asked client question in 2011 was around innovation. Senior managers wanted to know: “What is the best way to foster innovation in my organization.” This came as no surprise. Ongoing economic uncertainty, relentless global competitiveness, sustainability concerns and the high cost of R&D has put innovation near the top of most corporate agendas.
My answer is as simple as it is complex. In our experience, firms can drill deep into their customer’s needs, hire the best minds and allocate generous amounts of capital, and still fail to ignite the innovation engine. Though investment and ideas are important, delivering real innovation comes down to getting the “soft” factors right, such as a company’s culture, management systems and leadership.
A new survey published in strategy+business magazine supports these learnings. The authors, Booz & Company, canvassed 600 innovation leaders from 400 companies on their innovation strategies, practices and results. For perspective, these high-flying B2C and B2B firms represented $182B in 2010 R&D spending. Below are some of their key findings, mated with our insights:
- Spending lots of money will not necessarily lead to more innovation.
High R&D funding does not correlate with financial performance. Whether the measure is absolute investment or R&D spending as a percentage of revenue, there is no relationship between the amount invested and the results it generates. In fact, some notable innovation and financial leaders like Apple and GE tend to rank at the bottom of R&D spending tables.
- Innovation is expensive and must be effectively managed.
R&D spending has a large and growing bottom line impact. Thanks to improving business confidence and growth prospects, 68% of respondents (across all sectors) increased their 2010 innovation spending to $550B, up 9.3% versus 2009 and 5.6% versus the 2008 pre-recession high. And, these investments represent only part of the picture. All initiatives carry significant indirect costs such as management time, business risk and opportunity cost. As a result, CEOs need to remain diligent around innovation priority-setting, program ROI and commercialization challenges.
- Innovation goals do not account for the difference in financial performance.
Both financial leaders and laggards shared the same innovation goals. Specifically, “superior product performance” and “superior product quality” were ranked as number one or two by a plurality of more than 40% of respondents.
- Having an enabling and aligned organization is the key innovation driver.
Organizational enablement (i.e. supporting cultural attributes and strategic alignment) is strongly associated with superior financial performance. Firms with a high level of organizational enablement (interestingly, only 44% of the total sample) outperformed the average firm in the study by approximately 15% in terms of enterprise value and by 8% in terms of gross profit.
Many companies do not fully support innovation, notwithstanding the substantial amount of capital deployed. For example, 36% of firms did not strongly align their innovation initiatives to their corporate strategy while 47% reported that their culture did not support innovation. Ominously 20% of the respondents reported having no innovation strategy at all.
Our client experience has identified two other prerequisites for innovation germination. For one thing, an innovation mandate can only flourish when accompanied by supportive management systems – business processes metrics, scorecards, and capital allocation mechanisms. Secondly, corporate leaders must maintain a strong commitment to innovation in order to sustain project momentum, reduce conflict and ensure alignment across functions and lines of business.
- Cultural and alignment enablers will vary by organization
Significant research and market experience underscores the critical importance of culture – a firm’s norms and practices that govern behavior – in driving long term financial performance. Innovation-friendly cultural attributes would include tolerance for failure, a focus on the customer, silo-spanning collaboration, and openness to external technologies or ideas. Although most firms will agree with these enablers only a minority such as P&G, Google and 3M have been able to fully inculcate and leverage them. Other companies seeking to be more innovative will need to consider transformational strategies like redesigning their organization or bringing in innovation through M&A or alliances.
Importantly, the vital role played by culture and alignment is not impacted by the firm’s approach to innovation, for example, whether they are customer needs seeking, technology-driven or market-based. How these 3 innovation strategies stack up in terms of effectiveness and efficiency will be the focus of a later column.
The last word on the role of organizational enablement goes to Dover Corporation’s Soma Somasundaram: “Poor innovation performance is usually not caused by a lack of ideas or aspirations. What some companies lack is the structure needed to effectively dedicate resources to innovation. It’s the lack of will to develop a strategy that can balance today’s need with tomorrow’s.”
For more information on our services and work, please visit the Quanta Consulting Inc. web site.