Archive for the ‘Financial Performance’ Tag

The best innovation strategy

It’s one thing for a company to prioritize innovation. It’s quite another to reap the rewards over the long run.  The hard reality is that most product innovations will fail the market test.  Our research has shown that a company can increase their R&D returns by better aligning their innovation initiatives to their core business strategies, management systems and cultural norms & practices.  A recent survey of global innovators bears out this learning 

In their annual survey of the top 1000 global innovators, Booze & Company looked at the relationship between strategy, culture and innovation.  Three different approaches to innovation emerged from the corporate feedback – Needs Seeker, Market Reader and Technology Driver.  

Many high performance firms such as Dell,Toyota and Samsung are Market Readers. They use innovation to keep up with, not outflank, competition in their core markets.  These enterprises take a cautious approach to innovation preferring to be “fast followers.” On the other hand, Needs Seekers like P&G, GE and 3M pursue customer-centric innovation strategies.  They actively survey current and potential customers about their existing or unmet needs in order to shape new products and services.  Technology Drivers like Google, Apple and HP let their technology direction and existing intellectual property dictate the pace and scale of their innovation.  Technology Drivers seek out first mover advantage with breakthrough products that redefines existing markets or creates new market space.

According to the research, all three innovation approaches were successful in delivering positive financial results.  However, the study found that the Needs Seekers had a superior approach to turning potential innovation into superior financial performance. Six of the top ten most innovative companies were Needs Seekers, although they represented only two of the ten largest R&D spenders.  This variation in innovation outcomes did not trace to R&D spending levels or prior success.  Rather, differences came down to how enterprises managed two critical organizational variables: how receptive were their cultures to innovation and how innovation efforts were aligned to their business and functional strategies.

Needs Seekers out-perform as a result of their deep understanding of the customer and innovation management expertise in areas like failure analysis and commercialization.   These firms combine excellence in customer research, product development and operations with tight strategic alignment and an innovation-accelerating culture.  They are also very open to collaborating with external organizations for ideas and technology.  Needs Seekers are passionate about delivering and marketing superior products that address customer needs and experiences.  

Because of management, resource and cultural factors, not every company can be (or wants to be) a Needs Seeker.  These organizations can be successful by borrowing from the Needs Seeker playbook and maximizing their own unique attributes.

Market Readers will drive innovation by staying attuned to local markets customers and competitors. Once a Market Reader detects an important product innovation hitting the market, they must be quick to replicate, and if possible, leapfrog it.  As a result, they require effective decision making and resource allocation mechanisms, agile product development and close partnerships with their supply chains.

Technology Drivers seek both incremental and game-changing product innovations. They fund both applied and basic R&D initiatives, looking to develop compelling platform technologies that can germinate new product categories and create legions of new customers.  To be successful, these companies must: have an ambitious, technology-inspired vision; foster creativity and technical excellence, and; encourage collaboration between R&D, marketing and product groups.  As well, Technology Drivers will regularly seek out exploitable ideas and innovations from outside their organizations using sophisticated Open Innovation strategies.

Although there are different paths to accelerating innovation, all firms can leverage the above best practices:  expert innovation management capabilities, strong familiarity with relevant markets, customers and technology ecosystems, cross-functional strategic alignment and an innovation-supportive culture.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

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:

  1. 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.

  1. 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.

  1. 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.

  1. 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. 

  1. 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.

Goals gone wild: pitfalls in target setting

Every year or quarter sees managers turn their attention to an important and time-consuming task:  setting goals for the next reporting period.  The organization’s objective is to align around SMART (specific, measurable, attainable, realistic and timely) targets.  Goal setting is important for many obvious reasons including setting financial expectations, allocating resources and motivating & measuring employee performance. Despite its significance, the process is often marred by negative analytical, political and organizational factors – many hidden – which lead to sub-optimal business results.

Below are the three biggest challenges I have witnessed in goal setting:

  1. Goals are vulnerable to unethical and risky practices like sandbagging and steamrolling. Sandbagging occurs when managers manipulate sales demand and product supply to guarantee the likelihood of hitting the target.  Some industries like consumer goods, IT and professional services are rife with this type of behavior.  Sandbagging can lead to unnecessary customer purchases, missed sales, and extreme discounting.  In other cases, overly aggressive managers can resort to steamrolling (i.e. the over zealous pursuit of the goal), resulting in risky business decisions and internal conflict.
  2. Flawed goals are used.  Goals that do not directly impact key business drivers like revenue, cash flow or profit can focus management efforts and resources in the wrong places. For example, customer satisfaction measures tell a firm how happy a customer is but not whether they will remain a customer or refer you to a prospect.  Moreover, imperfect goals can shift management attention away from more important but difficult to measure goals like boosting productivity. 
  3. The targets are seen as illegitimate by the organization.  Illegitimate goals can arise from weak intellectual, historical or market rationales as well as management hubris. In fact, I have witnessed leaders choose a goal solely because it sounds impressive – also known as the BHAG or big hairy audacious goal. Furthermore, goals can be too specific or too broad rendering them ineffective as targets.  These factors can easily retard employee motivation and performance as well as degrade organizational performance. 

Given the challenges, should goals be used in every situation?  No, according to new research recently published at Harvard Business School.  The study suggests that goal setting in every situation can be counter productive, significantly hindering business and individual performance.  The researchers contend that:  “…the beneficial effects of goal setting has been overstated and that systematic harm caused by goal setting has been largely ignored.” Many of the problems identified in the study are noted above.  The authors recommend 10 questions managers should ask themselves before engaging in the goal setting process.

Used wisely, goals can inspire employees and improve performance.  Executives should consider whether the harmful effects of goal setting outweigh the potential benefits.  If employed, goal setting must be used carefully and sparingly, not as a standard remedy to increase productivity and change behavior.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Green companies outperform in times of volatility

It is conventional wisdom that sustainability and corporate social responsibility (S&CSR) programs can improve an organization’s image, morale and recruitment efforts, not to mention make a positive environmental impact.  Yet, many executives remain skeptical that these initiatives can deliver tangible business benefits and are the best use of scare capital and management attention.  Not surprisingly, many firms view the current recession as a time to batten down the hatches and not pursue unnecessary investments.   

This view can now be challenged by hard data. New research from AT Kearney, a consultancy, suggests that executives should think twice about cancelling or deferring sustainability initiatives during recessionary times.  The study showed that companies that are committed to launching and maintaining S&CSR initiatives will outperform their peers in financial returns.

In the second half of 2008, AT Kearney looked at 99 US public companies spanning 18 industries to understand how S&CSR-focused companies fared against sustainability-specific market indices.  Sustainability-based practices were defined as tangible programs that were geared toward protecting the environment, promoting social well-being and driving business results. 

The study’s results were instructive:

Sustainability-focused firms out performed in almost every sector.  Sixteen out of 18 industries awarded better returns to S&CSR-focused companies.  The 2 industries that underperformed were Construction & Materials and Personal & Household goods.

The performance differential was significant.  The difference in shareholder value between companies after 6 months was 15% or an average of $650 million. The industries with the highest 6 month stock price differential were Media, Automobiles & Parts (each 133 vs index), Financial Services (125 vs index) and Industrial Goods & Services (123 vs index)

Why did some companies do better than others?  For one thing, the market could be rewarding a longer term, more comprehensive and genuine commitment to S&CSR and risk management versus more ad hoc efforts.  In particular, sustainability driven innovation, supply chain optimization and green product development will yield higher returns in a firm that treats S&CSR as a strategic priority with proper funding and focus.  In addition, better financial results could be attributed to stringent governance, risk management and compliance efforts needed to fully deploy and manage S&CSR programs.

There are important implications for the poorly performing companies. Half measures with sustainability programs may be a waste of money and effort.  Laggard companies should consider one of three strategic options: 

  1. redouble their S&CSR investment and focus to catch up to leading competitors;
  2. look for market or supply chain ‘white space’ where they can leapfrog competition;
  3. abandon all sustainability efforts (except what is government-mandated) and direct their capital elsewhere.

For existing high performers, staying the course can be very rewarding.  Firms should consider increasing their sustainability focus if they deem it to be a major driver of competitiveness and market differentiation.

Despite some clear findings, managers should treat these results cautiously. The second half of 2008 was an atypical period in the public markets.  Likely many of the findings would be different during a more stable economic period.

For more information on our work and services, please visit the Quanta Consulting Inc. web site.

The Impact of Social Pressure on Financial Performance

Most executives across every industry will acknowledge that social pressure can negatively impact financial performance.  If you are doubter consider the cases of Nike and Walmart, who saw their corporate reputations tarnished and revenues impacted due to aggressive social pressure stemming from child labour practices within their Asian supplier networks.  As a result of these and other cases, many companies have implemented a series of strategies under the umbrella of Corporate Social Responsibility.  For most companies, CSR initiatives have been deployed to safeguard corporate reputations (and shareholder value) by pre-empting and mitigating the effects of anticipated and unexpected social and political pressures.  Examples of this pressure could include product boycotts, over-zealous regulatory enforcement, internet smear campaigns, public protests and statements to the press.

Despite the flurry of activity and funding, most executives do not understand how and why social pressures impact financial and brand performance.  A new, award-winning study published at the Stanford Graduate School of Business sheds some unique light on this topic.  The authors looked at how political and social forces impacted business performance and corporate strategy in 2,010 companies over the 1996 to 2004 period.   The research yielded some interesting conclusions:

First, there is no clear link between social pressure and social performance. Greater social pressure often leads to better social performance among companies.  On the other hand, the researchers also found the reverse is true — better social performance can lead to greater social pressure. Why?  Activists and NGOs often target firms precisely because they are responsive to social pressure.

Second, in the short-term, greater social pressure is associated with lower financial performance. Social pressure can hurt a company’s reputation, brand equity, revenue, cost structure (though higher compliance and PR spending) and morale. Initially, social pressure tends to boost corporate social performance while hurting financial performance.  Longer term and with strategic and consistent CSR initiatives, many firms can leverage superior social performance into share price increases and higher brand premiums as a result of greater demand from socially-responsible investors or differentiated market positioning. 

Third, financial and social performance are largely unrelated, except in certain industries. Within the consumer good sector, financial performance is positively associated with social performance, since consumers can directly reward a company’s socially positive behavior by purchasing its products or paying a brand premium. Among industrial companies, the opposite is true — financial performance is negatively associated with social performance. This traces to the fact that responsible behavior is often expensive, and there are no masses of consumers to directly reward an industrial company.

Fourth, “private politics” matter more than “public politics.”  The research showed that the negative financial impact of social pressure was due almost entirely to the actions of “private politics” — activists and non-governmental actors  — versus the actions of “public politics,”  those stemming from government actions 

This research is an important first step in drawing an explicit link between social pressure, CSR and financial performance.  However, more integrated research is needed to help companies understand CSR best practices that enhance shareholder value as well as determining the ROI of specific initiatives.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

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