Source: theHRDIRECTOR
Date: May 2006

Innovation is vital for companies, ensuring that they not only provide what their customers want now, but that they can anticipate what will be required or desired in the future. But how can organisations balance inspiration and forward-thinking with bottom line costs and risk? Tim Jones, Principal, Innovaro, considers this delicate balance. Why innovate?

It is hard to miss the fact that innovation is increasingly being seen as a good thing, and it seems as if everyone is now promising to ‘deliver innovation’. From FTSE 100 companies and EU Framework programmes to the World Bank and the UN, it is being embraced as a source of improved performance, sustained growth and long-term benefit. Certainly it has an attractive message, although quite what it actually means to different organisations, disciplines and even individuals varies widely. Research undertaken over the past decade repeatedly supports this:

• Innovative organisations are twice as profitable as other firms
• The top 20% of innovative firms deliver up to four times the shareholder return when compared to the bottom 20% 
• Companies generating 80% of their revenue from new products typically double their market capitalisation over a five year period 
• Innovative firms have repeatedly shown above average growth, and
• Innovation leaders consistently outperform both peers and most major indexes in terms of share price growth.

Innovation is also a stimulant for building a world-leading organisation (Microsoft, Rolls Royce and Apple), something that attracts the best people (Dyson, Egg and Google), a message that supports a corporate ambition (3M, Toyota and Adidas), an ingredient of increased brand value (Nokia, PepsiCo and Samsung) and a means of promoting continued leadership (BP, UPS and H&M). In fact, innovative organisations are widely seen as ‘organisations worth working for’. Furthermore, a positive influence of innovation on the external environment is also occurring through university spin-outs (Cambridge and MIT), creating a cluster of companies around a leader (Nokia and South West Finland), building a leading generator of added value from technology (Ireland) or even being linked to national repositioning (Taiwan’s ‘Innovalue’ campaign). It is, therefore, not surprising that every CEO wants some of this magic dust.

INNOVATION LEADERS
At one level, successful innovators all share some common elements:

• Strategic Focus – There is a strong strategic focus on the role of innovation within their markets and the contribution that innovation makes to the business.
• Insight – They have an excellent comprehension of the marketplace and customers, and an ability to configure products and services around evident needs.
• Collaboration – They understand clearly the core capabilities of themselves and their partners and work together to deliver innovative products and services.
• Process – They have simple yet effective approaches to identifying, and then quickly launching, new products and services.
• Organisation – Roles, responsibilities and culture all support innovation while appropriate metrics are used to measure and reward successful innovation.

However, innovation leaders - those companies that make the most of their innovation activities and balance inspiration and forward-thinking with bottom line costs and risk - also have something else. Innovation leaders are those who are either able to better understand customer requirements and exploit new market opportunities, or access new technologies to deliver successful new products and services. Innovation leaders are the
companies that CEOs want to head up and other organisations try to emulate.

An annual assessment of which companies in each of twenty sectors are making the greatest innovation impact, www.innovationleaders.org, highlights several organisations that are growing the top and bottom line, successfully supporting innovation by balancing long term foresight and medium term innovation with both long and short term risk:

• Anglo-Dutch FMCG manufacturer Reckitt Benckiser has  again increased revenues by eight per cent and their operating margin hit a target 20% a year ahead of schedule. Amongst several key dynamics at play within this company is the ability to launch swiftly, often incremental new products into test markets and then, if successful, roll them out globally in record time whilst simultaneously reducing manufacturing and supply costs. Reckitt Benckiser is an organisation obsessed with delivering sustained short term top-line growth through innovation, but one which is also pre-eminent in reducing costs and increasing productivity at
  the same time.
• Energy leader BP is, by contrast, an organisation that is focused on the longer view and, through massive investments in technology, is seeking to deliver significant game-changing innovations to the world – especially in the area of alternative fuels. Whilst other oil majors have similar ambitions and even activities, in BP the direct connection of these long term goals into actionable internal performance targets that ensure
  appropriate risks are suitably managed, is enabling the company to deliver its ambition of being “twice as good as the next best competitor”.
• Likewise, Nokia, known globally for its leading edge phones that command over a third of the market, is successfully managing the innovation/risk balance. Whilst new insights continue to drive Nokia into fresh, potentially high-risk, innovation spaces in gaming, TV and other services, the company’s internal obsession with matching engineering excellence with low cost production means that, even though largely still made in Finland, its products are both price competitive in the market and also command the highest margins in the sector.

In these and other such leading innovators, the ability to manage risk is being successfully integrated with the capability to deliver both incremental and radical innovations into the market. Moreover, as these companies have increasingly been seen as the ‘organisations worth working for’, so they continue to attract the key ‘people worth employing’ and hence they continue to build sustainable innovation capability.

KEY CHALLENGES
For other companies seeking to become more successful and sustainable innovators, there are several areas that continue to provide major challenge:

• Firstly, for many focused on the day-to-day delivery of existing products with P&L responsibility driving short-term focus, there is little opportunity for radical innovation to occur. Many companies are failing to provide an alternative route to market for major innovations that will not destabilise the day-to-day, but will enable higher growth products and services to realise the desired impacts.
• Secondly, in other companies it is not uncommon to find an external brand aspiration, or even CEO level analysts briefing, that mandates innovation across the board but is disconnected from the internal culture. While several UK firms are currently seeking to support the promise of doing things differently or trying something new, inside the organisations they are bound by restrictive innovation investment protocols, ineffectual  decision making and lack of alignment of growth strategies with individual responsibilities that are driven by a short-term risk adverse culture. Such companies are failing to realise their innovation investments not through lack of resource or capability, but because of no clear internal innovation ambition and no freedom to experiment and challenge.
• Thirdly, there are a number of companies that have implemented new business targets, individual metrics and even integrated balanced scorecards that all seek to motivate and drive innovation activities – with little impact. Individuals and teams alike are being motivated by activities not outcomes and, as such, there is a fundamental disconnect between the ‘innovation’ activities and the growth that they are meant to deliver.

CONCLUSION
Innovation and risk, although sometimes uncomfortable bedfellows, are certainly two issues that can be successfully aligned within the organisation. As highlighted by those companies identified each year as innovation leaders, innovation that is driven by insight and inspiration and managed within a balanced framework of risk and opportunity, continues to have top and bottom line impact. Although there are a plethora of
hygiene ingredients for successful innovation – from process and insight to strategic focus and motivation – across many of the current leading innovators there are three things that companies are doing to deliver high impact innovation, but without compromising their ability to manage risk in the day to day:

1. Innovation Ambition
Samsung encourages its employees to “create products that are amazing, accessible and affordable”, Adidas seeks to “launch at least one major technological innovation per category each year” and Google believes that “great just isn’t good enough”. These simple and yet focused ambitions successfully set not only the direction but also the pace for innovation with these firms. As with BP and others mentioned above, innovation leaders use such clear innovation ambitions to drive innovation delivery within the organisation and into the market.

2. Route to Market for Innovation
Shell’s Game Changer group provides a route for new ‘white space’ strategic innovations to be explored and developed outside the day to day business activities, and even outside the core business focused R&D that is taking place. Whether five, ten or 20 years away in terms of potential impact, this vehicle is successfully enabling new innovations to be built that will seed the future of the company. Similarly, Vodafone’s Future Products Unit has a remit to focus on the medium term of three to five years as its innovation remit. While the multiple business units concentrate on delivering new products and services to customers in as effective a manner in the short term, this group of 150 people worldwide is also exploring future options for the company that will realise significant innovation driven growth.

3. Innovation Leadership
Lastly, the responsibility for innovation delivery has risen up the organisational hierarchy out of its traditional tactical homelands of R&D and marketing, and directly into the lap of the CEO or even director of Strategy. In some leading US examples, such as ADM, Cargill, and PepsiCo, the role of chief innovation officer has come into being. In the UK, in the wake of similar appointments at Reuters and Citibank, RBS has recently appointed a global innovation director. The BBC has an innovation director and both Cadbury’s and Diageo have innovation as a board level responsibility.

Madelaine Cooper of Heroes, one of the first recruitment firms to address the demand for more innovation directors in the UK, confirms this: “More and more firms focused on sustainable growth in Europe are seeing that, to link together innovation ambition and innovation delivery, board level leadership is becoming key. The challenge for many seeking to appoint an innovation director is, however, two-fold – first in fully understanding and clarifying th e innovation remit and approach, and then secondly in finding the right candidate to deliver against it.”

Whether focused on existing or new business growth, as innovation has risen to be on the CEO agenda, so has the leadership of innovation within the organisation risen to become a boardroom level responsibility. As innovation is ever more recognised as the primary source of organic growth, the ability to manage its delivery and balance the innovation/risk dichotomy is of paramount importance.