For many top managers, innovation is like the mythical Fountain of Youth. If only they could lead their companies to its fabled waters, they would step out of the pool rejuvenated—or, to state it in business terms, with a sustainable competitive advantage. But alas, while many are believers in innovation's extraordinary powers, few can actually bear witness to its miracles.
Indeed, innovation is broadly accepted as an important means of value creation. Yet the value that innovation generates often takes time to materialize, and the business case for innovation is inherently fraught with risk and uncertainty. Frequently, markets are slow to recognize successful innovation, and impatient investors don't always afford executives the luxury of waiting until the market prices in their prescience.
A.T. Kearney has been studying innovative companies from across Europe for the past. And we've found that innovation leaders consistently outperform their peers not only in share price but also in revenue and earnings growth—arguably more meaningful indicators of value creation at a time when markets have proved to be extremely fickle. The difference is significant (see figure 1).
If innovation, then, is critical to resilience during economic downturns and an unmistakable path to long-term value creation, the question then is: What makes a company a Best Innovator?
Separating the Best from the Rest
Best Innovators don't just wake up one day and decide to innovate. Innovation must be enabled and unlocked, and the companies that do it well build specific capabilities to continuously fuel, develop, and manage ideas from concept to market launch. In other words, they actively create the conditions for successful innovation by developing the ability to explore innovation concepts and the skill to bring select concepts to fruition (see figure 2).
Charting the waters
Ideas are like nutrients floating in the sea. They are innumerable, yet if they could be isolated, captured, and refined, they could feed humanity. The ability to successfully isolate and capture ideas—refining them into concepts ready to be developed—is the primary driver of innovation performance in the exploration stage, and it requires several building blocks.
Many innovative endeavors are just evolutions of current value propositions. But in other cases, innovation provides a real breakthrough; it challenges the business territories and goes far beyond existing capabilities. A common requirement of all innovation projects, regardless of their disruptiveness, is the need for a clear innovation strategy that provides a "compass" for innovation, a set of directions that exclude irrelevant ideas and ensure alignment with company strategy.
Depending on the company, directions for innovation take various names—innovation areas, search fields, innovation platforms—but cover the same concept: business opportunities generated by unmet consumer needs, social and legal trends, and emerging technologies. These search fields can be closely connected to the existing offer, as with Coca-Cola's packaging innovation, or make incursions into more distant territory, as Nike did by entering the health monitoring business. The fields must, however, be fully aligned with corporate strategy.
Innovation leaders put more effort than their competitors into analyzing market and technology dynamics to better understand future challenges and opportunities. And they are skilled at linking an understanding of these dynamics to search fields aligned with the company's strategic growth gaps.
Leaders take a well-rounded approach to innovation, going beyond products to focus on innovation in processes, services, and business models. They do this, for example, by realigning all their business model components to serve new segments or unmet customer needs—and they do so in a unique and sustainable combination that is internally consistent and difficult for competitors to replicate. The Dutch financial conglomerate ING's online banking service, ING Direct, is a textbook example of business model innovation, as it offers a narrow range of simple, easy-to-understand banking products to customers while keeping its branch network to a bare minimum.
An inclusive view of innovation is not to be taken lightly: Research shows that while between 12 and 15 percent of the operating profit at manufacturing companies comes from product innovation, another 8 to 14 percent is attributable to other types of innovation.
Because uncertainty and risk are highest in the preliminary stages of innovation, failure is definitely an option in the concept exploration phase. In fact, in many cases it's a desirable possibility, for if all concepts are considered good, then none is likely to be good enough. Leaders display the ability to quickly distinguish high-potential ideas. They weed out less promising concepts as early as possible, as delaying the inevitable dilutes resources and makes a no-go decision even tougher to adopt.
The screening process involves clearly defined milestones that consider diverse criteria, including consumer value, market attractiveness, fit with present capabilities, and the risk-return relationship. Moreover, top innovators often try new tools and approaches such as "design thinking" to take into account meaningful consumer inputs in early stages of the innovation process.2 Concepts are systematically tested as early as possible; paper briefs are not sufficient to decide to develop and launch an innovation. Innovation leaders also bring in the most knowledgeable internal and external experts to decide quickly about which ideas to pursue.
It is now commonly accepted that involving innovation partners from all along the value chain broadens the scope of ideas and avoids the not-invented-here syndrome. Many innovation management concepts develop the theme of "open" or "porous" models where collaboration with third parties is essential.
Innovation leaders take full stock of their value chain partners' assets, resources, and capabilities. Their processes integrate a broad range of internal and external stakeholders as early as the idea generation stage in order to continually fuel the idea portfolio. Innovating in open mode can take multiple shapes, from incubators to corporate venture capital investments.
Suppliers are natural and accessible partners in innovation. Innovation leaders better understand the power of their supply base and work more collaboratively to involve the right suppliers as early as possible in the innovation process (see figure 3).
Some companies even reach out to their customers and users to select the most promising search fields and to fuel their idea funnels. A case in point: GE, in conjunction with several venture capital partners, launched its popular Ecoimagination Challenge to collect ideas on how to improve the world's energy future. In addition to the 4,000 submissions received in a first round, plus another 1,000 entries in a second round focused on the smart grid, nearly 75,000 citizens from more than 100 countries commented or voted on the ideas. The initiative was so successful that GE has since replicated it in China, Australia, and New Zealand, and it has also launched a Healthyimagination Challenge to find the best ideas to improve breast cancer diagnostics.
Sailing the course
Innovation is about creativity and new horizons, but that's not all it's about. Rigor and excellence in execution are also necessary, and superior execution does not happen by accident.
Best Innovators have simple yet robust innovation development processes to govern all development activities, from design to industrialization, marketing, and launch. These well-structured processes are impervious to functional silos and have clear milestones to ensure that choices about whether to continue development are made (and enforced) at the right stages. They also engage management at the appropriate times and places, bringing in top executives as necessary to provide guidance and adopt major decisions, without supplanting the experts.
Companies that excel at innovation conduct rigorous portfolio management, which provides long-term visibility and the ability to detect any gaps, overlaps, or inconsistencies in the innovation pipeline. They take an aggregate view of the resources dedicated to innovation and encourage resource sharing among projects when warranted. Furthermore, innovation leaders use the portfolio to actively manage the innovation pipeline's global value, and they employ cross-functional performance indicators to foster interoperability and consistent management throughout the innovation cycle.
To anticipate and develop all elements of innovative offerings in a timely manner, Best Innovators form interdisciplinary, high-performance teams that work in project mode, including people not only from R&D and marketing, but also from sales, procurement, supply chain, and manufacturing. The teams work under the supervision of skilled project managers who are responsible, among other things, for sequencing and coordinating contributions from experts, and ultimately, for delivering innovation.
Finally, all innovation leaders emphasize the importance of building and nurturing an innovation culture, especially during the development phases. Among the main dimensions of a successful innovation culture: implicit recognition of the value of innovation, a sense of urgency, and a readiness to change (see figure 4).
Final Port: Successful Innovation
As markets remain volatile, meeting growth targets will be more challenging than ever. But as we've seen, Best Innovators post above-market performance in both good and bad times. They chart a clear innovation strategy and screen ideas early in the exploration process to concentrate resources on only the most promising ones. They calculate the odds and bet on innovative offers that the market craves.