To achieve sustainable growth, companies must do a better job at integrating product innovation with process and service innovation.
(Editor’s note: This is an executive summary of a whitepaper available for download at desai.com/resources/resources.asp.)
Creating a roadmap for sustainable value creation requires an organization to truly master all aspects of innovation. Organizations looking for a competitive edge generally focus on product innovation, but most have little sustainable competitive advantage. Many new products never generate a profit, and those that do are often quickly copied by the competition, negating any long-term advantage. The result? A significant investment in product development, without a commensurate return in market share.
It is not a surprise that revenue growth is the primary driver of shareholder value and the number-one challenge for every business sector around the world. Yet today, growth objectives for most industries are tempered by a continuous focus on cost containment.
To achieve sustainable growth, companies must do a better job at integrating product innovation with process and service innovation, finding new ways to improve efficiency and customer service. That’s the kind of innovation customers demand. It is also the kind of innovation competitors will find difficult to duplicate. Yet some organizations have focused on product innovation for so long they don’t know how to innovate in any other way.
Transforming a company into an innovative enterprise is a major challenge that generally requires new strategies, new tools and behaviors, as well as a dedicated process for nurturing and commercializing good ideas. That deep commitment to innovation is the surest way to achieve meaningful and lasting differentiation.
Institutions with broad-based innovation capabilities enjoy higher customer satisfaction, greater loyalty, faster revenue growth, stronger earnings, and ultimately, dramatic lifts in investor returns.
We believe that an organization can achieve sustainable growth through innovation by:
- Having a clear strategic intent. A unique direction for the company that will generate a specific value (Top-line, bottom line or other).
- Value creation strategy. Depending on the value target, creation of a vertical and horizontal organizational alignment for everyone to see themselves in the vision and mission. This is essential for future returns.
- Developing deep insights. Commercially savvy perceptions to help develop great ideas that can be ventured profitably. Without insights, organizations will predictably migrate to Commodity Island with other industry laggards.
- Mobilizing strategically with discipline. Vision, strategy, leadership and ideas are all required for growth, but they don’t guarantee success until you execute with discipline.
- Having high-performing innovators. Innovation can occur by having innovators who can generate real wealth—not just come up with great ideas. Those who over-utilize resources and under-deliver value cannot be called real innovators.
- Selecting top-talent with optimum financial behaviors. Developing talent by creating self-awareness about what specific corrective actions executives can take to develop optimal behaviors.
The Unforgiving Markets
Along with productivity and cost control, the imperative to innovate transcends economic cycles and remains constant as the only long-term means of creating and maintaining the value of the enterprise.
Over the last three decades, focus and attention on quality, strategy execution, process automation, etc. have given business leaders strong results in achieving cost containment, process improvement and operational efficiencies—all tools for improving corporate performance. The hard truth is that there is only one roadmap to long-term sustainable value generation—continuous, profitable, top-line growth. Historically, the market has consistently rewarded profitable companies with higher values than those organizations that achieve their growth primarily through cost-cutting.
Accepting that profitable growth drives shareholder value, the next logical question is: What are the primary drivers for profitable growth? While the list of growth levers—addition of product lines, expansion into new markets, acquisitions, strategic alliances and partnerships, and joint marketing—is certainly large, research indicates that innovation sits at the top of a profitable growth strategy. In fact, Return on Invested Capital (ROIC) is most easily achieved when an innovation framework is aligned to corporate strategy and when it is enabled with the Voice of the Customer (VoC) every step of the way.
In the recent report “Value Innovation: the Strategic Logic for High Growth,” published in the Harvard Business Review—and in Desai’s own applied field experience—the data pattern can be used to conclude a direct correlation between innovation and sustainable growth. According to the report, a study of large U.S. and European companies found that discontinuous growth (the opposite of modest, gradational, ongoing, incremental growth) initiatives represented 14 percent of total projects, but fully 38 percent of new revenues and 61 percent of new profits.
Barriers and Risk
The keys to becoming innovative are highly dependent on your ability to address four critical barriers that are incumbent in most organizations. When not addressed together, the journey towards sustainability and value creation invites a higher risk of failure, potentially minimizing the results of innovation investments.
- The first barrier is that most organizations do not have the mindset to harvest ideas and manage those ideas.
- The second barrier is not recognizing—and then not aligning—the abundance of resources available to large organizations for investment in innovation.
- The third barrier is to recognize the sheer size of the human capital assets that are under-utilized and disengaged from an organization’s creative capacity.
- The fourth and final barrier relates to the broad product and delivery capabilities that large-scale organizations possess.
Agility for Speed
Most organizations have come to realize that organizational structure and more importantly, organizational decision-making processes are primary determinants of whether the organization will be innovative and agile.
For innovation, the ongoing debate regarding “best” organizational structures, no matter how complex, often returns to a single dilemma: centralization or decentralization of decision-making. Successful companies have developed an innovative answer to this question—it is all about the way in which you decentralize decision-making that makes all the difference in the world.
The Game of Innovation
It takes many elements to nurture innovation. Innovation is elusive. It cannot be produced on demand, nor can it be corralled or scheduled. Real innovation that matters and has a major impact in practice is extremely difficult to achieve. At best, the organization can create an environment in which innovation seeds are planted and nurtured, so the fruits can be harvested quickly thereafter.
Like a game of soccer or hockey, innovation is arduous, difficult and tricky. Be prepared to score a game-winning hat-trick once, maybe twice—but only if you are “in the game of innovation.” iBi
Jatin DeSai is chief executive officer of The DeSai Group, an Innovation Execution consulting firm based in Connecticut. DeSai’s Strategy-Driven Innovation Framework (SDI) is based on 25 years of innovation experience with regional and global clients across numerous industries. Using systematic execution methods, SDI directly addresses your specific mandate for innovation and can help move your organization towards the value target you are trying to hit.