March 16, 2018
In the new digital world,
business innovation is the new competitive imperative.
The results of KPMG’s 2016 Global CEO study delivered some very compelling evidence of how important it is for companies to leverage business innovation for their competitive advantage.
- 66% of CEO’s believe that their business is at an inflection point and the next three years will be more critical than the last 50 years.
- 40% of CEOs expect to be running significantly transformed companies within the next four years.
- 70% of CEOs said it’s important to specifically include innovation in their business strategies.
- 80% of CEOs are concerned that their existing products and services may not be relevant in 3 to 5 years’ time.
- 70% of CEOs believe their organizations’ cultures do not encourage risk-taking and safe-to-fail environments.
The disruptive impact of digital technology
Companies that downplay or overlook the disruptive impact of digital technology on their competitive performance do so at their peril as the chart below from a recent McKinsey study clearly illustrates:
The study went on to document that companies who aggressively pursue business innovation through digital technology have a 12% ROI vs. those who invest just to protect their core business who have a 6% ROI. It also forecasted that by 2025 that 32% of global sales will come from partner networks and ecosystems.
As I said in an earlier blog, conventional thinking has always believed that hierarchically structured, vertically integrated businesses will outperform alternative business structures. Recent evidence suggests that in the new hyper-connected digital world, cross enterprise partner networks and external business partner ecosystems outperform hierarchies.
A recent Harvard Business School study documented that “leading digital companies generate better gross margins, better earnings, and better net income that organizations that have not adopted a digital-first business growth strategy.” Early digital adopters delivered a three-year average gross margin of 55 percent compared to 37 percent for digital laggards.
Most companies fail to get the ROI they want from their portfolio
of business innovation investments
As the slide below highlights, more than half of most companies’ business innovation investments generate little or no ROI.
The reason most companies don’t get the ROI they want is because they don’t have a business innovation framework that distinguishes between the different types of innovations and the outcomes they are designed to deliver. As such, they tend to manage all innovation projects with the same processes, tools and metrics which is a recipe for failure. A note here: ROI is not always the best early metric to measure the performance of a new innovation or minimum viable product or service. Early adopters are more than willing to participate in and contribute to iterative discussions that enhance your offer and increase its value and benefit.
A framework for organizing and implementing digital technology
In his book Escape Velocity – Free Your Company’s Future From The Pull Of The Past, my brother Geoffrey Moore, put forth a three-part innovation framework that is designed to significantly increase the ROI on innovation investments. At the core of this framework are three distinct innovation playbooks, as shown on the chart below, that require different management approaches to get the desired ROI.
Here are the key diagnostic questions that clarify the mandates and outcomes for the three different innovation playbooks:
- Differentiation Innovations: Have we differentiated our offer enough to gain real competitive separation? Have we created a truly unmatchable offer?
- Neutralization Innovations: Have we neutralized offers with enhanced features from our reference competitors in a timely manner? Have we gotten to good enough fast enough?
- Optimization Innovations: Have we optimized our opportunities for gains in resource utilization and cost reduction? Have we reclaimed unproductive resources and redeployed them against a differentiation or a neutralization opportunity and made sure not to combine them?
Building a new business innovation PMO
More recently I have been working with digital technology innovation teams using the 4 Zones Model framework shown below to prioritize and manage a portfolio of business innovation projects. The early results of this approach have been a significant increase in time to value and a more direct impact on new revenues, margins and profits.
With this approach, the incubation zone is used as a staging area to prioritize all business innovation initiatives. Each initiative is first segmented using the following questions:
- Are they sustaining innovations or disruptive innovations?
- Are they enabling systems productivity and cost optimization?
- Are they increasing business unit operating performance and revenue growth?
- Are they enabling business model transformation?
In addition, instead of using resource capacity and budgeting constraints to make prioritization decisions, we deploy the following three questions:
- Should we do it? Does it align with and support critical business outcomes?
- Can we do it? Do we have the relevant skills, capabilities and tools to achieve the desired outcome?
- Did we do it? Do we have the right metrics to measure the achieved outcome vs. the desired outcome?
This new approach moves project prioritization decisions from a budget exercise to a business value creation exercise that leverages business innovation as the new competitive imperative.
Some best practices to help you win the business innovation wars
In working with different companies over the past several years to help them hone their business innovation skills, I’ve seen a series of best practices that increase the odds of winning the business innovation wars.
- You need to gain cross enterprise alignment and support for a digital first business growth strategy and implementation plan.
- The competitive landscape is changing so fast that anything less than an all-in approach will likely fail.
- You need to create a culture of continuous learning and experimentation and be willing to fail fast and learn fast.
- You need to excel at segmenting competing innovation options into three playbooks and manage each type differently to maximize their potential ROI.
- You need to be able to leverage data and analytics to identify and create entirely new customer services and experiences.
- You need to be able to construct and orchestrate business partner networks & ecosystems that leverage the competitive benefits of assets you don’t own and directly control.
- You need to have the resolve to sacrifice short term revenue and earnings in order to create sustainable long term competitive advantage.
As always, I am interested in your comments, feedback and perspectives on the ideas put forth in this blog. Please e-mail them to me at firstname.lastname@example.org.