The 4 Zones Model: A Playbook for the Incubation Zone

Companies have no choice but to up their technology enabled innovation game

According to a recent McKinsey study, more than 60% of CEOs expect up to 50% of their earnings growth in the next 5 years to come from “technology-enabled” business innovations. A recent study of CIOs by IDC found that 57% expect to be defined in terms of delivering business innovation to increase revenue, margins and new products.

In order for companies to be competitively viable in this new era of digital disruption, they have to dramatically increase their ROI on their portfolio of technology innovations. As I’ve stated in earlier blogs, these digital disruptions are fundamentally changing the way companies engage with their employees, customers, supply chain partners and other key stakeholders.

Companies have been spending money on research and development at the fastest pace in 50 years. From last November to the end of March, U.S. companies funded R&D at an annual rate of $316 billion or about 1.8% of GDP which is the largest share ever for the private sector.

As such, it is disturbing to read that, according to a recent Deloitte study, the return on R&D investments by the 12 biggest biopharmaceutical companies fell from 10.5% in 2010 to 4.8% in 2013.

The Incubation Zone: The Three Innovation Playbooks Model

The 4 Zone Model I’ve developed (link to earlier blog http://eepurl.com/blFb3T) is designed to enable CIOs and their senior leadership teams to maximize the business value of IT across their organizations. IT’s charter for the Incubation Zone in particular is to help the company identify, test and validate next generation product, service and business ideas and leverage technology-enabled innovation tools to develop them.

In our work with many companies across multiple industries, we have developed a set of three innovation playbooks to help them better organize and implement their portfolio of technology innovation investments as the chart below illustrates:
At the core of this tool are three distinct innovation playbooks that clearly define the mandate and desired outcome for each one. Here are the key diagnostic questions that clarify those mandates and outcomes:

• Have we differentiated our offer enough to gain real competitive separation?
  • Have we created a truly unmatchable offer?
• Have we neutralized offers with enhanced features from our reference competitors in a timely manner?
  • Have we gotten to good enough fast enough?
• Have we optimized our opportunities for gains in resource utilization and cost reduction?
  • Have we reclaimed unproductive resources and redeployed them against differentiation or neutralization opportunities?

Our work in this space has also shown us some of mistakes companies make with their approach to innovation which results in a very low ROI on their investments. Here are two rules of thumb to avoid:

• Never tie differentiation and neutralization programs to the same release schedule
  • Differentiation has to go far
  • Neutralization has to go fast
  • Combining the two dumbs you down and slows you down

• Best in class is appropriate for productivity innovations only
  • Too low a mark for differentiation (beyond class)
  • Too high a mark for neutralization (good enough)
  • Benchmarks are for productivity programs only

The Harsh Reality about the ROI on Technology Innovation Investments

As the chart below illustrates, the majority of innovation investments do not deliver the desired results or ROI. These less-than-optimal outcomes most often occur when differentiation projects are launched too soon or neutralization projects take too long.

While there is no silver bullet that guarantees innovation success, when the three innovations playbook model and tools are successfully deployed ROIs have greatly increased in many technology investment portfolios.

In my next blog, I will take a deeper dive into the Transformation Zone and talk about how you can deploy our Three Horizons model to scale net new lines of business that produce material new revenues and profits.

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 pdmoore@woellc.com.