July 31, 2024
In the digital world,
you either innovate or stagnate
How successful is your company in building its innovation capital and resources?
According to Harvard Business Review, researchers estimate that 70–90% of innovation projects fail. This includes new product innovations and business innovations that aim to change an existing market. And despite new organization structures, internal incubators, big data, and even artificial intelligence, there is no evidence those numbers are improving.
According to one Gartner report, a staggering 85% of AI projects fail. Several factors contribute to this high failure rate, including poor data quality, lack of relevant data, and insufficient understanding of AI’s capabilities and requirements.
The myriads of new disruptive digital technology innovations have raised the leadership bar for success. Companies can no longer pay lip service to innovation as an addendum to their business growth strategy if they want to compete as viable digital enterprises.
Leaders from the C-Suite and throughout the organization now must cultivate and develop their innovation leadership skills to influence others to support funding and development for next generation products, services and new businesses ideas.
A research study from the Harvard Business Review identified and measured four essential leadership qualities as proxies for creating innovation capital:
- Personal reputation for innovation – who you are
- Social connections and networks – who you know
- Track record for value creation – what you are known for
- Investor expectations for future value creation – innovation premium
Cultivating and developing these leadership qualities and leveraging them to deliver market leading value creation and customer experiences is very hard work. It requires an open-minded, forward-thinking approach to new ways of doing things combined with an ability to make innovation part of an organization’s cultural DNA.
As Marc Benioff, CEO at Salesforce, says “I can’t do it all. I don’t have all the ideas. That isn’t my job. My job is to build a culture of innovation. That’s something that we try to enforce. We encourage it. We value it. We notice it. We compensate for it. We require it.”
Leveraging innovation capital as a strategic resource
The only thing harder than predicting the future is building a successful path to it. In KPMG’s Global CEO Outlook survey of 400 CEOs they documented these results:
- 85% admit vulnerability about the amount of time they spend strategizing about forces of disruption and innovation
- 80% are concerned that their existing products and services will not be relevant in 3 to 5 years’ time
- 70% believe their organizations’ cultures do not encourage risk-taking and safe-to-fail environments
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 strategic 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 differentiation or neutralization opportunities?
Successfully leveraging innovation as a strategic resource requires strong leadership and a steadfast commitment to building and funding your organization’s innovation capital.
A framework and process to increase your innovation track record success
The hard truth for most companies is that well over 70% of their new product and business innovation investments generate little or no ROI. While there are numerous reasons given for this lack of success, I think it stems from not having a business innovation framework that distinguishes between different types of innovations and the outcomes they are designed to deliver as shown on the chart above.
Over the past two years, I’ve been working with senior business leaders and business innovation teams using this framework and process to prioritize and manage a portfolio of innovation projects. The key success factor has come from building a balanced portfolio of Sustaining innovations and Disruptive innovations that are aligned with the company’s business growth goals and financial metrics.
Each innovation initiative is first segmented using the following questions:
- Is it a Sustaining or Disruptive innovation?
- Is it enabling systems productivity and cost optimization? – Productivity Zone
- Is it increasing business unit performance and revenue growth? – Performance Zone
- Is it enabling a business model transformation? – Transformation Zone
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 as shown on the slide below?
This new approach moves innovation project prioritization decisions from a budget exercise to a business value creation exercise that leverages business innovation a the new strategic 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 have 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.
o 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 to create sustainable long term competitive advantage.
The market rewards successful new value creation with an innovation premium
One of the biggest drivers in how the market rewards companies and drives their stock prices higher is how well they can sustain innovation and invest in that innovation. Across industries, as companies successfully innovate, valuations tend to move higher.
A McKinsey study documented that those companies who aggressively pursue business innovation through digital technology have a 12% ROI vs. those who just invest to protect their core business who have a 6% ROI.
A Harvard Business School study showed that leading digital companies generate better gross margins, better earnings, and better net income than organizations who have not yet adopted a digital-first business growth strategy. Early digital adopters delivered a three-year gross margin of 55% vs. 37% for digital laggards.
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