Most debates fail to get at the core of why innovation in established companies succeeds or fails. Ultimately, innovation fails when a large company decides to use the same processes it uses to manage its core products to manage its innovation projects. Business planning does not work for innovation. All estimates of ROI, NPV and ARR are fiction. Investments based on such numbers are usually bets made on faith. In fact, this approach encourages managers to develop a tendency to invest in ‘surebet’ products for current markets.
The feeling is that by creating innovation labs, managers can separate innovators from the toxic environment within the company. But these labs fail because companies do not build any management processes around them, allowing innovators to work on whatever they want. There is a common tendency to conflate creativity with innovation. Management sees successful start-ups coming up with great new products and this motivates managers to pursue the development of similarly cool new shiny products via R&D labs, incubators and accelerators. But creating great new products is not innovation.
The investments that are spent on innovation labs often generate poor returns. Strategy & Business, a unit within PricewaterhouseCoopers, has been publishing an annual report of the top 1,000 most innovative companies in the world for over 12 years. In that time, they have found that there is no statistically significant relationship between R&D spending and sustained financial performance. This finding applies to total R&D spend, as well as R&D spending as a percentage of revenues. Spending on R&D is not related to growth in sales or profits, increases in market capitalisation or shareholder returns. In every annual report that Strategy & Business have published, the top ten innovative companies are often not the top ten spenders on R&D.
R&D spending and patents
What R&D spending seems to generate is an increase in the number of patents held by a company. However, the number of patents held is not the same as innovation. The US patent office is filled with thousands of patents that have never achieved commercial success. Only a few products from corporate innovation labs will have validated business models, or any alignment with the company’s strategic vision. We have seen successful innovators with great products that wither on the vine because there are no managers in the company willing to pick up the products and take them to scale. These products become orphans that are eventually abandoned, thus creating a discouraging and uninspiring environment for future innovators.
We have learned that companies need to put a great process in place in order to manage innovation. Without a clear process, innovators will not get the right level of support. It is hard to succeed when innovation is run as a covert operation that flies under the radar of executives. In that situation, there are often no clear exit criteria for the integration of innovative new products into the main business. There are also no clear career paths for employees working in innovation labs. The truth is that, no matter what you do or where you start, innovative products will always need someone from the main business to make a decision about their future. How those people view the new innovations will ultimately determine those products’ mortality rates.
A good place to start developing a management process is by providing a clear definition of what innovation is. Innovation is often simply defined as a novel creation that produces value. From our perspective, the concept of innovation as distinct from creativity involves three important steps. The first step involves the novel and creative ideas that are generated through various methods that trigger insights. The second step is ensuring that our ideas create value for customers and meet their needs. The final step involves finding a sustainable business model. This part of the journey involves ensuring that we can create and deliver value to customers in a way that is sustainably profitable.
Successful innovation is about new ideas and profitable business models
These steps make clear that it is the combination of great new ideas and profitable business models that defines successful innovation. As such, our corporate start-up definition of innovation is:
‘The creation of new products and services that deliver value to customers, in a manner that is supported by a sustainable and profitable business model’
This definition lays bare what the role of innovation in any organisation should be. It is not to simply create new products and services. New products may be part of the equation but the ultimate outputs of innovation are sustainable business models. A business model is sustainable when our novel creations deliver value to customers (ie when we are making stuff people want); and when we are able to create and deliver this value profitably (ie we are making some money). Without these two elements, a new product cannot be considered an innovation. It is simply a cool new product. It might be the coolest thing since sliced bread – the most creative product ever made – but if it doesn’t deliver value to customers and bring in profits, it is not innovation.
Our definition of innovation also provides us with a clear job description for corporate innovators. Your job is to help your company make money by making products that people want. The sweet spot is when your creativity meets customer needs and you can make money from serving those needs.
What this means is that, regardless of whether innovation happens in a lab, we need clear management processes that get at the core of what true innovation really is.
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