Why Companies Must Align Innovation Strategy With Business Strategy20 June, 2017 / Articles
With the world changing so rapidly virtually every established company feels the imperative to innovate. Executives, managers and employees across the globe are working hard to figure out how to succeed with innovation. The lessons that are emerging from this work are sometimes counter-intuitive and challenge many long held assumptions. For example, research by Strategy& shows that there is no correlation between R&D spending and returns from innovation. It is not about how much money a company spends but how the money is spent.
We are also learning that merely training employees on how to use lean startup and design thinking methods is not enough. It also important for leaders to change how they manage innovation within their companies so that they can align with their innovators’ way of working.
Last week PriceWaterhouseCoopers (PwC) published their innovation benchmark report. The report is based on a global survey that was conducted with over 1220 executives in 44 countries. The goal of the research was to “understand how these leaders view innovation and what they are doing to better reap its rewards”. Within the report are several key findings that are worth highlighting:
- The survey results showed that companies are now embracing more collaborative models of innovation such as open innovation and design thinking. In fact, companies that use more collaborative approaches to innovation were twice as likely as their counterparts to expect growth rates of 15% or more.
- Over 60% of companies view their employees as their most important partners for innovation compared to 16% of companies that held the same view for startups.
- Technology is no longer viewed as just a way to keep up with trends and competitors. It is now viewed as a key driver of innovation. Executives are also realising that beyond technology, it is just as important to develop innovative business models.
The findings highlighted above are an important contribution to knowledge in our field. However, the finding that stood out the most for me concerns the role of strategy. The PwC report makes it quite clear that executives are not just investing in innovation for the fun of it. The ultimate goal of their investments is to sustain and grow their companies over the long term. This goal is reflected in the finding that executives view sales growth as the most important metric for measuring the success of innovation. This metric is far more important than vanity metrics such as the number of products teams are working on or the number of new ideas in the pipeline.
While it may be necessary for companies to invest some resources in the creation of R&D labs or corporate accelerators, this by itself is not sufficient. I have encountered some innovation leaders who believe that innovation is about “letting a thousand flowers bloom”. However, the report shows that such ‘random acts of innovation’ do not always result in great returns. Companies should not be investing in a random collection of unrelated projects. There has to be some connection between our innovation strategy and the company’s overall business strategy.
And yet a large number companies in the PwC report indicated that they struggle with bridging the gap between innovation strategy and business strategy. In fact, 65% of companies that invest over 15% of their revenue in innovation indicated that aligning business strategy with their innovation vision was their top management challenge. Fifteen percent of revenue! That is a lot of money being invested in innovation projects that are in essence “flying blind”. What I have found in my own work is that there is often a lack of clarity from leadership on how they want to use innovation in the wider context of the company. There is often no real answers to the following questions:
- What is our vision of the future?
- What are the key trends that are impacting our industry?
- How do we plan to use innovation to respond?
Without this strategic guidance, it is often difficult for innovators in large companies to know ‘where to play’ or ‘how to play’.
But how can companies develop their innovation strategy? What strategic options are available to them? I posed this question to one of the authors of the report Volker Staack, who is the Principal and Global-US Innovation Leader within PwC’s Strategy&. According to Volker there are three main approaches to innovation strategy that they have identified over a decade of doing research:
- Need Seekers:Such as Apple, use their superior insights about customer needs to generate new product ideas.
- Marker Readers:Such as Samsung, focus on creating value by incrementally improving on products that have already been proven in the market.
- Technology Drivers: Such as Google, depend on their strong internal technology capabilities to develop new products.
According to Volker, all three strategic approaches to innovation have been found to work well for companies. What is important is that corporate leaders are explicit about their chosen strategic approach. In addition to this, corporate leaders also need to connect their innovation strategy to the overall company’s business strategy. They should provide clear guidance on the role of innovation within the overall company portfolio. Only when such strategic alignment is achieved will companies be able to innovate in the long term.