Compounding the problem, fewer resources are available to invest in other initiatives that may prove far more innovative and fuel profitable growth.
We call this the “innovation death spiral,” a cycle in which far too many firms find themselves today. They typically limit investments to safer, merely incremental extensions of existing products and services, which again prove unsatisfactory and absorb undue resources, accelerating the downward spiral. Increasing innovation budgets only makes things worse by putting more non-differentiating products into the market.
In contrast, companies taking a bolder, more far-sighted approach to innovation are on the opposite trajectory: becoming a high-performing organization. Their balanced portfolio of innovative efforts – including incremental, platform and sometimes breakthrough innovations – reinforces customer loyalty, expands their market, attracts valuable suppliers, investors and employees, and generates cash to be invested in further innovation.
Financially, companies simply do not generate the growth premiums with incremental innovations that they do with platform or breakthrough innovations. In many industries, it is possible to identify the value premiums that innovative companies earn in their stock prices, relative to companies that are not innovative. The delta between the two is the opportunity cost that the latter pay.
Pull quote: Financially, companies simply do not generate the growth premiums with incremental innovations that they do with platform or breakthrough innovations.
A recent Accenture analysis of 10 large players in the global foods industry over a three-year period demonstrates the strategic costs of failure to innovate successfully. Notably, the study found little correlation between R&D spending and revenue growth. For instance, a company launching more products than their competitors actually saw less organic revenue growth. That’s because the company made only incremental innovations, while its competitors launched a balanced portfolio of incremental, platform and breakthrough innovations that were perceived by the market as adding value.
Many companies are skewing their innovation portfolios toward the low risk, incremental end of the scale, rather than aiming for truly transformational, game-changing innovation. They tend to ignore the strategic, operational, and systemic opportunity costs associated with innovation, and therefore overvalue those incremental innovation projects.
Unsuccessful innovation not only cuts into profitable growth; it also affects market positioning. Companies with undifferentiated products are prone to lose market share to private labels, or are even forced to produce private-label versions of their own products, resulting in further R&D budget reductions and again, less product differentiation. Similarly, less innovative companies are in a weak position towards potential business partners. When U.S. car makers were in decline several years ago, for example, foreign competitors like Toyota and Honda were better able to attract top-notch suppliers.
New products, whether they yield success or failure, equally burden operational resources. Many businesses struggle with the impact of launching too many offerings, including increased costs, longer-than-projected lead times, and dissatisfied customers. Still, 44 percent of the respondents to a recent Accenture study reported that their companies gave limited or no consideration to the costs associated with new product introductions or with continuing to produce loss leaders. Further amplifying the impact of failed innovation is the inability to quickly manage out of failure. Companies allow non-value-generating offerings to persist in consuming valuable resources, while diluting margins and market position.
Corporate culture is profoundly impacted by inadequate innovation. Firms making only incremental changes in their products for several years will have diluted their R&D resources, marketing spending and other operational aspects so thoroughly that incremental change will be the only thing they can do. The less innovative a company is, the greater the human resources cost – such a company will struggle to attract first-rate employees who are excited by and proficient at innovation.
Path to successful innovation. To mitigate the effects of the innovation death spiral and begin to reverse its direction, consider the impact of new offerings on the entire value chain as they are launched. This means assessing both the real cost of their introduction and, if necessary, the most efficient path for removing them from the market.
Companies should also abolish complexity that doesn’t contribute to customer value. A bank offering 20 types of checking accounts, for example, may find that half as many checking accounts serve customers just as well, with the added benefit of fewer calls from confused customers to its contact center and cost savings from not having to support all of those extraneous products. Reducing the R&D organization’s project portfolio and eliminating multiple, overlapping layers of project approvals are other ways to break out of the death spiral.
Toward that end, the role of the CEO with respect to innovation is critical and needs to evolve from communicating vision to enabling innovation execution. But the CEO cannot do that alone – everyone must contribute to innovation. Unless organizational structures are put in place with clear job titles, roles and accountabilities, innovation will remain only a lofty ideal.
Ultimately, to transform their cultures and reposition themselves on a positive trajectory, companies must deploy a balanced innovation portfolio aligned with their growth strategy, systematically enable innovations to benefit the entire value chain – particularly customers, and, as with other business disciplines, support innovation with rigorous processes, performance targets, metrics and rewards.
By Wouter Koetzier
Wouter Koetzier is the managing director of Innovation and Product Lifecycle Management at Accenture, a global management consulting, technology and outsourcing company.