Few companies are able to consistently bring breakthrough innovations from concept to market success.
So says the latest iteration of the annual Global Innovation 1000 study conducted by Strategy&, PwC’s strategy consulting arm. This year’s study, which looks at publicly held companies that spend the most on research and development each year, has identified a set of firms that outperform their peers on a sustained basis, while spending less on R&D.
“Achieving high performance is difficult in any given year, and remarkably difficult to sustain over 5 years,” the report points out.
But even so, when it comes to the 88 high-leverage innovators, an elite group out of the 1,000 companies studied that outperform industry peers across seven measures of financial success while simultaneously spending less than the industry median on R&D as a percentage of sales.*
One finding has remained true over the years:
There is no statistically significant relationship between how much a company spends on its innovation efforts and its sustained financial performance.”
Yet R&D spending among the total Global Innovation 1000 has increased 11.4% in 2018, to a record high of US$782 billion – increasing across all regions and industries. For the <10% of companies that qualify as high-leverage innovators, sales growth was 2.6 times higher that those in the balance of the 1,000, and their R&D spend as a percentage of sales (R&D intensity) is lower than their industry medians.
How then do these high-leverage innovators, which count Apple and Adidas among their ranks, and high performance companies in general, do it? As it turns out, they do five things particularly well, and a sixth, even better.
In the global survey, R&D leaders and managers who reported they were outperforming their industry groups were far more likely to also report tight alignment with their innovation efforts. In fact, 77% of those outperformers said their innovation strategies were highly or closely aligned with their business strategies.
With alignment, employees remain clear in purpose as to why and what they are innovating and resources are funnelled into the research and development that will have the most impact on future success, not things that will divert attention away from achieving business goals. Additionally other critical functions (like sales or manufacturing) are well coordinated with the innovation direction.
Breaking down the survey respondents further into innovation models, ‘need seekers’, those that engage customers directly to surface unarticulated needs and get original products and services to market first, are more aligned than most, with 84% reporting close business/innovation alignment. This is far greater than either the ‘market readers’ (fast followers of new product introductions, 48%) or ‘technology drivers’ (relying on a technology push model, 53%).
Indeed, 65% of need seekers reported higher profitability than their peers, and 59% faster revenue growth.
As we’ve mentioned before on Digital Pulse, culture plays an important part in successful innovation. A total of 71% of respondents who reported their corporate culture as highly or very aligned with their innovation strategy also reported faster growing revenue.
Similar to business alignment, need seekers were again a stand out, with 82% reporting highly supportive organisational cultures compared to 48% and 47% respectively for market readers and tech drivers.
As an example of the importance of cultural cohesion, Apple, who the study classifies as utilising a need seeker strategy of innovation, likes to say that innovation is in their DNA. Indeed, its innovation mindset, integrated in both mission and organisational structure, has led to it being a high-leverage innovator throughout the entire 15 year window of the study’s analysis, one of only two companies able to make such a claim out of the more than 1,000 companies examined.
Innovation comes from the top in successful R&D companies – and executive input and support plays a large part in creating the aforementioned innovative culture. Leadership provides company vision to align R&D efforts with, and importantly, is often the only thing able to overturn older methods of management and red tape that get in the way of innovation.
In the study, faster growth companies said that their executives are more closely involved with R&D programs, and 78% of those, report tight executive alignment around both investment and strategy, numbers that drop to 62% for average-growth and 53% for slower-growth businesses. Tight alignment across the executive leadership team helps increase the chances that new innovations achieve the needed support of critical functional organizations beyond the R&D team.
Once again, need seekers reported higher involvement by leadership teams in innovation models, with 84% reporting high involvement (compared with 63% for market readers and 57% for tech drivers).
Deeper customer insights was ranked as the most important capability in coming up with innovative ideas, and all participants in the survey, whether they classify themselves as slow or fast-growth, viewed customer insight as critical to the success of the innovation process.
Interestingly, companies who report level or slower-growth believe they are doing the best at focusing on customer insight. Reported fast-growth companies, on the other hand, see it as being only their second-most competence. In the same vein, need seekers, who have consistently outperformed their competition in the above characteristics, also rank their consumer insight ability as slightly lacking.
As the report hypothesises, this makes a certain amount of sense – need seekers, whose model values customer insight, and fast-growth companies are always looking for further improvement, and perhaps recognise that “when it comes to gathering customer insights, no company is ever done learning.”
‘Fail fast and fail often’ goes Silicon Valley’s mantra. Yet for the R&D leaders and managers surveyed, where the point of failure happens is the critical part. Thirty-five percent of respondents believe that project selection is the most important part of the innovation process, followed by ideation at 31%. While an innovation program may go through multiple stages – from ideation, selection, development and onto commercialisation – it is the decision making on which projects to ‘green light’ at the front end that are most important drivers of success or failure.
Given that development takes longer, and costs more, it is perhaps obvious that the better the original idea the greater the chance of success – for the project, and the company. A poor product is more unlikely to be recoverable once it has made it into production. Backing this finding up, companies that self-select as faster-growing believe they are most competent at ideation and project selection.
As competition increases in a global landscape, companies have to do more to be the best. This is undeniably true of innovation. While companies could get by excelling at one or two characteristics in the past, this is no longer enough. To be truly great at innovation, and consistently attain higher revenues and profits, companies, like those on the high- leverage list, must exemplify all five of the above characteristics.
Simply throwing money at research and development will not result in success, and indeed, when done poorly, is likely to push companies towards negative outcomes. Instead, organisations must create a robust innovation program that is integrated with business strategy and culture, espoused by leadership, focused on the end user and rigorously vetted before selection.
This means thinking bigger, improving in the above five areas and making sure they then “converge in a way that pushes the boundaries of market expectations and transforms the customer experience.”
For more insights, statistics and examples drawn from the 2018 Global Innovation 1000 study, visit ‘What the Top Innovators Get Right’ on strategy+business.
* Based on 2017 data.
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