Surprise! Innovation will be governed more, not less
January 20, 2020
Disruption can happen in any industry, at any time. Whether it’s responding to a new technology, competitor or market, companies are well aware of the need to innovate to succeed. But, while most companies strive for innovation, they often struggle to turn investments into growth. Why?
Although 84 percent of companies we surveyed say that they direct their innovation efforts centrally (through Chief Innovation Officers or committees), only 50 percent of companies allocate innovation investments strategically (based on the long-term potential of their businesses). And this short-term approach toward allocating innovation investments is only part of the problem.
What is more, a vast majority of companies are not governing their innovation investments with discipline. As part of our research we identified 12 governance rituals that help companies to create the right conditions for ideas to flourish, to be selected, tested and scaled into commercial reality.
Surprisingly, only 12 percent of companies govern their innovation efforts extensively. Interestingly, those who do so with discipline are not only growing twice as rapidly, but also expecting higher growth than their peers.
Over the next five years, the appetite for innovation will increase in scale (innovation investments are expected to grow by 1.8x). They will also expand in scope (innovation adoption will broaden beyond incremental innovation and be applied across the business portfolio).
We call this Portfolio Innovation: the application of incremental and non-incremental (breakthrough or disruptive) innovation across businesses with different maturity levels to drive growth. For the sake of clarity, we labelled these types of businesses as Legacy (the most mature businesses), Growth (those experiencing strong market demand) and Emerging (the newest ventures yet to be scaled).
As part of our research, we identified two main portfolio models and their associated innovation strategies: Mature Portfolio companies (about three-fourths of incumbents) generate more than half of their revenues from legacy businesses. These companies innovate for longevity, funnelling most innovation investments to their legacy businesses.
In contrast, Balanced Portfolio companies generate more than half of their revenue from growth and emerging businesses. These companies Innovate for balance, funnelling innovation investments across their portfolio—legacy, growth and emerging businesses—in a relatively even manner.
Surprisingly, only 12 percent of companies govern their innovation efforts extensively. Interestingly, those who do so with discipline are not only growing twice as rapidly, but also expecting higher growth than their peers.
Once companies know their future portfolio models (and associated innovation strategies), their Chief Strategy and Innovation Officers need to identify first, the right types of innovation to focus on and second, the right governance rituals to ensure that the company’s innovation investments can achieve the desired growth across their portfolio of businesses:
- Putting innovation where it matters. According to our research, not all businesses need the same type of innovation. When it comes to innovating for longevity, a company must focus on increasing non-incremental innovation—breakthrough or disruptive—in the legacy business.
On the other hand, when Innovating for balance, the focus needs to shift to increasing both incremental and non-incremental innovation, especially when seeking to drive substantial growth across growth and emerging businesses.
- Governing innovation. The study revealed that governing innovation extensively (six or more of the 12 governance rituals) is the way to go. However, the core governance rituals that best support innovation in the next five years will depend on the expected portfolio mix. Companies Innovating for longevity should get more disciplined in the way they experiment with and scale new ideas.
In contrast, companies innovating for balance need to expand the way in which they identify disruptive ideas (sourcing these from their own people and from technology partners) and they need to get more disciplined in how they test them.
The right innovation strategy and mix of governance rituals will differ from company to company. What is clear is that leading companies recognize that to sustain strong growth they need to stay committed to governing innovation extensively.
Are you ready to improve your innovation governance discipline?
