THE FUTURE OF
Getting ready to govern innovation more, not less
August 4, 2020
As part of the innovation survey we examined governance rituals across four stages of innovation
“Large organizations typically get stuck at the ideation stage because success tends to tempt people into doing the same things that made them successful in the first place. When there is already a successful model, management focuses exclusively on exploiting the ‘tried and tested’ strategy by aligning their R&D, operations, processes and culture to it. When new ideas stop being generated and innovation models stop evolving, businesses put themselves in danger of obsolescence from new and disruptive ideas.”
Our research reveals that when companies are struggling to achieve growth, many concentrate their innovation resources in the businesses providing the highest share of revenue. But with a forward-looking innovation investment strategy and more disciplined governance, leaders can allocate resources to the right businesses with future potential in mind, not only the needs of today.
To turn innovation investments into growth, chief strategy and chief innovation officers need to first determine how the composition of businesses in their portfolio will need to evolve in the future, and then set their investment strategy accordingly. Mature portfolio companies generate more than half their revenue from legacy businesses. In contrast, balanced portfolio companies generate more than half their revenue from growth and emerging businesses today.
In our sample of 287 companies in Asia Pacific, a vast majority of companies (75 percent) have a mature portfolio today, while only 25 percent are balanced portfolio companies. This situation is not expected to change dramatically any time soon; in the next five years, 64 percent of companies expect to retain a mature portfolio, while only 36 percent will have a balanced portfolio.
From these two portfolio models, two innovation investment strategies emerge: Will an organization focus on revitalizing the legacy business—or will it double down on its growth and emerging businesses?
Under the first strategy, Innovation for Longevity, mature portfolio companies funnel majority of innovation investments into their legacy businesses. In times of crises, the dominant role of the legacy business can become a major bottleneck for large companies, especially if that part of the business is exposed to declining, or volatile market demand (e.g., airlines that have grounded their fleets in 2020).
In the second strategy, Innovation for Balance, companies channel innovation investments across their portfolio — legacy, growth and emerging businesses — in a relatively even manner. That way, their portfolio is likely to be less fragile when their legacy business is unexpectedly disrupted, such as by the crisis of 2020.
REVENUE CONTRIBUTION (%)
These companies have not hesitated to apply non-incremental (breakthrough and disruptive) innovation in newer businesses. What is more, balanced portfolio companies in Asia Pacific spend 1.6x times more on innovation overall, compared to mature portfolio companies. We argue that balanced portfolio companies in today’s environment, where external disruption is brutal can use these innovation lessons and investments more readily to find new opportunities for growth.
When Innovating for Longevity, our research indicates that mature portfolio companies plan to double down on their innovation efforts to further strengthen their legacy business that is the key generator of cash flows. However, in times of crisis, they should not miss the opportunity to innovate for the upturn by directing sufficient resources to their newer businesses with strong future potential.
The chief strategy and chief innovation officers need to identify the right governance rituals to ensure the company’s innovation investments can achieve the desired growth across its portfolio of businesses. Governance priorities help companies allocate innovation resources in places where opportunities are most promising.
It takes the right mix of innovation and governance
Some people fear that governance will stifle innovation. But in reality a systematic approach to managing innovation is key to greater financial impact.
When leaders align their future innovation investment strategy to the desired portfolio mix, they gain the power to turn innovation into a real advantage.