THE FUTURE OF
INNOVATION IN
ASIA PACIFIC
Getting ready to govern innovation more, not less
August 4, 2020
THE FUTURE OF
RESEARCH REPORT
In Brief
In Brief
- Innovation is high on the agenda of Asia Pacific companies, but as of 2019, only 18 percent of innovation investment was slated for emerging businesses. The global pandemic has led leaders to rethink that allocation strategy.
- But expanding innovation budgets won’t be enough: Companies need to show a greater commitment to governing innovation across their entire portfolio of businesses.
- With a forward-looking innovation investment strategy and more disciplined governance, leaders can allocate resources.
Governing Innovation | Insights from Emmanuel Lagarrigue
View TranscriptAsia Pacific is a hotbed of innovation
The demands of immense markets in Asia Pacific (it is home to 60 percent of the world’s population) combined with an avid appetite for business-led entrepreneurship make this region a hotbed of innovation.
Case in point: There are over 400 unicorns worldwide - 140 of them are in Asia Pacific. Beyond the young, entrepreneurial companies, the region also continues to inspire global leaders to step outside of their comfort zone and use innovation in new ways to expand their portfolio of businesses.
In 2019, innovation was high on the agenda of Asia Pacific companies: over half of innovation investment (on average) was channeled into the most established, legacy businesses; in contrast, only 18 percent was allocated to emerging businesses. But the economic uncertainty emanating from the unprecedented COVID-19 pandemic outbreak in early 2020 is making business leaders rethink their allocation strategy.
“To me, innovation is the embodiment of a useful idea in the marketplace. But instead of concentrating only on businesses that serve the needs of today’s markets, you need to allow for uncertainty to arrive, by channeling innovation into emerging businesses, where future growth will likely come from.”
Executives say that they expect to increase innovation investments 1.8 times by 2024, across their entire portfolio of businesses. For the 287 companies across Asia Pacific that we surveyed in 2019, this means allocating nearly 14 percent of their revenues to innovation activities (including R&D activities, new technologies, acquisitions, joint ventures and partnerships).
The adoption of innovation has an impact on businesses with varying levels of maturity, including legacy (the most mature businesses), growth (those experiencing strong market demand) and emerging (the newest ventures yet to be scaled). For example, when it comes to emerging businesses, 2.5x times as many companies expect to apply innovation in 2024 when compared to 2019.
Source: Accenture Portfolio Innovation Survey, 2019
Innovation should result in a tangible impact, such as increasing your company’s top line. However, expanding your innovation budget will not be enough. What’s needed? Greater commitment to governing innovation across your entire portfolio of businesses.
While most companies in the Asia Pacific region strive for innovation, they often struggle to turn associated investments into growth. Why? Because they do not direct their innovation efforts strategically and with the right discipline.
Think governance will stifle ingenuity? Actually, our research reveals that increased governance can create the right conditions for innovation to thrive in the right businesses, especially in times of crisis.
How do you govern innovation?
By embracing new rituals.
To better understand how companies govern innovation, we utilized a proprietary framework called Portfolio Innovation: the application of incremental, breakthrough and disruptive innovation across businesses with different maturity levels.
Portfolio Innovation
To test this model of Portfolio Innovation, we surveyed 1,090 executives globally (including 287 from Asia Pacific) and interviewed over 20 global experts. We uncovered how companies are applying different types of innovation (disruptive, breakthrough and incremental) across their businesses. We also learned how they extract tangible value from those investments: namely, by adopting what we call innovation governance rituals.
12 Governance rituals enable innovation
As part of the innovation survey we examined governance rituals across four stages of innovation
- Put innovation at the center of corporate strategy
- Actively communicate the innovation agenda to employees and the investor community
- Actively build a culture of innovation
- Everyone generates ideas to improve existing offerings
- A diverse team of experts generates ideas for brand new offerings
- Identify disruptive ideas with the help of tech partners
- Experimentation investments are made as part of the budgeting lifecycle
- Experimentation investments are funded gradually
- Experiments are conducted by an innovation lab/digital factory
- Scale with technology partners
- Scale with talent partners
- Scale through an innovation lab/digital factory
“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.
Rethinking your innovation investment strategy
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?
INNOVATION FOR LONGEVITY
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).
INNOVATION FOR BALANCE
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.
Two portfolio models: Where do you channel your innovation investments?
REVENUE CONTRIBUTION (%)
Note: Mature Portfolio Companies N=215 (75% of the total). Balanced Portfolio Companies N=72 (25% of the total).
Percentages represent average revenue generated for each portfolio business for each cluster
Source: Accenture Portfolio Innovation Survey, 2019
Our research also indicates that Asia Pacific companies that innovate for balance have been more resilient in recent years in terms of revenue growth.
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.
Get ready to govern innovation more
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.
Sample N=103.
Note: *Future Balanced Portfolio Companies are those that expect to generate more than 50% of their revenues from growth and emerging businesses.
Source: Accenture Portfolio Innovation Survey, 2019
Sample N=184.
Note: *Future Mature Portfolio Companies are those that expect to generate >=50% of total revenue from their legacy businesses.
Source: Accenture Portfolio Innovation Survey, 2019
Blend well for best results
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.
Are you ready to improve your innovation governance discipline?
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