What Keeps Leading Innovators Up at Night?

Transcription

1 Event Proceedings What Keeps Leading Innovators Up at Night? Best Innovator Club Annual Meeting Vienna September 2012 Best Innovators explore how to innovate outside the core, partner with others, manage a diverse portfolio, and create a culture that truly fosters innovation. 1

2 Winners of A.T. Kearney s Best Innovator contest have been meeting annually since 2005 to learn from one another and exchange best practices in innovation management. For the September 2012 gathering of the Best Innovator Club, participants selected four topics that they viewed as the most pressing challenges facing even the best innovators today. On Day 1, executives discussed innovating outside of the core business and partnering effectively with other players. Innovation outside the core business is known to be a key growth driver, but even the best innovators struggle to succeed in new and unfamiliar markets. Likewise, collaborating with external partners is seen as absolutely necessary for innovation today, but innovators face many challenges in finding the right partners and effectively organizing collaboration. On Day 2, club members turned their attention to innovation portfolio management and innovation culture. Portfolio management particularly deciding how to winnow the project pipeline and optimally allocate scarce resources is difficult due to the complexity of project portfolios and competing interests within organizations. The executives considered how best to combine a top-down, structured approach to portfolio management with a more bottom-up approach to innovation enabled by a free-flowing innovation culture. Innovation outside the Core Many companies take the easy path when deciding where to innovate: They simply tweak an existing product or otherwise seek to incrementally evolve a current value proposition. Yet companies that are audacious enough to venture further away from their core sometimes reap spectacular returns. Amazon provides a perfect example of this concept (see figure 1). The company famously began by selling books online from the United States. Next, it moved into other consumer-focused Figure 1 Amazon exemplifies innovation into non-core business opportunities New business opportunities outside of core Example: Amazon Market or customer segments New 4 1 Expansion into new consumer needs From books to CDs, electronics, clothing, games, housewares, and groceries, among other categories 2 Expansion into new markets Canada, United Kingdom, Germany, France Adjacent 2 3 Development of the Kindle (e-book reader) Sale of the device and e-books through associated online bookstore Existing Core business innovations Existing Adjacent New Entry into cloud computing Leverage of major data centers used for e-commerce platform to provide infrastructure-as-a-service Amazon Web services, a market leader in 2010 with estimated sales of $500 million Value proposition Source: A.T. Kearney analysis 2

3 product categories such as compact discs, consumer electronics, and clothing. Then, it opened websites in new geographic markets, including Canada, the United Kingdom, Germany, and France. When Amazon launched its Kindle e-readers, it pioneered a completely new product category, albeit one that it offered to customers in markets where it was already present. Its entry into enterprise cloud computing services is yet another bold move to extend its customer base and value proposition. What has been the result of Amazon s aggressive innovation moves into non-core areas? The company s revenues have grown from less than $1 billion in 1998 to more than $50 billion in Over the same 14-year period, the online sale of printed books has declined as a share of the company's turnover, from more than 90 percent to less than 10 percent. As much as any company today, Amazon illustrates how bold innovation outside the core can create enormous value. This is not to say that innovating outside the core business is without risk. But Best Innovator Club members agreed that it s a risk worth taking, because disruptions that make the current business obsolete can crop up at any time. Furthermore, markets and shareholders frequently demand ambitious growth objectives that can be nearly impossible to attain in mature core businesses. Meeting participants acknowledged that companies innovation strategies sometimes provide only vague indications or lack meaningful objectives related to innovation in new areas. The most successful companies develop explicit non-core innovation strategies that leverage one or more strong existing assets or resources such as proprietary technology, market know-how, channel access, brand, or production facilities. Successful non-core innovation strategies are anchored in a strong existing asset or resource base such as technology, market know-how, channel access, brand, or production facilities. Another best practice highlighted at the meeting is to task the new business to a small, dedicated, entrepreneurial team that combines the right mix of experience and energy. Such teams must be far enough removed from the core operations to escape the constraints of the existing ways of doing business, but close enough to receive support when needed. Ideally, the new business has its own board of directors, potentially including the company s chief executive officer and the heads of any business units that need to support the new business. Many club members noted the importance of approaching a new business with flexibility and patience. This means that the company is willing to accept risks and endure failure, taking advantage of setbacks to learn and fine-tune the new business ideas. The company should give the new business time to get on its feet, become profitable, and move out of the danger zone. Herein lies a challenge: In the face of subpar performance, how do executives know whether they should continue to wait or pull the plug? Participants agreed that the answer rests not so much in tracking the evolution of financial indicators as in making sure that the original market and customer acceptance hypotheses continue to hold. 3

4 Collaboration with External Partners Best Innovator Club members cited several reasons to intensify collaboration on innovation with external partners. First, partners often have complementary capabilities that enable a company to offer new products or enter new customer and market segments. Second, working with partners can mitigate internal resource constraints, since partners contribute additional organizational or financial resources. And third, partners are frequently a source of new ideas and innovation opportunities that would otherwise not be detected. Members focused their discussion on collaboration with two different types of players: companies in other industries and suppliers. Companies often work with counterparts from other industries to develop and launch a new product, service, or ecosystem. Smart energy meters are an example of how cross-industry collaboration in this case, among electric utilities, telecommunications operators, and IT providers can create superior customer value. With traditional meters, electricity companies have to dispatch personnel to take readings at the user s home or place of business. But by partnering with telcos, utilities can read customers meters remotely, thereby reducing labor costs. In addition, thanks to IT, customers have access to real-time information on their energy consumption through a tablet-like display on the meter or a special Web portal helping them to better manage their usage patterns and save money. In successful cross-industry collaboration, the partners define clear objectives at the very beginning, including how they will share costs and benefits. They find a formula that works for all the parties, and they have a common commitment to make it work. And finally, they define a governance process to handle issues such as cost overruns, development delays, or flawed market assumptions. Collaboration with suppliers is another approach that companies use to innovate faster, more efficiently, and more effectively. Supplier-led innovation can be used to generate product design improvement ideas, provide sorely needed competencies, reduce risk exposure, and speed time-to-market through parallel development. In other words, it can bring new products to the market more quickly, and at a lower cost. Participants cautioned, however, against outsourcing all innovation to suppliers, lest the company strip away all its differentiating capabilities and tempt suppliers to put it out of business through an aggressive forward-integration strategy. Meeting attendees underscored several practices that leading innovators use for supplier-led innovation. First, the companies segment the supply base to determine which suppliers should contribute to innovation. Next, they inform those suppliers of the search fields where they are expected to innovate, and they communicate to individual suppliers what they anticipate from them in terms of contributing ideas and developing innovations within those fields. Importantly, leading innovators make sure that their own R&D, procurement, and other functions also understand these expectations, so that suppliers receive consistent messages. Additionally, they involve strategic suppliers as early as possible in the innovation process to ensure that all ideas and inputs are considered when key design decisions are made. Finally, they make sure that suppliers truly benefit from valuable innovations, and they tackle intellectual property and exclusivity rights head-on to avoid conflict later. Companies that make this work have trained their procurement teams in the art of collaboration and built their ability to judge suppliers innovation capabilities. Moreover, they include contribution to innovation in the procurement function s performance dashboard, and they run programs to help their suppliers to better manage innovation. 4

5 Structured Portfolio Management Day 2 began by addressing ways to better manage the innovation portfolio. Innovation portfolio management focuses on alignment, optimization, and balance. That is, it aligns the project portfolio with the search fields set forth in the company s innovation strategy. It optimizes the portfolio by maximizing the projects value as measured by net present value, expected commercial value, or other financial or non-financial indicators. And it balances the innovation portfolio between short- and long-term bets, between different risk profiles, or among other possible dimensions. Many companies use two-by-two matrices (such as net present value versus risk, or size of opportunity versus competitive advantage) or other tools to aid in portfolio management. Some practitioners mistakenly believe that innovation portfolio management simply consists of applying one or more of these tools. Instead, club members agreed that portfolio management is best understood as a process, intimately linked to a company s innovation strategy. Portfolio management typically includes regular portfolio review meetings with clearly defined participants, inputs, and outputs. The managers in a portfolio review examine the innovation portfolio as a whole, challenging its composition and deciding on changes if necessary. Participants stressed that comprehensive portfolio management, properly understood, spans the entire innovation process, starting with the identification of search fields and idea management, and continuing with the definition of parameters such as risk exposure or ensuring a balance between the short and long terms. They agreed that executives often place too much emphasis on the achievement of short-term financial targets, leading them to neglect the product portfolio of tomorrow. To avert this danger, they suggested a series of indicators to judge the overall health of the innovation portfolio, although they cautioned that the indicators must be adapted to the industry, type of innovation, and stage of the innovation process (see figure 2). Sales from new products (that is, launched within the last three years) was repeatedly mentioned as a meaningful measure of innovation, although everyone granted that there is no one best Figure 2 Selected indicators to assess innovation portfolio management Input Portfolio Value Process Output R&D budget for current vs. new business R&D budget broken down along other strategic dimensions, such as time horizon Number of ideas generated NPV or ECV of new business project portfolio R&D yield (NPV or ECV over total allocated R&D budget) Projected percentage of growth gap closed by current portfolio Average time-to-market Average idea evaluation time Percentage of project milestones met on time Number of projects completed successfully Average time-to-profit Sales or EBIT from new products Actual vs. forecast sales or EBIT from new products Number of products launched Customer satisfaction with new products Number of patents Note: NPV is net present value. ECV is expected commercial value. EBIT means earnings before interest and taxes. Sources: Best Innovator Club meeting participants; A.T. Kearney analysis 5

6 indicator. Furthermore, they conceded that indicators are more useful to track progress and changes over time than to compare among companies or even among business units within the same company, given differences in business models, strategies, and calculation methods. Innovation Culture Without the portfolio management described above, the innovation portfolio would percolate from below as the sum of many individual decisions, each of which is made by individual employees without any comprehensive view of the portfolio. But would this be so bad? As an alternative to top-down portfolio management, a company could instead pursue a mostly bottom-up approach to portfolio management enabled by the right innovation culture. How would this look in practice? Consider the example of Google. Google has forged a bottom-up method of portfolio management, especially at the early stages of the process. Google engineers are encouraged to dedicate 20 percent of their time to collaborating with their peers on unofficial projects that they ve come up with on their own. Engineers advertise their 20-percent projects on the company s intranet, so that other engineers with passion and interest can volunteer to chip in their own 20 percent of time. The idea s originator decides whom to accept on the team. Later, if one of these informal projects passes an initial gate review, it can become eligible for further support and investment as an official project. A bottom-up innovation culture can complement and reinforce a company s innovation strategy and portfolio management process. Google ensures some consistency by requiring that all new software code fit with the existing software and hardware infrastructure, and that it adhere to specific testing and quality requirements. The results are undeniable: Some of the fabled company s bestknown innovations, including Gmail and Google Maps, were born as 20-percent projects. Best Innovator Club members engaged in a lively discussion of the Google example, and participants agreed that a bottom-up innovation culture can significantly complement and reinforce a company s top-down innovation strategy and portfolio management process. Those enterprises that do this well communicate the vital importance of innovation, telling stories about how the right behavior has led to innovation and celebrating people who have done so successfully. Executives at these companies put their money where their mouth is by allotting time and funding to pursue good ideas. They establish a learning culture that openly examines (but does not stigmatize) unsuccessful projects and delivers awards for well-considered risks that didn t pan out. With these and other measures, the innovation culture crosses a tipping point where people go from skepticism to belief, and they perceive the messages on desired innovation behaviors as authentic. 6

7 Innovation, Now and Always At a time when nothing seems certain in the marketplace, companies can feel tempted to double down on current business and postpone innovation until another time. But to do so is to cede the advantage to competitors and, in the medium and long terms, customers and the markets will judge the company severely. The members of the Best Innovator Club know that all too well, as they continue to exchange and learn from one another to remain in the forefront. Authors Kai Engel, partner, Düsseldorf kai.engel@atkearney.com Joshua Hubbert, principal, Berlin joshua.hubbert@atkearney.com The authors would like to thank Isabella Grahsl for her valuable contributions to preparing these proceedings. About the Best Innovator Club The Best Innovator Club comprises a unique and dynamic group of thought leaders in the field of innovation management. The club is open to all winners of A.T. Kearney s Best Innovator contest, and includes senior executives involved in innovation management, technology management, and research and development from industries and organizations around the world. Members meet once a year in retreats designed to encourage networking and the exchange of experiences and ideas. Participants reflect on today s important issues and explore the latest trends and best practices in innovation management. Companies represented at the meeting AGC Glass Air Liquide BSH Bosch und Siemens Hausgeräte Constantia Flexibles EWE Glaxosmithkline Biologicals Groupe SEB Grundfos Henkel Illycaffè Infineon Kapsch TrafficCom MAVI Sud Philips Qiagen Robert Bosch TTTech Computertechnik Wiener Wissenschafts-, Forschungs- und Technologiefonds 7

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