Why “Low Risk” Innovation Is Costly

Why “Low Risk” Innovation Is Costly
Overcoming the Perils of Renovation and Invention
By Wouter Koetzier and Adi Alon
Innovation is not working out the way many
companies expected. Despite increasing
commitment, funding and organizational
accountability, many companies are
disappointed by the returns they are deriving
from their investments. Correspondingly,
they are scaling back expectations. Instead
of the disruptive products, services, and
business models that were anticipated
several years ago, many initiatives have
become considerably more limited in scope.
Rather than offering “the next big thing,”
innovations coming to market today are
more typically line extensions.
1
This cautious approach to innovation
is understandable, given the relatively
disappointing results. At the same time,
however, it is a potentially perilous
strategy. Enterprises that are able to
successfully innovate at a breakthrough
level can increase the likelihood that they
will dominate and prosper in new markets
that they create. Enterprises that restrict
themselves to incremental innovation, on
the other hand, risk unknowingly entering
a vicious cycle in which they lag ever
farther behind.
Accenture recently sought to identify
the state of innovation by surveying 519
executives (vice presidents, directors,
managers) at large U.S., U.K., and French
organizations with revenues greater than
$100 million. They represented a wide
spectrum of sectors, with the largest
samples drawn from Banking and Capital
Markets, Retail, Electronics and High Tech,
Health Providers, and Consumer Goods
and Services.
A consistent theme emerged from this
study, revealing two dominant obstacles
that respondents say stand in the way of
driving higher returns from innovation.
The first challenge is a conservative
approach itself, focusing on individual
line extension renovation rather
than developing a broader portfolio
that also includes bold, big ideas.
Renovation can limit innovation to
small incremental improvements
and fail to result in significant step
changes and revenue opportunities.
The second challenge is the “invention”
trap. By this Accenture means overreliance on the invention process itself
to produce success and relative lack of
systematic, enterprise-wide processes
capable of commercializing inventions
into products or services at scale, bringing
them to market in a sufficiently timely
fashion and reaping the expected returns.
As Kodak found in digital photography, it
is sometimes not enough to have a great
idea or invention; the enterprise must
be equally able to bring its brilliant idea
to scale supported by a robust business
model, a unique customer experience and
an eco-system which further expands the
market potential.
How can companies overcome the
renovation and invention challenges? A
key part of the answer is to introduce
something new on a scale where it has
sufficient impact to re-define a market
while still not “betting the farm.” How?
By pursuing a prudent and disciplined
investment approach that specifically
addresses innovation risk management.
2
Increased Commitment to Innovation
Survey respondents are
aware of the importance
of innovation.
Seventy percent ranked innovation among
their top five priorities, 18 percent put
it at the head of the list (Figure 1). A
third of the sample—52 percent in the
communications sector, 44 percent
in manufacturing—called innovation
“extremely important” as a key enabler
facilitating their company’s successful
response to persistent change.
Companies have also committed to
investing resources and organizational
capacity to drive innovation. Despite
economic volatility, 51 percent report
an increase in funding that leads to new
products and services in contrast to
10 percent whose funding has declined
(Figure 2). Amongst sectors investing in
innovation, manufacturing leads with 74
percent reporting increased levels; those
least likely to have increased investment
are retail (32 percent) and consumer
goods (34 percent), where investment
levels in innovation is already high.
Furthermore, companies are implementing
managerial responses intended to
facilitate innovation. 60 percent of
respondents now have a Chief Innovation
Officer (or comparable position), in
contrast to 54 percent in a similar survey
conducted in 2009 (Figure 3). Such a
position is most prevalent within utility
companies (73 percent), electronics and
high tech companies (71 percent), and
manufacturers (70 percent). Moreover,
innovation is increasingly being measured,
with 87 percent of respondents “formally
evaluated on innovation activities” (up
from 64 percent in 2009).
Figure 1: Two thirds of responding organizations depend strongly on innovation for
their long term strategy success. Around one in five (18 percent) rate innovation as
their top strategic priority.
To what extent is your organization’s
strategy dependent on innovation for its
long term success?
Where is innovation ranked among your
company's strategic priorities?
18%
24%
67%
52%
43%
Top priority
Extremely dependent
Top 5 priorities
Very dependent
26%
Top 10
Dependent
23%
Important but not a
top priority
Slightly dependent
6%
1%
6%
Not at all dependent
Dependence
on Innovation
1%
Not important
Strategic
priority
Figure 2: Companies have committed to investing resources and organizational
capacity to drive innovation.
Changes in funding for
innovation initiatives due
to market volatility
51%
Increased
38%
No Change
Decreased
Figure 3: Companies are implementing managerial responses intended to
facilitate innovation.
Do you have a Chief Innovation Executive
(or similar title) primarily responsible for
innovation? (percent with "yes" response)
54%
+
60%
Are you formally evaluated on your
innovation-related activities?
64%
+
87%
36%
Yes
13%
2009 Global
3
10%
2012 Global
2009 Global
2012 Global
No
4
Disappointing Results
The vast majority of
executives, 93 percent,
continue to regard their
company’s long-term
success to be dependent
on its ability to innovate
but at the same time
less than one out of
five (18 percent) believe
their own innovation
strategy is delivering a
competitive advantage.
The divergence between expectations and
results, moreover, has widened in recent
years. In the 2009 survey, executives
were confident that their organizations
possessed the capacity to conceive and
introduce new products and services
so powerfully attractive to customers
that they would disrupt markets to the
competitive advantage of the innovator.
Today there is considerably less certainty.
In 2009, the objective of innovation for
30 percent of companies was to disrupt
existent markets; in 2012 the proportion
has shrunk to 26 percent (Figure 4).
Correspondingly, the approach currently
pursued by the majority of respondents,
64 percent, is not transformative in
pursuit of totally new products or
services but rather can be defined as
renovation—more limited incremental
line extensions (Figure 5). Most tellingly,
confidence that expectations can be
met in the future is waning. Fewer than
half the present-day respondents believe
they have an effective approach to new
product development or are seeking
innovation effectively.
5
Figure 4: Fewer companies are seeking to disrupt existent markets with innovation.
For your organization’s most successful innovation brought to market within the last
two years, please indicate the type of innovation?
48%
50%
30%
-
26%
New product or service
New process or business model
17%
24%
2%
2009 Global
Improvement or modification of an exising service
There has not been a significant innovation over the past
two years
2012 Global
Figure 5: Companies are pursuing a more cautious approach to innovation.
Please indicate the extent to which you agree with the following statements regarding
innovation in your organization?
My organization tends to pursue product
line extensions rather than developing
totally new products or services
64%
My organization has prioritized
short-term financial results over investing
for the long term
53%
2012 Global (Agree + Strongly Agree)
When it comes to rating their own
organization’s innovation performance,
the respondents are severe critics. Only
34 percent believe their company has a
well-defined innovation strategy (Figure
6), 46 percent say they have become
more risk averse in considering new
ideas, 45 percent see their company
pursuing a portfolio of smaller, safer
opportunities rather than seeking the
next breakthrough. On a variety of
measures—initial idea generation, product
development, manufacturing and testing,
commercialization and launch, portfolio
optimization—executives are less satisfied
today than in 2009.
Respondents also cited specific challenges
to innovation that include predicting
future trends (30 percent), achieving cost
containment (27 percent), securing ongoing budget support and leveraging new
technology (26 percent respectively) and
transforming new ideas into marketable
goods and services (24 percent).
In particular, “commercialization and
launch” and “achieving consistent
innovation performance” experienced the
sharpest drop in executives’ assessment of
their company’s performance. Those two
areas are indicative of the challenge that
many companies experience in scaling
innovation by moving from good idea
stage to large scale market deployment
(Figure 7).
Figure 6: Companies feel they have a sluggish innovation processes.
Which of the following statements apply to your company's approach to innovation
(includes a new product, service or business model)?
We are typically first to market with most
innovations-new products or services
45%
We effectively seek breakthrough
innovation opportunities
45%
Our organization has a well-defined
innovation strategy
We have an effective process for capturing
ideas from outside our company
34%
21%
Figure 7: Companies are seeking to innovate but are increasingly less satisfied with
the results.
How satisfied are you with your company’s performance in the following innovation areas?
Initial idea generation
36%
38%
Realizing profits and-or positive return on
investment from innovations
32%
Concept development
32%
Idea management
32%
Product development
31%
Manufacturing & testing
30%
Converting ideas into market-ready products,
services or business models
30%
Improving operations by eliminating redundant
processes and lowering operating costs
29%
Achieving consistent innovation performance
28%
Commercialization & launch
28%
Developing new processes-business model
37%
38%
37%
40%
38%
36%
36%
39%
27%
Developing pipeline
38%
26%
Growing portfolio
25%
Commercial portfolio optimization
End-of-life
38%
24%
21%
35%
32%
32%
32%
2012 (Very satisfied)
2009 (Very satisfied)
6
Going Forward
What can companies do
to improve disappointing
performance and
overcome the obstacles
to innovation? Part
of the answer may be
provided by the survey
respondents themselves.
Those organizations that have a holistic,
formal system in place for innovation,
consistently report better outcomes and
higher levels of satisfaction from their
innovation investment. For example, in
terms of “initial idea generation,” 43
percent of the companies with such
systems in place report they are very
satisfied in contrast to 24 percent with
only an informal system; 32 percent are
very satisfied in the “analysis of data to
inform R&D decisions” vs. 21 percent; 36
percent are very satisfied with “product
development” vs. 25 percent; 32 percent
are very satisfied with “commercialization
and launch” vs. 22 percent; 38 percent are
very satisfied at the return of investment
or profits from innovation vs. 22 percent.
Furthermore, companies with formal
innovation systems may be less likely to
pursue line extensions at the expense of
more significant breakthrough innovation
and less likely to miss developing new
markets due to a lack of an organizational
home to nurture them. Not surprisingly,
as compared with respondents who have
only an informal innovation system in
place, these companies are 138 percent
more likely to indicate their organization’s
strategy is dependent on innovation for
its long term success (31 percent vs. 13
percent), 50 percent more likely to define
their innovation strategy as delivering
a competitive advantage (21 percent
vs. 14 percent), 100 percent more likely
transform their business in the next 3-5
years with innovation (50 percent vs. 25
percent); and 20 percent more likely to
indicate that they are typically first to
market with new products or services (51
percent vs. 42 percent) (Figure 8).
Figure 8: Organizations that have a holistic, formal system in place for innovation, report better outcomes and higher levels of
satisfaction from their innovation investment.
To what extent is your organization’s strategy dependent
on innovation for its long term success?
Formal system
in place
Informal system
in place
No system or
process in place
Which of the following statements describe your
organization's innovation strategy as it relates to services,
products or business models?
21%
31%
14%
13%
17%
Extremely dependent
0%
51%
50%
42%
25%
17%
29%
Innovation delivers a competitive advantage
We intend to transform our business in the next 3-5
years primarily with innovations
7
We are typically first to market with most innovations –
new products or services
Agree
The implication is clear that having formal
systems in place to address renovation
and invention risks, while overcoming
execution challenges, is the critical
distinction between companies that are
satisfied with their results and companies
that aren’t. We believe that such a formal
system approach to innovation entails five
key aspects:
Run Innovation as an end-to-end value
chain emphasizing speed and flexibility.
As product life cycles shrink and
consumer preferences become more
volatile, speed becomes absolutely
critical to successful innovation. Lateness
to market was cited as one of the top
reasons for innovation failure by 28
percent of the sample. It is imperative
that innovation be run as a business
discipline organized to prioritize speed.
Flexibility can be one of the enablers of
speed and, in the context of innovation,
can be enhanced by an open approach to
R&D which looks beyond the enterprise
for skills, know-how and expertise to
support the development process.
Move from product to business
innovation, integrating elements of
product, service, technology and
personalization.
Innovation that drives substantial revenue
integrates elements of product with
service, technology, and personalization.
A “new thing with neat features” is
necessary but not sufficient. It needs
to be accompanied by a business
model that builds upon the product to
provide a unique, personalized consumer
experience and a service element that
maintains connection with the consumer
and supports an on-going revenue
stream. Indeed, fully 87 percent of
the survey respondents indicated that
personalization is a major part of their
company’s innovation strategy; it is a first
step in the right direction.
Apply risk management practices
specifically tailored to innovation to
identify future opportunities and to
properly evaluate your innovation
portfolio.
Driving bigger and more disruptive
innovation requires more advanced
capabilities to identify, measure and
manage risks. There is a 33 percent drop
from 2009 to 2012 in companies that see
the primary goal of their efforts being to
disrupt current markets or to introduce
entirely new product categories. This
indicates that enterprises have become
less comfortable taking on bold
initiatives. As a result, their portfolios
consist of renovation – incremental,
low value initiatives. Innovation-centric
risk management identifies future
opportunities and evaluates the value
of entire portfolios informed by the
different categories of initiatives. By
applying these mature refinements of
risk, companies can be better able to
avoid the renovation trap and to enhance
the future value of their portfolios.
Pursue frugal innovation both to capture
middle class consumers in emerging
economies and also to disrupt markets in
developed economies.
Fully 56 percent of respondents identified
frugal innovation as either critical or
very important to their innovation
strategy (manufacturing at 74 percent,
communication at 66 percent, and
banking at 62 percent are the leading
sectors). The importance of frugal
innovation in serving middle classes in
emerging markets is well established.
Equally important, however, is pursuing
frugal innovation in developed countries
for the sake of speed, cost reduction, and
the capacity to disrupt markets.
Leverage the digital power of Big Data and
social media to integrate the Voice of the
Customer into the development processes
and drive a high level of personalized
experience.
Digital analytics can provide
unprecedented real time access and
insights into consumer trends and
preferences. The majority of our
respondents invest in cloud and mobility
technology to enhance their innovation
capabilities (60 percent and 50 percent
respectively). However, less than a third
(31 percent) invest in social media,
with retailers and electronics and high
technology leading (with 43 percent
and 41 percent). With personalization
emerging as a decisive factor in the
success of innovation, it is imperative that
social data be exhaustively mined in order
to optimize consumer experience.
8
Conclusion
The recognition has
never been greater
that technology, social
transformation, and
economic volatility
will continue to roil
business models.
Companies understand change is the new
normal and with it the importance of
continual innovation. At the same time,
many are unclear how to drive higher
value from their innovation efforts.
Frustrated with past results, they tend to
pursue a low risk approach that produces
only incremental improvements while
exposing their core business to disruptors
within and outside their industry.
Conventional wisdom and traditional
risk management may well counsel
such cautious innovation. What this
conservative approach can fail to protect
against, however, are the renovation and
invention traps that await down the road
and which can entail a high price.
By putting formal systems in place to
manage innovation, companies can
protect themselves from these lurking if
often under-appreciated dangers. Even
more importantly, they can position
themselves to seize control of change and
become its master rather than its victim.
9
10
About the Study
About the Authors
About Accenture
The results cited in the article come from
a survey of executives conducted by
Accenture in November 2012.
Wouter Koetzier is the global Managing
Director of Accenture’s Innovation and
Product Development Consulting practice.
He is an expert in business strategy and
transformation, with a special emphasis on
commercial and innovation performance
in the Consumer Goods and High-tech
industries. Based in Amsterdam, he can be
reached at [email protected].
Accenture is a global management
consulting, technology services and
outsourcing company, with approximately
261,000 people serving clients in more
than 120 countries. Combining unparalleled
experience, comprehensive capabilities
across all industries and business functions,
and extensive research on the world’s
most successful companies, Accenture
collaborates with clients to help them
become high-performance businesses and
governments. The company generated net
revenues of US$27.9 billion for the fiscal
year ended Aug. 31, 2012. Its home page is
www.accenture.com.
519 executives (vice presidents, directors,
managers) at large organizations (revenues
in excess of $100 million or the equivalent)
in the USA (254), UK (230), and France (35)
answered a 28-question, 15-minute survey
administered on-line. The respondents
came from the following sectors: Banking
and Capital Markets (81), Consumer Goods
and Services (39), Chemicals and Natural
Resources (17), Communications (21),
Electronics and High Tech (68), Energy
(21), Health Providers (40), Insurance (32),
Manufacturing (43), Retail (75), Travel and
Transportation (20), Utilities (15), Other (47).
Trend results and comparisons were drawn
from a comparable survey conducted
by Accenture in 2009 that sampled 639
respondents from the U.S. (330) and
U.K. (309).
Copyright © 2013 Accenture
All rights reserved.
Accenture, its logo, and
High Performance Delivered
are trademarks of Accenture.
Adi Alon is a Managing Director in
Accenture’s Innovation and Product
Development Consulting practice. His work
focuses on supporting clients in upgrading
their innovation execution capabilities,
reduce time to market and aligning their
operating model and processes with their
innovation strategy. Mr. Alon has served
clients in Energy, High Tech, Life Sciences,
Financial Services and the Consumer Goods
industries. Based in Boston, he can be
reached at [email protected].
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