why low risk innovation costly

7/27/2019 Why Low Risk Innovation Costly

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Why Low Risk Innovation Is CostlyOvercoming the Perils of Renovation and InventionBy Wouter Koetzier and Adi Alon


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Innovation is not working out the way manycompanies expected. Despite increasingcommitment, funding and organizationalaccountability, many companies aredisappointed by the returns they are derivingfrom their investments. Correspondingly,they are scaling back expectations. Insteadof the disruptive products, services, andbusiness models that were anticipatedseveral years ago, many initiatives havebecome considerably more limited in scope.

Rather than offering the next big thing,innovations coming to market today aremore typically line extensions.


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This cautious approach to innovationis understandable, given the relativelydisappointing results. At the same time,however, it is a potentially perilousstrategy. Enterprises that are able tosuccessfully innovate at a breakthroughlevel can increase the likelihood that theywill dominate and prosper in new marketsthat they create. Enterprises that restrict

themselves to incremental innovation, onthe other hand, risk unknowingly enteringa vicious cycle in which they lag everfarther behind.

Accenture recently sought to identifythe state of innovation by surveying 519executives (vice presidents, directors,managers) at large U.S., U.K., and Frenchorganizations with revenues greater than$100 million. They represented a widespectrum of sectors, with the largestsamples drawn from Banking and Capital

Markets, Retail, Electronics and High Tech,Health Providers, and Consumer Goodsand Services.

A consistent theme emerged from thisstudy, revealing two dominant obstaclesthat respondents say stand in the way ofdriving higher returns from innovation.

The first challenge is a conservativeapproach itself, focusing on individualline extension renovation ratherthan developing a broader portfolio

that also includes bold, big ideas.Renovation can limit innovation tosmall incremental improvementsand fail to result in significant stepchanges and revenue opportunities.

The second challenge is the inventiontrap. By this Accenture means over-reliance on the invention process itselfto produce success and relative lack ofsystematic, enterprise-wide processescapable of commercializing inventionsinto products or services at scale, bringingthem to market in a sufficiently timelyfashion and reaping the expected returns.As Kodak found in digital photography, itis sometimes not enough to have a greatidea or invention; the enterprise mustbe equally able to bring its brilliant ideato scale supported by a robust businessmodel, a unique customer experience andan eco-system which further expands the

market potential.

How can companies overcome therenovation and invention challenges? Akey part of the answer is to introducesomething new on a scale where it hassufficient impact to re-define a marketwhile still not betting the farm. How?By pursuing a prudent and disciplinedinvestment approach that specificallyaddresses innovation risk management.


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Increased Commitment to Innovation

Survey respondents areaware of the importance

of innovation.Seventy percent ranked innovation amongtheir top five priorities, 18 percent putit at the head of the list (Figure 1). Athird of the sample52 percent in thecommunications sector, 44 percentin manufacturingcalled innovationextremely important as a key enablerfacilitating their companys successfulresponse to persistent change.

Companies have also committed toinvesting resources and organizationalcapacity to drive innovation. Despiteeconomic volatility, 51 percent reportan increase in funding that leads to newproducts and services in contrast to10 percent whose funding has declined(Figure 2). Amongst sectors investing ininnovation, manufacturing leads with 74percent reporting increased levels; thoseleast likely to have increased investmentare retail (32 percent) and consumergoods (34 percent), where investment

levels in innovation is already high.

Furthermore, companies are implementingmanagerial responses intended tofacilitate innovation. 60 percent ofrespondents now have a Chief InnovationOfficer (or comparable position), incontrast to 54 percent in a similar surveyconducted in 2009 (Figure 3). Such aposition is most prevalent within utilitycompanies (73 percent), electronics andhigh tech companies (71 percent), andmanufacturers (70 percent). Moreover,

innovation is increasingly being measured,with 87 percent of respondents formallyevaluated on innovation activities (upfrom 64 percent in 2009).

Figure 1: Two thirds of responding organizations depend strongly on innovation fortheir long term strategy success. Around one in five (18 percent) rate innovation astheir top strategic priority.

Figure 2: Companies have committed to investing resources and organizationalcapacity to drive innovation.

Figure 3: Companies are implementing managerial responses intended tofacilitate innovation.

Increased No Change Decreased

Changes in funding forinnovation initiatives due

to market volatility

51% 38% 10%

67%

Extremely dependent

Very dependent

Dependent

Slightly dependent

Not at all dependent

Top priority

Top 5 priorities

Top 10

Important but not atop priority

Not important

Dependence

on Innovation

To what extent is your organizations

strategy dependent on innovation for its

long term success?

Where is innovation ranked among your

company's strategic priorities?

26%

6%

43%

24%

23%

6%

52%

18%

Strategic

priority

1% 1%

Do you have a Chief Innovation Executive(or similar title) primarily responsible for

innovation? (percent with "yes" response)

+

+54%

2009 Global

Are you formally evaluated on yourinnovation-related activities?

2009 Global

64%

36%

No

Yes

2012 Global

60%

2012 Global

87%

13%


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New product or service

New process or business model

Improvement or modification of an exising service

There has not been a significant innovation over the pasttwo years

2012 Global (Agree + Strongly Agree)

2009 Global

50%

30%

17%

My organization tends to pursue productline extensions rather than developingtotally new products or services

For your organizations most successful innovation brought to market within the last

two years, please indicate the type of innovation?

My organization has prioritizedshort-term financial results over investingfor the long term

-

Please indicate the extent to which you agree with the following statements regarding

innovation in your organization?

64%

53%

2012 Global

48%

26%

24%

2%

Disappointing Results

The vast majority ofexecutives, 93 percent,

continue to regard theircompanys long-termsuccess to be dependenton its ability to innovatebut at the same timeless than one out offive (18 percent) believe

their own innovationstrategy is delivering acompetitive advantage.The divergence between expectations andresults, moreover, has widened in recentyears. In the 2009 survey, executiveswere confident that their organizationspossessed the capacity to conceive andintroduce new products and servicesso powerfully attractive to customers

that they would disrupt markets to thecompetitive advantage of the innovator.Today there is considerably less certainty.

In 2009, the objective of innovation for30 percent of companies was to disruptexistent markets; in 2012 the proportionhas shrunk to 26 percent (Figure 4).Correspondingly, the approach currentlypursued by the majority of respondents,64 percent, is not transformative inpursuit of totally new products orservices but rather can be defined as

renovationmore limited incrementalline extensions (Figure 5). Most tellingly,confidence that expectations can bemet in the future is waning. Fewer thanhalf the present-day respondents believethey have an effective approach to newproduct development or are seekinginnovation effectively.

Figure 4: Fewer companies are seeking to disrupt existent markets with innovation.

Figure 5: Companies are pursuing a more cautious approach to innovation.


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Initial idea generation

Realizing profits and-or positive return oninvestment from innovations

Concept development

Idea management

Product development

Manufacturing & testing

Converting ideas into market-ready products,services or business models

Improving operations by eliminating redundantprocesses and lowering operating costs

Commercialization & launch

2012 (Very satisfied)

2009 (Very satisfied)

How satisfied are you with your companys performance in the following innovation areas?

36%

32%

37%

37%31%

30%40%

28%39%

29%36%

28%36%

32%

32%

38%

38%

30%38%

27% 38%

38%

Achieving consistent innovation performance

Developing new processes-business model

Developing pipeline

Growing portfolio

Commercial portfolio optimization

End-of-life

26%35%

24%

21%

32%

32%

32%25%

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Figure 6: Companies feel they have a sluggish innovation processes.

Figure 7: Companies are seeking to innovate but are increasingly less satisfied withthe results.

We are typically first to market with mostinnovations-new products or services

We effectively seek breakthroughinnovation opportunities

Our organization has a well-definedinnovation strategy

We have an effective process for capturingideas from outside our company

Which of the following statements apply to your company's approach to innovation(includes a new product, service or business model)?

45%

45%

34%

21%

When it comes to rating their ownorganizations innovation performance,the respondents are severe critics. Only34 percent believe their company has awell-defined innovation strategy (Figure6), 46 percent say they have becomemore risk averse in considering newideas, 45 percent see their companypursuing a portfolio of smaller, saferopportunities rather than seeking thenext breakthrough. On a variety ofmeasuresinitial idea generation, productdevelopment, manufacturing and testing,commercialization and launch, portfoliooptimizationexecutives are less satisfiedtoday than in 2009.

Respondents also cited specific challengesto innovation that include predictingfuture trends (30 percent), achieving costcontainment (27 percent), securing on-going budget support and leveraging newtechnology (26 percent respectively) andtransforming new ideas into marketablegoods and services (24 percent).

In particular, commercialization andlaunch and achieving consistentinnovation performance experienced the

sharpest drop in executives assessment oftheir companys performance. Those twoareas are indicative of the challenge thatmany companies experience in scalinginnovation by moving from good ideastage to large scale market deployment(Figure 7).


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Figure 8: Organizations that have a holistic, formal system in place for innovation, report better outcomes and higher levels ofsatisfaction from their innovation investment.

Formal systemin place

Informal systemin place

No system orprocess in place

Extremely dependent Innovation delivers a competitive advantage Agree

We intend to transform our business in the next 3-5years primarily with innovations

31%

17%

13%

0%29%

21%50%

51%

17%

42%14%

25%

To what extent is your organizations strategy dependenton innovation for its long term success?

Which of the following statements describe yourorganization's innovation strategy as it relates to services,products or business models?

We are typically first to market with most innovations new products or services

Going Forward

What can companies doto improve disappointing

performance andovercome the obstaclesto innovation? Partof the answer may beprovided by the surveyrespondents themselves.

Those organizations that have a holistic,formal system in place for innovation,consistently report better outcomes andhigher levels of satisfaction from theirinnovation investment. For example, interms of initial idea generation, 43percent of the companies with suchsystems in place report they are verysatisfied in contrast to 24 percent withonly an informal system; 32 percent arevery satisfied in the analysis of data toinform R&D decisions vs. 21 percent; 36percent are very satisfied with productdevelopment vs. 25 percent; 32 percentare very satisfied with commercializationand launch vs. 22 percent; 38 percent are

very satisfied at the return of investmentor profits from innovation vs. 22 percent.

Furthermore, companies with formalinnovation systems may be less likely topursue line extensions at the expense ofmore significant breakthrough innovationand less likely to miss developing newmarkets due to a lack of an organizationalhome to nurture them. Not surprisingly,as compared with respondents who haveonly an informal innovation system inplace, these companies are 138 percentmore likely to indicate their organizationsstrategy is dependent on innovation forits long term success (31 percent vs. 13percent), 50 percent more likely to definetheir innovation strategy as deliveringa competitive advantage (21 percent

vs. 14 percent), 100 percent more likelytransform their business in the next 3-5years with innovation (50 percent vs. 25percent); and 20 percent more likely toindicate that they are typically first tomarket with new products or services (51percent vs. 42 percent) (Figure 8).


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The implication is clear that having formalsystems in place to address renovationand invention risks, while overcomingexecution challenges, is the criticaldistinction between companies that aresatisfied with their results and companiesthat arent. We believe that such a formalsystem approach to innovation entails fivekey aspects:

Run Innovation as an end-to-end valuechain emphasizing speed and flexibility.

As product life cycles shrink andconsumer preferences become morevolatile, speed becomes absolutelycritical to successful innovation. Lateness

to market was cited as one of the topreasons for innovation failure by 28percent of the sample. It is imperativethat innovation be run as a businessdiscipline organized to prioritize speed.Flexibility can be one of the enablers ofspeed and, in the context of innovation,can be enhanced by an open approach toR&D which looks beyond the enterprisefor skills, know-how and expertise tosupport the development process.

Move from product to business

innovation, integrating elements ofproduct, service, technology andpersonalization.

Innovation that drives substantial revenueintegrates elements of product withservice, technology, and personalization.A new thing with neat features isnecessary but not sufficient. It needsto be accompanied by a businessmodel that builds upon the product toprovide a unique, personalized consumerexperience and a service element thatmaintains connection with the consumer

and supports an on-going revenuestream. Indeed, fully 87 percent ofthe survey respondents indicated thatpersonalization is a major part of theircompanys innovation strategy; it is a firststep in the right direction.

Apply risk management practicesspecifically tailored to innovation toidentify future opportunities and toproperly evaluate your innovationportfolio.

Driving bigger and more disruptiveinnovation requires more advancedcapabilities to identify, measure andmanage risks. There is a 33 percent dropfrom 2009 to 2012 in companies that seethe primary goal of their efforts being todisrupt current markets or to introduceentirely new product categories. Thisindicates that enterprises have becomeless comfortable taking on boldinitiatives. As a result, their portfolios

consist of renovation incremental,low value initiatives. Innovation-centricrisk management identifies futureopportunities and evaluates the valueof entire portfolios informed by thedifferent categories of initiatives. Byapplying these mature refinements ofrisk, companies can be better able toavoid the renovation trap and to enhancethe future value of their portfolios.

Leverage the digital power of Big Data andsocial media to integrate the Voice of the

Customer into the development processesand drive a high level of personalizedexperience.

Digital analytics can provideunprecedented real time access andinsights into consumer trends andpreferences. The majority of ourrespondents invest in cloud and mobilitytechnology to enhance their innovationcapabilities (60 percent and 50 percentrespectively). However, less than a third(31 percent) invest in social media,with retailers and electronics and hightechnology leading (with 43 percentand 41 percent). With personalizationemerging as a decisive factor in thesuccess of innovation, it is imperative thatsocial data be exhaustively mined in orderto optimize consumer experience.

Pursue frugal innovation both to capturemiddle class consumers in emergingeconomies and also to disrupt markets indeveloped economies.

Fully 56 percent of respondents identifiedfrugal innovation as either critical orvery important to their innovationstrategy (manufacturing at 74 percent,communication at 66 percent, andbanking at 62 percent are the leadingsectors). The importance of frugalinnovation in serving middle classes inemerging markets is well established.Equally important, however, is pursuingfrugal innovation in developed countriesfor the sake of speed, cost reduction, and

the capacity to disrupt markets.


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Conclusion

The recognition hasnever been greater

that technology, socialtransformation, andeconomic volatilitywill continue to roilbusiness models.

Companies understand change is the newnormal and with it the importance ofcontinual innovation. At the same time,many are unclear how to drive highervalue from their innovation efforts.Frustrated with past results, they tend topursue a low risk approach that producesonly incremental improvements whileexposing their core business to disruptorswithin and outside their industry.

Conventional wisdom and traditionalrisk management may well counselsuch cautious innovation. What thisconservative approach can fail to protectagainst, however, are the renovation andinvention traps that await down the roadand which can entail a high price.

By putting formal systems in place tomanage innovation, companies canprotect themselves from these lurking ifoften under-appreciated dangers. Evenmore importantly, they can positionthemselves to seize control of change andbecome its master rather than its victim.


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About the StudyThe results cited in the article come froma survey of executives conducted byAccenture in November 2012.

519 executives (vice presidents, directors ,managers) at large organizations (revenuesin excess of $100 million or the equivalent)in the USA (254), UK (230), and France (35)

answered a 28-question, 15-minute surveyadministered on-line. The respondentscame from the following sectors: Bankingand Capital Markets (81), Consumer Goodsand Services (39), Chemicals and NaturalResources (17), Communications (21),Electronics and High Tech (68), Energy(21), Health Providers (40), Insurance (32),Manufacturing (43), Retail (75), Travel andTransportation (20), Utilities (15), Other (47).

Trend results and comparisons were drawnfrom a comparable survey conducted

by Accenture in 2009 that sampled 639respondents from the U.S. (330) andU.K. (309).

About the AuthorsWouter Koetzier is the global ManagingDirector of Accentures Innovation andProduct Development Consulting practice.He is an expert in business strategy andtransformation, with a special emphasis oncommercial and innovation performancein the Consumer Goods and High-techindustries. Based in Amsterdam, he can be

reached at [email protected].

Adi Alon is a Managing Director inAccentures Innovation and ProductDevelopment Consulting practice. His workfocuses on supporting clients in upgradingtheir innovation execution capabilities,reduce time to market and aligning theiroperating model and processes with theirinnovation strategy. Mr. Alon has servedclients in Energy, High Tech, Life Sciences,Financial Services and the Consumer Goodsindustries. Based in Boston, he can bereached at [email protected].

About AccentureAccenture is a global managementconsulting, technology services andoutsourcing company, with approximately261,000 people serving clients in morethan 120 countries. Combining unparalleledexperience, comprehensive capabilitiesacross all industries and business functions,and extensive research on the worlds

most successful companies, Accenturecollaborates with clients to help thembecome high-performance businesses andgovernments. The company generated netrevenues of US$27.9 billion for the fiscalyear ended Aug. 31, 2012. Its home page iswww.accenture.com.

Copyright 2013 AccentureAll rights reserved.

Accenture, its logo, andHigh Performance Deliveredare trademarks of Accenture.

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