JANUARY 14, 2020 RESEARCH REPORT
- Investments in innovation are expected to increase 1.8X in the next five years.
- However, companies are neither allocating innovation investments strategically nor managing these investments with discipline.
- Companies that govern innovation extensively over time expect stronger revenue growth.
Many companies assume that innovation and growth come hand in hand — that creative, new ideas will spark more business and provide a better way to run a company. But how do you turn those ideas into commercial reality?
The answer isn’t adding more to the innovation budget, according to our survey of 1,090 executives across 11 industries. The answer is to allow innovation to thrive in the right businesses. Companies should allocate innovation investments based on their businesses’ future potential — not on today’s needs — and apply governance to extract value from those investments.
Research reveals that increased governance can create the right conditions for innovation to thrive in the right businesses. We call this Portfolio Innovation: the application of incremental and non-incremental (breakthrough or disruptive) innovation across businesses with different maturity levels.
Disruptive innovation Enables an entirely new offering to address an unmet need
BUSINESS MATURITY TYPES
The most nascent ventures; new business models, yet to be scaled
Experiences strong market demand; based on differentiated offerings
The oldest, most mature, businesses; provide steady cashflows
Rethink your innovation investment strategy
Leaders need a structured way to direct their innovation investments. Chief strategy and chief innovation officers need to first determine their desired business portfolio composition for the future, discern what type of innovation each business needs, and set their investment strategy accordingly.
We identified two portfolio models from which two innovation investment strategies emerge:
Innovation for Longevity
Mature portfolio companies funnel the majority of innovation investments to their legacy businesses.
Innovation for Balance
Companies funnel innovation investments across their portfolio—legacy, growth and emerging businesses—in a relatively even manner.
Two portfolio models, two investment strategies
Companies that generate 50% or more of their revenues from legacy businesses today
INVESTMENT STRATEGY: LONGEVITY
Majority of innovation investments flow to legacy businesses
Companies that generate more than 50% of their revenues from growth and emerging businesses today
INVESTMENT STRATEGY: BALANCE
Majority of innovation investments flow to growth and emerging businesses
Get ready to govern innovation more
So what distinguishes companies that achieve growth from innovation and those that don’t? One factor is implementing more disciplined governance.
We identified 12 key governance rituals companies are practicing to effectively govern innovation.
Governance rituals enable 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
More is more
Companies that govern innovation extensively delivered 2x revenue growth compared to those following a haphazard approach
We found that the 12% of companies that already adopt six or more rituals are achieving double the revenue growth of companies using fewer rituals.
In fact, when companies that aren’t governing innovation as extensively increase to six or more rituals, they expect to see their revenue growth catch up to those currently in the lead.
REVENUE GROWTH AND COMMITMENT TO INNOVATION GOVERNANCE
Revenue Trajectory (Past: 2013-2018 and Future: 2019 to 2023 Estimated)
5.9% CAGR2.9% CAGR7.2% CAGRRevenue trajectory of companies adopting extensive innovation governance (past and future)6.5% CAGRRevenue trajectory of companies switching from selective innovation governance (past) to extensive innovation governance (future)
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 govern more to grow?