James P. Andrew of The Boston Consulting Group discusses the critical but elusive innovation programs among global companies and how executives can get far more for their innovation dollars.
Innovation 2007, the fourth annual innovation survey by the Boston Consulting Group, reveals a growing frustration with lackluster returns among global executives. These leaders recognize that innovation is critical to their business but find that benefits are elusive, despite significant and ongoing investments in new ideas and projects.
For most companies, innovation is the key to driving growth, shareholder value and a competitive advantage in today’s global economy. For these reasons, senior executives believe that innovation-driven growth is integral to their company’s success. But of the nearly 2,500 executives that BCG surveyed in 2007, only 46 percent said they were satisfied with returns on their innovation spending, down from 52 percent in 2006, and most report that they’re spending more on their innovation efforts every year.
According to a May 14th BusinessWeek article summarizing the survey’s findings, responses from manufacturing and industrial executives for the most part align closely with respondents from other sectors, but with some significant differences. Among 263 respondents from the manufacturing/industrial sector, 65 percent named innovation a top-three priority, and 67 percent plan to increase their company’s investments in innovation. But only 44 percent are satisfied with the return they get from these investments. Interestingly, heads of R&D are much more influential drivers of innovation in the manufacturing/industrial sector than in other industries (17 percent versus 6 percent in non-manufacturing).
Moreover, manufacturers are making it a priority to seek innovation by investing in low-cost countries (LCCs). Fifty percent of manufacturing/industrial executives plan to increase innovation spending in LCCs, compared to only 36 percent of respondents in non-manufacturing sectors. For companies planning to invest in LCCs, China is the top choice named by 81 percent of respondents in the manufacturing/industrial sector, versus 65 percent of respondents overall. Product development is by far the most popular innovation activity to offshore, named by 80 percent of manufacturing/industrial respondents compared to 68 percent of executives overall. Design and testing were the second and third most-named activities targeted for offshoring. Compared to their peers in other industries, however, manufacturing/industrial executives are less willing or able to work with outside innovation partners such as scientists, entrepreneurs, suppliers, and so forth.
Respondents from all industries reported that lengthy development times and a risk-averse culture were the biggest obstacles to innovation, but 34 percent of executives in the manufacturing/industrial sector said that a lack of customer insight was a key problem, compared to only 25 percent of respondents in other industries. And like their peers in other industries, executives in manufacturing/industrial companies believe that new products for existing customers are most important for future success, even more important than breakthrough, “new to the world” products.
A clear view of innovation performance is critical if a company is serious about profiting from its innovation efforts. But according to Measuring Innovation 2007, a more focused and in-depth companion report to Innovation 2007, most respondents said their companies don’t track innovation as rigorously as other business processes, despite spending vast and growing sums of money. More than two out of every three executives surveyed said their company will increase year-over-year innovation spending in 2007, and nearly one in three expects spending to grow significantly (more than 10 percent). Yet measurement of results continues to fall short. This laxity drives much of the frustration with innovation payback. Poor measurement practices result in bad or incomplete information, wasted resources, and a lower return on innovation investments. Yet even though most companies that we surveyed recognized the importance of measurement, few believe they are doing it as well as they should. Only 37 percent of survey respondents said they were satisfied with their company’s measurement practices.
Measuring Innovation 2007 finds that most companies use too few metrics, with 60 percent using five or fewer. (In our experience, 8-12 measures are required to generate a true understanding of not only what is happening, but why.) The single-most widely used innovation metric is total funds invested in growth projects, which 71 percent of executives said their company uses. In fact, the metrics that companies overlook may be the most important ones. The report showed that the least common metrics are the ones that could help track and shape innovation profitability – metrics like the percentage of ideas funded, the number of projects killed at each milestone, and the extent to which new offerings cannibalize existing offerings. The survey also found that companies are doing little to reward innovation. Few respondents (only 28 percent) said their company ties employee incentives to innovation on a consistent basis, while 24 percent said their company doesn’t link them at all. Moreover, only half of the executives said their company tracks the effectiveness and efficiency of the innovation process as a whole.
In Payback: Reaping the Rewards of Innovation (Harvard Business School Press, 2007), my BCG colleague Hal Sirkin and I advise measuring three aspects of the innovation process: inputs, process performance, and outputs, including indirect benefits. For instance, companies might track the financial resources and people committed to an innovation effort, how many ideas move from one stage to the next in the innovation process and how many get bogged down. For those that make it to fruition, you can measure the difference between expected end-value and actual cash payback. It’s also important to measure indirect benefits, such as knowledge acquisition, brand enhancement, ecosystem strength, and organizational vitality. But even these benefits must generate cash to be of value. The key to greater innovation returns is to stay focused on the bottom line.
To that end, companies should consider four key factors that support, or hinder, innovation returns: start-up costs, speed–time to market, scale–time to volume, and support costs. These four S-factors can be mapped onto a “cash curve,” which can help companies track cumulative cash investments and returns, both expected and actual. The challenge is to identify which projects need to be cut back or eliminated so the ones with real potential can be focused on and brought to market faster with greater odds of success. In many companies, nothing is ever finished. By really focusing on their winning ideas, companies can get far more for their innovation dollars.
James P. Andrew is a senior partner and managing director of the Boston Consulting Group and head of the firm’s global innovation practice. He is the co-author of Payback: Reaping the Rewards of Innovation (Harvard Business School Press, 2007)