Welcoming Business Strategy Into The Innovation Sandbox
by Volker Staack
Successful innovation is much more than a roll of the dice. Yet, many companies apparently feel lucky these days. They’re placing blind bets on innovation with huge sums of money on the line by failing to align innovation investments with business strategy.
Uniting innovation strategy with a company’s overall business strategy is essential to the success of any innovation program. However, a new PwC Innovation Benchmark study finds that most companies are struggling with alignment, particularly those that invest heavily in innovation.
Business leaders and strategists must remain deeply involved in helping set the innovation agenda in today’s more inclusive innovation operating environments—in which companies are opening up their innovation process to more stakeholders and contributors, both inside and outside the organization. Fortunately, within this new more open innovation framework, companies have an excellent opportunity to achieve better strategic alignment.
PwC’s Innovation Benchmark study, entitled “Reinventing innovation: Five findings to guide strategy through execution,” is based on a survey of more than 1,200 executives in 44 countries. It also includes insights from in-depth conversations with executives managing innovation initiatives at leading companies.
The study aims to understand how executives view innovation today and what they are doing to optimize its contributions to their businesses. We looked at innovation across a wide range of factors, including strategy, operating models, culture, metrics, and other factors, to understand how innovating companies are creating business value from their efforts.
Overwhelmingly, our respondents told us that innovation must reap measurable financial rewards to be considered successful. They indicated that sales growth is far and away the most important metric of success.
Nagraj Kashyap, corporate vice president of Microsoft Ventures, for example, was adamant that innovation investment must lead to measurable financial and strategic returns. “If that doesn’t happen, it’s just a waste of everybody’s time,” he said.
Driving superior financial results requires excellence across numerous factors, but without strong alignment with a company’s strategy, there is little chance that those efforts will advance the business. Much as any corporate merger or acquisition must be part of an overall business strategy or risk failure, organic innovation investments and processes need to support the company’s strategic goals.
So it is concerning that 54% of all surveyed executives indicated their companies are struggling with strategic alignment. The challenge holds true across all industries, but it becomes even more acute as companies invest greater proportions of their resources in innovation. Among companies that invest 15% or more of revenue in innovation, 65% said alignment with business strategy was their top strategic challenge. In other words, most companies admit they are flying at least semi-blind in deciding how to invest their innovation dollars.
There is, indeed, a strong correlation between strategic alignment and corporate financial performance. An earlier study by PwC’s Strategy&, called the Global Innovation 1000, found that companies that are adept at aligning business and innovation strategy tend to outperform their competitors. These so-called “Coherent Innovators” excel in developing a cohesive set of innovation capabilities corresponding with firm-wide strengths, thus ensuring strategic alignment. Companies that ranked in the top third in coherent innovation enjoyed a performance premium of 22% higher profit and 18% higher market cap growth than other companies.
Strategy and the Innovation Sandbox
Today, companies are increasingly pushing the boundaries of innovation both inside and outside their organizations. They are breaking down traditional silos and tapping a much wider ecosystem for new ideas, insights, talent and technology.
Our Innovation Benchmark study found that more inclusive operating models, such as open innovation, design thinking, and co-creation with partners, customers and suppliers, are now all embraced more than traditional R&D—and by a wide margin. Almost twice as many companies favor these models compared to R&D.
Opening up the innovation process and turning away from traditional command and control operating models does not mean a loss of strategic alignment, however. Indeed, done right, a more inclusive operating model will help promote alignment.
Inviting new stakeholders into the innovation sandbox can be a powerful accelerator, allowing innovation ideas to fail faster and get to market sooner. Inclusive innovation models bring fresh thinking, critical talent and greater understanding of needs and requirements into the process. It can also help improve alignment with business strategy by making those involved in strategic planning a more integral part of the process. Customers and partners, who are critical to a company’s business objectives, can also improve strategic alignment by becoming part of the innovation process.
When it comes to more inclusive operating models, over one-third of companies say that customers are their most important innovation partners. And the majority tells us that their customer engagement strategy helps define innovation requirements from the early ideation phase.
Moreover, companies applying customer-engagement strategies that employ design thinking and user-driven requirements from ideation to the launch of a new product or service are about twice as likely as their survey peers to expect growth of 15% or more over the next five years.
Companies that engage customers throughout the innovation process, team with business and technology partners, and bring together the right business leaders, strategists, and employees from across the organization can help close the strategy-to-execution gap. It is a challenge with which many companies struggle. But those who get it right have a huge advantage in harnessing the power of innovation for both growth and cost management.