Innovation has become an area in which CEOs cannot afford to ignore. The importance of innovation has become a major area for senior executives to address as they look to improve their performance.
The result is that many executives now see the ability to formulate and implement an effective innovation policy as one of the most important aspects of their leadership development.
According to the Australian Bureau of Statistics (ABS), investments in innovation are now widespread throughout the country’s economy. In most recent figures, the ABS revealed 36 per cent of companies had introduced new innovations in 2012-13, while a further 22.8 per cent stated they were still in the process of developing new products and services.
However, innovation is also an area senior executives are struggling to align with company strategy, making it harder for companies to combine their development efforts with internal processes.
This was the finding from a recent study from Strategy&, formerly Booz and Company and part of PricewaterhouseCoopers.
The organisation’s research found that aligning company strategy with innovation is a major concern for companies in coming years, with 20 per cent stating this is the largest obstacle for a successful innovation policy.
A further 14 per cent are concerned about trying to incorporate company culture into their innovation policies, while 13 per cent are looking to build an external innovation network that could improve their performance.
The research found that product innovation is no longer the main area for companies to address, with the majority of research and development spending set to shift away from goods and towards services in the future.
Organisations are also beginning to prioritise radical innovations amongst new products, rather than investing in incrementally improving an existing product or service, according to Barry Jaruzelski, senior analyst at Strategy&.
“With the healthier market conditions, it is not surprising that business leaders say they plan to focus more on big breakthroughs. This will require companies to build new capabilities, an effort which they must not underestimate,” said Mr Jaruzelski.
“It’s not by planning or shifting spending alone that they will achieve this.”
Clearly there are weaknesses in the current approach towards innovation, meaning CEOs are going to need to spend more time aligning strategy with the development of new products and services.
How do different organisations approach strategy and innovation?
Innovation is usually assumed to be a single process, but in fact it will take different forms depending on the composition of an organisation and the different strategies that are in play.
That is the finding from a further research project from Strategy&. The organisation has formulated three unique forms that businesses can take when developing an innovation strategy.
- Needs seekers – companies that use customer insights to drive their performance, finding innovative products that are specifically tailored to the needs of the customer.
- Market readers – companies that are adept at reading shifts in their industry, and will then invest their research and development efforts into areas that are consistent with shifts in the marketplace.
- Technology drivers – companies that are the most committed to out-of-the-box innovation strategies, relying on new developments and product offerings to offer something new to their customers.
Each of these different approaches to innovation require organisation-wide cohesion, which can then be applied to the specific product innovations that a company is pursuing. Strategy& also suggested that each of these models comes with a unique approach to the innovation process, with each being driven by different stakeholders within a business.
Strategy, not financing the key to effective innovation
Finally, one of the biggest mistakes CEOs can make is to assume that innovation is simply a financial exercise and that by increasing funding into a certain area they will be able to develop new products and services.
A study from the Harvard Business Review (HBR) suggests that the opposite is actually true – organisations that reduce their expenditure in research and development can actually see a greater return from their investments than those with a large budget for pursuing new products.
Using the case study of CISCO, the research suggested that innovation within an organisation consists of two different processes – explorative innovation and exploitative.
The first relates to a company’s ability to pursue big-picture thinking and develop products that are radically different to anything currently on the market. Exploitative research on the other hand, focuses on commercialising existing processes and driving new growth within an organisation.
Importantly, exploitative innovation doesn’t require a significant investment, and can often yield a greater immediate return for a business than explorative research and development.
In the case of CISCO, the researchers found that although overall investment in innovation declined in the early 2000s, the company’s output of patents – i.e. its exploitative innovation – actually increased.
Even more, successful organisations are those that can quickly change gear between these two different forms of innovation. By quickly shifting between philosophies, organisations were able to pursue the greatest number of new products and services.
Strategy underlying innovation
So how does organisational strategy factor into these findings? Well, firstly it illustrates how important company processes and management styles are for supporting research and development within a business.
Building and embedding this flexibility into the way a company approaches its internal processes is a major challenge for CEOs, especially as they look to develop a competitive organisation. Fortunately, the HBR research shows that developing the right strategy is more effective than simply expanding the budget for further innovation.
The research emphasised that effective leadership was essential for managing the strategic shift between the two forms of innovation.
“Visionary leadership is also about helping the company overcome inertia so that it can shift effectively from one frame of mind to another when the time comes. Few companies pivot easily, but those that do position themselves to ride wave after lucrative wave of exploratory, then exploitative, R&D,” stated the HBR authors.
As innovation becomes an increasingly important business function, effective CEOs are going to have to consider how they can align company strategy with innovation initiatives to drive greater value in their company.