Strategy : mother of invention

 

Customers are won and retained by innovative products and services, and to stay ahead of the game enterprises worldwide invest heavily in innovation. But the increasing complexity of modern markets and products mean that few companies can succeed alone. This has spawned the creation of collaborative innovation networks, where multiple organizations bring different skills to the whole innovation process.

 

Far too many companies throw money at research and development (R&D) without really getting any measurable return. Consultants Booz Allen Hamilton, who publish an annual report on the world’s 1,000 largest corporate R&D budgets, say that there is no statistical correlation between R&D spending and financial success, such as sales and earnings growth. Booz Allen Hamilton asserts that successful innovators excel throughout the innovation value chain and have the right culture to succeed. The Booz Allen Hamilton Global Innovation 1,000 report found 94 companies that consistently outperformed their competitors, while spending less than the industry median.

 

“Innovation can lead to higher performance, but the process isn’t automatic and it does not necessarily require above-average levels of investment. The most successful companies combine an integrated process and a supportive culture to create a sustainable competitive advantage,” says Barry Jarulzelski, Vice President, Booz Allen Hamilton. “There’s no silver bullet and just throwing money at the problem is not the answer.”

 

Part of the problem is that money is being thrown at the wrong projects. Many companies focus on the invention process without establishing whether it is actually relevant for the business. Looking at how many patents a company produces is no measure of innovation success because most patents will have little business worth. To prevent this, many leading innovators, such as Black & Decker, do not even maintain a centralized R&D function and leave innovation to the business units themselves.

 

 

Innovation should not be carried out in isolation; it needs to involve many different people and entities working in parallel, including third parties external to the organization. Collaboration between companies in the innovation process is becoming increasingly common, and analysts Forrester found that 75% of CEOs across industries now view it as essential. These ‘innovation networks’ are not just a collection of different companies’ R&D departments working towards a common goal. They need to comprise a number of different players in the whole innovation process: inventors, financiers, transformers and brokers.

 

Inventors produce the early stage ideas; these can come from anywhere within the organization, and successful innovators tap their entire employee base for them. Financiers provide the capital to develop the product and service and transformers are instrumental in turning ideas into business success. Finally brokers are useful in larger networks to introduce different parties to one another.

 

Innovation networks can either be built from the top down or the bottom up, said Navi Radjou, analyst at Forrester Research in a recent interview. The former approach requires executive leadership and a clear strategic decision to partner with other companies. The latter approach see the networks built up organically, perhaps through business partners collaborating towards a common goal on a succession of projects. Whatever approach, proper governance needs to be in place to minimize the risk and make sure that all people in the network get the right payback.

 

Many large organizations that would traditionally be labeled as inventors, are actually better placed to work in the transformer role. Proctor & Gamble is a successful example, says Forrester’s Radjou. When developing a new mass-market medicine, it licenses an existing successful prescription drug from a third party, and develops a marketable over-the-counter medicine from it. Everybody in this innovation network profits from the invention and P&G has minimized its risk by choosing a successful drug to develop rather than building it from scratch.

 

 

These new relationships change the nature of company intellectual property. The traditional approach to building up corporate IP quickly was to acquire companies and their innovations. However, many larger organizations found that when they acquired a smaller innovator, it would negatively impact the innovation culture that it was trying to buy into. Further, markets are changing so quickly that by the time they acquire a company, they soon realize that they need to buy a completely different set of companies.

 

Rather than something to be jealously guarded, intellectual property should be shared with business partners through innovation networks. With the right transformers and financiers on board, an invention that might be languishing in one company’s vaults making little money could be transformed into a huge success. IBM, for example, is making an impressive profit from licensing its inventions. According to Radjou that has contributed $10 billion in revenue to IBM over the past 10 years.

 

New business models are an important part of innovation. The success of the iPod has less to do with the device itself than the breakthrough business model of selling digital tracks with iTunes. Involving the business unit in development choices cuts the risk of expensive failures when a new product or service is launched. In fast-moving markets these decisions will need to be made quickly, and innovation networks will help enterprises stay abreast of all market changes.