The 2012 top innovators earned a 6.3% total shareholder return premium (stock price appreciation and dividends) over 3 years. Companies that have been on the list since 2004 delivered a 4% premium over 10 years.
What is Innovation
Innovation is the creation of new value. It involves generating ideas around products, services and processes, organizational design, and having a system that manages the implementation of these ideas on a consistent and reliable basis. Every organization – ranging from not-for-profit to public sector to publically traded companies can benefit from a systematic approach to innovation management that brings ideas to life.
Why Innovation Matters
Innovation is tangible. Research shows that innovation is highly correlated with both competitive positioning and financial performance. If seriously pursued by organizations, an innovation orientation will prove to be a sustainable competitive advantage. The same cannot be said about investments in other systems and processes such as the balanced scorecard or general culture and engagement surveys.
A Boston Consulting Group survey revealed that 64% of senior executives agreed that innovation is a top strategic focus for their firms. They feel that innovation provides strategic value and is a key differentiator because it can:
- Increase revenues
- Decrease costs through increased efficiencies
- Reduce competitive and financial risk
- Create better positioning and performance outcomes
- Lead to higher levels of customer satisfaction
- Elevate employee behaviours and actions beyond that of competitors, which are not capable of being imitated by competitors
The Performance Outcomes of Innovation
Innovation is highly correlated with performance, and organizations that possess strong innovation cultures lead their respective industries. For example, the top 25% of companies (as measured by top line financial performance) have innovation orientation scores that range up to 22% higher than bottom quartile performers (Strategian F1000 Survey, 2013). As well, organizations that focus on innovation capabilities report higher profit margins by up to 22% (Booz and Company Global Innovation Study, 2010), and an increase in EBIT of 4% and more than 10 times higher returns from their innovation investments (Arthur D. Little Innovation Survey, 2005).
Innovation creates long-lasting advantages and produces dramatic shifts in competitive positioning; being good at it will provide a competitive advantage, being great at it can result in major industry-wide disruptions.
The Innovation Advantage
Successful organizations recognize the need to continually re-invent themselves in efforts to remain competitive. For these organizations, innovation is a priority. They rely on it to identify opportunity space and execute new growth strategies. Organizations that are innovative possess cultures that support value creation through their employees. They are more creative, empowered and engaged.
Innovation matters, as innovative organizations have the following in common. First and foremost, they are competitive innovators in that they continue to break through to the next level because they are constantly defining it. Second, they understand that it is not the organization that is innovative; rather it is the sum of the people who, through the way they think and act, allow the organization to be innovative. Third, they possess a certain culture, one that is proactive and market driving – it is palpable and employees all know why they are at the top of their game. Fourth, these organizations have made decisions in the past to become innovative – decisions which required sacrifices – but ones from which they are benefiting from today. Lastly, innovative organizations leverage resources; they are able to better define, engage and pursue emergent opportunities. This is in contrast to the strategic fit model approach which essentially promotes competitive imitation.
The Innovation Hurdle
For many organizations however, developing an innovation orientation is very challenging as they are at a loss to define what it is they need to do to become innovative, or how to integrate innovation into their strategy process. Only 1 in 4 organizations indicate that they are successful at innovation. Why is this? We refer to this as the innovation hurdle.
Managers tend to use the terms innovation and strategy together, as if they are one of the same. Nothing could be further from the truth. Innovation has been broadly defined by academics and practitioners alike, however it is nothing more than a state of being while strategy, also widely defined – is nothing more than a process of doing. The two are mutually exclusive, yet complementary. Unfortunately, managers try to piggy back the two only to discover that the ‘process of doing’ with all of its budgets, levels, and timelines stifles the ‘state of being.’ Managers have to understand that innovation is achieved through an imperative internalized by employees, and not as a strategic agenda item.
The good news is that organizations do not have to defect from their strategy process to pursue innovation. The two are complementary, and success with innovation will depend on how managers are able to connect with the emergent opportunities associated with strategy. To achieve this balance, it will be necessary to defect from orchestrated and stagnant practices and allocate resources to create a context that encourages autonomous innovation behaviours.
How to become Innovative
Rarely does a game-changing idea emerge from the planning process or from the thoughts and ideas of one employee. Rather they originate from a context and infrastructure that encourages ideas across the organization. The innovation gain could potentially represent 50% of an organization’s value-base or emergent business. These opportunities lie at the margin, an interface controlled by employees interacting with customers, value chain members, and competitors. Innovation within the organization comes from operational level employees whose job descriptions generally don’t include being visionary, futuristic, or strategic. These employees simply need a context to become innovative.
Organizations become innovative through their employees. However, it is the management of the organization that must create an environment for innovation.
The key to innovation in organizations resides in the ability to define, instill and reinforce an innovation orientation (or culture) amongst employees. Innovation will only flourish under the right circumstances, determinants of which include vision and mission, customer focus, management processes, leadership, support mechanisms, and employee constituency to name a few. Management has to markedly change the context and send the necessary signals to facilitate a change in the way employees think and act. In turn, employees have to respond to these changes and take up the challenges and possibilities under the new management model. The ability to successfully do this (achieve an innovation state) will ultimately depend on the propensity of management, the strategic architecture in place to support innovation, and the constituency of employees to whom these efforts are focused on.
Innovation is more likely in a context where participants attribute high levels of integrity, competence, reliability, loyalty and openness to other participants, and view others as equals. In turn, employees will adjust their behaviours and character in light of these convictions. The cycle works something like this; employees seek out other good employees or smart teams to work with or to consider as role models. They learn from them, adjusting their behaviours, and a new standard is cast. The team gets better and smarter, and they choose to include even better employees and practices. From this standard, everything ratchets up as good seek out better, and better seek out best.