Six Levers for Solving The Corporate Innovation Problem – Part 2

By: Frank Mattes / Rob Munro

This is the second part of a three-part article series. In the first part we illustrated that firms are investing heavily into the early phase of innovation. In this second part we show that despite of all these investments, innovation results remain disappointing. We call this the “corporate innovation problem”. We provide some metrics and find that there are two root causes. In the upcoming third part we will suggest that six levers can be used to address one of the root causes. We believe that moving these levers can provide a solution to the corporate innovation problem – and ultimately lead to increased innovation performance.

The corporate innovation problem: The figures

In the first part of this article we have outlined number of routes that companies take in order to achieve excellence in the early phase of innovation (“Fuzzy Front-End”, FFE). However, as a number of studies have found, there is a pressing problem on hand. We call it the “corporate innovation problem”. It manifests in three ways:

Only 10-20% of innovations succeed in the marketplace.

Firstly, despite of all of the investments into the FFE, the success rate of innovation is still low. From metastudies done on innovation in various industries and circumstances it can be concluded that only 10 to 20 percent of innovations are successful.

Secondly, improvements are moving rather slowly. According to Strategy&’s 2014 Global Innovation Study, only one third of CEOs see their companies to be “much better” in innovation than they were 10 years ago. A recent Accenture study explains why this is so: More companies have become more risk averse, are missing more opportunities and are failing to learn from mistakes than even only a few years ago.

And thirdly, the future outlook is not very positive. A senior Executive of a leading global bank we know estimates that 80 to 90 percent of innovation centers (see the first article in this series for more explanation) will fail and end up being a massive waste of resources.

The corporate innovation problem: What CEOs are saying

The corporate innovation problem is also seen by CEOs. From the CEO view, the key problem is not so much the number of innovative ideas but rather executing on the right ones which pull in the commercial potential contained. In other words, CEOs think that too many companies allow ideas that could drive them forward to fall by the wayside or to be bogged down in poorly-designed processes or risk-averse cultures.

The problem is not having ideas but executing them.

The supporting data comes from Forbes and the Boston Consulting Group (BCG). A recent Forbes’ article cited a study on managerial aspects of innovation. More than 75% of US Top Managers say that new ideas are poorly reviewed and analyzed. 80% say their companies do not have the resources needed to fully pursue promising new ideas. And only 5% report that their staff feels highly motivated to innovate.

Diving into BCG’s Global Innovation studies 2014 and 2015, provides additional insight. Based on BCG figures we see that the symptoms of the corporate innovation problem can be found in the FFE, in the interface between the FFE and the execution phase of innovation (“Efficient Back-End”, EBE) and in the EBE itself:

Exhibit 3: Where the corporate innovation problem becomes visible

Two root causes cores of the corporate innovation problem

We do not think that the source of the corporate innovation problem is the individual innovator. Rather, we believe that the corporate innovation problem has two root causes:

• The complexity problem. Today, companies are dispersed, geographically, by sector, by technology and culturally. R&D labs are positioned all over the globe and wheels are being reinvented over and over again.
• The systems problem. In most companies the complex fabric of leadership, KPIs, culture, innovation capabilities of staff, innovation routines and systems that support innovation work is not knitted in a way that it fosters innovation.

The impact of the complexity problem is enhanced by the fact that in most companies, the “incremental” and the “radical” FFEs are not properly integrated into one EBE. The point in this argument is not in separating FFEs for incremental and radical innovation – Many companies have done this.

Merging an ambidextrous Fuzzy Front-End into one Back-End.

The point is that somewhere in the innovation process the incremental and the radical FFE need to be integrated into one backend. This is because at the end of the day, the new product will be in one catalog alongside with all the existing ones, sold by one sales organization and serviced by one field maintenance unit. However, this integration is not done properly in many companies.

Exhibit 4: Different innovation logics of incremental and radical innovation

Our experience about the missing integration is supported by two interesting facts from the Accenture study mentioned in the first part of this article series:

• Executives are aggressively demanding for radical innovations: Interest has nearly doubled since 2012, probably driven by the business communities’ belief that “disruption” is a necessary prerequisite for growth and profitability.
• But 72 percent of the same Executive group state that radical innovation opportunities often languish because “they have no organizational home” in which to nurture them.

Focus on the “system problem”

Certainly there would be value in exploring the complexity problem. But in order to keep this article series handy, we will focus on the “system problem”. We feel encouraged to focus our attention here since a famous quote from Dr. Edwards Deming, the father of modern Quality Management and a great Systems Thinker, reminds us that “94% of the problem is in the system, six percent in the individual person”.

“94% of the problem is the system, 6% the individual person.”

In fact, from a system’s perspective, we see some parallels between innovation management on the one hand and quality management on the other. Both require definition of targets at some point (an innovation that addresses a valuable and unmet customer need respectively measurable quality criteria) and actually both management concepts share a number of touchpoints, e.g. when innovation features are identified and translated into quality criteria using the QFD methodology, for example.

The good thing about putting the “systems problem” in the focus is that we are able to come up with six actionable levers to improve the situation as we will show in the third part of this article series. Moving these levers will significantly contribute to solving one of the two main parts of the corporate innovation problem – and hence improve corporate innovation performance.

By Rob Munro & Frank Mattes