By: Mark Turrell
Innovation may be the watchword of the executive team, but desire does not necessarily lead to the right level of real, sustained commitment. Now, a recent study by Imaginatik Research, building on previous work on the financial impact of innovation, has uncovered a simple, compelling connection between corporate objectives, and the generation and management of ideas and business opportunities.
The Holy Grail of corporate innovation is connecting investment in innovation capacity to corporate objectives. Innovation may be the watchword of the executive team, but desire does not necessarily lead to the right level of real, sustained commitment. Now, a recent study by Imaginatik Research, building on previous work on the financial impact of innovation, has uncovered a simple, compelling connection between corporate objectives, and the generation and management of ideas and business opportunities.
The Revenue Growth Gap
The starting point is the Revenue Growth Gap. This is the gap between plan or forecast revenue over a time horizon (say, three to five years) and the company’s ability to achieve these targets. This year over 70% of companies interested in idea management have calculated this figure, compared to just 20% two years ago. As the cost reduction wave recedes, executives are concluding that the only way their companies can grow is by focusing on innovation, from products and processes to customer service and business models.
The Revenue Growth Gap is ‘owned’ by corporate strategy and planning, and of course, the CEO and executive team. Firms spend months working out future strategic direction, translating direction into financial measures. In the course of developing the “Growth Plan 2010,” the strategists assess the company’s current capability to achieve targets, and in so doing identify the growth gap. This gap needs to be filled, whether by new products, revenue streams, mergers or other, to achieve the long-term financial targets of the business.
At this time, a single PowerPoint slide will be created, highlighting the overall gap, perhaps, or breaking down the gap into business units or product lines. This slide will be the clarion call to innovation, and will help steer the innovation group in its long-term work.
Note that the gap is a long-term gap, and that the gap widens over time. The gap is also cumulative. A single year gap may be $50m, but over a five-year period, the company would be missing $250m worth of revenue.
The long-term nature of the gap
The long-term nature of the gap is important. Many enthusiastic companies embark on one-off innovation initiatives with the goal of boosting their pipeline of new products and services. One-off, ‘innovation-on-demand’ initiatives may succeed in temporarily boosting the pipeline, but the lack of a pervasive, systematic approach to innovation means that the taps get turned off. Worse, we have found that some companies over-focus on breakthroughs at this stage, to the detriment of their core business. Lego, for example, embarked on an ambitious attempt to bring five breakthrough brands to market, and in so doing distracted management, with the result that they became distracted and made massive losses in their core business.
Our cross-industry studies show how large the gap can be. Any company with a goal of doubling its revenue within five years typically has a monster growth gap. Even companies with less ambitious targets can end up with a cumulative growth gap of many millions of dollars.
The Revenue Growth Gap crystallizes the argument for executives and management in a way that softer ‘culture’ messages do not. The gap is typically allocated directly to business units and product lines, however the business is structured, and the management team, supported by corporate strategy, is tasked with uncovering ideas for how to close the gap.
At this point, the most enlightened firms will already start using advanced idea management systems and processes. This stage in the overall innovation process is called Framing, “hunting for hunting grounds,” or finding opportunity spaces. The bigger the gap, the more widely the company should cast its net.
Next step: Developing the opportunity pipeline
Once the executive mandate has been established, the next stage is developing the Opportunity Pipeline. This entails identifying and quantifying a portfolio of business opportunities that will close the gap over the time period. An opportunity may be a new product or service, a novel marketing approach, new process capability, new markets, or something else. The key for management is that an opportunity is not just a new technology or product line. Many firms get far enough to understand their gap, and then revert to type by allowing traditional R&D and new product development to dictate innovation terms. The world’s best companies deliberately look for opportunities outside of core product (but still within the scope of the business), and innovate across a spectrum of corporate activities.
One of the critical questions at this stage is working out the ideal size of the Opportunity Pipeline. In today’s business environment, the majority of executives are comfortable identifying opportunities that exactly meet the growth gap. At this point, it is hard to criticize executives that future projects will not perform as expected. However, history provides a powerful guide to how well these ‘opportunities’ will perform. From a list of ten prospective opportunities, you can expect one to out-perform expectations, two or three to produce decent results, and the rest to under-perform or stall altogether. A recent review of an insurance company’s opportunity list, miraculously covering 100% of their known gap, is likely to miss its target by over 60% based on probable outcomes.
To close this gap, companies have turned to the principles behind a sales pipeline. A sales force typically has two- to three-times more opportunities than plan revenue to ensure that targets are met. In sales it is clear that a forecast sell is driven by multiple factors, some of which are outside the control of the sales person, and assessments are influenced by many uncertainties. Innovation opportunities are similar to sales prospects, although with possibly more uncertainties, and so it makes good logic to target opportunity value as a multiple of the growth gap. Research with several leading firms has found that companies look for between two- and four-times the Opportunity Value. Different methods are used to define opportunity value, from Net Sales Value to Net Present Value.
The impact on the innovation process is clear. Companies need to invest effort before the front-end stage of innovation to identify opportunities and frame their initiatives. Then, during the Idea Management phase, they begin to extract and develop a broad range of ideas and possible solutions. Following the idea stage, companies then need to build out the top ideas as opportunities, and ideally provide a consistent framework for such opportunities to allow for effective decision-making.
Companies need to keep track of potential opportunities, and hold business units accountable for developing, sustaining, and ultimately executing upon these opportunities. Often these opportunities will clash with today’s business, but as the Revenue Growth Gap demonstrates, if the firm does not find a way of replacing existing revenue streams with new ones, profitability will decline and growth will stall.
To make people accountable, the innovation process needs to generate the key metrics required to measure performance and to measure contribution to the opportunity pipeline. Without clear metrics, it is almost impossible to manage the pipeline process (ask any sales director).
Benefits of the opportunity pipeline
The benefits of the opportunity pipeline approach to innovation are:
- Increased executive visibility
- Direct link between growth and ideas
- Increased management accountability
- Increased organizational visibility
- Better allocation of resources for early-stage opportunities
This connection, the link between growth targets and the creation of business opportunities, is the driver behind the best innovation programs. The method is simple enough to be used by any firm, and is likely to become the driver behind the majority of serious corporate innovation programs worldwide.
Mark Turrell is a co-founder and CEO of Imaginatik, a leading supplier and thought leader in the enterprise idea management market.