Over the past 18 months, two global surveys with senior executives of leading companies investigated the growing business importance of innovation. First, IBM interviewed 765 CEOs, business executives and public sector leaders from around the world (30% from Asia) about their innovation approach (“Expanding the Innovation Horizon: The Global CEO Study 2006”). Then, McKinsey surveyed 722 senior executives and contrasted their views with 736 of their lower-level executives (“How Companies Approach Innovation”).
In both studies, most CEOs and senior executives confirm that innovation is vital for the success and survival of their firm. Here are key findings of the surveys — and some questions for how they relate to your business.
1. The Innovation Mix Matters
CEOs consider traditional areas of innovation such as product and service innovation as very important. At the same time, they also understand that this is just the entry ticket into the innovation game. “If you don’t get your products, services and markets right, the other stuff doesn’t matter,” noted one CEO. Another draws a similar scenario for (operational) process innovation: “In the operational area, much of the innovation and cost savings that could be achieved has already been achieved.” These statements are confirmed in the financial analysis of the IBM study: Pure product and service innovators as well as process innovators were found to have a basically flat operating margin growth.
In contrast, business model innovators have grown their operating margins by a whopping 5%. Business model innovation targets innovative ways as to how a company is structured and makes money. As such, it becomes a strategic differentiator. Thereby, companies that mix different forms of innovation achieved the most impressive financial results. “It is vital to combine the different types of innovation — products/services/markets, operational and business model — to meet your particular objectives and help establish sustainable differentiation,” conclude the authors of the IBM study.
Questions: To what extent do your innovation efforts go beyond the traditional innovation areas? Do you mix the different innovation areas in your Strategy Innovation Projects?
2. External Collaboration is vital
Most CEOs regard collaboration as indispensable for generating meaningful innovation in the 21st century. In particular, they want to intensify external collaboration efforts with outside parties such as suppliers, customers, consultants, and even competitors. At the same time, many executives acknowledged problems in implementing these aspirations in real life. All in all, it is worthwhile bridging this collaboration gap: The IBM study found that companies with higher revenue growth used ideas from external sources significantly more than slow growers.
Questions: To what degree is external collaboration supported in your firm? Have you already bridged the collaboration gap between your intent and the actual realization of collaboration?
3. Talent is often not an issue
A modern myth in management circles claims that there is a shortage of innovation talent. The McKinsey study brushes off this popular excuse: 64% of the lower-level executives confirmed that sufficient innovation talent resides inside their organization. However, they also reported that only in one third of the cases, these talents are correctly allocated, motivated and protected by senior leaders. Sadly, two out of three innovation talents are either not working in innovation projects or are prevented in their efforts by an innovation-hostile culture.
Questions: Do you know who the innovation talents in your organization are? And do they work in innovation projects?
4. Culture is the biggest obstacle to innovation
Can you guess what CEOs regard as the biggest obstacle to innovation? Here comes the remarkable answer: An unsupportive culture and climate inside their organization. Many CEOs confess that they find it difficult to transform the established “don’t rock the boat” culture inside their firm into one that is open to innovation and change. The climate of complacency in many companies can be explained by a factor extracted in the McKinsey study: Only one out of four lower-level executives stated that failure is viewed positively (as a chance to learn) in their firm; in the other 75% of companies, failures in innovation are not tolerated and sometimes even identified as a detriment for career advancement. Vinod Khosla, founding CEO of Sun Microsystems, noted in this context: “I think the single biggest piece in aligning innovation is allowing people to fail without hurting their careers. And the companies generally don’t do a good job with that.”
Finally, the IBM survey also found that faster-growing companies have had a culture that is collegial and team-based and at the same time rewards individuals.
Questions: Do you have a culture that tolerates or penalizes failure? Does your firm emphasize teamwork and at the same time reward individual innovators?
5. Innovation starts at the top
In the McKinsey study, most executives — and again in particular those on lower levels — agreed on the two most important factors to improve the innovation performance: Making innovation a core part of the leadership agenda; and modeling behavior that encourages innovation, such as taking risks.
Questions: How often is innovation discussed as a separate item on the agenda of your board meetings? And: Do you walk your talk when promoting innovation in your firm?
© Dr. Detlef Reis 2007. This article was published in parallel in the Bangkok Post under the same title on 6 December 2007.