Managing innovation successfully - approaches for Switzerland
Handelszeitung: Innovation - July 2015
Thanks to exponential technologies, market leaders are currently emerging out of the blue and disrupting established sectors in virtually no time. What Amazon did with the traditional book and music trade a decade ago, companies like Netflix (videos) and Uber (taxis) are now doing more quickly and effectively in other sectors.
Often, though, this revolution is perceived as a purely technological matter, but the applications are only the visible part of a broader change.
The new generation of market leaders have in fact understood that innovation often takes place far beyond the product or service itself. Analyses by Deloitte clearly show that the most successful companies in all sectors systematically combine several types of innovation, including the business model, customer engagement, sales channels and business processes. The most innovative companies in the last 15 years – in all sectors – have in this way achieved 175% higher returns than more traditional companies.
Pursuing innovation by creating added-value locally
In Switzerland, too, there are many companies that are pursuing this approach successfully. Nespresso, for example, supplies customers through a variety of sales channels, including its own Nespresso boutiques and kiosks, with the online sales channel complementing the existing shops. From a corporate perspective, both the proprietary capsule system and the Nespresso Club engender a high brand loyalty, which also enables efficient reordering.
Because of global competition, companies need to focus on getting the most important added-value locally, and on promoting networks with universities, policy-makers and other enterprises. Apple, for example, has focused on the design and development of new products, and has used the transfer of production from the USA to Asia to alter the brand message from "Made in USA" to "Designed in California" and to anchor it among its customers. In Switzerland, the strong Swiss franc and the cost structure mean that companies need to focus on the work with the highest value contribution, which is often innovation.
Choosing an ideal balance for investment in innovation
Deloitte's analyses also show that successful ventures define their innovation objectives clearly, and achieve an ideal balance between investment in the core business, in adjacent businesses as well as in the new business in order to manage innovations. The distribution of capital expenditure across the three areas varies from industry to industry and from company to company. In each case, the weighting for each innovation area is determined by the degree of maturity and speed of change. For the company itself, other questions are also relevant:
- Competition: How far ahead are our competitors, or are we in the lead?
- Growth: What are the organic growth targets? What is the current business growth rate, and how fast could it be expected to grow?
- Risk tolerance: Which risks are taken, and in which areas?
- Return: What are the targets for return on equity?
In the consumer goods industry, successful companies invest around 70-80% in the core business, around 15-18% in related business areas, and 2-5% in new business areas. In the manufacturing sector, the division is approximately in the ratio of 70:20:10, while the technology industry places a stronger emphasis on new business and accordingly allocates investment in the ratio of approximately 45:40:15 between core business, related business areas and new business. A pharmaceutical company recently opted for a distribution of approximately 50:30:20 to support a strategic realignment and targeted investments in innovations that extend far beyond the product itself, including in the digitization of the business model.
Managing innovation within a coordinated structure
The Deloitte investigations also reveal that innovation should be seen as a discipline that can also be managed. The management should create the appropriate structures for supporting innovation, focusing on five core areas:
- Talent: A variety of skills is required for the management of the three portfolio areas. That's why Procter & Gamble is deploying 70 managers globally as "Technology Entrepreneurs" who identify innovations in related business areas. Successful companies make innovation an integral part of the managerial career. Medtronic, a manufacturer of medical technology, enables employees who distinguish themselves in the area of innovation, for example, to become members of the Bakken Society, an honor society for the recognition of scientific progress.
- Integration of innovation into the enterprise: New structures may be needed for innovations, depending on how far they deviate from the core business. Which new skills, resources, technologies and processes are required that are currently scarce or completely absent? For its i3 electric vehicle, for example, vehicle manufacturer BMW has established a new organizational unit that has been able to develop outside the group structures.
- Financing: The company should provide a specific budget for innovation. In the core business, this can be simply co-financed above the line. For new business, however, separate funding should be secured. The pharmaceutical company Merck, for example, has set up a special fund, which invests in companies that are active in areas related to Merck's business, with the aim of identifying parts of a future Merck business model.
- Pipeline management: The often-applied stage-gate process (a structured approach that involves, after the completion of each project phase, taking a decision regarding how the project should proceed) can support innovation efforts in the core business. It is not always conducive to radical ideas, however, as it terminates many projects at an early stage. What is more important, therefore, is an understanding of patterns, trends, customer behavior and customer benefits that make it possible to anticipate new customer needs. A good example of this is a company outpost in Silicon Valley, like the ones set up by Swisscom and Nestlé.
- Key indicators: Executives rely on key indicators, also in the field of innovation. However, traditional financial indicators are often out of place. Initially it is better to use a combination of quantitative and qualitative indicators that reflect customer value and benefit. Google, for example, measures what is learned from an innovative project.
Deloitte believes new opportunities and threats are opening up for Swiss companies due to the exponential impact of new technologies and socio-economic trends. For many enterprises, innovation will continue to be a collection of uncoordinated activities, and for many managers an ongoing source of frustration – but the successful ones will be those that, by seeing and applying innovation as a holistic system and discipline, can turn it into a reliable growth driver.
As published in Handelszeitung Innovation special, July 2015