4 keys to growth through transformational innovationOctober 24, 2012: 12:51 PM ET
Most companies underinvest in transformational innovation, weighing down R&D portfolios with incremental projects. The best organizations attack the "front-end" of the innovation process to generate more break-through ideas.
By Michael Griffin, Doug Eckstein and Randeep Rathindran, CEB
FORTUNE -- With growth slowing even in emerging markets, companies realize they need to innovate, now more than ever, to maintain and accelerate growth. They cannot rely solely on market momentum to achieve their growth ambitions.
Most companies, however, fall into a trap of investing in "incremental" innovation. Our research has found that the best companies tilt their innovation portfolios away from incremental initiatives and toward breakthrough and transformational projects. They invest a much higher proportion of their R&D resources in transformational projects relative to lower-performing peers.
Specifically, we found top industry performers (in terms of three-year EBITDA margin growth) allocated more than a fifth (23%) of their R&D budgets on average to transformational projects. Their lower-performing peers allocated less than 10% to these projects. The rest is allocated toward next generation (36%) and incremental projects (55%).
Of course, it is very difficult to break free from the "the tyranny of the incremental." There is a pressing need for incremental product development that can crowd out and consume companies' most important innovation resources. How do the best companies overcome this challenge?
Our work with innovation leaders suggests that the front-end of the innovation process—the exploration and idea creation phase—is a critical differentiator between great innovators and the merely good. Surprisingly, we found that the best companies don't source more ideas, they source better ideas.
Innovation leaders spend more time refining fewer ideas. On average, these leading firms spend 40% more time than their peers moving from idea to concept. That allows them to then move from concept to market much more quickly, because the concepts are more robust. Indeed, the overall time-to market is more than 10% faster at innovation leaders than at other companies. Even more importantly, these companies have much higher success rates on their breakthrough projects than their peers; a whopping 28 percentage point advantage.
A key to success here is improving the quality of ideas that are refined. Our work with innovation leaders suggests four best practices for improving idea quality:
- Define the problem before brainstorming solutions – Guide business managers to collectively agree on the problem first, in order to generate the most effective solutions.
- Enable staff to self-assess ideas to improve idea quality – Teach employees to self-assess the quality of their own ideas by using simple yet objective criteria to improve the quality of the idea pool, while freeing up executive time for prioritization decisions.
- Actively manage social media to refine ideas – Use crowdsourcing platforms to allow broad-based, geographically dispersed communities to virtually share, assess, and refine ideas.
- Motivate well-connected network partners (e.g., suppliers, customers, etc.) to bring high-quality ideas – Continuously assess the innovative potential and connectedness of open innovation partners and identify internal assets (e.g., channel access, customer testing data, etc.) that can be used to motivate them to contribute innovative ideas.
Case-in-Point: Avery Dennison's Office and Consumer Products Group – Idea Box
A great illustration of these practices comes from Avery Dennison, the global leader in pressure-sensitive labeling technology and materials and retail branding and information solutions, and a CEB-member firm. The team at Avery Dennison's Office and Consumer Products Group developed "Idea Box," an internal idea management platform that allows employees to suggest and rapidly build upon ideas. Key elements of their platform include:
- A targeted inquiry system that clearly defines the problem to ensure that participant feedback fits within the opportunity space.
- Idea submission guidelines that push creators to self-test and secure support for their ideas at submission, to ensure only those ideas that have a realistic chance of survival are shared.
- An ongoing, time-saving feedback mechanism that allows for rapid and interim changes to the idea, based on perspectives from employees and partners.
- Idea prioritization filters that combine internal feedback with strategic considerations such as brand promise, alignment to strategy, etc.
By tapping the collective wisdom of employees and customers, companies can source better ideas for transformational innovation. For example, in 2010, Avery Dennison's Office and Consumer Products Group discovered that small businesses were struggling to find low-cost ways to market and merchandize their products. The business then reached out to employees and customers to share and vet ideas on low-cost marketing, leading to the successful launch of a new line of customizable marketing solutions that small businesses can use to brand and market their products.
The experience of Avery Dennison Office and Consumer Products Group suggests executives who want to drive growth through transformational innovation should ask themselves the following three questions:
--Are we allocating sufficient R&D resources to transformational projects (versus incremental and next-generation)?
--Are we sourcing high-quality ideas at the front-end of our innovation process?
--Are we spending enough time nurturing and developing those ideas into concepts that can be market-tested?
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