I’ve written about the problems with corporate innovation
and what makes a successful innovation department
in the past. This is a more granular follow up for why these challenges exist and perhaps will give you some ideas on how to tackle them.
Short-sighted P&L focus over long-term success
This has to be one of the most common challenges faced by innovation projects and innovation/R&D departments inside a company. As MITER from MIT states, there is a desire for predictable and consistent results in the corporate world. Mature companies have investors with large amounts of deployed capital who value and expect predictable, consistent financial results.Unfortunately, the same formats that produce process excellence — which is how the Street often judges profits and future profit potential — are not conducive to innovation. Wall Street has no long term vision priced into stocks (with limited exception). Anyone who understands the Great Recession crash knows that short-term profits are always valued over long-term vision.
3M famously went through this short term vs. long term struggle after James McNerney left for Boeing and George Buckley took the reigns. For those not familiar with the story, McNerney came from GE into the hotseat at 3M and began implementing Six Sigma – an efficiency program. 3M’s total revenue from inventions created in the last 5 years decreased from one third of total revenue to one fourth of total revenue in his tenure. For a company whose identity was built on innovative products, they had effectively killed creativity. The now former CEO once said, “Invention is by its very nature a disorderly process.” CEOs everywhere are tormented with managing the tension between innovation and efficiency.
“The more you hardwire a company on total quality management, [the more] it is going to hurt breakthrough innovation,” said Vijay Govindarajan, a management professor at Dartmouth’s Tuck School of Business in a Businessweek article. “The mindset that is needed, the capabilities that are needed, the metrics that are needed, the whole culture that is needed for discontinuous innovation, are fundamentally different.”
There is a place for P&L, but it is not in innovation or R&D. You simply can not create big impacts with incremental change. Wharton management professor Mary J. Benner says now may be the time to reassess the corporate utility of process management programs and apply them with more discrimination. “In the appropriate setting, process management activities can help companies improve efficiency, but the risk is that you misapply these programs, in particular in areas where people are supposed to be innovative,” notes Benner. “Brand new technologies to produce products that don’t exist are difficult to measure. This kind of innovation may be crowded out when you focus too much on processes you can measure.”
If leadership and C-suite executives truly care about the long-term success of the company and its performance on Wall Street, then they’ll need to learn that these processes are not a catch all for the entire organization. It will kill the company eventually and stagnate growth. Benner said of her research, “I suspect that many companies with widespread process management initiatives over the past few years have reached the limits of improvement.” In addition, the ability to gain competitive advantage from cost and efficiency gains also has limits. Once a firm’s competitors are adopting the same practices, it is difficult to sustain a long term competitive advantage. “Companies need other advantages, such as new innovation.”
Fear that this project will cannibalize an existing business line
Leadership is often nervous about risking cannibalizing revenue from an existing business line with a new business model or product. I call this the fear of success. Examples of this are rampant. Cliché but relevant, Blockbuster and Kodak are two prime examples of not fiercely pursuing different distribution models or new technologies, at least in part because of the fear of cannibalizing their revenue lines.
First, understand that this fear is real, and as frustrating as it may be, it’s also understandable. It’s natural to not want to threaten what puts food on your plate. It’s counterintuitive and may feel like you’re shooting yourself in the foot. However, the opposite is true.
If you see an opportunity and you don’t take advantage of it, someone else will. We’re not unique snowflakes. Someone, somewhere is working on it, guaranteed. Any angel investor or VC will tell you the biggest red flag to hear in a pitch is that a company doesn’t have competitors. They’re sure to find someone with nearly the same idea with 5 seconds and a smartphone.
Defend the ROI
The “business(es)” not understanding the value in what you’re doing is fairly common. Often, especially in the research side of R&D, ROI can be a difficult to justify for projects early in their lifecycle. The easier ROI to calculate is often for projects with more incremental change. Disruptive and new technology is a return that’s developed over time. Something that is disruptive and 5 years out, by definition, does not likely have many parallels. Of course, without a parallel to examine, it’s hard to predict ROI. Sure you can make arguments to justify just about any return, however, it’s all just pie in the sky guesses at that point. In order to be able to defend returns with any certainty, it’s important to have a good portfolio with products that span the innovation lifecycle.
There’s a story I’m often remind of in the Harvard Business Review:
Take the example of a consumer goods company we know. Attuned to the need to keep its brands fresh in retailers’ and consumers’ minds, it introduced frequent improvements and variations on its core offerings. Most of those earned their keep with respectable uptake by the market and decent margins. Over time, however, it became clear that all this product proliferation, while splitting the revenue pie into ever-smaller slices, wasn’t actually growing the pie. Eager to achieve a much higher return, management lurched toward a new strategy aimed at breakthrough product development—at transformational rather than incremental innovations.
Unfortunately, this company’s structure and processes were not setup to execute on that ambition; although it had the requisite capabilities for envisioning, developing, and market testing innovations close to its core, it neither recognized nor gained the very different capabilities needed to take a bolder path. Its most inventive ideas ended up being diluted beyond recognition, killed outright, or crushed under the weight of the enterprise. Before long the company retreated to what it knew best. Once again, little was ventured and little was gained—and the cycle repeated itself.
Investing across the spectrum of risk and reward of an innovation portfolio (and having conviction to “hold long” on the riskier and far out innovations) is just as important as having a diversified stock portfolio.