Is Your Company Unleashing the Full Power of Innovation?

Making innovation function the right way in today’s rapidly evolving and disruptive markets is a topic of interest in many C-suites and boardrooms. The big picture reveals that innovative technologies — for example, large language models (generative artificial intelligence), digital twin solutions, augmented and virtual reality, quantum computing, the expanding Internet of Things and increasing broadband speed and access — are fostering disruptive change. The effect of technical debt and the likelihood of new waves of regulation to protect consumers from harm and avoid unwanted consequences are other important considerations.

This picture portends continuous, dramatic change. It offers opportunities for innovative companies to place smart, data-informed bets. But it is also underscored by a sobering premise that the risk-reward balance of years past with respect to innovation may not be suitable in the years to come. That is why it poses a lethal inflection point for companies embracing the status quo.

Strategic agility — the ability to improve performance and thrive amid disruption — has emerged as a critical success factor in sustaining relevance. Indeed, innovation is the organization’s lifeblood. There is extensive research in the market to support this point. For example, a recent McKinsey study indicates that for organizations asserting that their innovative culture gives them a competitive edge, they are over four times more likely to drive significant new growth from their research and development investments than are organizations that do not believe they have gained a competitive edge through their innovation culture.

But the real question is this: Why are some organizations more successful in innovating than others?

For example, why do some companies have a higher percentage of revenue from products and services introduced to the market over the past two or three years than others? Why are some able to be disruptive in the marketplace, while others appear to embrace status quo thinking? What’s the secret sauce? Is it culture? Is it about talent and how people are motivated? Is it the data more successful companies collect from customers? How does risk fit into the discussion? How do more successful companies balance innovation initiatives with the legacy business? 

These are important questions for senior executives and directors to address. In the digital age, these leaders have an important role to play in strengthening and nurturing the innovation culture. The following is a useful roadmap for executives and directors to consider.

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Position the organization to pivot quick — resources, leadership and capital allocations

Strategic agility is about sustaining alignment with changing business realities, including reinvented business models, redesigned workflows, and new and improved market offerings. The global pandemic posed an object lesson that organizations can indeed innovate with intention more rapidly than they ever thought they could. For most companies, it was a matter of innovating out of necessity using capabilities that had been available for years so they could maneuver in the face of an abrupt, massive shift in market conditions. 

What did it take for companies to implement sweeping changes to their processes and market offerings in a matter of days? Attention to changing markets, ability to adapt, proximity to customers, decisiveness in the face of uncertainty, commitment to act to address new realities and a resilient workforce with an “all hands on deck” mindset come to mind. These same attributes offer keys to driving innovation at market speed both now and in the future.

Risk planning and resilience planning go hand in hand to identify blind spots, maximize preparedness and encourage creative thinking. Some ideas:

• Have top performers or outsiders consider the confluence of potential market conditions, possible competitor actions and disruptive technologies that could take down the company and present the results to the executive team and board.
• Identify the toughest challenges in executing the strategy and consider how to address them.
• Evaluate plausible and extreme “what if” scenarios, capture and synthesize the learnings and incorporate them into the strategy-setting process.

Apply an ‘outside looking in’ approach

Innovation strategy cannot be formulated in a vacuum. The organization should avail itself of external perspectives. For example:

• Connect innovation to customer value through a focused effort to blend customer experience data, institutional knowledge and digital perspectives when making decisions on how best to channel emerging tech initiatives to improve the customer experience continuously.
• Involve customer advisory teams, a “chief customer officer,” knowledgeable subject-matter experts and field operators at the innovation “drawing table” and encourage them to challenge assumptions and point out improvement opportunities. 
• Meet periodically with and learn from investment bankers to discuss innovation ideas from their monitoring of industry developments.
• When evaluating strategies to monetize the company’s intellectual property, pay attention to how startups are being funded, i.e., how are they framing their value proposition with investors to attract funding partners?
• Obtain innovation ideas from external sources, e.g., academics, software and consulting companies, industry and technology trends and innovation communities, suppliers and external partners that are part of the value ecosystem.

Lessons from the “outside looking in” should be condensed into easily digestible business intel for decision makers.

Reach a common understanding of innovation risk tolerance and risk appetite

Executive management and the board are responsible for the preservation, safety and growth of economic value. When focusing on innovation strategy and initiatives, risk appetite is about not just the maximum risk to take but also the minimum innovation fail rate. This means mitigating risk-averse behavior. The notion is, “If you’re not failing, you’re not learning.”

Leaders should open up continuous conversations about the kinds of innovations the company needs — business model, business processes and product/service offerings. This conversation should be fed by what the company is learning about markets, customers, consumers, competition, suppliers and regulators. The conversation should address the innovation budget, e.g., how much to invest, where to invest and why. It should also cover incentives to ensure people are empowered and rewarded even if they fail.  

Periodically, the board and management should consider whether the company is taking on enough innovation risk. How much risk is enough? Are our incentives right? Do we have the data we need? Is the fail rate too low, or are we failing too slowly? Is there evidence we are penalizing failure? 

Focus on the expected innovation results

The board should engage management in setting innovation policy and facilitating risk-taking. Excessive process and controls can stop innovation in its tracks, i.e., exposure to “corporate oxygen” can suffocate a startup. While some guardrails are needed, it is up to the board and CEO to find the balance and frame the culture that allows freedom to run. Focusing on customers is vital. What’s working? What’s not working? What are competitors doing? Market intelligence centered on the customer experience can facilitate decisions on where to be a disruptor to avoid being disrupted.

In today’s digital world, it is easy to recognize the power of technology in driving continuous improvement in processes, products and services as well as creating a disruptive force to reinvent business models. But innovation can be transformative in strengthening brands and leapfrogging competitors without technological underpinnings. For example, Roberto Goizueta transformed Coca-Cola by divesting side businesses and focusing solely on the soft drink business, consolidating the bottling network and introducing new products that became highly popular. Shareholder value increased over 35 times during Goizueta’s 16-year tenure as CEO and the brand became more international, becoming most recognized in the world.

Airbnb and Uber are recent examples of business model innovation (albeit with models enabled by technology). As innovation can also focus on continuously improving processes, products and services, it helps to view it as a discipline that enables the organization to play defense better or offense differently.

Make the innovation process more robust

For organizations that have made innovation a priority, the process has traditionally been about setting performance expectations linked to company objectives, designating responsible individuals, allowing them to operate in a risk-free environment, monitoring their progress using appropriate metrics and holding them accountable for results. However, for many organizations, innovation has been opportunistic and ad hoc. 

There is no off-the-shelf process design to enable innovation to reach its full potential in the digital age. Nonetheless, innovation is a differentiating skill. Several years ago, Jeff Bezos, then-Amazon CEO (he stepped down from the role in 2021), issued a letter to shareholders offering sage advice on fostering an innovation process:

• Protect a company’s vitality with a true customer obsession: This means experimenting patiently, accepting failures, planting seeds, protecting saplings and doubling down on customer delight. A strong, data-informed focus on the customer experience ensures the relevance of innovation.
• Do not allow proxies to displace a deep understanding of the customer: Effective processes enable serving customers. But management needs to ensure that the process doesn’t become the thing, which can happen easily in large organizations. 
• Embrace external trends to seize a tailwind: The outside world can threaten a company that won’t or can’t embrace powerful trends quickly. Fighting these trends — whether they relate to changes in the industry, demographics, customer preferences or geopolitical realities — is probably tantamount to fighting the future.
• Emphasize high-velocity, high-quality decision-making: This is easy for startups but challenging for large incumbents. Speed matters in business. Avoid a one-size-fits-all decision-making process. Make decisions with somewhere around 70% of the information desired, rather than wait until obtaining 90% or more. Be good at course-correcting bad decisions so that being wrong is less costly than being too slow. And don’t get mired in a time-consuming consensus-building process — sometimes it is better to disagree and commit to act.
• Pay attention to organizational alignment: Recognize true misalignment issues early and escalate them immediately. 

The bottom line is that senior executives and directors should nurture and strengthen the internal capabilities conducive to an innovative culture and should measure and reward innovation so that it becomes a core competency. Their focus should embrace priority-setting, capital allocation, talent acquisition, leadership development and top-line growth. A robust innovation core competency is built on data for decision-making. To that end, “data informed” and “data driven” do not mean relying on data available. The focus should be on the data necessary to support the innovation process without sacrificing decision-making velocity.

Keep the innovation portfolio top of mind and up to date

Companies should sharpen their line of sight on innovation priorities by mapping their 10 best opportunities to experiment and keep the map current. Managers responsible for innovation initiatives should be evaluated based on their respective portfolio of outcomes rather than single projects.

A dashboard reporting the results the innovation strategy is delivering, return on investment, and the effectiveness of the company’s R&D processes supports C-suite and boardroom discussions regarding progress and accountabilities. In a slowing economy, an emphasis on cost cutting cannot lead management to lose focus on innovation strategy. The marginal analysis supporting capital allocation for innovation investments to generate value remains relevant.

Fail fast to learn quick

An increased innovation risk appetite can increase speed, provided there is strong focus on failing fast and learning quickly. This reduces project risk by minimizing the time and resources invested in unsuccessful initiatives. It can be accomplished in a smart way by breaking down large initiatives into discrete, manageable segments that can be completed quickly and evaluated to learn what works and what doesn’t so that the larger initiative can progress more rapidly with confidence. The notion of ”fail fast” enables innovation teams to redirect efforts toward more promising solutions.

Organize at the top for innovation excellence

The responsibility to set the tone and culture for innovation falls to the board and executive management. To that end, executives and directors need to be adept at strategic thinking, abreast of the evolving technology landscape and cognizant of how emerging technologies impact the customer experience and the company’s talent acquisition and retention strategies. The key is to understand changing business realities, often expressed as “currency.” Not easy to sustain, currency is a prerequisite to engaging effectively in strategic innovation conversations.

Board composition is also important. For example, an analysis of the boards of U.S.-listed companies determined that companies with boards of directors that have at least three technology-savvy members outperform other companies. But the importance of the innovation discussion is such that every director — and every member of executive management — should be engaged.

In summary, taking calculated risks in an intelligent and proactive way to drive innovation and sustain competitiveness is necessary to thrive in a rapidly changing world. Innovation inherently involves uncertainty. Accordingly, not all endeavors will yield desired outcomes. Framing risk appetite for innovation is about unleashing creativity and accepting failure as a natural part of the process. In driving the process, the focus of the board and the C-suite should be on the upside of unlocking untapped potential, identifying new revenue streams, improving operational efficiency and enhancing the customer experience.