Why Low Risk Innovation Is Costly

Overcoming the Perils of Renovation and Invention

By Wouter Koetzier and Adi Alon

Innovation is not working out the way many companies expected. Despite increasing commitment, funding and organizational accountability, many companies are disappointed by the returns they are deriving from their investments. Correspondingly, they are scaling back expectations. Instead of the disruptive products, services, and business models that were anticipated several years ago, many initiatives have become considerably more limited in scope. Rather than offering the next big thing, innovations coming to market today are more typically line extensions.

This cautious approach to innovation is understandable, given the relatively disappointing results. At the same time, however, it is a potentially perilous strategy. Enterprises that are able to successfully innovate at a breakthrough level can increase the likelihood that they will dominate and prosper in new markets that they create. Enterprises that restrict themselves to incremental innovation, on the other hand, risk unknowingly entering a vicious cycle in which they lag ever farther behind. Accenture recently sought to identify the state of innovation by surveying 519 executives (vice presidents, directors, managers) at large U.S., U.K., and French organizations with revenues greater than $100 million. They represented a wide spectrum of sectors, with the largest samples drawn from Banking and Capital Markets, Retail, Electronics and High Tech, Health Providers, and Consumer Goods and Services. A consistent theme emerged from this study, revealing two dominant obstacles that respondents say stand in the way of driving higher returns from innovation. The first challenge is a conservative approach itself, focusing on individual line extension renovation rather than developing a broader portfolio

that also includes bold, big ideas. Renovation can limit innovation to small incremental improvements and fail to result in significant step changes and revenue opportunities. The second challenge is the invention trap. By this Accenture means overreliance on the invention process itself to produce success and relative lack of systematic, enterprise-wide processes capable of commercializing inventions into products or services at scale, bringing them to market in a sufficiently timely fashion and reaping the expected returns. As Kodak found in digital photography, it is sometimes not enough to have a great idea or invention; the enterprise must be equally able to bring its brilliant idea to scale supported by a robust business model, a unique customer experience and an eco-system which further expands the market potential. How can companies overcome the renovation and invention challenges? A key part of the answer is to introduce something new on a scale where it has sufficient impact to re-define a market while still not betting the farm. How? By pursuing a prudent and disciplined investment approach that specifically addresses innovation risk management.

Increased Commitment to Innovation

Survey respondents are aware of the importance of innovation.
Seventy percent ranked innovation among their top five priorities, 18 percent put it at the head of the list (Figure 1). A third of the sample52 percent in the communications sector, 44 percent in manufacturingcalled innovation extremely important as a key enabler facilitating their companys successful response to persistent change. Companies have also committed to investing resources and organizational capacity to drive innovation. Despite economic volatility, 51 percent report an increase in funding that leads to new products and services in contrast to 10 percent whose funding has declined (Figure 2). Amongst sectors investing in innovation, manufacturing leads with 74 percent reporting increased levels; those least likely to have increased investment are retail (32 percent) and consumer goods (34 percent), where investment levels in innovation is already high. Furthermore, companies are implementing managerial responses intended to facilitate innovation. 60 percent of respondents now have a Chief Innovation Officer (or comparable position), in contrast to 54 percent in a similar survey conducted in 2009 (Figure 3). Such a position is most prevalent within utility companies (73 percent), electronics and high tech companies (71 percent), and manufacturers (70 percent). Moreover, innovation is increasingly being measured, with 87 percent of respondents formally evaluated on innovation activities (up from 64 percent in 2009). Figure 1: Two thirds of responding organizations depend strongly on innovation for their long term strategy success. Around one in five (18 percent) rate innovation as their top strategic priority.

To what extent is your organizations strategy dependent on innovation for its long term success?

Where is innovation ranked among your company's strategic priorities?

24%

18%

67% 43% Extremely dependent Very dependent 26% 6% 1% Dependent Slightly dependent Not at all dependent 6% 1% 23% 52% Top priority Top 5 priorities Top 10 Important but not a top priority Not important

Dependence on Innovation

Strategic priority

Figure 2: Companies have committed to investing resources and organizational capacity to drive innovation. Changes in funding for innovation initiatives due to market volatility
Increased

51%

38%

10%

No Change

Decreased

Figure 3: Companies are implementing managerial responses intended to facilitate innovation.

Do you have a Chief Innovation Executive (or similar title) primarily responsible for innovation? (percent with "yes" response)

Are you formally evaluated on your innovation-related activities?

54%

60%

64%

87%

36% 13% 2009 Global 2012 Global 2009 Global 2012 Global

Yes No

Disappointing Results
The vast majority of executives, 93 percent, continue to regard their companys long-term success to be dependent on its ability to innovate but at the same time less than one out of five (18 percent) believe their own innovation strategy is delivering a competitive advantage.
The divergence between expectations and results, moreover, has widened in recent years. In the 2009 survey, executives were confident that their organizations possessed the capacity to conceive and introduce new products and services so powerfully attractive to customers that they would disrupt markets to the competitive advantage of the innovator. Today there is considerably less certainty. In 2009, the objective of innovation for 30 percent of companies was to disrupt existent markets; in 2012 the proportion has shrunk to 26 percent (Figure 4). Correspondingly, the approach currently pursued by the majority of respondents, 64 percent, is not transformative in pursuit of totally new products or services but rather can be defined as renovationmore limited incremental line extensions (Figure 5). Most tellingly, confidence that expectations can be met in the future is waning. Fewer than half the present-day respondents believe they have an effective approach to new product development or are seeking innovation effectively. Figure 4: Fewer companies are seeking to disrupt existent markets with innovation.

For your organizations most successful innovation brought to market within the last two years, please indicate the type of innovation?

50%

48%

30%

26%

New product or service New process or business model Improvement or modification of an exising service There has not been a significant innovation over the past two years

17%

24% 2%

2009 Global

2012 Global

Figure 5: Companies are pursuing a more cautious approach to innovation.

Please indicate the extent to which you agree with the following statements regarding innovation in your organization?

My organization tends to pursue product line extensions rather than developing totally new products or services My organization has prioritized short-term financial results over investing for the long term 2012 Global (Agree + Strongly Agree) 53%

64%

When it comes to rating their own organizations innovation performance, the respondents are severe critics. Only 34 percent believe their company has a well-defined innovation strategy (Figure 6), 46 percent say they have become more risk averse in considering new ideas, 45 percent see their company pursuing a portfolio of smaller, safer opportunities rather than seeking the next breakthrough. On a variety of measuresinitial idea generation, product development, manufacturing and testing, commercialization and launch, portfolio optimizationexecutives are less satisfied today than in 2009. Respondents also cited specific challenges to innovation that include predicting future trends (30 percent), achieving cost containment (27 percent), securing ongoing budget support and leveraging new technology (26 percent respectively) and transforming new ideas into marketable goods and services (24 percent). In particular, commercialization and launch and achieving consistent innovation performance experienced the sharpest drop in executives assessment of their companys performance. Those two areas are indicative of the challenge that many companies experience in scaling innovation by moving from good idea stage to large scale market deployment (Figure 7).

Figure 6: Companies feel they have a sluggish innovation processes. Which of the following statements apply to your company's approach to innovation (includes a new product, service or business model)?
We are typically first to market with most innovations-new products or services We effectively seek breakthrough innovation opportunities Our organization has a well-defined innovation strategy We have an effective process for capturing ideas from outside our company 21% 34% 45% 45%

Figure 7: Companies are seeking to innovate but are increasingly less satisfied with the results. How satisfied are you with your companys performance in the following innovation areas?
Initial idea generation Realizing profits and-or positive return on investment from innovations Concept development Idea management Product development Manufacturing & testing Converting ideas into market-ready products, services or business models Improving operations by eliminating redundant processes and lowering operating costs Achieving consistent innovation performance Commercialization & launch Developing new processes-business model Developing pipeline Growing portfolio Commercial portfolio optimization End-of-life 21% 32% 32% 32% 31% 30% 30% 29% 28% 28% 27% 26% 25% 24% 36% 38% 38% 37% 38% 37% 40% 38% 36% 36% 39% 38% 35% 32% 32% 32%

2012 (Very satisfied) 2009 (Very satisfied)

Going Forward
What can companies do to improve disappointing performance and overcome the obstacles to innovation? Part of the answer may be provided by the survey respondents themselves.
Those organizations that have a holistic, formal system in place for innovation, consistently report better outcomes and higher levels of satisfaction from their innovation investment. For example, in terms of initial idea generation, 43 percent of the companies with such systems in place report they are very satisfied in contrast to 24 percent with only an informal system; 32 percent are very satisfied in the analysis of data to inform R&D decisions vs. 21 percent; 36 percent are very satisfied with product development vs. 25 percent; 32 percent are very satisfied with commercialization and launch vs. 22 percent; 38 percent are very satisfied at the return of investment or profits from innovation vs. 22 percent. Furthermore, companies with formal innovation systems may be less likely to pursue line extensions at the expense of more significant breakthrough innovation and less likely to miss developing new markets due to a lack of an organizational home to nurture them. Not surprisingly, as compared with respondents who have only an informal innovation system in place, these companies are 138 percent more likely to indicate their organizations strategy is dependent on innovation for its long term success (31 percent vs. 13 percent), 50 percent more likely to define their innovation strategy as delivering a competitive advantage (21 percent vs. 14 percent), 100 percent more likely transform their business in the next 3-5 years with innovation (50 percent vs. 25 percent); and 20 percent more likely to indicate that they are typically first to market with new products or services (51 percent vs. 42 percent) (Figure 8).

Figure 8: Organizations that have a holistic, formal system in place for innovation, report better outcomes and higher levels of satisfaction from their innovation investment.
To what extent is your organizations strategy dependent on innovation for its long term success? Which of the following statements describe your organization's innovation strategy as it relates to services, products or business models? We are typically first to market with most innovations new products or services

Formal system in place Informal system in place No system or process in place

31%

21%

50%

51%

13%

14%

25%

42%

17%

0%

29%

17%

Extremely dependent

Innovation delivers a competitive advantage We intend to transform our business in the next 3-5 years primarily with innovations

Agree

The implication is clear that having formal systems in place to address renovation and invention risks, while overcoming execution challenges, is the critical distinction between companies that are satisfied with their results and companies that arent. We believe that such a formal system approach to innovation entails five key aspects: Run Innovation as an end-to-end value chain emphasizing speed and flexibility. As product life cycles shrink and consumer preferences become more volatile, speed becomes absolutely critical to successful innovation. Lateness to market was cited as one of the top reasons for innovation failure by 28 percent of the sample. It is imperative that innovation be run as a business discipline organized to prioritize speed. Flexibility can be one of the enablers of speed and, in the context of innovation, can be enhanced by an open approach to R&D which looks beyond the enterprise for skills, know-how and expertise to support the development process. Move from product to business innovation, integrating elements of product, service, technology and personalization. Innovation that drives substantial revenue integrates elements of product with service, technology, and personalization. A new thing with neat features is necessary but not sufficient. It needs to be accompanied by a business model that builds upon the product to provide a unique, personalized consumer experience and a service element that maintains connection with the consumer and supports an on-going revenue stream. Indeed, fully 87 percent of the survey respondents indicated that personalization is a major part of their companys innovation strategy; it is a first step in the right direction.

Apply risk management practices specifically tailored to innovation to identify future opportunities and to properly evaluate your innovation portfolio. Driving bigger and more disruptive innovation requires more advanced capabilities to identify, measure and manage risks. There is a 33 percent drop from 2009 to 2012 in companies that see the primary goal of their efforts being to disrupt current markets or to introduce entirely new product categories. This indicates that enterprises have become less comfortable taking on bold initiatives. As a result, their portfolios consist of renovation incremental, low value initiatives. Innovation-centric risk management identifies future opportunities and evaluates the value of entire portfolios informed by the different categories of initiatives. By applying these mature refinements of risk, companies can be better able to avoid the renovation trap and to enhance the future value of their portfolios. Leverage the digital power of Big Data and social media to integrate the Voice of the Customer into the development processes and drive a high level of personalized experience. Digital analytics can provide unprecedented real time access and insights into consumer trends and preferences. The majority of our respondents invest in cloud and mobility technology to enhance their innovation capabilities (60 percent and 50 percent respectively). However, less than a third (31 percent) invest in social media, with retailers and electronics and high technology leading (with 43 percent and 41 percent). With personalization emerging as a decisive factor in the success of innovation, it is imperative that social data be exhaustively mined in order to optimize consumer experience.

Pursue frugal innovation both to capture middle class consumers in emerging economies and also to disrupt markets in developed economies. Fully 56 percent of respondents identified frugal innovation as either critical or very important to their innovation strategy (manufacturing at 74 percent, communication at 66 percent, and banking at 62 percent are the leading sectors). The importance of frugal innovation in serving middle classes in emerging markets is well established. Equally important, however, is pursuing frugal innovation in developed countries for the sake of speed, cost reduction, and the capacity to disrupt markets.

Conclusion
The recognition has never been greater that technology, social transformation, and economic volatility will continue to roil business models.
Companies understand change is the new normal and with it the importance of continual innovation. At the same time, many are unclear how to drive higher value from their innovation efforts. Frustrated with past results, they tend to pursue a low risk approach that produces only incremental improvements while exposing their core business to disruptors within and outside their industry. Conventional wisdom and traditional risk management may well counsel such cautious innovation. What this conservative approach can fail to protect against, however, are the renovation and invention traps that await down the road and which can entail a high price. By putting formal systems in place to manage innovation, companies can protect themselves from these lurking if often under-appreciated dangers. Even more importantly, they can position themselves to seize control of change and become its master rather than its victim.

10

About the Study

The results cited in the article come from a survey of executives conducted by Accenture in November 2012. 519 executives (vice presidents, directors, managers) at large organizations (revenues in excess of $100 million or the equivalent) in the USA (254), UK (230), and France (35) answered a 28-question, 15-minute survey administered on-line. The respondents came from the following sectors: Banking and Capital Markets (81), Consumer Goods and Services (39), Chemicals and Natural Resources (17), Communications (21), Electronics and High Tech (68), Energy (21), Health Providers (40), Insurance (32), Manufacturing (43), Retail (75), Travel and Transportation (20), Utilities (15), Other (47). Trend results and comparisons were drawn from a comparable survey conducted by Accenture in 2009 that sampled 639 respondents from the U.S. (330) and U.K. (309).

About the Authors

Wouter Koetzier is the global Managing Director of Accentures Innovation and Product Development Consulting practice. He is an expert in business strategy and transformation, with a special emphasis on commercial and innovation performance in the Consumer Goods and High-tech industries. Based in Amsterdam, he can be reached at wouter.koetzier@accenture.com. Adi Alon is a Managing Director in Accentures Innovation and Product Development Consulting practice. His work focuses on supporting clients in upgrading their innovation execution capabilities, reduce time to market and aligning their operating model and processes with their innovation strategy. Mr. Alon has served clients in Energy, High Tech, Life Sciences, Financial Services and the Consumer Goods industries. Based in Boston, he can be reached at adi.alon@accenture.com.

About Accenture
Accenture is a global management consulting, technology services and outsourcing company, with approximately 261,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the worlds most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$27.9 billion for the fiscal year ended Aug. 31, 2012. Its home page is www.accenture.com.

Copyright 2013 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.

13-1368