It feels like we live in a world where companies are constantly innovating, but how can they be sure they’re investing in the right areas? To find out we spoke to innovation expert Ben Thuriaux-Aleman, a partner at management consultancy Arthur D. Little (ADL). Based on the latest version of ADL’s long-running benchmarking research, he shares some illuminating findings.
Gary Drenik: Ben, can I start by first asking you – why is innovation important?
Ben Thuriaux-Aleman: Innovation is vital on two levels. First, in increasingly crowded and competitive markets it is essential to differentiate and provide customers with products and services to meet their changing needs. That drives profitability and growth. Demonstrating this, research carried out by Arthur D. Little (ADL) for the Association of Swedish Engineering Industries in 2023 found that investment in research and development (R&D) generated a 7x return on innovation investments made by the Swedish state.
Innovation is now crucial on a wider level too – the world faces existential challenges in areas such as decarbonization and sustainability. Innovation is key to delivering the transformation we need to overcome these issues.
However, our latest Global Innovation Excellence Benchmark (GIEB) study with 500 large organizations finds that despite innovation being more important than ever, business leaders are increasingly disillusioned with the performance of their research and development (R&D) and innovation programs. Overall satisfaction has decreased by 33% since 1991 and just 29% of business leaders are currently happy with their company’s innovation performance.
Drenik: I guess humans have always innovated, but more recently how has the idea of successful innovation changed over the last 50 years or so?
Thuriaux-Aleman: Early innovation literally came from the lab, with siloed R&D centers that were separate from the business itself. Over time innovation has become much more decentralized, with smaller units embedded within different parts of the business, so that advances are much more focused on their needs. Since we published our first GIEB over thirty years ago, we’ve seen the rise of open innovation, with companies collaborating with wider networks, such as academics and other businesses to generate fresh ideas.
Now we have technologies such as generative AI that bring new possibilities for transforming innovation. It is early days, but a recent Prosper Insights & Analytics survey found that 44% of people that use ChatGPT use it for research. That shows the potential of AI to change how we manage and carry out innovation programs.
However, what hasn’t changed is the link between strong, effective innovation management practices and overall innovation success. The better managed that R&D is, the stronger the results.
Drenik: Looking at your research, what do the best performers do when it comes to innovation focus?
Thuriaux-Aleman: Our most recent GIEB points to five specific areas where leaders excel, improving returns on their innovation investment.
Firstly, leaders invest in breakthrough innovation management, creating completely new products and services, as well as entering new markets. This generates greater revenues and higher margins but does require a longer-term investment focus.
Secondly, top-quartile companies innovate around their business models. They are continually adapting how they operate to out-perform the market. However, despite the benefits even many innovation leaders struggle with this — 70% of companies rate themselves as having average or less-than-average satisfaction with business model innovation.
Thirdly, leaders perform consistently when it comes to how they manage R&D across different business units. Astonishingly we found enormous differences in innovation performance between multiple business units in the same company, leading to an estimated 5% gap in revenues from new products and services. Successful harmonization of practices is often a cultural issue and requires senior management involvement and an approach that builds trust and aligns incentives.
Fourthly, successful companies selectively deploy agile methodologies. They can bring together the right teams with the right skills quickly to rapidly develop new ideas and get them to market faster and more efficiently. However, agile isn’t the silver bullet for every problem – leading innovators understand where it delivers value compared to traditional innovation methods and apply it just for these opportunities.
Finally, strong leadership is vital to innovation success. Interestingly the skills needed to be an effective leader in innovation management have changed. While people still require skills including communication and strategic thinking, they also need new capabilities such as vision belief, meta knowledge, network skills, perspective originality, and a digital-first mindset.
Drenik: It’s clear that innovation is crucial to success. So why don’t companies just invest more in R&D if it delivers such great benefits?
Thuriaux-Aleman: You’d think that would be the simplest solution – but the data tells a different story. Across industries, we found no significant correlation between R&D intensity and innovation success except for organizations with the best innovation management practices. Essentially if you are already performing well, there’s a clear case for increasing your investment. However, other organizations need to fix their underlying R&D management issues, or any increased spending will just be wasted. In fact, it could even decrease performance.
Drenik: Not everyone is an Apple or a Tesla. Is innovation management equally important for every industry?
Thuriaux-Aleman: In short, yes – but what companies should focus on changes between sectors. You cannot expect innovation processes within a food and beverage company to be identical to those of a heavy industrial company, for example.
When we look at our data, we can see clear differences between sectors in terms of what is important and what has the highest impact on innovation success. For example, process-driven industries such as automotive, electrical engineering, and food and beverage rate innovation project management most highly, while chemicals companies have a stronger focus on ideas management. There are similarities too – for virtually all industries, technology and market intelligence are highly valued.
Drenik: Finally, what advice do you have for CEOs when it comes to better managing innovation?
Thuriaux-Aleman: Global economic conditions are currently turbulent, which can drive CEOs to focus their efforts and resources on short-term problems and deprioritize innovation, particularly when it comes to longer-term breakthrough projects.
This is very much a false economy – which means it is pleasing to see that the latest Prosper Insights & Analytics survey found that 23% of company purchasing managers plan to invest in technology over the next six months. Backing this up, looking closely at innovation management and improving practices and structures can deliver real benefits, while eliminating waste and duplication.
Our research shows that companies that proactively invest more on “riskier” innovation endeavors, have higher company innovation success scores. This means that CEOs should be looking at widening the scope of R&D to look at breakthrough innovations, transforming their business models, closing the gap between business unit innovation performance, adopting agile methods, and ensuring their leaders have the right skills. This will drive a mix of short-term benefits and position the company as a successful innovator for the long-term too.
Drenik: Thanks Ben for your insights on innovation management – I think your data really brings home the importance of R&D and also how companies can improve their performance, benefiting themselves and the wider society.
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