Innovation takes place in many different forms across functional units, value chain stages, and no longer holds sway as the sole driver of innovation. More tools and approaches such as open innovation, crowdsourcing, and cross-sector partnerships are become available to fuel innovation, accelerating companies’ return on investment. Companies can benefit from adapting these new mechanisms to streamline the sources, strategies, and process of igniting innovation.
The limits of R&D spend
In this research, we investigated companies’ innovation performance based on various parameters. Our findings suggest that innovation is not linearly depended on the amount of R&D spending. Although investment in R&D can allow a company to maintain innovations progress, simply increasing spend is not sufficient to fully capture and capitalize on all innovations opportunities.
Forbes ranks large global companies’ innovation capability based on the ratio of investors’ projection of their future growth over their current valuation, a metric termed an “Innovation Premium”. Among the 10 U.S. firms exhibiting the highest Innovation Premium, companies viewed as more promising by investors do not always spend more on R&D than their peers, even after taking industry differences into account.
Similar trend was also found when it comes to brand perception based on past performance. Among the top 10 companies that are ranked highest for their innovation reputation by Strategy&, for instance, Apple Inc. is the best recognized innovative brand but spent much less percentage of their net sales on R&D than Microsoft in 2014, who only hits the 8th place.
Consolidate your innovation strategy
If tossing more money onto R&D is not the only viable innovation strategy, what are other options on the table? In the Innovator mapping tool, we outlined four different types of innovation strategies based on the level of integration as well as the focus of a strategy. A company’s innovation activities could be driven by largely traditional internal R&D taskforce, or by incorporating collaboration across the board including open innovation, crowdsourcing, consumer insights, and cross sector partnerships. At the same time, a company’s innovation strategy could focus on aggressively seeking new business models, or on the other hand the continuous optimization and improvement of current operations.
By engaging talents across functional teams and stakeholders, channeling underutilized resources, and discovering new opportunities, disruptive innovators oftentimes define new market trends with groundbreaking products and services. For instance, Apple’s iPhone was a result of innovation not just from its stellar product design team (both hardware & software), but also new strategies in marketing, supply chain, and many other functional units. Disruptive innovators, however, could lose their competitive advantage when the innovative business model is replicated and improved by competitors. Apple once redefined the concept of cell phone, but now faces fierce competition with a number of Android phone manufacturers. Disruptive innovators who are much ahead of their time are likely to face regulatory risks and resistance from traditional players. A case in point is the struggle of the new sharing economy platforms such as Uber and Airbnb have with regulation restrictions in many regions and protests from businesses whose market shares are affected. It is critical for these first movers to be able to both sustain its core competency and mitigate social and governance risks.
Being an agile innovator means continuously optimizing products, services, and processes based on existing business models, which requires critical thinking and goes beyond the old-fashioned “continuous improvement”. A company might not produce disruptive innovation every day. But it can certainly be an all-time agile innovator. This strategy sets more tangible and achievable goals, maximizes the value of existing assets, and makes timely adjustment to external environment possible. Agile innovators face less risk of failure, but they also put ceilings on the potential of business transformation. After the introduction of the first generation of iPhone and iPad, Apple has been continuously rolling out newer versions of these products every year.
Due to industry specifics and longer development cycle for particular types of products, many innovators, pharmaceutical companies and hardware manufacturers for instance, are still largely relying on R&D. Discrete innovation strategy allows companies to dedicate themselves to developing new products with its own proprietary knowledge and technology. However, this strategy may not be suitable in many business situations. It is less flexible in terms of decision making and the inward focus may slow down the response and adjustment to external changes. Therefore, a successful discrete innovator requires that the business leaders are fully aware of the mega trends and making the right the business decisions. Until 2013, Nokia spent more money on R&D than Apple every year. However its poor decisions on both high-end and low-end market segments could not turn the investment into profitable business.
Incremental innovators, on the opposite direction to disruptive innovators, have minimal integration of innovation effort and short-term objectives. This is the least-desired innovation situation yet common situation to many companies that are struggling with innovation. Incremental innovation does not have a systemized approach for collaboration. The R&D effort is mainly focused is on existing business models which makes it difficult to make adjustment to disruptive changes in the market competition. Incremental innovation might be sustaining for a while, but not sufficient when there is a shift in competitive landscape. Strangled by the focus on its long successful and profitable film business, Kodak did not react timely to the new market trend with new products or services and lost its competitive advantage in the era of digital technology.