Economic Recovery Inspires Innovation and Frustration

While they continue to slog through the longest economic downturn in decades, companies are no longer making cost-cutting their primary focus. Innovation is now front and center on the corporate agenda, according to a global survey we recently conducted with 65 senior executives from diverse industries. Executives are adding more breakthrough innovations and business model changes to their portfolio to fuel the growth engine for the recovery. Yet our survey reveals that companies by and large are having trouble making innovation efforts work. Executives are struggling to find the right combination of business strategy, operational model, and execution to deliver profitable growth. Why the concern with execution? Currently every aspect of business is fair game for reinvention—revenue and margin models, functional areas, and even the organization itself. The risks are also a lot higher than in the past. With so many moving parts and so much riding on the outcome, it's no wonder executives are anxious that they will miss the target when they execute. As one executive told us: "Management feels very comfortable about our ability to manage costs—we have a good track record. We don't have the same track record for organic growth from innovation." In other words, it's harder to innovate than it used to be. There's no magic formula for successful execution, of course. But there is evidence of growing interest in business model innovation, whereas in the past the focus was mostly on product and technology innovation. Roughly one-quarter of the companies surveyed are developing bundled products and services to provide solutions. General Electric (GE), for example, created Power by the Hour, bundling jet engines, financing, fuel services, and operations and maintenance contracts. Bundling products and services creates stronger customer loyalty and improves both revenues and margins. serving future needs: Virgin GalacticAn additional quarter of companies is developing B2B offerings, or back-office services, with the goal of improving customers' business performance. These business model innovations typically improve a customer's return on assets by squeezing more out of what they already have. They are potent ways to refresh customer relationships and gain competitive advantage. A further 25% of companies are investing in anticipation of entirely new customer needs, such as the space flights planned by Virgin Galactic. Creating the next new thing can be risky, but this type of business model innovation provides rapid growth via entirely new products and services. It's perhaps as noteworthy that two further areas of business model innovation are receiving scant attention. Only a small number of companies are significantly expanding the boundaries of their offerings. Marvel Entertainment (MVL), for one, moved from comics into feature films with Marvel Studios, which produced the blockbuster Spiderman movies. Expanding into an adjacency to leverage a core competency, as Marvel did, is fraught with risk, which is probably why few companies do more than dabble in this area. It's likely, however, that this area will grow as companies learn to manage new business models and feel comfortable outside of traditional confines. Paradoxically, the area of business model innovation that is receiving the least attention may turn out to have the greatest impact. Only 10% of companies are expanding the scale of their traditional offerings. Consider, for example, Tata Motors (TTM), which developed the $2,500 Nano for the millions of Indians who previously could not afford a car. In addition, GE recently launched "reverse innovation," an initiative to develop innovations in emerging economies such as India and China and then market them worldwide, instead of introducing them first in developed markets. No other type of business model innovation has such global reach and growth potential. Although few companies are pursuing it at the moment, we think this will change over the next few years as more attention is focused on emerging markets. How to achieve innovative growthThe recession did more than shrink revenues and margins. It changed the way executives think about innovation. Everywhere you look, innovation is taking on a new face. Large auto companies are departing from their traditional approach and investing heavily in new, clean mobility—from hybrids to electric vehicles. Pharmaceutical giants say their innovation operational model is broken and executives such as Eli Lilly (LLY) CEO John Lechleiter have called for a revitalization of medical innovation. Even utilities are getting into the game. Smart grid initiatives are revolutionizing electrical generation, transmission, and distribution. With the tried-and-true approaches no longer delivering like they used to, three practices are essential to ensure that innovation remains a major engine of growth: Make sure your innovation strategy supports your business strategy. As the economy and competitive environment shift, companies know they must make changes in their business strategies. It's important to recognize that the innovation strategy must shift as well. Use the innovation strategy to send clear signals to the organization about the execution approach and the expected business outcomes. Reconfigure operational models to deal with the increasingly complex nature of innovation. The old models can't handle the new types of innovation, either breakthrough or business model. GE, upon realizing that it was not effectively harnessing innovation for organic growth, added reverse innovation to its arsenal and made the requisite changes in its operational model. Above all, get the execution right. There will probably never be a single approach that works every time. Each company will have to find one that fits their particular strategy, culture, and operational model. That discovery may be the most important innovation companies can make.

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