Strategy Driven Innovation

By M. Isi Eromosele

Innovation makes a big difference. But some companies are much more successful in innovating than their industry counterparts. Companies that focus on the innovation with focused management and rigor greatly improve their business performance compared to those that see innovation as something best left to chance.

Innovation excellence means making a clear choice between three sources of value creation and then aligning innovation efforts towards one of those choices.  Each one requires unique approaches to be successful towards building a predictable innovation engine.

The right choice for innovation for value creation depends on the business strategy. Two companies in the same industry can make very different choices.

Successful innovation is not about how much you spend, but why and how you spend it.  In other words, it’s about knowing what kind of value your business is aiming to create and then managing innovation in the most appropriate way given the context in which your business actually operates.

Therefore, innovation must be targeted towards a clearly defined value creation focus:

• Top-Line growth - innovation activities that primarily generate revenue.
• Bottom-Line optimization growth - innovation activities that yield profit.
• Shareholder value growth - innovation activities that increase the value of the
• Company - elements that will increase Net Present Value (NPV).

Unforgiving Markets

Along with productivity and cost control, the imperative to innovate transcends economic cycles and remains constant as the only long-term means of creating and maintaining the value of the enterprise.

Over the last three decades, focus and attention on quality, strategy execution, process automation, etc. have given business leaders strong results in achieving cost containment, process improvement and operational efficiencies, all tools for improving corporate performance.

There is only one roadmap to long-term sustainable value generation - continuous, profitable, top-line growth.  Historically, the market has consistently rewarded profitable companies with higher values than those organizations that achieve their growth primarily through cost-cutting.

Accepting that profitable growth drives shareholder value, the next logical question is: What are the primary drivers for profitable growth?  While the list of growth levers -  addition of product lines, expansion into new markets, acquisitions, strategic alliances and partnerships, joint marketing, among others is certainly large, research indicates that innovation sits at the heart of profitable growth strategies.

Return on Invested Capital (ROIC) is achieved best when an innovation framework is aligned to corporate strategy and when it is enabled with the Voice of The Customer (VoC) every step of the way.

There is a direct correlation between innovation and sustainable growth. Discontinuous growth (the opposite of modest, gradational, ongoing, incremental growth) initiatives represented 14% of total projects but fully 38% of new revenues and 61% of new profits.

Sustainable, profitable growth drives value creation; this principal holds true regardless of economic conditions or legitimate focus on cost containment and productivity in the near term.

Still, relying on growth to justify market values is a high-stakes game. With so much value tied up in the promise of future continued growth, companies cannot afford to lose sight of the growth imperatives; because when they do, or when they miss their growth targets, the punishment by the markets is swift and severe.

Value Creation Through Organic Growth

Why organic growth? The major source of growth in the past has been acquisitions, which often proved a valuable way to complement and consolidate existing offerings and expand into new markets. But many companies are finding an acquisition strategy inadequate to meet growth targets.

There is one substantial difference in acquisition vs. innovation strategies to grow: Acquisitions are an all-or-nothing path since they require the company to commit completely at the time of acquisition.

Innovation and the subsequent organic growth, if done right, allows the company to place smaller bets with similar payoff. While focused acquisitions will always be an important option for increasing market footprint, companies will have to rely on organic growth to a far larger extent to sustain above-average shareholder returns.

Innovation and growth are central to value creation, regardless of economic cycles or the industry. While the absolute size of the growth premium clearly changes as market conditions change, the larger point holds.

Institutionalized Innovation

While sustainable growth through innovation is not optional, it is central to the valuations of large commercial enterprises regardless of economic conditions. While large companies possess resources and capabilities, that give them unique opportunities to innovate, very concrete roadblocks often stand in the way.

The central questions relating to the innovation imperative then, are not whether to

innovate, or even how to, but rather how to institutionalize innovation, especially in a large company environment.           That is how to build a climate and culture of innovation, agility, and entrepreneurship while maintaining standards and controls necessary for ongoing governance.

Innovation Barriers

What must CEOs do to embrace innovation while managing the associated risk and overcoming the barriers?]

The answer lies in developing a clear Innovation Mandate - a strategic statement that describes innovation in the context of your business, the value it promises to generate for growth and disciplined process by which to get there.

The Innovation Mandate must be vividly clear for everyone in your organization; it must be concise to help drive alignment to business unit initiatives and it must help articulate specific employee behaviors necessary at all levels for innovation climate to take root. When designed correctly, it must be clearly linked and driven by your business strategy.

Additionally, keys to become innovative are highly dependent on your ability to address four critical barriers that are incumbent in most organizations.  When not addressed together, the journey towards sustainability and value creation invites a higher risk of failure, potentially minimizing the results of innovation investments.

The first barrier is that most organizations do not have the mindset to harvest ideas and manage those ideas as Venture Capitalists do.   

The amount of “innovation opportunities” available to large companies dwarfs the potential available to small companies. So the myth that only small, nimble businesses can be most agile and innovative is completely false.

New ideas are easy to find in every corporation; it’s the distinctive capability of turning them into commercial ventures that most companies fall short on.

The second barrier is not recognizing and not aligning the  abundance of resources available to large organizations for investment in innovation. Even when overwhelming evidence shows that the companies who invest in innovation consistently outperform their peer groups, why haven’t most organizations taken innovation seriously?

The challenge is not that an organization does not have resources to invest in innovation; rather it’s where to most effectively funnel those resources. Innovation in most organizations is a mandate that cuts across functional areas, making effective resource allocation decisions very difficult.

Resources are available, but the allocation and ownership for innovation is fragmented across most companies.

The third barrier is to recognize the sheer size of the human capital assets that are under-utilized and disengaged from an organization’s creative capacity. The opportunity for most organizations is to dedicate talented teams, focused on harvesting the creative ideas and leadership competencies to build new top-line growth capacity.

Developing a holistic and integrated human capital strategy for innovation is critical because it promotes value creators and rewards them to continue to create value while staying in workable compensation systems.

The fourth barrier relates to the broad product and delivery capabilities that large-scale organizations possess. For example, the typical institution in the financial services industry has gone from handful of delivery channels in the 1980s to literally 15-20 channels (Branches, Direct Mail, Internet, National Sales Force, Business ATMs, Corporate Cards, Affinity Marketing, Wireless, etc.); all the while expanding its product offerings by ten-fold. 

“Anytime, Anywhere” banking has become the price of entry across the industry as providers strive to meet the need of large and diverse customer bases. This has created a huge challenge, since those dedicated assets to serve the wide variety of customers are not fully leveraged for new innovation.

The accomplishment of end-to- end alignment between products, channels, and talent acquisition (employment offers) is the single largest challenge facing large companies today.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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