Friday, May 15, 2015

The problem with corporate innovation

If that sounds like a pretentious title, you are probably right, but it's time to start talking about the fact that so many companies simply cannot innovate effectively.  Many long standing corporations in the US are simply withering on the vine, unable to respond to changing market conditions, new competitors or changing consumer demands.  Past success does not guarantee future success, and by the time many of these firms recognize the need to innovate the opportunity has past them by.

Corporate innovation faces challenges that entrepreneurs can't fathom.  Entrepreneurs often wish they had the people and resources that larger organizations do, without realizing that all those people and resources are already spoken for.  Larger organizations lack the freedom and agility that smaller organizations have.  Larger organizations are very slow to recognize and respond to major seismic shifts, so comfortable in their day to day operating models.  Industry conventions become first defensive barriers and then comfortable blankets, reassuring large organizations that they understand what the customer needs and what the industry will do.

Corporate executives face a really difficult challenge:  on one hand they must meet the quarterly numbers, or heads will roll.  Yet meeting quarterly numbers means an all hands on deck focus on day to day operations and ever increasing efficiency and effectiveness.  Yet on the other hand they are expected to grow revenues, differentiate and create valuable new products and services.  The difference is that the payoff for new stuff is all in the future and relatively uncertain, while cost cutting and efficiency is easily understood and implemented, and adds value to the bottom line immediately.

So corporate executives are faced with a couple of important questions.  First, how much innovation should we do, and of what type?  Second, how do we allocate resources and funds to innovation, and how do we oversee it and manage it?  Third, do we have internal capabilities and bandwidth to do innovation, or should we build the skills or outsource the work?  Faced with all of these questions, executives are often satisfied with small pilots or distributed innovation activities that may accomplish some incremental innovation but don't build innovation capabilities or change the operating models or culture of the business.  In other words, they are "innovating" but it doesn't seem to accelerate growth.  That's because where there is little risk there is likely little reward.  Further, even if the organization gets better at generating ideas, they haven't resolved how to commercialize good ideas quickly, due to long decision making and product development processes.  It's not an either/or proposition.  To get better at innovation you must design and develop a "front end" idea generation capability and link it to a product or service capability that is better at allocating resources to the best solutions.

Of course this demand for more innovation, and its incumbent investments and implementation timeframes, is happening at the same time as executive tenure shrinks.  Executives need to hit the ground running, demonstrate real value in their positions or the corporation will move them on to other roles.  Trying to "invest" in innovation capabilities and competencies isn't a winning proposition when the results may not happen for several years.

So executives are faced with a dilemma:  either use expert external partners who specialize in innovation to create new products and services, or build internal capabilities.  Both are ripe with opportunity and risk.  Outsourcing innovation means that the corporation becomes even more focused on day to day operations and may become blindsided by a new entrant, while paying top dollar for new ideas.  Where does the money come from to fund the external innovation consultants?  Can the ideas or concepts they generate enter the product development process?

On the other hand, if you try to build an internal innovation capability, that will mean designating staff to focus on innovation, and build skills and methodologies.  That sounds a lot like an internal investment that won't pay off in new ideas for quite some time, and even then may not generate valuable ideas.

So we are left with the classic tradeoff of money (outsourcing) or time (developing internally).  Currently, money is cheap and time is valuable, so I believe we'll see a turn to more and more outsourcing of innovation, which is smart in the short run and terrible in the long run.  The more corporations outsource innovation the more insular and protective of their operating models they become.  Innovation shouldn't be thought of as an occasional activity to boost revenues but a consistent internal capability to constantly reinvent both the corporation and the industry itself.

Until executives decide what innovation is meant to do, its role and position within the strategic framework of the corporation, it will have only short term appeal in most organizations.
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posted by Jeffrey Phillips at 8:50 AM


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