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06 April 2015

Breakthrough Innovation. The “State of the Nation”

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“Breakthrough Innovation” (BI), as opposed to “Incremental” or “Evolutive Innovation”, in this era of business and human activity of all kinds, characterized by global hyper competition, significant technological disruptions, increased customer power, and fast changing business ecosystems (we call it the “Era of Creativity”) is being pursued as the way to renew and revitalize large corporations in their efforts to remain as such.

We consider to be in front of BI when it delivers quantum leap improvements in existing performance and/ or cost, resulting from totally new business models or the opening up of a new market space, and generating an entirely new set of performance features.

Our recent research indicates that a majority of the Chief Executives of most large companies, believe that specific and explicit BI objectives should be a part of the formal strategy definition, even though less than half claim to have them in place.

But BI continues to be an elusive target, especially when the performance is measured with hard facts: its average revenue contribution is around 8% (a third of that generated by incremental evolutions), the unit costs reductions achieved through it after 5 years are below 10%, and the Time to Revenue in most cases well beyond the 3 years mark.

Funnily enough, there are as many Chief Executives unsatisfied with their performance in the field (88%), as the ones who believe in its strategic importance (89%), and there are a few emerging indications of where may be the origin of this great gap between thrust and performance.

Nearly two thirds of the declared efforts in BI are devoted to finding the “El Dorado” of Product or Service Innovation. Only one quarter to Process Innovation and just one eight to Business Model Innovation! In brief, this fact unveils two very significant problems:

On the one hand, that most companies are still shooting to the wrong target. It is reasonably intuitive and acceptable that the gigantic changes in our lives derived from mobile connectivity and communications, in the use of massive data, or about to be brought by the internet of things and humans, have much more to do with the way of doing things than with what product or services we need.

And on the other hand, that the approach for the transformation in the way of doing business, continues to be seen as a matter of evolution from the existing paradigms, and continues to be, as a result, in the hands of those that, supposedly, should have to put their respective homes upside down!

A second problem area, according to the Chief Executives responses, lays in the leadership and governance of the BI processes and the organizational models to deal with BI. To a greater or lesser extent, most companies are struggling with the dilemma between defining a dedicated leadership and teams, separated from the “as is” organization, with varying degrees of executive clout, versus putting the emphasis on cross-functional involvement and solutions, with “intrapreneurs” and “ring fenced” funding as a part of the equation. This dilemma, that can be described as the choice between practicing organizational surgery (transplants included) versus the “homeopathic” transformation of the existing structures, is far from being solved in most cases: more than 40% of the companies declare that there is no formal BI organization as such, and half of them consider that their leadership and governance structure to that purpose is ineffective, or very ineffective.

Lastly, as it frequently happens when dealing with complex matters, there is an issue with the metrics, which are geared to identify and prize short term incremental achievements, and not to measure the potential impact and “externalities” of BI, and even less to properly determine when has a dead end been reached, in order to take the decisions to discontinue investments or initiatives.

Where do Chief Executives put their hopes for improvement?

Be it cynically or sincerely, the majority of them point to the realm of people and practices. The three most highly rated practices for BI progress, and which can be argued that are- all three, at least in theory – very easily actionable, are trend monitoring, external networking, and agile processes: securing that you have in your “radar” all the relevant ingredients of the future cocktail, admitting that it is unlikely that all the necessary information and knowledge resides in your organization and trying to move away, when possible, from the “waterfall” to the “agile” rules and procedures, are seen as the key levers to pull.

A final idea to share, as a main corollary of this “State of the Nation” research on BI. To a large extent, it is all about ANTICIPATION, in capital letters. Professor Richard Foster, from Yale University, measured that the average lifespan of a company listed in the S&P 500 was 60 years in the 60s of the past century, and has decreased to 15 years these days, half a century later. The length of CEOs mandates has also reduced to a quarter of what it used to be. The risk of not putting in place your “BI Factory”, or of not having it working to unveil the “unknown unknowns”, as Donald Rumsfeld put it: those risks and opportunities that we do not know that we do not know, or of not pushing its innovation deliverables to transform the current organization, is not affordable. The companies that are not putting enough effort and talent in this quest are, very simply, not reading the “writing in the wall”.

Carlos Abad

Managing Director. Arthur D. Little Spain

This post builds upon the findings of Arthur D. Little’s last Breakthrough Innovation Survey, and on the collective work of its Technology and Innovation Management practice.

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