Corporate Innovations. Types of innovation, innovation indicators and recent insights from the field (2012).

Innovations. This is what global companies constantly look for in order to better meet needs of their customers. The questions on the agenda today are: how to embedd innovations into company’s operations and processes? how to innovate? which innovation strategies to adopt? how to spend R&D budgets wisely and efficiently? Innovation inside or purchase startups (open innovation)?

So, the agenda for today’s post will be:

  1. Types of corporate innovations.
  2. Key indicator of corporate innovations.
  3. Insights from Booz & Co Innovation 1000 study.

Types of Corporate Innovations

There are different classifications out there. You could view innovations from market vs company perspective, domain vs problem perspective, you could look at innovation through the lens of growth and sustained value.

I prefer to have simple classification. Thus, according to me companies could look at corporate innovations thinking about 3 main types:

  • Product-centric. Historically this is the most significant type of innovation. Almost all new inventions fits into this category. Product innovations address the value, features, and quality of a company’s product. This type of innovation could be also subdivided into two: designing new products or disruptive innovation, and incremental updates and line extensions of existing ones that add substantial value.
  • Service-centric. Service innovations could be also divided into two categories. First one is similar to product-centric innovations bu applied to companies that deliver services such as financial institutions, banks, etc. Other category is about service innovations that ensure and enhance the utility, performance, and apparent value of a company proposition. “They make a product easier to try, use, and enjoy; they reveal features and functionality customers might otherwise overlook; and they fix problems and smooth rough patches in the customer journey.”
  • Business model. When we speak about business model innovation think about business model of a company. I prefer to use Business Model Canvas to describe any business model of any company. Thus, innovation in any given area of a business model or combined one could be considered as innovative. The pace of new technologies appearence force companies to look for competitive advantages not only in their product or services, but  leveraging existing resources, and processes: value chains, distribution channels, customer bases and customer engagement in order to sustain their competitive positions. Apple, for instance, is innovative, firstly, in it’s business model. Only after it in it’s products.

If we will also remember Shumpeter, we will notice that mine classification fits into his one. He thought about five types: new products, new methods of production (e.g. business model), new sources of supply (e.g. business model), the exploitation of new markets and new ways to organise business (e.g. business model). In economics, most of the focus has been on the first two types. I think the situation is changing right now towards business model innovations.

Additionally, I would like to provide you with another perspective on corporate innovations that I find very useful and exhaustive. It’s created by Larry Keely and his team from Doblin Inc. and consists of 10 types of innovations. I know that they changed several times their classification and now it consists of 3 basic categories and 10 types. Please see the link. However, I will give an older classification. The only thing I want to mention is that it’s not so different from my perspective. The difference is in view points.

Doblin - Ten types of innovation

Doblin – Ten types of innovation

Innovation Indicators

Is it possible to measure innovation? Clearly, this is a question that attracts a lot of attention among business experts, policy makers, academics and investors. Today, there exists a large set of approches to the problem of innovation indicators. How to measure innovative processes, the resources that are needed for innovating, and the processes that must be implemented in order to turn innovation inputs into innovative outputs. I don’t have an ambitious goal of researching this issue. I would like to concentrate on high-level things. Mainly, how could we approach the innovation assesment problem and what could be key 2-3 indicators for the company.
I believe that mid-level assesment should be based on several things:
1) type of innovation. This gives us understanding what type of metrics we should apply. The business model innovation could be completely different from inventing and launching a new product.
2) innovation strategy (will explain later)
3) implementation of innovation project (budgets, time, innovation project life cycle, process, etc). This is basically an introduction of systems engineering approach where you asses the performance of the system at each gate of the process development.
I’ve studied several resources and cases about how Fortune 1000 do it really. And it’s very different. Basically what do they measure is efficiency factor, i.e. the relations between output and input. There are commonly defined several categories whithin each there are dozens of indicators. The basic categories are:

1. Manufacturing and Production Indicators
2. Sales and Marketing
3. People
4. Research and Development
5. Environment
Academics as always are far away from reality and propose surveys and lists of indicators constisting of hundreds of variables. One of such a lists could be found here or below:
  • KPI 1 Return on investment
  • KPI 2 Various profit margin measures
  • KPI 3 Sales and sales growth
  • KPI 4 Payback and payback period
  • KPI 5 Cash flow
  • KPI 6 Customer satisfaction
  • KPI 7 Customer retention rate
  • KPI 8 Labour productivity
  • KPI 9 Quality of products and/or services
  • KPI 10 Lead time
  • KPI 11 Delivery reliability and/or speed
  • KPI 12 Process time
  • KPI 13 Employee development
  • KPI 14 Employee knowledge

To summarize, I would argue the efficiency of the process is the most important. So, we need to look at two things: input of the process, and output of the process of innovation. This will be the base for the assessment. The question is which inputs to look at. McKinsey and Booz in their studies revealed that there are 4 most important indicators, together 40% of the used metrics:

  • R&D spendings of a company (input)
  • Revenue growth due to new products or services (output)
  • Customer satisfaction with new products or services (output)
  • Number of ideas or concepts in pipeline (input)

Moreover, these innovation indicators do not depend on innovation types. Let us now turn to the last point I’m going to cover in today’s post. The recent results of Booz & Co Innovation 1000 Study.

Insights from Booz Innovation 1000 Study

Firstly, I need to state that about 50% of the study concentrates on analysis of R&D spendings of Fortune 1000. And here are the main insights I would like to highlight:

  • After growing 9%+ for the second consecutive year in 2011, R&D spend is back on its 10-year historical growth trend after its one-year decline in 2009
  • The top three industries by R&D spend continue to be Computing and Electronics, Health, and Automotive – Industrials, Automotive and Health accounted for 66% of the overall growth
  • North America grew at an above-average rate of 9.7%; Europe and Japan grew at below-average rates of 5.4% and 2.4%, respectively…
  • …while India and China-based firms increased R&D spend at a phenomenal rate (27%) – albeit from a small spend base
  • The Top 20 R&D spenders averaged 5% R&D growth, compared with a 9.6% increase overall
  • The Top 10 “Most Innovative Companies” outperformed the Top 10 R&D spenders across key financial metrics – revenue growth, EBITDA as a percentage of revenue, and market cap growth

The Global Innovation 1000 Comparison of R&D SpendingR&D Expenditure Growth 2001 - 2011

The study mentions three Innovation Strategies, which were very interesting for me to think about. Booz & Co have identified the innovation strategy models have a distinct set of front-end innovation mechanisms and use different networks for generating ideas:

  1. Need Seekers (such as Apple or P&G) focus on discovering unarticulated customer needs through direct customer observation, end-user focus groups and idea work-out sessions. They are aiming to be first movers.
  2. Market Readers (such as Samsung, Caterpillar) “cherry pick” from existing ideas by mining traditional market research and feedback from their sales and customer support channels. These adopt 2d mover strategies, focusing on delivering value through incremental change.
  3. Technology Drivers (such as Google, Bosch) focus on developing technology-based breakthrough products. These are the least proactive of the three strategies in directly contacting customers

3 Innovation Strategies by MNCs

Companies reported that the majority of new ideas are coming from 5 main sources:

  • Direct customer observation
  • Traditional market research
  • Feedback from sales and customer support
  • Idea work-out sessions
  • Technology roadmapping

Idea Conversion vs Idea Generation

Companies applied the following mechanisms and processes that were the most effective in evaluating and converting an idea to a promising product or service concept for commercialization:

Internally-focused

  • Rapid / virtual prototyping (proof of concept, preference testing)
  • Advanced development review teams
  • Lead customer surveys
  • Business case competitions

Externally-focused

  • Seed-funded due diligence and concept design
  • Third party partners (rapid assesment, concept development)
  • Focus groups
  • Learning launches

To sum up, the best top ranked front-end mechanism is Direct Customer Observation. Top ranked internal network structures are Innovation Champions and Cross-unit Staffing (non-rotational). Top ranked external network structures are Customers and Channel Partners & Suppliers.

Lastly, it’s interesting to notice that only 25% of idea generated were converted into highly effective products or services.

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