Success in a highly competitive business world demands executives make their companies stand out with breakthrough products, business models and customer experience. So, how much should a company invest in innovation and where should it invest to produce real business results?
Many business executives will be surprised to learn that the answer isn’t simply to spend more dollars on R&D. Instead, true innovation leadership requires an investment focus not just on product development but more systemically across an organisation’s business processes. That’s one of the key findings from a recent IDC study that looks beyond the big myth of innovation as a process synonymous with developing disruptive products or business models, such as Apple’s iPhone or Uber’s car sharing service.
Conducted on behalf of Ricoh, the global study of 1,600 large enterprises sought to understand innovation and how it drives business results. IDC grouped companies into four categories (Leaders, Performers, Followers and Laggards), based on the extent to which they exhibited innovative behaviours tied to positive business outcomes.
Linking innovation and business results
IDC’s study revealed a strong link between innovation and business outcomes. Innovation Leaders drive far better business results than any other category, which points to their systemic approach to investments. By comparison with Laggards, the study found that over a three-year period, Leaders achieved:
- 41% greater sales growth
- 40% greater improvement in productivity
- 16% greater improvement in profit margins
- 33% greater improvement in product quality
- 41% more revenue from new products
However, most companies are not producing business results from their innovation efforts, according to IDC. The two main reasons for this are how and where companies invest in innovation, and how well the organisation performs on innovative behaviours.
So, which best practices help define a company as an Innovation Leader? IDC’s study offers an eye-opening and instructive look at several high-impact practices displayed by successful innovators.
Innovation investment: How much leaders spend on R&D
One of the study’s most striking findings is that contrary to common wisdom, Innovation Leaders spend 5% of revenue on R&D versus the 7% that Laggards spend. This begs the question: If the Leaders are spending a lower share of revenue, then how are they driving better business results?
The surprising answer: Innovation Leaders spend a greater share of their R&D on blue-sky projects – research outside of current products or offerings. Leaders spend 29% of their R&D on this, in contrast to 18% for Laggards. As one study respondent said: “[A driver of innovation is] how much money you spend on stuff you are not sure is going to work or not.”
Innovation investment: Where Leaders put their focus
Should innovation focus on making big infrequent bets or small frequent bets? IDC’s study found that Innovation Leaders are more focused on making many small bets: 81% of Leaders but only 19% of Laggards take this approach. Making lots of small bets allows the innovator to iterate rapidly, learning what works and what does not, and to quickly adjust to changing market conditions. The study found strong evidence that making many small bets also leads to better business outcomes.
Leaders also focus on information technology as an innovation enabler and derive strong business results from its use. They understand that IT is fundamental to unleashing and optimising the flow of information to spark ideas, derive insight, and to enable collaboration. All these activities help drive innovation.
Interestingly, Innovation Leaders also use technology most broadly – and not just the latest technologies like mobile, cloud, and social. That approach is reflected in the top five technologies Leaders use to support innovation: Enterprise social networks, Business process workflow automation, Digital signage, Information capture/tagging/indexing/search, and Mobile device support for core enterprise applications.
Use of key technologies such as collaboration tools, enterprise search tools, and information capture and tagging produce real and striking business results. For instance, companies that effectively leverage internal collaboration tools have:
- 16% higher revenue growth
- 28% higher profit margin
- 90% more growth in their fastest-growing product line
Is it possible to innovative without disrupting a market or offering new products? IDC’s study suggests the answer is yes. It found that the most successful companies innovate broadly, creating new revenue sources and new business models, not only new products. These companies believe innovation across many functional areas is important. To achieve innovation leadership, they focus their R&D on blue-sky opportunities and use technology very effectively. It’s not how much these leaders spend but what they invest in that enables their innovation to produce superior business results.