Our findings show that companies are struggling with clearly aligning their innovation efforts with their business strategy. We’re also seeing companies.
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2 To learn how companies are responding to this mandate, PwC conducted a major global study. We surveyed over 1,200 executives in 44 countries and spoke in depth with individuals charged with managing innovation initiatives at leading companies. Our goal was to understand how these leaders view innovation and what they are doing to better reap its rewards. We looked at innovation across a complex set of challenges, including innovation strategy, operating models, culture, metrics, and more to understand how innovating companies are seeking to create business value and ˜nancial returns on their efforts. Our ˜ndings show that companies are struggling with clearly aligning their innovation efforts with their business strategy. We™re also seeing companies across a wide range of industries enlist technology as the driverŠnot just the enablerŠfor market change and innovation, while also recognizing that technology is only as good as the humans using it, including customers, employees, and partners. With this in mind, companies are opening up the innovation process earlier to a broader set of stakeholders both inside and outside the company. The majority of respondents, for example, say they are bringing customers into the innovation process at the ideation phase. 2Key insights from PwC™s Innovation Benchmark
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3Moreover, companies applying customer-engagement strategies that employ design thinking and user-driven requirements from ideation to product/service launch are about twice as likely as their survey peers to expect growth of 15% or more over the next ˜ve years. Clearly, bringing more parties into the innovation sandbox is a smart idea that can deliver signi˜cant bene˜ts, ranging from improving strategic alignment to accessing fresh ideas and critical talent, to failing faster and getting new innovations to market sooner. We hope that these and other trends uncovered in our study, along with the insights accompanying them, will help other innovators in their path forward.
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4 Improving the ˜nancial return on innovation is ultimately the name of the game. But when it comes to getting results, it™s not so much about the size of your budget. It™s about how effectively you spend itŠfrom strategy through execution. Roughly half the companies participating in PwC™s Innovation Benchmark think that their innovation efforts have had a figreatfl impact on driving their revenue growth, with an equally signi˜cant impact on cost management. And nearly all companies believe there has been at least a moderately positive impact on both topline and bottom-line growth. When it comes to ˜nancial performance in particular, respondents from sectors undergoing rapid digital disruption, such as communications, technology, automotive, and entertainment and media, are, overall, more likely than others to say that innovation has improved their revenue growth in the past several years. When probed more deeply, however, just slightly more than a quarter of respondents professed to being innovation leaders in their industries. As it happens, they also expect higher growth than their survey peers, as do those respondents who plan to reinvest in innovation at higher rates. 1)
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5The relationship between a company™s level of innovation spending and economic success is, however, tenuous at best. Over the past dozen years, our annual Global Innovation 1000 study has found no statistical relationship between dollars spent on research and development (R&D) and ˜nancial performance, suggesting that the way you spend your innovation dollars is more important than how many of those dollars you spend. A majority of companies in PwC™s Innovation Benchmark study are looking beyond R&D to focus more on inclusive operating models that bring a variety of parties into the innovation sandbox. It™s good that these approaches are helping companies achieve the dual objectives of revenue growth and cost containment, since at the end of the day (whether it be in a year™s time or ten years™ time), the business bene˜t delivered by innovation really does have to be a ˜nancial one, superseding other metrics such as brand health, product performance, and customer satisfaction. It™s no surprise, then, that we see over two-thirds of ˜rms ˚agging sales growth as the most important innovation metric, with all other metrics lagging considerably behind.Innovation’s impact: Sales growth is the top metricQ: What are the most important metrics for measuring innovation at your organization?Percentages denote the number of companies citing each metric as among their most important ones. Source: PwC’s Innovation Benchmark Base: 1,22236%31%28%24%Market shareNet value of innovation portfolioTime to marketNumber of products in the pipelineSales growth69%43%Customer satisfaction ratings40%Number of new ideas in the pipeline
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6For Bonny Simi, president of JetBlue Technology Ventures, a key metric is how the business model of the parent company, JetBlue Airways, evolves based on the strategic investments that her group makes. But she clari˜es that the team also considers the ˜nancial returns to ensure that they are investing JetBlue™s funds wisely. Nagraj Kashyap, corporate vice president of Microsoft Ventures, is blunter: fiRegardless of what anybody tells you, it™s in your best interest to do ˜nancially driven investments, because if they succeed, then there will be ˜nancial and strategic returns back to the parent corporation. If that doesn™t happen, it™s just a waste of everybody™s time.fl While not everyone might see things precisely that way, no company innovates with the goal of losing money, and none can lose inde˜nitely. For that reason alone, how you innovate is every bit as important as how much you invest. 6Key insights from PwC™s Innovation Benchmark
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8GE is hardly alone. Over half of innovating companies struggle with bridging the gap between innovation strategy and business strategy, ˚agging it as their greatest strategic challenge when it comes to innovation. That™s more than twice as many that point to any other strategic challenge.This issue holds true across all industries and becomes more salient as a company invests more of its resources in innovation. Sixty-˜ve percent of companies investing 15% or more of revenue in innovation say that aligning business strategy with innovation vision is their top strategic challenge. The upshot? Too many companies are ˚ying blind (or semi-blind), with a lot of money on the line. Bringing people from the business-strategy side of an organization into the innovation sandbox from the startŠat the ideation phase of any new, potential innovationŠis critical to making innovation pay off in the long term, rather than having it be a potentially losing proposition. That requires knocking down silos within a company. At GE, says Siegel, it means filooking horizontally within the company, across the various industries, and asking, ‚What can we take from the various trends in each of these verticals and bring them together to create an opportunity?™ It™s all about the horizontal place.fl
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9 Innovative companies aren™t going it alone. Instead, they™re pushing the boundaries of innovation both inside and outside their organizations by breaking down traditional barriers, tapping a much wider ecosystem for ideas, insights, talent, and technology, and incorporating the customer throughout the innovation process. More-inclusive operating models, such as open innovation, design thinking, and co-creation with partners, customers, and suppliers, are now all embraced ahead of traditional R&D, and by a wide marginŠ almost twice as many companies favor these models.Q: What operating models does your organization currently use to drive innovation?Percentages denote the number of companies using these innovation models. Source: PwC’s Innovation Benchmark Base: 1,222Open innovationDesign thinkingCo-creating with customers, partners, suppliersTraditional R&DInnovating in emerging markets, exporting to developed markets Taking risks, failing fast, trying againInternal incubators 61%59%55%34%34%21%31%Investing in start-ups via corporate venture capital27%More collaborative operating models outpace traditional R&D3)
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10When it comes to these more-inclusive operating models, over one-third of companies say that customers are their most important innovation partners. And the majority tell us that their customer engagement strategy helps de˜ne innovation requirements from the early ideation phase. Real-time customer engagement, in particular, is playing an increasingly useful role in innovation, thanks to new connected technologies. fiAs our vehicles become smart products, we™ll start to see more of that real-time customer engagement, where we can really mash up what™s happening in the vehicle in real time with big data,fl says Rachel Nguyen, executive director of Nissan Future Lab. Established as an extension of Nissan™s advanced planning group, Future Lab is looking at what lies ahead for mobility, not just from the standpoint of the individual, but also from the broader perspective of urban mobility. The group™s research includes teaming with external partners, like the San Francisco-based scooter rental network, Scoot Networks, to learn by observing riders™ behaviors.Q: Who are the most important external and internal partners for innovation at your organization?Q: To what extent do you engage customers during innovation? Source: PwC’s Innovation Benchmark Base: 1,222of companies say customers are their most important innovation partners35%of companies say customer engagement strategy from early ideation54%
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11 The goal is to ˜nd opportunities for solving unmet needs, Nguyen says: fiWe push ourselves to always look for something that has not yet been demonstrated.flThis desire to break new ground is shared by many organizations. And it is backed by ˜nancial commitment: PwC™s Innovation Benchmark study shows that companies investing more in innovation are more likely to be focused on breakthrough innovation than on incremental improvement. Of those reinvesting more than 15% of revenue, most are engaged in breakthrough innovation, with over 40% of them focusing on that exclusively. Larger companies with $1 billion or more in revenue have a greater tendency than smaller companies to focus on breakthrough innovation. They™re also more likely than smaller companies to work with technology partners, engage in reverse innovation, adopt design thinking, and encourage open approaches to innovation. The embracing of open innovation and design thinking by larger companies is a positive development, as it helps break down walls in those organizations and brings together people from across the company™s various areas of expertise, spanning business strategy to technology. This is something that smaller, streamlined companies are often able to do with greater ease and frequency but that has tended to elude bigger enterprises. And yet, in a key respect, larger businesses are better candidates for design thinking, in that they typically have greater ˜nancial wherewithal to devote the time and patience required of design thinking™s iterative process, whereby different approaches can be tried before the right solution is reached. One large business that™s successfully taken an iterative approach to innovation is Marriott International. George Corbin, the company™s senior VP of digital, describes Marriott™s innovation cycle as a fiprototype-to- pilotfl process that is designed to test three risk factors. They will test the innovation as a pilot at a handful of hotels; as the risk factors are
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