“Innovate or Die.” It’s a popular saying, and one that suggests the act of innovating is at least as important as the result. There also is the subtle suggestion in this saying that the more money a company spends on innovation, the greater the return it will get on its investment. But is that true, or is there more to innovation than meets the eye? According to Kevin Dehoff, co-author of Booz Allen Hamilton, Inc.’s annual Innovation 1000 study, “We’ve done just about every permutation and analysis of innovation spending, and continue to find that the answer is not simply to spend more. You can’t buy your way to success.” In fact, “high-leverage” innovators spend less than the average in their industry segments while achieving higher performance.
“What was consistent across the 112 high-leverage companies was their management of the innovation stream,” he says. This included looking at how to connect customers and markets with innovations, how companies determine what new product and technology roads to follow, as well as the efficiency of their product development and innovation processes. “For these companies,” says Dehoff, “it is about their capabilities across the innovation value stream, and how tightly they are aligned, integrated, and managed compared to the companies that spend the most.” This lends itself to moving ideas through the pipeline, developing new products, and getting them to market quickly.
Talk to Your Customers
Dehoff and co-author Barry Jaruzelski focused on how a company’s connection to its customer affects the innovation process by studying alignment between the business and innovation strategies, as well as the capabilities necessary to support the strategies they uncovered. Three strategy models emerged from their interviews: Need Seekers, Market Readers, and Technology Drivers. Companies following the first strategy actively engage current and potential customers to shape new products, services, and process so that they can be the first to market with those products. Market Readers, on the other hand, carefully watch their markets, but predominately focus on creating value through incremental change. Not unexpectedly, Technology Drivers use their inherent technical capabilities to leverage R&D spending to drive breakthrough innovation and incremental change to solve the unarticulated needs of their customers. “High-leverage innovators were found in each of these categories,” says Dehoff, “and no one strategy performed consistently better than any other. However, those companies that said their innovation strategies were tightly aligned with overall corporate objectives showed 40% higher operating income growth and 100% higher shareholder returns than less aligned companies.” Not only does focusing on customer insight and market needs directly impact the bottom line, Dehoff and Jaruzelski discovered that companies that directly engage their customer base have twice the return on assets and triple the growth in operating income compared to other survey respondents.
Know When to Pull the Plug
Part of this success, Dehoff suggests, is that listening closely to the customer—both what is said and left unsaid—allows the organization to better discern what projects have the best chance of success. It is the efficiency of the functional interfaces between engineering, product development, sales and marketing, etc. that determine a company’s innovation performance, including when to stop a program from going forward. “You have to have the discipline to constantly evaluate the value proposition of the product, the parameters of the business case, and any changes that occur during the development process,” says Dehoff. “This will tell you when to proceed and when—despite the amount of money spent—to kill a product.” Often this is more difficult than it appears as the pair found numerous examples of an inbred bias to continue development of a product despite the fact that it was off-target.
In terms of spending, the auto industry was the only sector that showed a con-tinuing decline. Spending dropped from 3.9% to 3.8%, partly due to the maturity of the auto industry in all aspects of its cost structure. Efficiency improvements in terms of the product development process—emphasized by the move to fewer and more flexible platforms—and the use of low-cost sources for engineering and technical services at the Tier 1 level, coupled with a product offensive pushing more models into more finely defined segments have kept R&D spending low. Dehoff believes Toyota’s fast, efficient product development system lets it make product investments other companies find economically unattractive, and reap greater benefits from the Toyota Produc-tion System. “It is the nature of how they approach the process of design choices and resolutions, when to make tradeoffs and what tradeoffs to make, and how this is a natural part of the process instead of a calendar-driven, stage-gate process that explains much of their suc-cess,” he says. It also may be proof that, as with the high-leverage innovators, spending less to get more is the better choice.
Successful Companies Don’t Copy
However, Dehoff warns, simply copying Toyota isn’t enough, especially since the time to capture the value of innovation in a segment has compressed immensely over the past 15 years. “That calls into question what blockbusters are going to be achievable, and how much of the value you can capture given the cycle time compression and the number of fast-following new entrants there are in the market,” he says. “Toyota, which has an 18-24 month product development cycle, is very good at not being first while capturing a lot of the segment value by being quick to market with a product that capitalizes on its reputation for quality, durability, and reliability.” To effectively compete, each company must create an “economically advantaged” system based on its own strengths and weaknesses. This implies evaluating how to change the process currently used, determining which fundamentals have to be changed, and studying what capabilities are currently missing and how they can be brought into the system. “You can’t borrow it,” says Dehoff. “To be successful, you have to determine what works best for you.”