April 15, 2005
Innovation — the ability to define and develop new products and services and deliver them to market — is the fundamental source of value creation in companies and an important enabler of competitive advantage. In a recent study conducted by Strategy&, company CEOs and other senior executives cited goals for improving innovation performance that averaged 20 to 30 percent in areas like time-tomarket, product quality, and development cost, in just the next two years. The bar has been set very high. Among the many factors that influence a company’s innovation performance, the dynamics of the “innovation organization” (which in different companies might include some combination of the engineering, R&D, and product development functions) is perhaps the most important.
Innovation is inherently a highly cross-functional activity that, when it works well, creates a constructive tension between competing objectives of development cost, product value, performance, quality, and time to market. Product development touches every part of the company. Functions like strategic planning, sales, operations, customer support, purchasing, and finance are just as important to successful innovation as R&D and engineering. How well these very different functions work together in large measure determines how effective a company will be at developing successful products and services.
It is common to look to an organization’s structure to suggest the relative roles and authorities of these functions. Structure is often the first thing companies seek to change when they search for better organizational performance. The Strategy& study found that over half of all companies had restructured their innovation organizations within the prior two years. Our experience indicates that there is no one right structure for a given innovation organization. Different structures work successfully under different circumstances. It also turns out that structure in itself is a poor predictor of how an organization will really behave. Independent of their organization structures, some companies seem to deftly mobilize their best capabilities to meet unexpected changes in the marketplace or competitive actions. Other companies seem immobilized by such challenges, unable to respond effectively. There are deeper factors at work. Factors that, to use a biological metaphor, are embedded in a company’s organizational DNA.
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