Driving from the top

The first characteristic of the outstanding performers in our survey is that they closely align innovation strategy with business strategy. CEOs must ensure that their companies are not investing in a random assortment of disparate projects. Of the group of companies that were outperforming their industry group, 77% said that their innovation strategies were closely aligned with their business strategies. This compares with 54% of companies with average growth, and 32% of those with slower growth.

We also found differences in terms of strategic alignment among the three innovation models into which we have segmented companies over the past 11 years – need seekers, market readers, and technology drivers. Need seekers engage with customers directly to generate new ideas. Market readers do not set the pace, but are fast followers, and look to boost performance through incremental innovations to current products. Technology drivers, who constitute the largest proportion of companies, use their technological expertise to generate new products and services which they hope will appeal to their customers.

Need seekers report higher profitability and revenue growth than the other two categories. It is significant to note, therefore, that 84 percent of need seekers say their innovation and business strategies are closely aligned, whereas this is true for only 48 percent of market readers and 53 percent of technology drivers.

Specialty-based chemicals company DIC is one of our high-leverage innovators. The senior management team has sought in recent years to tie the company’s R&D activities with its business strategies. The company divides its R&D operations into two divisions. The direct-to-customer technology division, which focuses on incremental innovation that hones an existing product's development efficiency and differentiation, always works closely with the business units and in tandem with the business strategy. “The budget control and administration are both done by the business units, and they approve the themes for technology and R&D,” says Kiyotaka Kawashima, executive officer and general manager of R&D. A separate division, which concentrates on more fundamental innovation, has also become more closely aligned with business strategy, but has more freedom to select individual projects to work on.

The second characteristic of successful innovators is explicitly related to senior leaders. Respondents reporting higher growth than peers were significantly more likely to state that their company’s executive team were closely attached to the R&D program. Some 78% in this category said that their executive team was closely aligned with R&D investment and strategy. This compared to 62% for those companies with average growth, and 53% for companies with lower than average growth.

Also, across the three innovation models, need seekers are significantly more likely to report that their leadership teams were closely aligned with their innovation strategy (84% versus 63% of market readers and 57% of technology drivers).

What is even more striking is that every single one of the high-leverage innovators we interviewed or analyzed reported that their top leaders were closely connected to innovation strategy. Stanley Black & Decker has consistently appeared among our list of high-leverage innovators since we first started to compile it in 2007. “The executive team is involved in innovation right from the top,” says Tim Hatch, Chief Technology Officer at Stanley Engineered Fastening, one of the company’s divisions. “Whenever we have project reviews or product reviews, (the CEO) is always asking questions around where we are with breakthroughs and how we are commercializing the ideas that have been generated by teams.”

The third characteristic of high-performing and innovative companies is company-wide cultural support for innovation. Almost three quarters (71%) of respondents from those companies with faster growth said that their corporate culture was highly, or very, aligned with their innovation strategy. This compares with 53% of companies that reported the same growth as competitors, and 33% of those companies that reported slower growth.

The CEO has a major role to play in creating the organizational culture and ensuring that it is actively encouraging innovation. The organization’s leader should set out the expectations and goals regarding innovation so that they are clear to every employee. The CEO’s words and deeds are highly influential, as ambitious workers will recognize these signals about leadership priorities and naturally seek to live up to these demands to progress within the company. Similarly, as the pronouncements of the CEO are so public, potential candidates with a passion for innovation are more likely to be drawn to apply to that particular company in the first place.

Indeed, recruitment policy should have innovation in mind. It should embrace the goal of a diverse workforce. People from a variety of cultural and career backgrounds are more likely to approach issues from different angles, thus potentially reducing the damaging effects of “groupthink,” preventing inertia, and boosting the flow of fresh ideas.

The company’s reward and incentive structure, established by the leadership team, can also reinforce a culture of innovation. A record of conceiving and implementing new ideas should be taken into account within individual performance reviews. Similarly, there should be no negative consequences for those who fail in their bid to introduce a new approach or product. A blame culture impedes innovation.

Particular individuals could be assigned specific responsibility for supporting innovation. To underscore the importance of innovation, the organization could appoint a chief innovation officer, who is tasked with originating new ideas and who recognizes and promotes the innovative ideas emanating from other people.

Alternatively, advocates for innovation could be strategically positioned throughout the organization. Another of our high-leverage innovators is Amadeus IT Group, a global provider of travel solutions and software based in Spain. Amadeus has introduced innovation champions within its R&D and business units. The role of these champions is to promote and foster the company’s innovation approach at their particular site, encourage people to submit ideas and then collect those ideas to ensure that the rest of the organization can view them.

The fourth characteristic of top performers is that they rigorously control project selection early in the innovation process. Indeed, when asked which stage of the innovation process is most important—ideation, project selection, product development or commercialization—project selection was the most popular answer. The initial stage of the innovation process is undoubtedly critical to success. Most of the long-term costs of product development—up to 70%, in our experience—are already committed once the ideation and project selection phases are completed. Poor selection early on will quickly drain resources.

Companies reporting relatively strong growth were more likely to state that they were adept at project selection. They were also more likely than their counterparts to see the potential in improving these selection capabilities still further. They have identified the crucial importance of project selection.

The CEO must see to it that an appropriate and effective system is in place to identify, evaluate and prioritize projects, and to make the necessary tough decisions. Often a steering committee is established to oversee the process of project selection, including project monitoring. Either this steering committee directly reports to the CEO, or the CEO is actually a member of that committee.

At Amadeus, leaders carefully track the innovation pipeline and make use of explicit criteria for project selection. “It’s about making sure we have a problem-solution fit,” says Marion Mesnage, head of research, innovation, and ventures at Amadeus. “It’s also about making sure that we have really found a problem worth solving, that we have a solution in mind that can solve it, and that there is a business appetite, so that we know there are enough people willing to pay for the solution we are proposing.”

The CEO has a pivotal role to play in innovation, not least because the close involvement of the leadership team has been shown to increase the likelihood of success. The CEO must also ensure that that innovation strategy is closely aligned with business strategy, that the culture of the company helps innovation to flourish, and that project selection is tightly controlled early in the process. Once it has these characteristics, the organization is ideally positioned to generate a steady flow of new ideas, the lifeblood of any company intent on growth.

This article originally appeared in the Winter 2020 edition of Trends.