Innovation is a top-three priority for 77% of companies, according to a survey of 1500 executives by Boston Consulting Group. And talk of innovation is on the rise. Back in 2007, 99 of the S&P 500 mentioned “innovation” in their third-quarter conference calls, as measured by Capital IQ. By 2013, the number was 197.
But for all this investment and confidence, most innovations fail to meet expectations. Harvard Business Review notes that 75% of consumer packaged goods and retail products fail to garner even $7.5 million of sales in their first year. Not even 3% of these innovations reach $50 million in sales in year 1.
What is Innovation?
With so much talk of innovation, one might think that innovation itself has a simple definition. However, It doesn’t. Many associate the term with lightning-bolt “Eureka!” moments of creativity and genius. An innovation program can have elements of genius, creativity and invention, but innovation success isn’t defined by or dependent upon any of those qualities – Innovation is a process.
P&G CEO A.G. Lafley defines innovation as “the conversion of a new idea into revenues and profits,” drawing the distinction between creativity and invention, in and of themselves, and the process of monetizing their outcomes. Ultimately, the most relevant innovation outomes can be measured on P&L statements and by favorable customer behavior.
Set Innovation Goals
What is the role of innovation in your overall strategy? Answering this question requires thinking about a wide array of issues. For example:
- How much revenue should come from new products? Studies show that about 30% of company revenues come from products introduced in the last three years. This number varies by industry and company, but you should weigh the role of innovation on your business growth in deciding your priorities.
- What is your risk profile? Placing fewer big bets may be riskier than opting for many smaller bets. Being a first mover is also riskier, but the upside is a larger return than that realized by a follower, even a fast follower. Your overall appetite for risk will govern many decisions throughout the innovation process.
- How much are you prepared to invest? With dedicated budgets, innovation will get more focus and energy than if it’s merely a buzzword in people’s job descriptions.
Many of these questions are interdependent and relate back to the overall company strategy. Regardless of that strategy, innovation can flourish only if goals are clearly set, communicated, and embraced by top management as a key initiative rather than a fleeting t-shirt tagline.
Inspiration can come from many places. There are many publishers of market research (e.g., Datamonitor, Mintel, Nielsen) that track market and consumer trends. There are innovation “gurus” who can lead your team through an ideation offsite.
There is no one right way to inspire and track ideas. There are, however, a number of drill sites that warrant exploration.
- Consumer. This is the audience you are trying to win. Steve Jobs said, “People don’t know what they want until you show it to them. That’s why I never rely on market research.” And user ethnographies can offer useful insights by following consumers through their day to see how they actually use products in order to fulfill their needs.
- Technology. Brainstorming all the consumer applications from you and other people’s technologies is a smart step. Not all of the brainstorming output will make sense to pursue, but the exercise can create great energy and ideas. DuPont’s invention of Teflon, for instance, spawned products ranging from cookware to coaxial cables to hydraulic hoses. Amazon.com was created when Jeff Bezos sought the best application for the internet’s new ecommerce capabilities (he reviewed the top 20 mail order businesses to find the ones that could be conducted more efficiently over the internet).
- Connections. Great ideas are often inspired by something or someone unrelated to your own industry. For example, Velcro came about after its inventor went for a hike and was fascinated by the burrs that stuck to his clothing. Other inspiration can come from your personal network. Malcolm Gladwell’s The Tipping Point describes how a small group of well-connected trend-makers influence our culture. You may not be part of that inner circle, but filling your own network with smart people can provide a stimulating environment that spurs creativity.
Another drill site for ideation is other companies and partners. The Spotlight on Open Innovation explains how third parties are increasingly being used to come up with ideas.
Refine and Prepare Concepts for Market
Innovation is both an art and a science. Ideation leans towards art, but the process of developing and commercializing innovations leans towards science.
The phase-gate approach is embraced by many respected innovators, from P&G and PepsiCo to Honeywell and Kraft. The goal of this methodology is to efficiently and effectively shepherd prospective new products to market.
There are many versions of the phase-gate approach. Here we will present a simple overview of the concept.
“Phases” represent steps of work, and “gates” are where decisions are made whether to progress or not. Phases might be:
- Discover & Create – leverage learning to generate ideas and concepts.
- Test & Assess – build a business case considering the market, consumer, retailer, competitor, and other dynamics.
- Design & Develop – define product specifications and prototypes; this is an iterative process, with work being tested and refined.
- Prepare & Launch – establish the supply chain, ramp-up production, and bring the product to market.
- Evaluate & Learn – evaluate both the product and the process.
After each phase, the gate is a time-out to check the attractiveness of the idea and the merit of continuing to invest. A gate will cover:
- How well the work in the recent phase was conducted. Is the process being followed to maximize information and minimize risks?
- How attractive the business case is at this point. Are the economics still attractive?
- What the next steps are. Is there alignment on the investments and work in the next phase?
The decisions at a gate could be go, no-go (kill or hold), or recycle to get more information.
Several teams tend to execute and oversee the phase-gate process. Names of the teams differ from company to company, but the roles are similar. Teams usually include:
- Steering Team – group that oversees the gates; usually a senior team of decision makers.
- Category Team – group that has close connection to the market, consumer, and competitor insights; this team fosters new ideas.
- Project Team – group that works to bring concepts through the phases; this team usually involves people across many disciplines.
The phase-gate process requires specific information to be presented at each gate. One of the key documents is the Project Charter. This document initiates in the first phase and gets fleshed out in subsequent phases. Key elements include:
- Platform description – overview of the product description.
Consumer target/insight – review of the demand desires of the marketplace.
- Key benefit – description of what this product is aiming to achieve.
Point of differentiation – clarity on how this product will stand out from the others in the market.
- Areas to explore – indications of research needed or questions to be answered.
- Success criteria – benchmarks for efficacy, branding resonance, quality, trial and repeat.
- Financial projections – estimates of revenue, profit, start-up investments and project return-on-investment.
Smart processes can help enhance a company’s innovation engine, but care should be given to not add too much bureaucracy; innovation must maintain a carefree spirit and a challenger mindset.
Case Study - Afarpack Wooden Packaging Client Studio
AfarPack Client Studio is the innovation division of AfarPack Wooden Packaging, a Professional & Leading supplier of Wood packaging. They have been innovation catalysts since 2014.
The team helps clients develop new brands, new wood packaging solutions, and new industrial design solutions. They’ve driven innovation in industries ranging from yachts to footwear to consumer goods of all types. Client Studio works through every innovation stage – from discovery and design to preparation and launch.
Client Studio delivers branding and packaging excellence with aligned incentives, an end-to-end process, and demonstrated results. They are a unique “Open Innovation” solution for clients who want to strengthen their innovation pipeline.
Innovation requires juggling many balls and making many tradeoffs. While aiming for the next killer product, there is the need to stay practical.
Align inputs and outputs
Your innovation budgets should correlate to the amount and magnitude of innovation you’re seeking. For game-changing new products, you’ll need meaningful investments in things (e.g., market research or laboratories) and people.
Involve the right people
While it’s not necessary to have a dedicated team of innovators, the innovation process requires a certain type of person. General Electric measures its leaders on “growth values,” which include External Focus, Imagination and Courage, and Clear Thinking. GE seeks and rewards employees with these traits with the knowledge that these people can help the company grow.
Manage the innovation portfolio
Just as with your personal investment portfolio, you want to manage an innovation portfolio to deliver the best return with the lowest risk. This means you must evaluate the system regularly, and best-in-class companies tend to look at four variables:
- Value maximization. Allocate resources to achieve the highest expected value of the portfolio.
- Diversification. Spread risk by balancing projects across dimensions like long-term vs. short-term, evolutionary vs. revolutionary, product category X vs. category Y.
- Resource allocation. Pursue the right number of projects given the resources you have.
- Strategic direction. Ensure the portfolio is aligned with the company’s overall imperatives.
As new information arises, individual projects as well as the whole portfolio should be re-examined.
Protect your intellectual property
After all the work of building a new product, you don’t want to lose the benefits by having someone else steal your ideas. There are many legal tools available to protect your intellectual property, and you may want to find an attorney who specializes in structuring intellectual property agreements. As a start, you can educate yourself on the basics of trademarks, copyrights, patents, and trade secrets. Also, use well-written non-disclosure agreements with any outside parties and make sure your employment agreements spell out your firm’s rights to employee-generated intellectual property.
Innovation is essential for business growth. Consumers’ short attention spans drive them to look for new products that satisfy their evolving needs and preferences. While companies realize this and are investing more than ever in R&D, many fail to produce winning results. This paper defined innovation and reviewed ways to make it more efficient and effective.
- First, companies need to set clear innovation goals.
- Second, organizations must embrace the right innovation mindset, taking cues from Thomas Edison and the early days of Hewlett-Packard.
- Third, companies should tap into multiple sources to generate innovative ideas.
- Fourth, processes like the phase-gate approach add discipline when bringing new ideas through the innovation funnel.
All four of these steps – and the practical tips discussed in the last section – help increase the odds of innovation success. And innovation is a learned process; companies that follow all these steps and learn from their failures will do far better than new-product novices. For companies with less “innovation experience,” selecting partners to help with the overall process and with key phases is a way to improve the odds.