Benchmarking Innovation: Minding Gaps in Ideation and Business Strategy
A recent PwC report of more than 1,200 global executives and business leaders examined how top companies are meeting innovation challenges. So what did the report find?
Among the findings, the report notes that less than one quarter of respondents say that they lead their competitors in innovation. The most innovative companies are promoting innovation by breaking down traditional barriers to bring in a much wider ecosystem for ideas, insights, talent, and technology. So what are leading companies doing?
The PwC report explored the different approaches to ideation and innovation models deemed most successful. Overall, companies are becoming more inclusive and are adopting open innovation models that bring more voices to the table, including employees across all levels and departments. Not only does this foster fresh thinking, it also establishes a more innovative culture. Furthermore, companies are looking to customers as partners to realize innovation.
“It’s critical for executives and business leaders to meet innovation challenges head on, but often times they are unsure of how or where to begin,” says Volker Staack, co-author of the report and Principal, Global and US Innovation Leader, PwC, in commenting on the study. “This report identifies the pain points for executives across all industries to help find solutions to drive innovation that will align with business strategy and result in bottom-line success.”
Technology companies lead the way in breakthrough innovation followed by roughly half of innovating businesses in the pharmaceutical and life sciences.
—PwC Innovation Benchmark Report (June 2017).
Innovation metrics and barriers. Among the key findings is that roughly half the companies participating in PwC’s Innovation Benchmark Report think that their innovation efforts have had a “great” impact on driving their revenue growth, with an equally significant impact on cost management. And nearly all companies believe there has been at least a moderately positive impact on both top-line and bottom-line growth.
Delving deeper, however, the PwC report shows that executives exhibit low confidence in their company’s innovation prowess with just one-quarter of respondents believing that they lead their competitors in innovation as well as showing a gap between innovation leaders and non-leaders in innovation success. Twenty percent of innovation leaders expect more than 15% growth in the next five years whereas just 13% of all other innovating companies expect the same level of growth.
Another important finding relates to the amount of innovation funding and success. The study found that the relationship between a company’s level of innovation spending and economic success is tenuous at best. Over the past dozen years, the PwC Annual Global Innovation 1000 study, which analyzes trends of the world’s 1000 largest corporate research and development (R&D) spenders, has found no statistical relationship between dollars spent on R&D and financial performance, suggesting that the way companies spend innovation dollars is more important than how much they spend.
The report also examined the metrics that respondents felt were most important in measuring innovation. By far, sales growth was cited as the most important metric with 69% of respondents citing it as such. Customer satisfaction ratings (46%), number of new ideas in the pipeline (40%), and market share (36%) were cited by respondents as the next important metrics. Number of new products in the pipelines (31%), net value on innovation portfolio (28%), and time to market (24%) were also cited as key metrics for innovation by respondents of the PwC study.
Another key finding is that 54% of the executives surveyed said that they struggle to align innovation strategy with business strategy. This issue holds true across all industries and becomes more salient as a company invests more of its resources in innovation. Sixty-five percent of companies investing 15% or more of revenue in innovation say that aligning business strategy with their innovation vision is their top strategic challenge.
New models for innovation. The report also finds that the most innovative companies are promoting innovation both inside and outside their organizations by breaking down traditional barriers to bring in a much wider ecosystem for ideas, insights, talent, and technology. Sixty-one percent of respondents say their company deploys an open innovation model, followed by design thinking (59%) and co-creating with customers, partners and suppliers (55%), all well ahead of traditional R&D (34%).
Moreover, the report shows that 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 five years.
The report further shows that when it comes to these more-inclusive operating models, more than one-third of companies say that customers are their most important innovation partners, and a majority reports that customer-engagement strategy helps define innovation requirements from the early-ideation phase. Real-time customer engagement, in particular, is playing an increasingly useful role in innovation.
The technology sector invests the most in innovation as a percentage of revenue followed by the pharmaceutical sector.
—PwC Innovation Benchmark Report (June 2017).
The PwC Innovation Benchmark Report further 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 more than 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 and are more likely than smaller companies to work with technology partners, engage in reverse innovation, adopt design thinking, and encourage open approaches to innovation. Small entities (those with under $1 billion in revenue) are more likely than their large counterparts to work with academics and research institutions.
Inside talent. When asked who are the most important external and internal partners for innovation, most companies surveyed (60%) consider internal employees as their most important partner for innovation. Although Big Data and analytics were considered important, the report showed that executives place value on human judgment and intuition to bear on the data in obtaining useful insights for innovation. Thirty two percent of the businesses surveyed say that finding employees with the right skills is their biggest people-related innovation challenge. This challenge was topped only by the need to establish a leadership culture conducive to innovation, cited by 37% of companies, according to the study.
In identifying the human factors that determine innovation success, 65% of respondents said innovative behaviors and culture, followed by “fresh thinking” (63%), strong C-suite leadership (52%), clear business models (42%), and increases to the innovation budget (32%). Other important partners cited in the study were technology partners (50% of respondents), channel and business model partners (44%), and customers via data mining, feedback, and focus groups (35%). Supply-chain partners, vendors, and suppliers were also cited as a source for innovation by 29% of respondents. Other partners useful for innovation were similar companies outside regional markets (23%), academia and research institutions (22%), and start-ups and entrepreneurs (16%).
Industry leaders in innovation. Technology companies set the pace in developing breakthrough innovations with 58% of respondents reporting their companies focus mainly on breakthrough innovation. Almost a third say their innovation is either all or mostly technology-led, and another third say they use a combination of technology- and market-led innovation. Nearly half of technology-led companies focus entirely or mostly on breakthrough innovation; another quarter of them focus on a combination of breakthrough and incremental innovations.Technology companies lead the way in breakthrough innovation, with nearly two-thirds of them making this the focus of most or all of their innovation efforts, according to the PwC study. Roughly half of innovating businesses in the pharmaceutical and life sciences (51%), health services (47%), communications (45%), and automotive industries (43%) focus mostly on breakthrough innovation. The technology sector also invests the most in innovation as a percentage of revenue followed by the pharmaceutical sector.