The Right Way to Spend Your Innovation Budget

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Innovation is famously difficult — multiple projects completion up losing money, frustrating employees, and going nowhere. And yet corporations and governments spend billions of dollars annually pursuing innovation. This huge spending would generate more financial worth for businesses and societies if the innovation success rate were merely a little higher. Is there a way to increase the success rate without spending more?

We think there is. Innovation projects often fail because the resources are funded on the wrong kind of innovation. Too much money is funded on attention-grabbing activities that are straightforward to do, like hiring new people, procuring new technologies, and buying more facilities. It is much less obvious, and usually harder, to change the design of a current service system, introduce new customer experiences, or build a ahead company model — but the return on those investments may be much higher.

Innovation needs to be considered in two ways: innovation capacity and innovation ability.

Innovation capacity is the organization’s potential for innovation. This is the stuff that’s simple to buy, and that organizations tend to spend too much on: assets and resources. This includes technology and people, as well as tangible, intangible, and financial assets. Most innovation investments, such as product improvement, technological innovation, and research and development (R&D) traditionally aim at strengthening the innovation capacity of the organization. Today, every company, small or multi-national, new or incumbent, can obtain innovation capacity. People can be hired over the sharing economy; technology can be rented by the hour; finance can be sought for any prototype, and assets bought. But capacity alone is insufficient to create new, significant, sustainable financial worth for customers — no matter how huge the capacity.

That’s where innovation ability comes in. This term describes the more difficult aspects of creating value, like new customer experiences, a revised service system, or new company models. An organization may have multiple people providing innovation capacity, but may still struggle to increase innovation ability, because capacity by itself does not invent nor implement a new company model or a ahead customer experience. Yes, an organization requires a certain amount of innovation capacity, but there is no increased financial worth creation over an increase in innovation capacity alone.

We’ve come to these conclusions after completing case study analyses of a scope of companies, including Nokia, Kodak, Borders, Amazon, Apple, and Xerox. Together, these companies have funded billions on innovation. But although the latter three funded relatively less on innovation, they funded their innovation budgets more wisely, choosing to invest in innovation ability rather than capacity.

Nokia concurrently 2007-2010 was an example of a corporation with fantastic innovation capacity. Nokia consistently offered technologically feature-rich mobile phones — in fact, Nokia invented the smartphone. Nokia actually offered a touchscreen smartphone two years ahead of Apple’s iPhone. Yet Nokia hung on to the Symbian operating system despite knowing its weaknesses in the eyes of the consumer. Nokia did have resources to develop a new operating system, but chose to stick with Symbian. As a result, Nokia progressed to less and less able to create new value. At one point Nokia manufactured 90 dissimilar mobile phones. Their functionality was developed slightly from one model to the next, but best phones were examples of innovation driven by the company’s innovation capacity. In short, technology was a courage for both companies, but Apple did a much ahead job connecting its technology to a service system delivering new customer experiences over a relevant company model. Developers outside of Apple were allowed to sell apps over iTunes and the App Store. Apple kept 30% of the sales made by outside developers. The huge number of apps created provided customers with a true large selection of new customer experiences.

Nokia launched the OVI Store globally in May 2009. The company was however unfit to match the service system provided by the iPhone in combination with iTunes and the thousands of applications that had already been developed. The then Nokia CEO Stephen Elop was quoted in Wired of February 2011 stating: “The first iPhone shipped in 2007, and we still don’t have a product that is close to their experience.” The Ovi Store was discontinued in 2015.

Kodak is an additional example of a company that funded best of its resources on drivers of innovation capacity. The company famously funded over four billion dollars developing the digital camera, but chose not to develop a new company model to convert that innovation capacity into innovation ability — and as a result, unsuccessful to capture the financial worth of what they’d invented. By contrast, Xerox invested in customer experiences, creating increased financial worth for customers by expanding its platform, resulting in increased revenues. As Xerox’s CEO Anne Mulcahy stated in the Dean’s Innovative Leader Series at MIT in 2006: “In trying to rebound, we funded the vast majority of our time talking to customers.”  By 2011, two-thirds of Xerox’s revenues got from products or services it had introduced within the last two years. Put simply, Xerox embraced the digital era and developed a host of technologies enabling the firm’s ability to transform to a services company . Kodak — in contrast — attempted to delay that transformation as long as possible, avoiding developing its service system, customer experiences, and company model.

Three lessons for financial worth creation emerge here.

First, organizations should spend less on premises the capacity for innovation. In other words, even if your organization increases the number of people working on innovation initiatives by 10% or even 20% — although at the same time no other changes are made internally — there is simply no legitimate reason to believe that the organization will create even greater value.

Second, to succeed with innovation initiatives, corporations require to consider the financial worth drivers that change over innovation ability — the company model, customer experiences, and the service system. Even if an organization has a new idea, a new technology,  a new product, or a new service, none of these will necessarily increase the  organization’s innovation success rate unless innovation ability changes one or more of the financial worth drivers.

Finally, the thinking and practice of innovation should start from the premise that successful innovation is driven by the shared financial worth created. Innovation should be value-driven; corporations, and governments, require to create financial worth for a network of stakeholders: customers, suppliers, and the firm — maximizing financial worth solely for the owners is not enough.

A corporation can have the same idea, product, service or technology as its main competitor, but to triumph in the marketplace it should develop a new company model, customer experience, or service system that will put that new idea, product, or technology to use.

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