Innovation excellence: The relationship between R&D and innovation success
In this article I describe how successful innovators manage to achieve Innovation Excellence. As can be seen in the Steve Jobs quote, R&D expenditure is not synonymous with innovation success. In this article I explain how R&D can contribute to innovation success and how innovation and R&D can reinforce each other. Because I do not explain every concept in detail and some concepts may cause confusion, I have also added a list of terms used at the bottom of this article.
What is innovation excellence?
Innovation Excellence is the capacity of an organization to continuously want to excel in innovation. This means that all its new products, services and business models meet or even exceed the needs of customers, that they can be delivered in a scalable way and contribute to the objectives of the organization. Innovation is structured as a continuous process that continuously provides new relevance.
Innovation excellence is the counterpart of operational excellence. Operational excellence focuses on ensuring that the current organization runs smoothly, 'running the business'. Getting better and better at the things you do. This also includes exploitation. Exploitation is about making use of relevant products and services. You are busy optimizing the life cycle of the current products and services. This activity has many similarities and interfaces with operational excellence.
What does R&D actually do?
The definition of the tasks that belong to R&D differs per company. In my view, R&D is concerned with conducting research and inventing. The focus is on inventions.
Within the research domain we can distinguish between
- Applied research: this is research aimed at making the core products function as well as possible (continuous innovation / exploitation)
- Business research: this is a term we use for research efforts brought forward by the Business.
- Basic research: this is research aimed at completely new technologies that are suspected of having potential in the future. The goal here is to learn.
Innovation excellence and R&D
Several studies show that there is no correlation between expenditure on R&D and success in innovation and / or the financial performance of an organization (ref 1,2,4). A 2018 study by PwC showed that the parties that spend the most on R&D lag behind the performance of the best innovators. Gina O'Connor's research did add a nuance: there is no relationship between basic, exploratory R&D and shareholder value.
But what do you as a company do with this finding? If R&D makes no sense, should we not stop? Well no, that is certainly not the right answer, because it has also been shown that if you spend less on R&D than similar companies, performance actually deteriorates. But what then?
The bottom line is that we need to ensure that our R&D expenditures are more successful. And fortunately we can influence that ...
This picture of The Inovo Group illustrates how Strategy, Innovation and R&D can potentially strengthen each other.
It turns out that (2) R&D can have a positive influence on the value of an organization. If R&D goes beyond simple, exploratory R&D, there is a clear, reinforcing influence on innovation. This was measured by looking at the activities in the field of incubation, innovation personnel and communication about innovation.
The secret of successful innovators
The most successful innovators have a high performance on the following matters (source 3):
- Strong link between innovation strategy and business strategy
- Company-wide support for innovation (it's in the culture)
- Top leadership is involved in and sponsor of the innovation program
- Innovation is based on insights from end users
- Clear innovation process with criteria for selection of initiatives
- They are able to integrate 1 to 5 into unique customer experiences
I will explain these factors and then also make the link with R&D.
1. Strong link between innovation strategy and business strategy
In many organizations you see that there is a general strategy, but that it is not subsequently concretised in an innovation strategy. In the absence of a clear framework, two things can happen. Everyone runs in all directions; there is no focus but chaos. The other reaction is just the opposite, nothing happens because people think 'nothing is possible / allowed'. By indicating clear frameworks that are sufficiently broad for learning. experimenting and innovating, people can judge whether an initiative contributes to the strategy or not. A model that we often use for this is the “Three horizons“. It is important in this model that a distinction is made between
- incremental innovation / improvements
- new / substantial innovations
- breakthrough / radical innovations
For the innovation strategy you determine the distribution between the various types of innovation. That way you also divide budgets and resources. Moreover, you ensure that there is at least a so-called Chinese Wall between incremental innovation and substantial / radical innovations. . The budget is not transferable between the different types of innovation. Only projects that fall under the same innovation category can claim the budget to be distributed.
Research (3) shows that of the innovation outperformers, no fewer than 77% claimed that their innovation strategy was strongly linked to the business strategy. This was only 32% among the innovation underperformers.
What you also see with the successful innovators is that they also make a subdivision for their R&D activities between incremental, new and radical innovations:
Integration of innovation strategy and research strategy
We think organizations should go one step further. It makes even more sense to use the Research strategy to integrate into the Innovation Strategy. After all, both must contribute to the Business strategy. We use the following model for this, which we will illustrate by means of an example.
Suppose a company has drawn up an innovation strategy. They have determined that they will focus more on 'Adjacent Innovation' over the next 3 years. They focus on new propositions and technology for their existing customers and adjoining customer groups. They have made the following distribution:
- incremental innovation / improvements: 60%
- new / substantial innovations: 30%
- breakthrough / radical innovations: 10%
This distribution relates to the allocation of budget & resources. We then look at how the Research focus should be, which is carried out by the R&D department. R&D is concerned with realizing inventions
We see a distribution of this
- Applied research: 70%
- Business research: 20%. R&D reserves budget (and therefore capacity) which is distributed from the Business based on strategic priorities.
- Basic research: 10%. The technologies to which time and attention are devoted arise from the innovation strategy. The Business and R&D have jointly contributed to this to see which technologies could become relevant for the company in the future.
By dividing Budget and resources in this way, it is ensured that there is a strong link between the business, the corporate strategy and R&D.
2. Company-wide support
71% of the outperformers said that the corporate culture was strongly linked to the innovation strategy, for the underperformers this was only 33% (3). This is also logical, because innovation arises in the workplace, not in the boardroom. When people recognize themselves and support the direction the company is taking, there is room for ideas. It's necessary to 'assign innovation champions', who play a role in driving innovation and new ideas within an organization.
Specifically for R&D, if there is a clear, overarching goal, this can give direction to the Research strategy. For example, if a company states that it wants to operate completely climate-neutral in 10 years and that it wants to apply a cradle-to-cradle principle for product development, this provides a very clear direction where the research focus should be.
3. Top leadership involved in and sponsor of innovation
We can of course hire 'innovation managers' and send everyone on a Design Thinking course, but that is not enough to change. What is needed is that top leadership also wholeheartedly supports innovation and acts accordingly. So not only explicitly praising 1 successful innovation, but standing firm for the preconditions, the processes, the mindset that make this possible:
Put your money where your mouth is
Just like that before exploitation certain incentives and systems (KPIs such as growth, margin, etc., balanced score card, ERP and CRM systems), this is also exploration required.
This means that there must be sufficient budget available for exploration, that people are allowed to spend time on it, that failure and learning are allowed, and above all that we look at the results of innovation with different standards. So instead of KPIs we use innovation accounting, as an alternative to the balanced score card we apply innovation portfolio management and instead of the ERP / CRM system a full-fledged innovation platform is required. This obviously looks different in larger organizations than in small organizations, but what matters is that the leadership must ensure that the right preconditions are in place to be able to innovate.
4. Innovation is based on end-user insights
People are solution-oriented. When we hear about a problem, and the problem lies in an area of which we think we have knowledge, we prefer to come up with a solution immediately. After all, we know what is going on in the market, and don't we know our customers? We often first focus on technical feasibility, or the feasibility. We then look at whether we can achieve a profitable business model with this, we look at which sales price is justified and then try to launch it in the market. We call this viability.
Unfortunately, this often goes wrong. No less than 40% of product launches fail.
The starting point of Design Thinking it is precisely that we start from the human being, the human desirability. In other words, what are the actual wishes and needs of our target group? And when we have a solution, we expose it to the customer as soon as possible. With his targeted feedback, we change and improve our design in such a way that we come up with something that people are waiting for. Here is an example from practice:
The survey (3) shows that all respondents see the value of deep customer knowledge and customer insights. The companies that grew the fastest cited it as their second-best competence, precisely because they saw room for improvement.
5. Clear innovation process with criteria for selection of initiatives
Companies that reported the highest growth rated themselves as the most competent in selecting initiatives across the different phases. At the same time, they also saw room for improvement there.
This does not mean that you make the selection criteria so strict that no initiative will pass unless it is a risk-free project. We have to differentiate between the different types of innovation. As uncertainty increases and the reuse of existing resources decreases, there are totally new concepts for the company. These new concepts must be tested against the innovation strategy, but different standards apply to the selection of these initiatives. These standards change depending on the stage they are in in the innovation process. So we make a distinction between exploitation en exploration. Improvement mainly takes place in Horizon 1, as the market and technology are both well known. If we practice Exploration, Horizon 2 and 3, therefore, you need to use a different innovation process that fits this type of innovation.
The role of R&D in the innovation process
As we have argued earlier in this article, the Research strategy should be integrated into the Innovation Strategy. The Research activities can also be divided over the following axes. Clear selection criteria must also be present for the research process to determine whether a project continues to the next phase. We advocate for the part that we have coined above “Business Research, to make this a joint responsibility of the Business and R&D. They must together defend that the investment in an initiative will be continued. In this way we guarantee sufficient focus on both feasibility (R&D focus) and desirability and viability (the Business)
6. They are able to integrate 1 through 5 into unique customer experiences
It is no longer enough to be good at one of the above factors. The standard for innovation excellence goes up quickly. If you have the ambition to be an innovation leader, you should score well on all the factors mentioned.
Innovation excellence cannot be achieved by following an innovation course and organizing an internal moonshot challenge. It requires an adjustment in the organizational structure, in the way of thinking and working. You have to learn to be open to people with a different way of thinking, you will measure things in a different way. But in order to become more successful in innovation, and not hope for accidental success with a lucky shot, these changes are necessary.
R&D activities play an important role in this. By better aligning R&D activities with the innovation strategy and business activities, but also vice versa, we strengthen our innovation excellence. Lessons can be learned from the most successful innovators in the world that can also be applied in your organization. Just like you have invested in in the past operational excellence, this is the decade that companies will have to invest in innovation excellence. Only in this way can we ensure that an organization is agile and can continuously adapt to a new reality.
Invention / Invention
For this I use the definition from the Cambridge dictionary: “something that has never been made before, or the process of creating something that has never been made before”. What is important about this is that this invention has not yet been proven in the market. The invention can be protected, for example by a patent, but as long as there is no successful market introduction, it is only an invention. We don't know yet whether it is useful or not. Gina O'Connor: “No matter how many amazing invention R&D produces, it is just the beginning of the innovation process” (2)
Innovation / Innovation
Pimcy's definition of innovation is: "Innovation is the successful realization and launch of new products, processes, propositions, services or business models that offer added value to the customers and/or end-users . An innovation also has added value for your own company. ”
An invention is therefore not the same as innovation. However, it can be a great starting point.
Research & development (R&D)
I find Shopify's definition of Research & Development clear: “Research and development - R&D - is the process by which a company works to obtain new knowledge that it might use to create new technology, products, services, or systems that it will either use or sell. The goal most often is to add to the company's bottom line. ”
R&D is mainly concerned with “inventing”. It is then up to the “Business” to test whether they can use the new technology / process etc. in such a way that it has added value for the customer and the company. Within R&D we make a distinction between different types of research.
- BASIC RESEARCH
“Helps the company acquire new knowledge, but doesn't have any specific application or use in mind. Think of it as research for the sake of research ”
- APPLIED RESEARCH
“Applied research is done to acquire knowledge, it's done with a specific goal, use, or product in mind”
Exploring and testing the most promising opportunities and developing an appropriate business model and strategy for them.
The 'Business' is a term that you hear a lot in larger companies, yet I cannot find a suitable definition. For me it is a collective name for departments or units that are busy or responsible for developing, improving and delivering products and services to the customer. Consider, for example, product development, marketing, sales, innovation department.
Explore versus Exploit
It is also important to understand the difference between “Explore” and “Exploit” activities. We use the Strategyzer definition for this:
- Explore / Exploration
Exploration activities relate to search. Searching for ideas that are turned into value propositions that are relevant to customers. And that can be embedded in a scalable and profitable business model
- Exploit / Exploitation
Operating activities relate to growth. This involves scaling new business models and improving or reinventing existing business models.
- The Global Innovation 1000: Proven Paths to Innovation Success, B. Jaruzelski, V. Staack, B. Goehle, Strategy + Business (2014)
- Real innovation Requires More Than an R&D Budget, Gina O'Connor, Harvard Bsusiness Review (Dec 2019)
- What the top innovators get right, B. Jaruzalski, R. Chwalik, B. Goehle, Strategy + Business (2018)
- Innovation vs R&D Spending, T. Viki, Strategyzer, (May 2019)