It feels like we live in a world where companies are constantly innovating, but how can they be sure they’re investing in the right areas? To find out, we spoke with innovation expert Ben Thurio-Aleman, a partner at management consultancy Arthur D. Little (ADL). Based on the latest version of ADL’s long-running comparative study, it shares some striking findings.
Gary Drenick: Ben, can I start by asking you first – why is innovation important?
Ben Thuriot-Aleman: Innovation is vital on two levels. First, in increasingly crowded and competitive markets, it is essential to differentiate and provide customers with products and services that meet their changing needs. This leads to profitability and growth. Demonstrating this, research conducted by Arthur D. Little (ADL) for the Association of Swedish Engineering Industries in 2023 found that investment in research and development (R&D) generated 7 times the return on investment in innovation made by the Swedish state .
Innovation is now crucial and on a broader level – the world is facing existential challenges in areas such as decarbonisation and sustainability. Innovation is key to bringing about the transformation we need to overcome these challenges.
However, our latest Global Innovation Excellence Benchmark (GIEB) survey of 500 large organizations finds that while innovation is more important than ever, business leaders are increasingly frustrated with the performance of their research and development (R&D) programs and innovation programs. Overall satisfaction has declined by 33% since 1991, and only 29% of business leaders are currently satisfied with their companies’ innovation performance.
Drenik: I guess people have always innovated, but lately how has the idea of successful innovation changed in the last 50 years?
Thuriot-Aleman: Early innovation comes literally from the lab, with isolated R&D centers that are separate from the business itself. Over time, innovation has become much more decentralized, with smaller units embedded in different parts of the business, so progress is much more focused on their needs. Since we published our first GIEB over thirty years ago, we have seen the rise of open innovation, with companies collaborating with wider networks such as academia and other businesses to generate fresh ideas.
We now have technologies like generative AI that bring new opportunities to transform innovation. It’s still early days, but a recent study by Prosper Insights & Analytics found that 44% of people who use ChatGPT use it for research. This shows the potential of AI to change the way we manage and execute innovation programs.
What has not changed, however, is the relationship between strong, effective innovation management practices and overall innovation success. The better R&D is managed, the stronger the results.
Drenik: Looking at your research, what do top performers do when it comes to innovation focus?
Thuriot-Aleman: Our latest GIEB identifies five specific areas where leaders are excelling, improving the return on their investment in innovation.
First, leaders invest in breakthrough innovation management, creating entirely new products and services, and entering new markets. This generates greater revenue and higher margins, but requires a longer-term investment focus.
Second, companies in the top quartile are innovating around their business models. They are constantly adapting the way they work to outperform the market. Despite the benefits, however, even many innovation leaders struggle with this – 70% of companies rated as having average or below average satisfaction with business model innovation.
Third, leaders perform consistently when it comes to how they manage R&D across business units. Surprisingly, we found huge differences in innovation performance between multiple business units within the same company, resulting in about a 5% difference in revenue from new products and services. Successfully harmonizing practices is often a cultural issue and requires senior management buy-in and an approach that builds trust and aligns incentives.
Fourth, successful companies selectively implement agile methodologies. They can quickly assemble the right teams with the right skills to rapidly develop new ideas and bring them to market faster and more efficiently. However, agility is not the best bullet for every problem – leading innovators understand where it delivers value compared to traditional innovation methods and apply it precisely to those opportunities.
Finally, strong leadership is vital to innovation success. Interestingly, the skills needed to be an effective innovation management leader have changed. Although people still need skills, including communication and strategic thinking, they also need new abilities such as belief in the vision, meta knowledge, networking skills, perspective originality and digital thinking.
Drenik: Clearly, innovation is critical to success. So why don’t companies just invest more in R&D if it brings such great benefits?
Thuriot-Aleman: You’d think this would be the simplest solution – but the data tells a different story. Across industries, we found no significant relationship between R&D intensity and innovation success, except for organizations with best innovation management practices. Essentially, if you are already performing well, there is a clear reason to increase your investment. However, other organizations must correct their fundamental R&D management problems, or any increased spending will simply be wasted. In fact, it can even reduce performance.
Drenik: Not everyone is Apple or Tesla. Is innovation management equally important for every industry?
Thuriot-Aleman: In short, yes – but which companies should focus on cross-sector changes. You cannot expect the innovation processes in a food and beverage company to be identical to those in a heavy industry company, for example.
When we look at our data, we can see clear differences between sectors in terms of what is important and what has the biggest impact on innovation success. For example, process-driven industries such as automotive, electrical engineering, and food processing value project management for innovation the most, while chemical companies have a stronger focus on idea management. There are also similarities – for almost all industries, technology and market intelligence are highly valued.
Drenik: Finally, what advice do you have for CEOs when it comes to better managing innovation?
Thuriot-Aleman: Global economic conditions are currently turbulent, which can lead CEOs to focus their efforts and resources on short-term issues and de-prioritize innovation, especially when it comes to long-term breakthrough projects.
This is largely a false economy – which means it’s nice to see that the latest survey by Prosper Insights & Analytics found that 23% of corporate purchasing managers plan to invest in technology in the next six months. Supporting this, looking closely at innovation management and improving practices and structures can deliver real benefits while eliminating waste and duplication.
Our research shows that companies that proactively invest more in “riskier” innovation ventures have higher firm innovation success scores. This means that CEOs must seek to broaden the scope of R&D to look at breakthrough innovations, transform their business models, close the gap between business units’ innovation performance, adopt agile methods and ensure , that their leaders have the right skills. This will drive a combination of short-term benefits and position the company as a successful innovator in the long-term as well.
Drenik: Thanks Ben for your insights on innovation management – I think your data really highlights the importance of R&D and how companies can improve their performance to the benefit of themselves and society as a whole.
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