The 6 Paths To Innovation Every CFO Needs To Know
Recently, I was talking to the Head of Innovation at one of the world’s largest companies, who told me that in the first two years of their corporate accelerator, they just bled money. None of the ideas being developed in their accelerator brought any commercial success for 24 months.
But now, several years later, this accelerator has contributed over $400 million to the company’s revenues. Was it just a matter of time or something else, I asked?
His answer: “we changed the way we thought about innovation, and that’s when we started to get results.”
My company, supported by researchers from the University of Chicago, authored a research report into how the world’s largest companies approach innovation. We spoke to innovation and strategy leaders on conditions of anonymity, to find out what really happens behind corporate closed doors.
What we found is that when companies approach innovation as a binary endeavour: win big or fail, then those efforts are unlikely to pay off. But, when companies see that innovation is not only confined to the breakthrough moon shots of companies like Moderna, they get significant results.
Since it is usually the CFO who signs off on the innovation budget, the more the financial officer understands the topic, the better.
As Clayton Christensen pointed out in the Innovators Dilemma, companies need to balance the need between getting things done today and looking towards the future. This is the quintessential creative tension between the innovation department and the finance department.
But how do you balance the risk of innovation with the need to predict cashflows?
While there are no easy answers, understanding the 6 paths to innovation is a good place to start.
First, let us begin with how we define innovation. Innovation is the creation of new value pools
This is both vague and specific. It must be something new, but what the new-ness is, is open to debate. For example, you could take an existing product and open new value pools by selling it to a new market. You could continue selling the same product to the same market, but change the way it is made.
If we widen our view of what innovation is and how it helps company performance, we will make better decisions about funding new projects and their associated risks. This piece by Albrecht Enders, describes innovation in terms of the Value/Cost Ratio, Innovating Your CFO Activities.
6 Paths to innovation
1 PRIVATE INNOVATION
Private Innovation is part of the Research & Development process and its secrets do not leave the company’s walls.
What value pool is private innovation creating?
The aim is market creation. We didn’t know we wanted iPads until Steve Jobs told us. Private Innovation efforts strive to make something completely new and unique. Therefore, it has to be kept under wraps.
If it works, you win big. You create a market and dominate it, the way Amazon did when it launched Amazon Web Services
2 PUBLIC INNOVATION
Public Innovation is when being seen to be innovative is as at least as important as actually being innovative.
What value pool is public innovation creating?
Marketing nous is embedded into public innovation. In other words, it is being done so customers see the company as innovative. This can open new markets or deepen relationships with existing customers.
For example, to grow Burberry plc needed to attract millennial customers and move away from its formerly unappealing mix of fusty countryside raincoat image and downmarket ubiquity.
For this, they had a radical brand change and invested in digital store experiences and online presence. In 2006, the company began its digital transformation with investments in technology. Burberry was one of the first luxury brands to join Facebook in 2009 and expanded its presence on other social media platforms.
As new customers flocked to the stores, investors rewarded Burberry’s public innovation efforts with an increasing stock price.
3 INCREMENTAL INNOVATION
Incremental innovation answers the question “what can we do to make process X cheaper, faster, easier?”
What value pool is incremental innovation creating?
Incremental innovation is about deepening existing value pools, rather than creating new ones. How can you sell more to the same customer? Or, how can you make it cheaper to deliver you service, while keeping quality high?
Implementing new technologies could be one answer. But it could also be as simple as training sales teams to do an upsell: would you like some protein powder in your shake?
4 BREAKTHROUGH INNOVATION
Breakthrough Innovation says that we need to do something completely different.
What value pool is breakthrough innovation creating?
This type of innovation focuses on entering completely new markets, and thus exponential revenue growth and business transformation. A good example is Netflix moving from delivering DVDs to streaming, and then to content creation.
While we all admire Netflix as an innovator today, the early days of breakthrough innovation are inevitably far from glossy.
Speaking on the Harvard Business Review podcast, Noubar Afeyan, founder of Moderna said:
“In the history of major breakthrough innovations, and mRNA is no exception, if you look at what actually became valuable, and you trace backwards to its roots, what you quickly find is that the ancestors of great, beautiful ideas are really ugly things.”
5 PRODUCT INNOVATION
Product Innovation answers the question: how can we get our customers the things they want today and will want tomorrow?
What value pool is product innovation creating?
Product innovation increases revenue by creating new products for changing customer needs and tastes.
The aim is to sell new things to existing customers, because they won’t want your existing product anymore.
FMCG and Consumer Packaged Goods companies like Nestle are now heavily focussed on product innovations to keep up with the environmentally conscious and increasingly vegan consumer.
6 PROCESS INNOVATION
Process Innovation is usually focussed on reducing cost, while most other innovations focus on increasing revenue.
Process innovation answers the question: it takes us too long/ it costs too much to do X. How can we change that?
What value pool is process innovation creating?
Good process innovation is often invisible to the customer and is instead focussed on the delivery process. For your handbook to process innovation use A Guide to Financial Process Redesign
For example, Ant Financial serves more than 10 times as many customers as the largest U.S. banks with less than one tenth the number of employees. This wide reach and low cost are possible because Ant Financial uses data and AI from its core mobile payments platform, Alipay.
Increasingly, firms are embedding AI into their operating models:
“The business model defines the theory and the operational model captures the practice. While the business model points to the potential of the firm, the operating model is the actual enabler of firm value and its ultimate constraint.”, say Harvard Business School professors Marco Iansiti and Karim R. Lakhani in their book Competing in the age of AI.
To learn more:
- Download the research report abstract: The Pragmatist’s Guide To Innovation https://www.techfornontechies.co/innovation-guide
- Listen to the Tech for Non-Techies podcast on: How To Commercialise Innovation https://www.techfornontechies.co/blog/how-to-commercialise-innovation
About the author:
Sophia Matveeva is the CEO & Founder of Tech for Non-Techies, a learning organisation & consultancy. Tech for Non-Techies helps corporates upskill their teams for digital transformation and teaches non-technical professionals how to succeed in the innovation age.
Tech for Non-Techies classes have been taught at The University of Chicago, The University of Oxford, The University of Texas, as well as at the world’s leading corporates.
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