The Critical Difference Between Core And Strategic Innovation

Imagine two different companies, each funding the same innovation program. They are both looking for technology that demonstrates destructive potential in their industry, but it faces an uncertain path to market viability. Each company has invested millions of dollars in research and development upstream. Three years later, none of the firms made a breakthrough.

The directors of Company A, let’s call it Alpha Corporation, have seen enough. They stopped the program, making sure it was not effective enough and became a cream on the company’s balance sheet. They are curtailing and waiting for a convenient opportunity to re-participate. When and when the technology matures, they will buy one of the startups that managed to crack the code. The premium they pay in mergers and acquisitions has cost to reduce uncertainty.

The directors of Company B, let’s call it Beta Corporation, decided to double. They conclude that the potential of technology to destroy the industry is too powerful to ignore; they can’t afford not to invest. They are launching an innovation center dedicated to technology; they buy several well-known startups in the space; and they become active in promoting the “leap into the future” campaign. They view these efforts not as a dead end but as an admission price for the first participant’s advantage.

In the boardroom discussions and leadership, it is possible to gather sound evidence of arguments for any approach. Alpha leaders can refer to case after case of erroneous companies that throw good money after bad. The beta version can contrast with its own research companies that have aggressively invested and become dominant in their industries. Both can offer structural and economic analysis in support of their views.

They are both wrong.

Two types of innovation capital

Over the past few decades, there has been a trend to reduce innovation to investment, similar to any other aspect of the company. Either you make innovation as predictable as the plant, or you reinvest the money in another place where it can be more productive. Special cases may persist, but they become exceptions to the rules due to the intuition of the CEO or too much panic. From this perspective, any substantial innovation effort either provides value to the balance in a predictable schedule, or exists in an extended purgatory – its own special snowflake.

Before we get into the little things, let’s make a difference. There are two types of innovation with very different investment requirements: core innovation and strategic innovation.

The main innovation is that most companies are already doing well. This is sometimes called “progressive” innovation – although this is not entirely true, as some major innovations can change the situation in the immediate state of the company. All major innovations are united by the fact that they seek to expand or extend the value of current business.

Strategic innovation is a place where most companies tend to invest accidentally or not invest at all. You may hear this as a “breakthrough”, “subversive” or “transformational” innovation, although such labels are not always appropriate. The defining characteristic is that strategic innovation creates new growth options for the company’s future.

Over and over again, we have found that companies have not mastered what is needed for good strategic innovation. Instead, they applied enough clothing for major innovations to disguise themselves as something else.

This is a real shame because our study has shown that companies with well-developed strategic innovation practices consistently outperform their industry counterparts. Indeed, those in the top quintile of revenue growth (compared to counterparts) are twice as likely to have a dedicated technical intelligence team (62% vs. 32%) and twice as likely to fund new innovations through a dedicated Corporate Ventures team (41% vs. 22). %). While these are key components to the success of strategic innovation, so far only a few individual companies have learned to connect the dots.

Consistently, we have noticed that most corporate leaders in research and development and innovation instinctively understand the value of strategic innovation. But they cannot follow their instincts. They are stuck trying to prove the improper return on investment to the CEO and / or board.

Different expectations from different innovations

Let’s get back to Alpha and Beta corporations. How do we know they were both wrong? This is because they apply core business logic to make decisions about a strategic innovation program.

Key innovations are achievements that can help businesses win now– for example, expanding and improving the product, improving processes and improving internal systems. As a rule, at the very beginning of the main innovation effort the expectations are quite clear. You can measure the expected value using conventional methods – IRR, NPV, ROI. If the investment fails, it’s a simple decision to undo the effort and deploy operating capital elsewhere.

Strategic innovations are different. Measures like NPV, while useful in many areas of business, don’t make sense for strategic innovation because there are too many unknowns. If you try to impose conventional forward-looking measurements on strategic innovation programs, air managers will make promising assumptions and you won’t be able to trust the numbers. Instead, the investment thesis should focus on creating new growth options for the business.

As an example, consider the growth of electric vehicles (EVs) in the automotive industry. Ten years ago, the only car Tesla sold was a roadster. The notion that the world would move en masse to EV was considered bizarre. No self-respecting car company has made a major effort in next-generation battery technology or charging stations. We are moving forward to the present day, and everyone is trying to catch up – not only OEMs, but all companies in the automotive supply chain. Tesla’s score is superior to any other car company on earth.

It is important that your company should not be the next Tesla. Strategic innovations create new opportunities for growth, but they also protect against downside risks. If your corporate goal is to become a quick follower, then a strategic innovation program is crucial to building up your absorption capacity – ensuring you are ready to play the game when Tesla appears. Too many companies pay huge bonuses for high startups only to have acquired companies fade away after integration. Others start working on key R&D programs too late, catching up on unrealistic deadlines. When it comes to innovation, the ability to absorb greatly reduces the risk of costly and sometimes existential mistakes.

More generally, the mission of strategic innovation is to study destructive technologies or market trends until a company gains a sufficiently well-developed understanding of its potential applications (or lack thereof). Then, anytime ahead, you have the opportunity to invest more in expansion, development and launch – when and when commercial opportunities (or threats of competition) appear on the horizon.

You can even quantify the expected future value by your strategic rates on innovation. But instead of making a payback in terms of ROI and discounted cash flows, focus on analyzing the real options of the strategic portfolio. The bottom line is to develop a scenario-based view of the large-scale threats and opportunities lurking at medium distances. Investments serve the purpose of demystifying the most likely pathways to viability, which in the process serves to create (or exclude) strategic options for business.

This is what the best venture capitalists and entrepreneurs do – go into the unknown, keeping in mind the strategic thesis, and then work tirelessly to find out the playing field as effectively as possible. We have seen that leading companies such as Land O’Lakes have already started to follow their example. There’s no reason your company can’t do that either. But strategic innovation won’t stand a chance if you don’t allocate capital with proper expectations from the start.

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