Digital transformation is booming. Boosted by a pandemic that upended many longstanding assumptions about both what could be digitized and would be accepted by customers and employees, investment in direct digital transformation has rocketed. According to the IDC, this will reach $6.3 trillion over the next two years, and in 2022 alone, more than half the global economy will be based on or influenced by digital.
But what is the state of business model innovation in corporate business today? The popular narrative dictates that start-ups and digital natives lead the way in this domain, with established businesses—burdened by legacy infrastructure, siloed businesses, and inefficient bureaucracy—left trailing in their wake. Can it be such a cut and dried story? The World’s Most Innovative Companies list suggests not, but while rankings like these tell us that innovation isn’t necessarily the preserve of new challengers and disruptors, they’re less revealing about where the winning strategies lie, and what is helping—or hindering—companies in their efforts.
We’ve been working with global organizations on their transformation agendas for more than nine decades, helping them turn strategic intent and investments into tangible and measurable outcomes. From this wealth of experience we see clearly that there’s still a sizeable gap when it comes to nailing the innovation agenda, which our recent Global Innovation Survey confirms.1 With the stakes higher than ever before, where are companies falling down, and what can they do about it? This report seeks to find the answers, providing a snapshot of the business-building landscape today.
1. Delivering returns on initial investments
While reports such as the Global Innovation Index 2021 confirmed that innovative sectors of the economy remained strong during the pandemic, there’s a nagging concern that technology is evolving faster than our ability to adapt to it. We’re still plagued by headlines that talk about how many of these initiatives fail; our own findings indicate that around 80 percent of technology investment doesn’t deliver its full potential, and more than two-thirds (68 percent) of the companies that experienced growth during the past 18 months derived just 5 to 15 percent of their annual revenues from innovation-driven initiatives.
2.Lack of focus defining the specific problem to solve
This lack of focus on returns and value creation can be easily identified within organizations. Again and again, we see insufficient governance, ownership, and buy-in to create an innovation agenda with real impact. And while there is ample evidence of experimentation with various innovation models, the long-term commitment to making them work is much more elusive. “Once bitten, twice shy” is the overwhelming narrative, meaning too many organizations are missing out because of previous subpar forays into new territory, or because the long tail of “get rights” means it’s impossible to prioritize activity or apply a measure of consistency across the organization. Real rigor is required to avoid these misfires.
3. Going it alone
Linked to the last point, the majority of organizations have yet to figure out exactly how to capitalize on the opportunities to build and scale that third-party partnerships offer. Although collaborations with start-ups, accelerators, and venture capital investors each account for more than 20 percent of commercial innovation activity, the innovation ecosystem remains a relatively white space, and guidance to navigate it effectively is needed. For example, one in three of our survey respondents said they have “no reason” for not working with an external innovation partner, again revealing the extent to which innovation potential remains untapped.
4. Short-term planning, long-term ambitions
Expectations of organizations’ current innovation strategies are high. Although more than three-quarters (77 percent) of businesses are committing to activity over a six-month to two-year time frame, increasing the likelihood of changes in direction, 55 percent believe this will lead to long-term growth. Additionally, despite firms not yet seeing the full impact of their innovation efforts on revenues, and the unpalatable fact that so many tech initiatives are unsuccessful, 90 percent of executives are confident that their organizations’ innovation agendas will succeed commercially (see figure 1). These findings don’t quite stack up: without having a firm plan to bridge the gap between expectations and reality, the optimistic view seems misplaced at best.
The state of innovation: 2022
Innovation leads the charge on future growth
Innovation clearly matters when it comes to business building: almost all (97 percent) of our survey respondents said that it is part of their organization’s growth strategy for the next three to five years, with 61 percent naming it the key contributor in this respect.
Large organizations were more likely to say that innovation was the most important factor in their plans for growth: 78 percent of those with $75+ billion in annual revenues stated this vs. 59 percent of those in the $500 million to $1 billion category. Walmart, Unilever, and Saudi Aramco are just a few of the biggest names investing heavily in innovative new technologies to take their businesses forward.
However, the picture changes in small-cap companies, where four in 10 executives do not view innovation as a core growth contributor, probably due to a compulsory focus on execution, coupled with tighter constraints on budget and other resources. This could place smaller companies at risk of falling behind. Conversely, those that bite the bullet and fully embrace innovation will have a prime opportunity to leapfrog their peers and get ahead of the game.
The purpose of the innovation strategy is broadly split between moving into new areas and markets to drive new revenue streams and improving the existing setup (see figure 2). Fifty-two percent of firms are using innovation approaches to develop new products and services, with 45 percent driving a technological step-change, 44 percent developing new business models, and 43 percent building new businesses, compared to 51 percent improving existing products and services, and 50 percent enhancing internal processes and operations.
Traditional innovation models are not delivering on their promised potential
We investigated the types of innovation being pursued now, and how much commercial activity can be attributed to each approach. Overall, internal research and development (R&D) and external partnerships with start-ups and other companies show strongly across both categories, with academic partnerships and merger and acquisition (M&A) activity also popular, resulting in a healthy percentage of commercial innovation activity.
However, there is a disparity between the types of innovation that are currently pursued least (direct engagement with start-ups, participation in accelerator programs, and venture investing), which were each indicated by fewer than 1 percent of our survey group, and the potential impact they can have, each being responsible for more than 20 percent of commercialized innovation where they are already in use.
Our research also reveals that even tried and tested approaches are not adopted consistently. Although there are high levels of experimentation with various innovation models, around a third of these have been tried but are no longer in use, indicating that many firms are struggling to find the right fit, and tend to move on if their fingers have been burned (see figure 3).
As a result, we see a high level of mistrust in the ability to deliver on the innovation agenda, particularly where third-party partnerships are concerned.
“We are pretty skeptical whether this kind of cooperation can bring enough benefits to the company.”
Current engagement with start-ups, accelerators, and corporate venturing setups is patchy
The benefits of using external collaborations and partnerships to drive growth are well established: they give organizations the ability to add new experience and perspectives to the issues they want to solve, and promote the conditions that foster idea generation and game-changing solutions. Forty-three percent of our survey respondents agreed that the combination of internal teams and external partners is the best environment for successful innovation (see figure 4). Added to this, the 57 percent that reported having worked with an external accelerator as part of their start-up engagement agenda were 1.6 times more likely to feel highly confident in the commercial success of their innovation efforts than those that had not.
As we’ve already established, however, forming successful collaborations doesn’t necessarily come easily, and organizations face various challenges in making them work. Roughly a third have found issues in determining the right model to pursue as a starting point, identifying potential partners, and—once found—establishing commercial agreements and protocols with them.
A similar percentage struggle with how to embed their new external partners within their business, and to evaluate the true value they add. Finally, between 25 and 30 percent said that aligning ambitions between the two organizations could be problematic, and cited problems with IP, including lack of access to IP rights, and trust issues around rights management.
Almost one in three organizations have “no reason” for going it alone
We were also interested in the reasons why organizations had chosen not to work with an external accelerator to date.
Twenty-nine percent of respondents said that there was no reason for this, or that they didn’t know why, while 26 percent said there was no need to partner with a third party because they already had an internal solution, didn’t need an accelerator function, hadn’t considered or developed the idea, or that there was no interest/it wasn’t a priority for their business.
Nineteen percent did not find the accelerator model appealing. Reasons given included accelerators being unable to meet the organization’s needs, not being flexible enough, not fitting the business, being unable to find a suitable partner match, and integration issues.
More concerningly, around a quarter of these responses mentioned potential impact on business operations, IP, security and risk, and overall control, suggesting that the idea of open collaboration—a prerequisite for effective partnering—is not only a barrier to the innovation agenda, but one that organizations are not interested in overcoming.
For the remainder, skepticism in accelerators’ ability to deliver, lack of trust in this type of support (“Seems like a scam”), collaboration difficulties such as information sharing and internal issues including cost, insufficient capital, and lack of knowledge, time, capacity, or resources have stopped them from going down this route.
All things considered, what we have found is an innovation landscape that has expectations of long-term success, but is characterized by inconsistency, false starts, and lack of monetary return. What is needed if organizations are to turn the corner and see sustainable improvement is an approach that is built on rigor and focus.
“There is no particular reason we are not considering this. It just never happened.”
“Our company’s line of business makes it hard to work with an external accelerator.”
Building an innovation agenda with rigor
For two years or more, leaders have been overwhelmed by the need to make bold decisions across many fronts just to ensure their organizations’ survival. Many were forced by the pandemic to re-engineer their products and services, delivery channels, and ways of interacting with customers. But with few seeing a big impact from their innovation agenda where it matters most—on annual revenues—and further disruption a given, the choices they make now are crucial.
In our view, compromise has always been the enemy of the ability to make real impact. Instead, we’ve found that succeeding with innovation requires strong governance and more of an investor mindset, one that is absolutely focused on returns and moves at pace to make smarter investments linked with specific business outcomes, killing off underperforming assets along the way.
Our Innovation Value Creation Model provides the structure to build this way of thinking by interrogating and finding answers to questions around the future vision and goals, what the portfolio of desired assets and capabilities looks like, which model/s are best aligned to deliver on those goals, and how to organize for execution (see figure 5).
It’s worth adding at this point that external partnerships are obviously not the only route to launching a new product or service. As outlined in a Afsuham article about strategic alliances, there are essentially five options here, depending on how far removed the new endeavor is from the business’s core strengths: build, lease, buy, venture, and partner. We carry out a thorough assessment based on organizations’ specific goals to find and select the right vehicle/s (see figure 6).
It could be the case for many that new innovation models are required, such as the venture client approach, in which the company buys the start-up product, instead of acquiring an equity stake in it. Now gaining in popularity, these have yet to definitively prove their return potential, but if done properly we believe they present a vast opportunity to drive growth.
Where to from here?
Big questions for innovation leaders
From our perspective, there are several key questions for organizations now, the answers to which must form part of their innovation strategy:
1.Realizing potential
As competition continues to ramp up, and with more challenges forecast on the horizon, is deriving 5 to 15 percent of your revenues from innovation activity enough? What information and tools do you need at your disposal to build a comprehensive investment case for innovation that addresses key considerations around market risks, the required infrastructure setup, and—a core predicament for so many organizations—finding and securing the right talent to deliver on your ambitions?
2.Gaining focus and commitment
Which innovation model is best aligned to help you achieve your ambition? Is your innovation strategy financially or strategically motivated? How do you define success and measure it? And how do you balance competing priorities in the organization, including the perennial trade-off between legacy assets and new sources of innovation?
3.Embracing external expertise
What would it take for you and your leadership colleagues to embrace more open collaboration and risk, and reap the rewards of working with external innovation partners? For example, do you have a culture in which the ability to experiment—and fail—is a valued component of the innovation agenda? What help might you need to add rigor and focus to your innovation agenda? How can a culture of innovation enhance your talent value proposition, both in terms of attraction and retention?
4.Matching optimism with delivery
What evidence do you have that your level of confidence in the organization’s innovation agenda accurately reflects its ability to deliver results? For example, is a short-term plan enough to secure long-term growth? And is organic innovation enough in itself to help you achieve your ambition?
Make innovation the driver, not the enabler, to create real value
Through our work with corporate leaders across the globe we are helping to address the major challenges identified through our Global Innovation Survey to support the transition from ambition to action and drive value creation, revenue growth, enhanced capabilities, and an attractive employee value proposition.
To do this, AFSUHAM adopts an investor-focused approach to help companies pin their strategic innovation investment to tangible and measurable business outcomes. We collaborate with clients to build robust risk-weighted investment cases, leverage ecosystem partners and advisors to scan the markets and set the foundations for successful start-up selection and integration, establish a clear governance model to enable bold decision-making, set up agile pilot programs tracked against clear KPIs, and support asset scaling and seamless integration into the core of the organization. As the business builder arm of Afsuham, AFSUHAM taps into 90+ years of hands-on experience and cross-industry best practice working with global organizations on their transformation agendas.
With deep technology expertise, a proven process leveraging experts for venturing and change, a sharp focus on the numbers, and a clear set of rules, we guide corporate leaders every step of the way to transform problems into solutions and to develop the assets needed to set them up for long-term success. Our approach is very clear.
1.Nail it down:
Approach every asset with a founder’s energy but an investor’s mindset. Identify specific business problems to solve for, the value you can generate, and define the measures to get from A to B.
2.Partner with the right people:
Scout external partners working on solutions that address those needs precisely. Ensure clear processes are in place to onboard them to your corporate environment and reduce time to market.
3.Mobilize:
Incentivize business functions to work collaboratively with your start-ups, and ensure commercial value generated is beneficial for all parties to drive forward your co-creation efforts.
4.Run iterative pilot processes:
Push innovator teams to work at the highest pace adapting, customizing, and optimizing solutions to solve real business problems. Empower your teams to take bold decisions and accept failure—this sometimes means learning and starting over again.
5.Integrate to activate:
Implant the solution, or even better activate processes and interfaces for the solution to be delivered smoothly within your organization. Communicate successes to encourage others to be a part of the venture.
6.Appreciate:
Value people, encourage participation, and enjoy the journey—there is no dream without the team.
Every growth strategy, and innovation agenda therein, will of course be different, depending on myriad factors including ambition, objectives, time line, investment appetite and risk profile, resources, returns, and so on. Now is not the time for corporations to rest on their laurels where innovation is concerned, but to fix their focus on the end goal, and move faster to go further than ever before. In a year that looks set to be a rocky one for business, getting it right will be the difference between sink and swim for many firms. Is “no reason” really reason enough to keep going solo, and stay in the more comfortable lane?
Introducing Afsuham’s Business Builder
Having supported global organizations across industries on their innovation and digital transformation journeys, we have first-hand experience of what it takes to succeed, supporting industry leaders to find their focus, and take their organizations forward.
Now, we’re fast-tracking breakthroughs by addressing the key challenges associated with establishing venture client units, scaling assets, and delivering tangible business outcomes in a bid to drive sustainable long-term growth. Our investor-focused approach helps companies pin their strategic innovation investment to tangible and measurable business outcomes.
With the start and end point mapped out, we work alongside leaders to chart the journey together, then co-create to bring it to life. This includes building robust risk-weighted investment cases; tapping into ecosystem partners and advisors to scan markets and set the foundations for successful start-up selection and integration; establishing clear governance models to enable bold decision-making; setting up agile pilot programs tracked against clear KPIs; and supporting asset scaling and seamless integration into the core of the organization.
Whether you’re considering which is the right innovation model for you, seeking partners that can help you turn your vision into reality, finding investment, or looking to pull everything together, we’ve got what you need.
1 We surveyed 750 C-suite executives and directors with ownership of the innovation agenda in organizations across industries in 15 countries spanning North America, Europe, the Middle East, and Asia Pacific. Fifty-nine percent of respondents represented firms with annual revenues between $500 million and $10 billion, with 18 percent from those bringing in $10 to $50 billion, and the remainder sitting in the $50 billion-plus category.