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2023: How does the year ahead impact your innovation strategy?
A new year typically brings new resolutions, new opportunities, and - for many businesses, start-ups, or enterprises - new innovations.
Yet how do we plan for the new when many organisations still feel the hangover from the challenges of the past year or even years?
2022, 2021, 2020? When was the last time your business felt on solid ground?
2023 looks no more certain. For the first time in its history, Salesforce said it would not provide financial guidance for the year.
It was, in their words, simply too unpredictable.
So how do businesses plan for and execute innovations when the social and economic landscape lacks clarity? Simply holding onto the old can feel like an achievement - never mind evolving something new.
We're thinking differently. We have to. If economic uncertainty discourages innovation activities, it reduces the rate of technological progress - damaging your business' botto
m line, its survival, and humanity's broader mission to live with more equity and more compassion.
If 96% of innovations fail even in 'typical' years, what can we do to shore up resilience to not just survive but to excel in the face of the unknown?
Dive into the details here: why you should not only be pushing ahead with innovations but why you must - and how to do it well.
What we know about 2023
We know at least some of the challenges ahead. There's a 98% chance of a global recession and the new paradigm of the war in Ukraine, higher energy prices, inflation and supply chain sluggishness across most regions.
The result: rises in costs, rises in prices.
The ONS in the UK reported in early December 2022 that 3 in 10 trading businesses said they expected to put their prices up for January 2023.
The reasons they cited are of little surprise:
39% energy costs
29% the price of raw materials
26% labour costs
According to a new study by Forbes, 87% of manufacturing CEOs said they planned to increase prices in 2023; in the UK, McDonald's raised the price of its cheeseburgers for the first time in 14 years.
And the increments are eye-watering. Nearly half of those 150 manufacturing CEOs polled by Forbes said they had already begun to raise prices to consumers by as much as 20%.
As James Quincey, CEO of Coca-Cola stated in May 2022: "Trying to catch up on pricing in a recessionary environment is very hard. And so we have a bias to action."
Inflation vs. Innovation
According to the world's sixth richest man, investor Warren Buffet: "Inflation is a far more devastating tax than anything that has been enacted by our legislatures. The inflation tax has a fantastic ability to simply consume capital."
Corporations' capital intended for investment is quickly eaten up by, as he called it, the 'tapeworm of inflation'.
What, then, are the risks of inflation to your innovation business, project, or strategy?
Risks in companies with an innovation portfolio…
From where do you draw your innovation budget?
In a report funded by KPMG, nearly 70% of companies admitted that innovation budgets were drawn from the annual budget rather than having a discrete process and, therefore, a source for funding innovation projects. Around 30% said that innovation budgeting has its own process.
This leaves innovation projects or even innovation departments potentially vulnerable to cost-cutting in any emergency budgeting/ budget review with the objective of reducing capital spending.
More, moving forward into gloomier economic periods, the impact on specific investments in R&D and, hence, in innovation can be severe in many companies.
Studies in the last decade have shown that an increase of 1% in inflation contributes to reducing the intensity of investments in R&D by approximately 0.374%.
Risks for start-ups / new companies
For those seeking capital to grow their businesses, the same study presented a perhaps predictable picture: the economy's instability, added to by inflation, can considerably influence how eager investors are to make those investments.
The uncertainty associated with changes in relative prices and, consequently, in the costs of inputs directly impacts the realisation - and returns - of investments.
Everyone from VC's to angel investors are more likely to hold fire on decisions until greater economic stability for the execution of innovation projects returns.
Is capital spending on new investments or innovations in such an environment a foolhardy move?
According to the Harvard Business Review: not necessarily.
Offence or Defence?
Despite the compulsion to hunker down and wait for the storm to pass, there's evidence that a more offensive approach can add momentum to your organisation's growth during challenging economic times.
The Harvard Business Review's groundbreaking study (following the 2007 financial crisis) showed that of the 4,700 public companies surveyed, those that played 'defence', a staggering 80% had not regained their pre-recession growth rates for sales and profits… three years after a recession.
"Firms that cut costs faster and deeper than rivals don't necessarily flourish. They have the lowest probability—21%—of pulling ahead of the competition when times get better, according to our study." The Harvard Business Review.
The study showed that only 9% of the companies surveyed were doing better after the slowdown.
So, what is the play?
It's both: offence and defence. They found that companies that can be 'ambidextrous' and play both tactics did better post-recession.
But within this group, a 'progressive' splinter group of companies did better, earning them the highest probability—37%—of 'breaking away from the pack'.
And their move?
A perfect balance of laser-sharp focus on operational efficiency to reduce costs faster than their rivals while investing comprehensively in the future: spending on marketing, new assets… and R&D.
Post-recession, those companies who played defence only still feel its impact.
For them, growth, on average, of only 6% in sales and 4% in profits
For the ambidextrous: 13% and 12%
The message is clear: while one hand is improving operational efficiency, the other is investing.
This is the antidote to recession and inflation.
2023 spending: where and how much
Firms are still spending.
This year, Gartner expects tech spending to rise by 6.8%, fuelled by the need for software innovation and hardware developments to increase everything from operational efficiency to the customer experience
According to The Economist, automation will accelerate for similar reasons
Cloud computing will grow, supporting remote work and companies' desire to collect and crunch data. Spending on cloud services offered by tech giants such as Amazon and Microsoft will hit about $600bn, Gartner projects
So, where does this leave your innovation budget? How much do you invest in R&D to evolve your business and innovate to continue its growth?
Firstly, you need a strategy for innovation and robust processes to assess each innovation's progress - with a healthy methodology to decide whether to continue or kill ideas as they evolve.
Secondly, not all innovations are equal. And getting the ratio between types of innovation - or at least the impact they could have on your business - is vital.
Investing in innovation
In their 2012 research for the Harvard Business Review, co-authors and Deloitte partners, Nagji and Tuff defined three types of innovation within an innovation portfolio:
Core: those providing small or incremental changes to develop existing products and services to existing customers
Adjacent: those to expand offerings and attract new customers
Transformational: those to explore completely new markets with new inventions
They noted that the highest performing companies invested in 'three levels of ambition' to improve current performance and bring the future forward - creating and developing breakthroughs for markets that don't yet exist.
And the ratio was: 70 - 20 - 10.
In 2018, research by Innovation Leader and KPMG drilled into the allocation of spending again, and also by type of company. Six years later and the average had changed: 49-28-23.
But in what you could arguably call 'areas of innovation' - or at least industries that forge new products and even markets - like aerospace, tech, and pharmaceuticals, the ratio of their portfolio mix changes again. Comparatively, they spend more on adjacent and transformational innovations.
The study found the aerospace industries spent almost as much on transformational as on core innovation: 35% and 36%, respectively.
The learning?
Align your investment in innovation with your sector and your growth strategy.
One final finding from the study: who innovates in an organisation?
Core innovations - primarily executed by business units largely
Transformational innovations - are performed mainly by dedicated innovation departments.
We've spoken before about the importance of a culture of innovation - and this research bears it out. A culture of creativity, and acceptance of risk - and failure - across each facet of a business is the way to see innovations thrive and succeed.
And, back to funding: whilst the HBR suggest funding for core and adjacent innovations should come from a business unit's annual budget cycles, they posit that a completely different funding structure for transformational innovation.
They advocate for large-scale innovation and R&D to be funded separately from the regular P&Ls of the business: 'above the fray' of annual budget allocation.
Bold investment for bigger innovation.
Inventive Innovation
A study by Accenture found that 62% of high-growth companies plan to invest more in innovative technologies in 2023, compared to 54% of other companies.
High-growth companies understand the importance of innovation in remaining competitive - reframing the market rather than just reacting to it.
While core innovations present a lower risk, they also deliver a lower ROI. That same Harvard Business Review reveals directly inverse returns on the investment ratio: transformational innovations take only 10% of the R&D budget - if successful they generate 70% of your innovation ROI.
As the HBR put it: "Transformational initiatives are the engines of blockbuster growth."
The danger is to play it too safe - or lack ambition - to try for these big wins and see the slow decline in your business' growth and offers' relevance. Cross-sector casualties of a failure to innovate include global brands and household names: Nokia, Blackberry, Blockbuster and Xerox.
The caveats, of course, to where you invest and how much, are what industry you're in, where your company sits within it - and how young or mature your company is.
But to explore the possibilities of transformational innovation to deliver for business, you're probably going to have to think differently to others: finding not only new THINGS to innovate, but new WAYS to innovate.
Creating new products is only one way to innovate. According to leading players in the field of innovation, Doblin, it provides the lowest return on investment and the least competitive advantage.
In fact, in their continuum of innovation opportunities, product or service innovation comprises only 20%.
They state, "The most certain way to fail is to focus only on products. Successful innovators use many types of innovation."
If you're seeking new areas to create a market shock, breakthrough, or revolution, a step back from traditional thinking about innovation might support your goals.
Doblin notes that innovation can also exist in your organisation's 'configuration' and the 'experience' it offers. A company's structure can be as innovative as tweaks or evolutions to its core product.
Can you innovate in the alignment of your talent and assets? Samsung did.
To innovate on design, they focused on the talent to deliver this. They relocated their design centre from a small town to the capital, Seoul, to harness the talent of new young designers who lived there. In doing so, they found the talent and transformed. In the first quarter of 2012, Samsung Electronics became the world's largest mobile phone maker by unit sales, surpassing Nokia, which had held the position since 1998 and would soon be obsolete.
But, it's by harnessing a suite of strategies - across a framework of Doblin's suggested 'Ten Types of Innovation' - that your innovations make it to market and you sustain growth.
Samsung, unlike Nokia, paid attention to the importance of product innovation and sustaining brand relevance in an aggressive tech market. Today, the company has over 50,000 people working in R&D globally, spread across 42 global research facilities, including R&D centres and design centres.
The company invests at least 9% of its sales revenue into R&D activities.
Experience Innovation
What makes your customers go, 'Wow!' is unlikely to be your app's next update.
If more than two-thirds of companies now compete primarily based on customer experience, can you explore avenues to elevate the experience your customers have with your brand? What about the community you can create around it? Or the support and service you offer to your customers?
We understand that, especially in innovation sectors, the focus is often on the new idea, service or product - especially if it's upending the status quo.
And that's why Wildtribe exists.
We innovate innovators' marketing ecosystems: we use non-traditional methods to speak on a human level to the people whose lives and businesses could be changed by the products and services our clients deliver.
The way we communicate our innovators' often complex message to the world and create communities who are engaged by it and compelled to interact with them is, in itself, a form of innovation.
If you're interested in how we could be one of the building blocks for your innovation, book a discovery call: we work with clients in aerospace, SaaS, aviation, and AI sectors.
Wildtribe: we innovate for the innovators. Resolve to make 2023 power-up your innovation’s success. Let’s chat about how.
