Exploiting Ideas for Profitable Growth

For manufacturers today, innovation is the engine of growth.
Paradoxically, however, building or restructuring their operations to profitably bring new products and services to market is near the bottom of most manufacturers’ priorities.

Our research shows this to hold true in just about every industry we have analyzed—from consumer products, automotive, and chemicals, to pharmaceuticals and high tech. Yet, our data also suggest that overcoming this “innovation paradox” is crucial to survival and success in increasingly complex global markets.
Few of the nearly 650 companies from North America and Europe that we have studied have resolved the paradox.
However, those making inroads generated better business performance, with profit levels up to 73 percent higher than all other companies studied. These companies are resolving the paradox by synchronizing their global operations amidst massive complexities. We thus refer to these leaders as “complexity masters.”

Based on our research, we believe that nearly every manufacturer will have to master such complexity over the rest of the decade. The pressures to innovate are unrelenting.

Executives expect new product revenue as a share of total sales to hit 34 percent in 2007, up from just 21 percent in 1998. Over the next six years, products representing more than 70 percent of manufacturers’ sales today will be obsolete due to changing customer demands and competitive offerings. For companies in the fastest-moving industries like high tech and fashion goods, such obsolescence may take only a year or two. Without innovation, companies are doomed to decay.

But generating profitable innovation is far from easy. Many companies fail to effectively generate big new concepts and assess whether they are “sustaining” (improvements to existing lines) or “disruptive” (potentially cannibalizing, and thus needing to be nurtured as a whole new business). And, once a new concept is developed, the value chain that builds and brings it to market often cannot cope effectively with the dramatically increasing complexities of global markets. The reasons for this are many. Some manufacturers lack incisive information on customer needs, supplier capabilities, product profitability, and supply chain costs. Others are ineffective at collaborating internally and with customers and suppliers. Still others have difficulty matching supply with uncertain demand or are thwarted by inflexible, high-cost supply chains. Given the challenges for effectively managing the entire product lifecycle—from idea to launch to after-sales service—it is perhaps of little surprise that companies overall are reluctant to spend more on R&D. Executives forecast average R&D spending as a percentage of revenues to increase only slightly over the next three years, from 4.1 percent today to just 4.4 percent in 2007.

Based on our research on the success factors behind complexity masters and in-depth analysis of best practices, there are some very decisive steps that companies can take to generate profitable growth through innovation:

• Creating Innovation: Generating and evaluating ideas. Leading companies aim to better identify both “sustaining” and “disruptive” innovations, the latter of which are typically ignored by managers of established companies trying to protect their current products. They are superior at generating ideas or sourcing concepts from outside the organization, developing business cases upon which enlightened investment decisions can be made, understanding the gap between the performance of existing products that satisfy customer demands and proposed new offerings, and deciding on the best organizational model for putting the innovations into action.
  
• Exploiting Innovation: Turning ideas into growth and profits. Companies that successfully exploit innovation
  maximize profits throughout the entire lifecycle of a new product; essentially they look at it as a “profit cycle” rather than as a lifecycle. Most companies focus on the front end of the cycle—on creating a product that will make a big splash with customers. Good companies realize that this is only the first leg of a long race. They know the profitability of a new product can erode rapidly if its design cannot be updated quickly and cheaply, if it cannot be marketed and serviced cost-effectively, and if other “downstream” activities are not dealt with at the outset. The best at product innovation synchronize the entire value chain, not just the product development process.
  
• Building Innovation Capabilities. Behind the ability to create and exploit new ideas are four key capabilities that propel complexity masters to success:
  • Better visibility, both upstream and downstream in the value chain, through access to information on product profitability, production and distribution costs, and the ability to model future scenarios.
  • Flexibility in product designs and platforms that allow for quick modification of product offerings to meet market demands, and flexibility in the supply chain network toquickly shift manufacturing loads, production volumes,and product mixes.
  • More extensive collaboration with customers to define product requirements and with suppliers to design
    components and new materials. Complexity masters are also far more likely to have methodologies and processes in place for managing the lifecycle of their products.
  • Use of advanced technologies for product lifecycle management (PLM), product data management (PDM), customer relationship management (CRM), and advanced planning and scheduling (APS).
    

Such capabilities give these manufacturers an edge in creating, evaluating, and exploiting innovation throughout the entire lifecycle, from idea to launch to after-sales service.

Profitable growth through innovation may be difficult at best. But without innovation, companies will eventually languish and fail. As our research shows, however, companies with an in-depth understanding of the challenges, opportunities, and capabilities for building an “innovation machine” are rewarded handsomely with high profits, stronger growth, and more value for shareholders.