Innovation drives growth (but requires more than just burning money)
Nearly three out of four executives agree that the changes brought about by COVID-19 will present a big opportunity for growth. But only 21% have the expertise, resources, and commitment to successfully pursue that growth. As I read those numbers in a McKinsey report, one thing immediately crossed my mind: businesses need innovation to drive growth, and large businesses can only drive innovation by building some startup muscle.
According to the McKinsey report, 90% of executives believe that COVID-19 will fundamentally change the way they do business over the next five years. At the same time, the COVID-19 crisis is just one of many challenges businesses face today.
Large companies, especially, feel the threat of up-and-coming startups and scaleups breathing down their necks. As a result, profit margins decrease. These large companies understand that innovation can help them to reclaim lost market share. However, those innovations usually don’t last long, nor do they result in the desired outcome. The reason for this is, of course, because innovation is more than just having the guts to burn money.
Innovation is like a child growing up
I often compare the relationship between a business and innovation to that between a parent and child. Innovation starts small, like an embryo in the mother’s womb. It takes time and energy for the baby to develop. And after it’s born, it takes even more time and energy to raise the child. But as we all know, raising a child brings joy and happiness, as well as challenges, pains, and problems.
As an innovation project evolves – just like a kid growing up – rules will be broken and problems will arise. And no, the project probably won’t create any tangible value for the company for quite a while. But then again, imagine a “perfect” child who would always follow its parents’ rules. Would it ever become a strong, independent individual?
4 success factors for innovation
Success requires hard work. I believe you need four elements for innovation to succeed:
1) Use stepping stones, keep testing
Starting small and testing each and every step of the way is key. Measure and invest time in understanding what works and what doesn’t. Sometimes you have to break stuff that works just to understand its essence.
2) Have the guts to burn money
Be aware that the innovations you work on will have a negative impact on your P&L for a couple of years. C-level executives need to prepare the board and convince it of the need for a multi-year program. With a squeezed P&L, this can be hard to achieve, but it’s the only way to get to the other side.
3) Understand that innovation takes longer than corporates would like
I came to understand this while listening to a podcast with Jeff Bezos. With an average project, return on investment is expected to come within a year or two. But innovation takes longer. Even though a revenue stream can be created within this time frame, for it to become profitable usually takes longer because you need to keep investing for longer as well.
4) Understand that you need a different business model (or maybe even a different entity)
Just as the business model might be different, so too might its culture. In addition, there might be legal elements you want to protect. That’s why I’m a strong believer in creating subsidiaries to “house” innovations. This will decrease the pressure on the parent company and also decouple the processes of the corporate entity and the startup, resulting in a freer environment where saplings can flourish.
A couple of years ago, Jeff Bezos wrote to the Amazon shareholders: ‘Experiment patiently, accept failure, protect saplings, and double down when you see customer delight.’ That’s exactly what you need to keep in mind when you’re innovating.