The Financial Implications of the Innovation Gap
There is overwhelming executive support for innovation in most corporations, with 80% of the top 500 companies listing "Innovation" as one of the top three priorities in 2002 / 2003 (Source: Bain & Co Innovation Study, HBR Oct 2002). However, the most pressing problem for corporate innovators is not convincing management of the importance of innovation, but the need to do something about it.
Studies by Imaginatik Research have found that the goal of the majority of corporate innovators is to be allowed to do what they think is right for their organization. The ability to act though requires resources and investment, and in order to get the appropriate level of investment, innovators must present a compelling business case to key decision makers.
Currently many organizations are stuck in a rut with minimal resources, scant budget, and they are forced to implement wide-scale innovation-related change with the equivalent of 'a man and a dog'.
And yet innovation is as important as quality, safety, cost reduction and any number of corporate activities that are 'blessed' with attention and resources. In many cases, innovation is the future of the firm, and at least in theory should take precedence over some other activities.
The key to gaining top level support is all about numbers. Prove that innovation does have an impact on the revenue and profitability of the firm, and then you can show how you can help.
Our research, in partnership with leading business schools in the US and Europe, has led to the development of a methodology called the Innovation Gap which helps assess the financial impact of innovation on a firm.
The method is based on three key concepts:
1) Impact of Innovation (IOI)
- What proportion of current and future revenues and profitability are dependent on the organization's ability to handle new things (products, processes, market conditions, etc).
2) Innovation Capacity
- How much innovation can your company handle with current resources, mind set, and skills, and what would the capacity be to hit the required IOI target.
3) Innovation Gap
- The difference between your current Innovation Capacity and the target IOI.
The methodology for calculating the IOI considers various factors such as target rate of growth, and the financial impact of disruptive change. The IOI is expressed as a percentage of current and future revenues. For example, Mott's Inc., a subsidiary of Cadbury Schweppes, estimate their IOI to be 16% ($140m based on 2002 revenue of $900m).
In terms of Innovation Capacity, all organizations have some innate capabilities to innovate and change the way things are done. Some firms, such as Intel, have a very high capacity, developed through management support, culture, and business practices. Other firms, who can remain nameless, approach change as though they were a truck heading for a brick wall. The range of Innovation Capacity we have found reaches as high as 85%, and as low as 10%.
Based on the IOI, it is then possible to calculate the Innovation Gap. A $1bn company with a 10% IOI ($100m) and a 40% current Innovation Capacity ($40m) has an Innovation Gap of $60m.
The final step is to work out an appropriate level of resources that should be dedicated to closing this gap. If this $60m was a new revenue opportunity, how much budget should you invest? It might not be 10% of the total, but it is certainly more than 1%.
This methodology has been used by several organizations with excellent results. The Innovation Gap may have been higher than expected, but the method convinced management to treat innovation as a core business area, not a nice-to-have side project.
Imaginatik Research worked with Baseline Magazine to develop a simple spreadsheet calculation for the Innovation Gap, available here.
If you have any ideas, feedback, or concepts you would like to share, please e-mail research@imaginatik.com.
Reference: The Financial Implications of the Innovation Gap - RN-0103-1