The Pressure to Innovate (in 2003)

Update: This paper was written in Feb 2003. It is gratifying to read that these pressures, identified way back when, are still playing out, albeit it to varying degrees. Over time organizations experience many pressues - and the only true solution is to ensure that companies are prepared with strong leaders, a supportive innovation climate, and good, flexible innovation processes.

There is continual pressure on companies to innovate, whether it be responding to competitive threats, finding ways to improve margins, or developing a pipeline of new products and services. Every year, though, brings its own challenges. In 1999 and 2000 the challenge was e-business, how to take an organization into the strange new world of the Internet. Today's pressures are more severe and urgent, and the solutions are hard.

Cost Pressure - Companies have extreme pressure to control and reduce costs. In markets with falling revenue, cost containment is the only way of minimizing the impact of red ink. Moreover, many 'easy' cost reductions took place in 2002, leaving companies with more difficult decisions, or the need to do things differently. General Mills for example, has a $1bn cost reduction target following its merger with Pillsbury, but only 20% of that target can be achieved with traditional cost reduction according to Randy Darcy, General Mills' senior vice president of supply chain.

Wall Street Demands - The stock market creates pressure on executives to meet growth and earnings targets. At the same time, new rules on corporate governance limit a firm's ability to use accounting techniques to flatter earnings, and pose more constraints on executive behavior. One of the most important movements, little remarked on in the press, is the proposal of Coca-Cola and some other large companies to no longer provide quarterly guidance on business direction, claiming that the short term horizons of most investors diminish the ability of companies to plan sustainable long term growth.

Fewer Mergers - Some industries are increasingly dominated by large players, and a strong regulatory environment in the US and Europe will limit companies' abilities to grow through acquisition. This creates more pressure to grow organically, something that many large companies have not done for a long time.

Future Growth And Cost Reduction - Companies like GE have finally realized that there is a limit to growth through cost containment and productivity improvements. Ultimately companies grow through innovative products, technologies, processes and business models. The twin pressure of cost containment and growth targets is confusing to an organization used to one or the other.

Low Inflation, Slow Economic Growth - With GDP growth in the developed world forecast between 1.5% and 3% - well below recent trends - and inflation held in check, companies cannot rely on economic improvement to pull up their performance. The increasing "Wal-martizaton" of America is creating downward pricing pressure on all kinds of companies, be they manufacturers, suppliers of raw material, or competitive retailers.

More Pressure, Less Time - Headcount reductions over the last years have reduced costs but they have often left more work to be done by the remaining workforce. Goals have often not changed, just the amount of resource available. Companies have started to realize that they must continually rethink the way they do business and manage processes, or risk being unable to achieve corporate goals, slipping further into trouble.

Risk of Disruptive Change - 2003 is proving to be a fragile year with war, the threat of global terrorism and disease, and burgeoning consumer unease. The long term threat of litigation in the food and healthcare industries, funded by windfalls from tobacco and asbestos litigation, will create uncertainty in a range of affected industries. In the longer term, China is growing as an economic force. Just 5 years ago there were few Chinese cell phone manufacturers, now there are so many they are starting to export to the rest of the world.

Fortunately every year has brought its challenges and every year brings resolutions. The human race has survived wars, famine, catastrophes, and worse, and will ultimately triumph again. Adversity, though, is conquered through an organization's willingness and ability to innovate - to do new things, and to do things differently. Operational efficiency can only go so far in helping a company achieve its corporate goals. Ultimately a firm needs to build its innovation capacity and move new products and projects through the innovation pipeline.

If you have any ideas, feedback, or concepts you would like to share, please e-mail research@imaginatik.com.

Reference: The Pressure to Innovate (in 2003) - RN-0203-1