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Many companies are still stuck in the old R&D paradigm. Their innovations are coming out of traditional R&D labs that are technology-centric or product-driven, pushing products to market without a great deal of customer insight. Most of these companies are still calling innovation R&D (research and development) or R&T (research and technology). They track KPIs that are mostly R&D focused: R&D as a percent of sales; R&D spend; number of R&D labs and technicians; R&D output, etc.>
One might say there is no issue with this approach and that a company can be extremely successful being product-centric and investing a lot in product innovation. I agree fundamentally, but I am proposing that these companies are not leveraging the full scope of their innovative power by looking outside of product development. There is a necessary move from product to strategic innovation, especially in the context of the COVID crisis and the tsunami of investments in software, data and digital transformation. Skeptics to this claim argue that services and software are within the products and R&D, associated with product management, oversees the new product development process.
I have disagreed for years with this approach, to the point that I got in trouble and was removed from programs and assignments from being vocal. Strategic innovation encompasses all the components listed below.
These days, I posit that service and software innovations are as important as product innovation or R&D. Being an innovative company requires a focus on all of these components managed by professional strategic innovation teams. R&D leadership cannot oversee and do a proper job managing such a complex scope. Similarly, product managers cannot be great at software innovation and service design. They are trained in product development and management.
Adopting a strategic innovation strategy and mindset requires a different functional and organizational design. In this design, R&D reports into strategic innovation and works closely with strategic marketing. The output of strategic innovation efforts is a balanced portfolio of customer-driven innovative opportunities and an innovation rate that draws new revenues from the different innovation sources.
In 2021, focusing solely on product R&D and innovation misses some of the biggest trends that are widely recognized around the world.
- Over 85% of companies are doing some digital transformation, investing heavily in data, software and new digital business models.
- The rate of development of the software space is high-speed. Software is eating the world and some sectors have been dramatically transformed by the pace of software adoption. The energy, building management, agriculture and automotive spaces are good examples.
- Industrial companies are launching new recurring business models. They are investing heavily in subscription and usage business models and moving away from one-time product sales. More than 70% of companies have embraced subscriptions as a new revenue model.
- Business portfolio diversification has never been so important after years of price wars, intense product commoditization and a COVID crisis that has challenged legacy product-centric business models.
If we just focus on digital transformation for a moment, there is a strong need to develop a systematic and customer-centric innovation pipeline that feeds the innovation process. The funnel must be full of innovative opportunity, keeping in mind that only one out of 10 might lead to a successful launch.
Innovation ideas and opportunities might come from software, APIs, new business models, start-up ideas or stand-alone service propositions as shown in the figure above. Having a strategic innovation process allows for that systematic pipeline management using best-in-class innovation practices to generate profitable new revenue sources.
My experience is that when R&D and product management manage the process, it leads to at best new services around the product and incremental improvement in software and business models supporting the product.
Over the past two years, many consultants have written about the need to move away from product-centric transactional business models. They recommend focusing on services, software and new business models. They highlight the development of recurring business models, direct-to-consumer models and ecommerce opportunities to move away from product competition and price erosion. Having a diversified portfolio of innovations also allow to mitigate the difficulties in sustainable growth, especially in the context of the COVID crisis.
So, what are the points I am trying to bring across?
1. It is time to move from R&D strategy to a strategic innovation approach.
2. It is important to manage non-product innovations with the same attention and intensity as product innovations.
3. It is essential to reach the goal of having a balanced business portfolio that focuses on all relevant sources of revenues (service, software, product, systems, and digital solutions).
4. Product managers manage products. If you want to have a service and software business, hire service managers and software product managers. They are distinct functions requiring separate set of skills.
5. Digital transformations require a strategic innovation pipeline to ensure new digital opportunities are customer-focused, value-rich and differentiated.
Stephan Liozu is Founder of Value Innoruption Advisors, a consulting boutique specializing in industrial pricing, digital business and subscription-pricing models, and value-based pricing. Stephan has 30 years of experience in the industrial and manufacturing sectors with companies like Owens Corning, Saint-Gobain, Freudenberg and Thales.
