CEO Survey on Business Innovation

CEO Survey on Business Innovation

 Judge Business School, Cambridge University



 Summary of Findings The Judge Business School, supported by Fujitsu Services, the University of Surrey, and the Monitor Group has undertaken a survey of top management opinion in the UK under the theme of Innovation. Fifteen Chairs and CEOs were interviewed from leading UK companies such as Astra Zeneca, BAA, BP, BT, Diageo, Goldman Sachs, QinetiQ, Legal & General, IBM, ICI, Standard Chartered Bank, Tesco and Unilever.

The views of these executives were almost unanimous €" innovation is crucial to competitive survival yet it is the one capability that large companies find near impossible to master. Factors such as scale and complexity, cultural and system legacy, risk aversion and short-termism lead to organisational inertia in this respect. Innovation is rarely achieved through internal mechanisms alone. Instead, it takes place most often at the point of interaction between large companies and their external networks €" from customers and alliance partners to suppliers and contractors.

The survey concludes that the single most important flow of corporate innovation today occurs through the main functions. For example, the CIO

and related IT organisation accesses a wide range of technically driven innovations from global IT suppliers such as Fujitsu and IBM as well as small, innovative boutiques such as QinetiQ. The CFO organisation accesses new financial techniques by interacting with a myriad of financial services organisations from corporate finance specialists such as Goldman Sachs to leading international banks such as Standard Chartered Bank. The CTO organisation, often viewed as leading innovation in an organisation, accesses new techniques, products, processes and services via well established external links with universities, customers and by developing the open source philosophy that is rapidly gaining currency. We describe this phenomenon as €Innovation Flux' when it is linked to interactions with third parties. In this respect the functional channels become €Innovation Portals' that attract and channel new innovations into an organisation. Impediments to successful innovation often relate to inadequate functional capability €" where CXOs become blockers of new ideas rather than active filters.

Outsourcing of corporate functions such as IT, HR, Finance and R&D can either amplify or diminish innovation flows. This largely depends on the nature of the relationships with external partners and the contracts that bind them together. First generation outsourcing contracts based on fixed price, fixed term relationships have been responsible for inhibiting innovation in key areas such as IT and R&D. New generation contracts based on open book, risk-reward principles tend to encourage continuous innovation through the lifetime of a supplier/customer relationship. As organisations seek to outsource ever larger elements of their operations €" from manufacturing and logistics to shared services, this factor becomes ever more important to fostering innovation. Here are the main findings of the survey and some relevant quotes from the respondents.

1. Innovation is a central factor in competitive survival For all those interviewed the message was clear and direct: Innovation is core to competitive survival. Individual comments included: ¬ €Innovation is the life blood of our company€ (Chairman, Legal and General) ¬ €Innovation is about wealth creation €" that is our only mission€ (CEO, Astra Zeneca) ¬ €Two main themes dominate our board's thinking: sharing of knowledge and accelerating innovation€ (Executive Vice President, BP) ¬ €Innovation is about being in a high state of alert €" not being complacent€ (CEO, BAA) ¬ €We're in danger of extinction . . . innovation is the key to survival€ (CEO, BT)

Some referred to the recent McKinsey study that forecasts the average life expectancy of Global 2000 companies to be around 25 years €" compared to 90 years in the early part of the twentieth century. For this reason alone, Innovation remains high on the corporate agenda. According to the survey the drivers for innovation are numerous. They include the growing commoditization of goods and services, induced by global competition and Internet-based markets. Pressure for improved returns from the financial community, in terms of revenues and earnings, is demanding more innovative approaches to business. Regulatory changes enable new responses in sectors such as pharmaceuticals and financial services, as do disruptive technologies. All contribute to pressure on the CEO and the Board to innovate his or her organization at an increasingly rapid pace. €Life cycles are increasingly short before the onset of commoditization. The only hope for sustainable, high quality earnings is continuous innovation€ (Unilever)

2. The focus for innovation is expanding

Innovation was focused traditionally on new products and services, and in many cases required large expenditures on Research and Development. Even today organizations such as Astra Zeneca, Fujitsu and IBM spend many billions of dollars on product development. However innovation has become a much more pervasive issue, especially as many of the companies interviewed belong entirely to the service economy. Examples of market-driven Innovation include: € Brand development and brand focus, as illustrated by recent efforts within Unilever to simplify and promote no more than thirty global brands and develop share holder value around these intangible assets € Customer propositions that preoccupy IBM Global Services, where 20% of its revenues €fall off the edge of a cliff each year due to technological advances' and need constant replenishment € Customer relationships have risen recently in importance within Goldman Sachs as emphasis switches from a transaction culture to a relational one € Product innovation remains the single driving force for business value in Astra Zeneca where multi-billion dollar funding is channeled into drug discovery €Few if any companies really comprehend the customer's needs or desires €" we are all led by supply side thinking and related process€ (BP) A further focus for Innovation extends into the core processes and structures of a business. Organizations are experimenting with entirely new business models to drive higher share holder value as is the case with Astra Zeneca. The latter adopts a portfolio management approach to drug discovery, allocating the most senior executives in the firm to drive forward product development within tight clusters of medical science. In many ways this corresponds to a Venture Capital approach.

Some are considering new structures to shift innovation away from the line businesses towards functional competencies. BP has instituted tighter control of the business through its twenty two corporate functions, and is exploring the possibility of using these channels as the main route for corporate strategy and innovation. This philosophy is embodied in Lord Browne's Green Book. The majority of companies interviewed are continuing to transform internal processes in the expectation that this will improve operational efficiency and effectiveness. Few see this as a building sustainable competitive advantage €" more a matter of staying in the competitive game. €Traditional business structures and processes were designed for the era of manufacturing and steady state thinking €" we need to revisit our value model€ (ICI)

3. Removing the barriers to Innovation Many of today's barriers to innovation relate to scale and complexity. Most of the organizations interviewed believe that size is no longer an advantage here, and may well be an obstacle to innovation in the future. Top-heavy and bureaucratic structures can impede innovation, but the