Business Growth - Funding Growth In An Age Of Austerity

Growth - real growth - depends on innovation. Oh, sure, a big acquisition can inflate a company's top line, but it's hardly fair to call this growth; agglomeration would be a better word. Deal making of the sort that was used to jack up revenues at companies such as Tyco, Vivendi, HealthSouth, and DaimlerChrysler is unlikely to produce above-average growth for more than a few years at a time. Study a company that has delivered strong revenue growth over a decade or more, and you're likely to find evidence of world-class innovation. Maybe the company invented a new industry structure, like Microsoft did when it "de-verticalized" the computer industry.

Maybe the firm pioneered a bold new business model, like Costco did with its upscale warehouse stores. Or maybe it hatched a bountiful brood of sleek new products, like Nokia did. Put simply, innovation is the fuel for growth. When a company runs out of innovation, it runs out of growth.

And there's the rub. We live in an age of austerity. Every line of every budget in every company is under perpetual scrutiny. Innovation budgets are no exception. Increasingly, R&D units are required to negotiate their budgets directly with key operating divisions, in hopes of tying their research spending to real-world customer problems. Companies like IBM are sending their R&D professionals into the field to interact directly with customers.

Organizations are subjecting nascent development programs to ever more rigorous screening with the goal of focusing their resources on a few big-win projects. Additionally, companies are training their R&D staffs to think in business terms so the researchers will be better able to decide whether an idea is worth pursuing in the first place.

These efficiency measures are commendable, but they don't go far enough. A company can't outgrow its competitors unless it can out-innovate them. And in these austere times, that is only going to happen if a company is capable of substantially raising the yield on its innovation investments. Achieving such a step function improvement requires more than just a bit of R&D belt tightening. It demands a fundamentally new way of thinking about innovation productivity, as well as a set of strategies that have the power to deliver a whole lot more bang for every innovation buck.

To dramatically improve innovation yields, companies must believe that innovation outputs (new processes, products, services, and business models) are less than perfectly correlated with innovation inputs (cash and talent). This assumption is more unorthodox than it first appears. When we recently asked more than 500 senior and midlevel managers in large U.S. companies to identify the biggest barriers to innovation in their respective organizations, the number one response was "short-term focus" followed by "lack of time and resources." In this view, innovation is highly dependent on investment, and it is senior management's presumed obsession with near-term earnings that most limits a company's innovation productivity. We think this view is wrong.

"Funding Growth in an Age of Austerity", Gary Hamel and Gary Getz, Harvard Business Review, July-August 2004.