Why innovate? This is the first question that came to my ears when I sat down to discuss the subject of innovation with Pierre Ollivier.
I/ Pierre Ollivier’s bio
Pierre Ollivier is founder of Winnove (www.winnove.com), an innovation management & strategy support consultancy service company. His customers are SMEs and listed companies from the energy sector and from the media, information technology, entertainment and telecom industries, as well as public laboratories and education organizations. He believes that innovation ensures a company’s survival in the medium and long-term.
II/ Does innovation really matter?
So I mentioned many leaders are happy to say that innovation is critical to their company. And yet, when I look at the financial decisions they make on a daily basis, I noticed that money tends to flow to mergers and acquisitions more than it does to innovation projects.
In addition, today, any company in the world has a chief financial officer sitting on the board but, only a fraction of them have a chief innovation officer. If board presence is any indicator of the relative importance of a management position, then one would have to conclude that finance is considered more important than innovation. In other words, innovation, which is always publicized as critical to the company’s success, doesn’t wield real clout.
I’ve also noticed that when a company does a merger or an acquisition, what it’s really doing is acquiring innovations that have been developed by the company they are acquiring. This explains many of the acquisitions occurring in the Pharmaceutical industry: pharmaceutical companies acquire one another in order to secure their R&D pipeline. This is the rationale behind the Merck and Schering-Plough M&A, the Pfizer and Wyeth M&A, among others.
Innovation is effectively conducted by managers who are not innovation directors. So, are innovation directors really relevant?
III/ Innovation is a subject that directly relates to the company’s shareholders, according to Pierre
Non-short-term speculating shareholders, more than anybody else in the company, are concerned by a company’s value, which directly deals with medium and long-term growth prospects; in fact, in our ever rapidly changing world, not innovating would be equivalent to die and to rapidly destroy the company’s value, which is a real hard conundrum to deal with. Besides, a CEO would be more inclined, if not strongly and continuously supported in time by his shareholders, to focus on conducting business on a daily basis rather than preparing the future (which is by definition more risky than the short term). This would include:
- maintaining profitability
- maximizing the company’s competitive advantage
- growing the existing client base
- ensuring that the overall organization is functioning
But CEOs have a really hard time dealing with innovation because innovation is concerned not with day-to-day management but with medium and long-term issues. Therefore, rather than taking charge of it, CEOs would tend to nominate innovation directors, who then could focus on midterm and long-term issues. The difference in time horizons, where the CEO is focused on the day-to-day management and the innovation director is focused on medium and long-term management, may be a source of tension. This kind of tension can even get bigger if future business models start undermining existing ones. This typical management-related dynamic has attracted significant attention, most notably on the part of Clayton Christensen. Christensen shows in his publications how innovators must be given the right to kill the mother company when they are working on disruptive innovation: hard for a CEO to admit !
IV/ Short-term financial gain may undermine innovation
Investors are trying to maximize return on shareholder value. Many investors today come in and out of a company in the course of a single year and in doing so they undermine innovation projects which, typically, require several years to pay off. This kind of financial speculation has attracted criticism from leading French decision-makers, including Claude Bébéard, from AXA.
“CEO must refuse short-term financial tyranny”, Claude Bébéar, Founder of Axa
Our financial system, as Pierre has said, quoting Clayton Christensen, is undermining our ability to produce disruptive innovations. Given that financial analysts are looking to maximize their profits as fast as possible, they tend to favor efficiency innovations offering low risk and high returns, over disruptive innovations, which take a longer time to pay off.
Innovation ensures corporate survival
Conclusion: Innovation ensures a company’s future revenue streams. However, innovation remains hard to manage because:
- Managing business on a day-to-day business is very different from creating new businesses for the future
- Creating new businesses may undermine existing business
- Innovating is viewed as risky and long term to short-term focused financial analyst
Given all of these problems, how should company go about innovating? This is a topic I brushed upon in another conversation I had with Pierre Ollivier.
- For a discussion of how the pursuit of profit kills innovation and the US economy, please refer to Clayton Christensen’s article, here
- For a discussion on why innovation matters, please refer to this Forbes article and this blog
- For a discussion on the relationship between shareholders and innovation, please refer here and here