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Closing the Innovation Gap Between Business Units

An opinion piece by the partner in charge of innovation and growth strategy at Arthur D. Little

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If a business had two similar manufacturing sites that failed to share best practice processes between them, the chief operating officer would be seen as negligent and could well be fired.

Yet the same thinking does not seem to apply to sharing best practices in innovation, according to in-depth research. Why is this and how can the problem be overcome?

Why companies take a business unit approach

Many large organizations deliberately decentralize their research and development and innovation centers. This allows individual business units to focus their R&D on their particular needs, just as individual factories concentrate on the specific products they create. However, in any organization there is normally some level of central control to ensure best practices are followed and maximum effectiveness and efficiency is achieved across all operations.

Yet data from the Arthur D. Little Global Innovation Excellence Benchmark (GIEB), which has been completed by over 500 companies, show that there is often little common adoption of similar innovation management practices across companies.

Among business units within the same company, there is such a broad range in scores for innovation performance that you would not even know they were in one organization.

For example, in the chemicals industry, there was a 500-point spread among business units in some organizations - some were in the top quartile for innovation, others in the bottom. The same range is typical across industries.

These innovation gaps lead to the following:

  • Lower overall innovation performance across the organization

  • A lack of transparency with no single view of innovation processes and projects across the business

  • Duplication of programs and repetition of processes that failed in other business units

This gap is a significant issue: 78% of senior innovation executives and practitioners said not sharing common approaches to innovation management negatively affected innovation performance.

By our calculations, if the innovation performance of the worst business unit was improved to just the company average and rate of new product service innovation, the result would be a 5% average growth in annual business unit revenues plus improving margins.

Understanding the root causes

There are three root causes of this best practice gap:

1. Ineffective leadership and misaligned incentives

Senior managers in individual business units have their own specific goals and revenue targets. This can lead them to focus on their own short-term goals, and make them uncomfortable with the uncertainty and risk associated with incorporating new innovation management practices from other parts of the organization. This is particularly true if business unit managers are incentivized to hit quarterly revenue targets.

This risk-averse mindset can lead to an unwillingness to adopt new ideas and practices as leaders fail to see the potential benefits, making it a low priority. The lack of an organization-wide governance strategy for innovation management, or senior management support for an overall innovation focus, holds back efforts to collaborate and share best practices.

2. Diversity of needs and aims

Business units want control over their innovation programs. They may well see organizational best practices as inappropriate for their needs, targets and aims. There may also be variances in the pace of innovation and maturity levels between business units, particularly if they are spread over diverse regions or have different backgrounds, such as being added by acquisition.

This contributes to a rejection of organizational best practices, no flow of ideas between business units, and a lack of collaboration between teams.

3. Cultural differences

Individual business units have built up their own cultures and may even compete against other parts of the same organization. Internal conflicts between business units around power, politics and resources can lead to an insular ‘not invented here’ mentality. Central management may be seen as out of touch, and sometimes there is a lack of a shared language of innovation across the organization. There is a strong resistance to external ‘interference’ in business unit innovation management.

Bridging the gaps and improving performance

These challenges can be overcome but require a strategic approach. Senior management must show support for the following:

1. Strong leadership, backed up by the right incentives

Senior managers must first understand the size of this ‘innovation gap’ and then take an active role in closing it. They need to emphasize the strategic importance of innovation management best practices to the entire organization. Leaders must help make it part of overall company culture, demonstrating that sharing best practices is an opportunity, not a threat. To increase engagement, organizations can roll out incentives, such as providing access to additional innovation funding for business units that deploy best practices and meet innovation targets.

Companies then need to create a balanced, cross-business unit innovation portfolio. This brings together all activities, with clear plans and protected budgets for short, medium, and long-term innovation targets.

2. Engaging business unit stakeholders to enable change

Change carries risk. To minimize the potential for rejection, senior management should engage, involve and listen to business unit stakeholders to create a sense of ownership around ‘new’ best practices.

It is vital to build opportunities for this collaboration at all levels by breaking down silos and enabling the cross-pollination of ideas through meetups, communities and other knowledge-sharing forums. Bringing in influential innovation project leaders from outside can sometimes be effective. They act as neutral evangelists to demonstrate the value of best practices.

3. Building a collaborative, innovation-led structure and culture

As with any successful change initiative, building a cross-business unit culture of collaboration requires both top-down and bottom-up approaches.

Leaders should start by clearly expressing the overall innovation vision, mission, and objectives for the organization, while at the same time understanding that there may be variations between markets, based on business unit maturity and local needs. This should include the establishment of a common language to describe innovation and what innovation success looks like across the organization.

Involving business units from the outset and getting their input is vital. This will help build an iterative and participative process that creates trust and agreement on a common set of priorities when it comes to best practices.

Innovation has never been more important to competitiveness. Large organizations invest heavily in R&D to drive innovation. Yet by not sharing innovation management best practices, they are currently failing to realize the full benefits of innovation. Essentially, innovation value is being unnecessarily left on the table. Organizations with decentralized R&D therefore need to act now to bridge this innovation management gap. Achieving this requires a three-fold approach centered around strong leadership, engagement with business units, and changing of the overall culture to deliver the right results.

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