Are your owners secretly killing your innovation strategy?

To succeed with new products and services, innovation managers must know who their shareholders are and how they think.

Every Innovation Manager wants to succeed with his or her innovation strategy. However, too many among them experience that the outcome has a too strong component of random and that projects that logically could bring enormous benefits to their employer get shut down by the CEO. Why is that and how can one increase the odds of success within the organization when it comes to developing innovative products and services?

One key, and often ignored element, is to take into account the composition of the shareholder base. You may think that the owners of a mature corporation with low organic growth rates would cheer any innovation effort that is aimed to spur new growth on top or bottom line.

Not so fast.

One of the hardest things to accept for innovation teams is the fact that innovation isn’t a goal in itself. Innovation is just one of many tools that the management can use in order to increase shareholder value. As such a tool, it has to compete with other methods that, at least on paper, seem much safer and in many cases much faster too. The company can for example increase its leverage in the balance sheet and thus increase dividend payment almost overnight. It can outsource many of its processes. It can acquire or get acquired. It can even increase prices. (Apple is doing exactly that these days in the UK after Brexit has dragged the GBP down).

As a result, it is understandable that some owners don’t immediately share the joy when new innovative bets are launched.
These shareholders will allow some deviation of resources from the core business and into other areas for a while, even if they don’t really understand the new business model or the KPIs attached to them. However, innovative activities will eventually start becoming relevant in the financial numbers. They will visibly be eating up resources, but probably won’t be able of matching the expected profitability or other key parameters , just because it is too soon. Shareholder insatisfaction will in many cases be the result. This insatisfaction may then promptly be reflected in the share price, specially if the shares have good liquidity as it is the case of public listed companies.

Suddenly, your owners have become your worst enemy. After a while, a realistic CEO with bonus linked to share price may naturally give up and shut down any innovation outside the core business. This is exactly what has happened with telecom operators every single time they have tried to compete head-on with global internet companies Remember Comoyo, the Norwegian alternative to Netflix?

Two elements are therefore key for Innovation Managers in order to avoid such a situation and eventually get the approval from the CEO when launching new products and services.

First of all, an Innovation Manager has to understand the shareholder base of the company and its expectations. If your shareholders are basically pension funds with focus on stable free cash flows and predictable dividends, your innovation strategy has to be consistent with these expectations. In this case, organic innovation and product extensions will probably be a sensible strategy.

On the other hand, your owners may be mostly cash-rich private equity funds with risk appetite and focused on jockey stick growth and exit within few years. In such case your innovation strategy should probably be aggressive and based on disruption. You will by the way have to deliver on this quickly. Otherwise your owners will rather embark in a furious string of acquisitions and leave no funds left to innovation. Your department will risk being shut down shortly after.
If your shareholder base are retail investors, almost anything goes. Just get your story straight.

The second crucial element is to study which operational and financial KPIs shareholders have got used to follow and expect from the management. Unless their name is Jeff Bezos, CEOs have a tough time trying to introduce new KPIs that shareholders accept without getting suspicious. Even Google has been forced to create Alphabet, and thus separate the Google KPIs that shareholders understand (Cost per Click, Customer Acquisition Cost etc.) from the more unknown ones that the so called moonshots deliver.

Any innovative initiative will rise its chances to thrive if the new products and services share KPIs with the current ones. Alternatively the new KPIs should be clearly related to them. If shareholders are used to pay attention to CAPEX/ Sales and your new product’s cost base is mostly OPEX based, could you show how the overall CAPEX becomes lower and therefore the CAPEX / Sales  ratio improves?

Innovation Managers that want to succeed should pay attention to the shareholder environment and put together their product portfolio accordingly. Instead of fearing and even criticizing the CFO, Innovation Managers should seek his or her help and try to aling own interests and visions with the expectations of the shareholders.

Indeed, maximizing shareholder value should be the common language for anyone in the company and the base of its innovation strategy.

Interesting? You may want to share it!

Forfatter: Salvador Baille

Daglig leder ved Intelis, et rådgivingsfirma med fokus på Innovasjon og teknologiledelse.

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