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Replicating Innovation Across Business Units

Posted August 19, 2021 in Business Technology & Digital Transformation Strategies
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In analyzing our benchmark dataset on innovation management practices, we discovered a pattern that challenged our assumptions about deploying innovation best practice: there is far less transfer of innovation best practice across a company’s business units than is typically expected, and that the impact can represent over 5% of EBIT improvement from innovative new products and services. Because replicating best practice across business units is fundamental to improving innovation performance, we sought to understand why this happens and how businesses can overcome the challenge.

Background

Arthur D Little’s long-standing Global Innovation Excellence Benchmark (INNOVEX) assesses a firm’s innovation performance against best innovation management practices (IMPs) and allows participants to benchmark their performance against that of their peers. The benchmark has demonstrated a strong statistical link between excellence in innovation management and higher innovation success.

Recent projects have led us to explore decentralized R&D activities in business units using the Global Innovation Excellence Benchmark dataset. We looked at multiple industries and made the following discoveries.

High variability in innovation processes across business units

We found statistically significant evidence that there is a high level of variation in the innovation management performance across different business units within a company. This variation is so great that comparisons of the variance of IMP scores for a company’s business units are not statistically different from the spread of performance across the entire benchmarked industry. In fact, you would not be able to guess that the business units were from the same company. Figure 1 illustrates the variability of IMP performance for selected companies within the chemicals industry and medical technology and devices industry.

IMP in Chemicals, Medical Technology & Medical Devices
For a top quartile firm, for example, 200 IMP best practice points might represent a 50% increase in sales from new products launched in the last 3 years combined with increased EBIT contribution of 5-10% to total EBIT for 3 years.

Figure 1 - IMP in Chemicals, Medical Technology & Medical Devices.

To validate our findings, we conducted a series of statistical tests[1] of companies that reported performance of three or more of their business units. The companies spanned a range of industries, including automotive, telecommunications, transport, manufacturing, medical devices, and chemicals. We identified 12 organizations with multiple Business Unit responses and in every case, the variance among the companies’ business units was not statistically different than that of their respective industries.

This evidence fundamentally undermines a widely held assumption that multi-business-unit companies share best practices to increase performance across their business units. Through relatively simple standardization of best practice across business units, companies could achieve significant value and likely increased sales of new innovative products and services as well as increased profitability.

Research identifies the underlying drivers of this observed variance in companies’ innovation performance as well as the key barriers to internal standardization of IMPs. Such root causes may include, for example:

  • Decentralized strategy across business units, with siloed operations.
  • Poor process integration and standardization post M&A.
  • Lack of common process reporting.
  • Missing incentives (or disincentives) for replicating best practices.
  • Poorly structured R&D funding mechanisms.
  • Geographical or segment specificity requiring specific IMPs.
  • Lack of an effective innovation management digital platform across the BUs.
  • Different leadership style and culture.

[1] Based on two-tailed F-tests. For all companies tested, we were unable to reject the hypothesis that the variance of the company scores versus the industry scores were significantly different. We validated the normal distribution of the datasets using the Shapiro-Wilk test.

An Opportunity for Senior Innovation Practitioners

The authors of this report have gathered an impressive group of innovation practitioners as panelists for an upcoming exploratory webinar to better understand how businesses and innovation excellence teams can share good innovation management practices across multi-division organizations.

If you're a senior corporate innovation or innovation excellence practitioner in a multi-division organization, or an academic in the field, please join the discussion on September 14 from 15:00-16:30 CET (find your local time.) All participants in this highly participatory working session will receive an anonymized report of the group's findings. Register today.

What prevents adoption of innovation best practice across business units? webinar, Sept 14.

About The Author
Ben Thuriaux
Ben Thuriaux is a Senior Consultant with Cutter Consortium and a Partner at Arthur D. Little (ADL). He works across ADL’s Technology & Innovation Management and Utilities & Alternate Energy practices and heads up the Energy practice’s Competence Centre in Technology, Innovation, and Digitalization. Mr. Thuriaux focuses on strategy, technology, and innovation management diagnostics and adapting innovation management best practices;… Read More
Frederik van Oene
Frederik van Oene is a Senior Advisor to Arthur D. Little (ADL), where he was a member of its Technology & Innovation Management practice prior to his retirement. With extensive experience of ideation processes, he focuses on helping organizations enact the changes required to improve performance and realize their objectives. Mr. van Oene has extensively worked in innovation, R&D and technology management, strategy implementation, and… Read More
Elis Wilkins
Elis Wilkins is a Strategy Consultant with Arthur D. Little, where he is a member of its Technology & Innovation Management practice.