Inarticulate ramblings of a management consultant

the day to day experiences of a consultant operating in weird and wonderful client situations

The latent energy of innovation…transactional or transformational?

 Golden Goose

Over the past 6-9 months, we’ve seen an M&A frenzy which has been based on 2 considerations: the low cost of capital and the need to buy innovation. I’ve written about the latter before (see this link). From recent conversations with corporate strategists, the sad truth of the matter is as follows:

  1. In large corporates, disruptive innovation (not incremental) is either no longer feasible, cost effective (given the vagaries of return) or, given ever-decreasing time horizons, likely to satisfy the requirements of analysts and shareholders. The same applies to CEOs, whose tenure is getting shorter and whose appetite for risk is reducing as a consequence.
  2. The focus therefore is to control the supply chain, manage production and manufacturing as efficiently as possible. Using the scale to acquire is the implied strategic focus.
  3. The other implication is that for large multinational corporates (P&G, Diageo are two that have been mentioned), the valuation of brands may have reached a tipping point where the ‘sum of the parts’ is at a discount. This may lead to a gradual sell off of ‘non-core’ brands. This trend has the potential to grow substantially.

So, what is the problem with ‘buying’ innovation? Why does this represent a problem?

Well for a start, ‘not invented here’ is a difficult challenge to respond to and I suspect that for a number of the acquisitions recently announced, the cultural integration task will be difficult and may well result in the drivers of innovation (the people) leaving as they find the strictures of their new employer unappealing.

However, internally generated innovation has a bunch of side affects which you don’t get with acquired innovation. Here are 3 which come to mind immediately:

  1. Breaking down silos. Internal innovation does not typically see any boundaries…in fact, one of the reasons why it works is because it finds solutions which cross traditional corporate barriers and actively challenges these areas to work together to implement challenging solutions. The benefit of that process extends way beyond that specific idea as relationships and levels of trust are established, leading to other areas of cooperation and collaboration.
  2. Creating an appetite. Much as watching someone eat some small delicacy creates an appetite, so it is with innovation. Through network, social interaction, informal communications, the energy created by an individual successfully challenging the status quo in a positive, solutions based way can spread very quickly, leading to little sparks of innovation elsewhere.
  3. Employee engagement. For many corporate leaders, this is a vague concept born of psychologists and corporate ‘well being’ surveys which are a distraction from the day to day challenge of creating value for shareholders. The reality is different as per a couple of recent articles (see link). Whether it’s ‘under the radar’ or as part of an endorsed corporate programme, the value of initiatives that have been developed within the workforce from a bottom up perspective should not be underestimated. Those organisations who achieve this, talk to material benefits (less medical leave, reduced turnover / attrition levels, higher levels of recruitment from internal referrals) as a result of the greater engagement. They also point to the impact of stories of great performance, as a critical part of creating role models for new employees…leading to more effective on-boarding and early productivity.

Reductionist thinking would have you believe that whether by acquisition or through internal processes, innovation is a linear process and its only value relates to the specific product / service being developed. In my experience, that barely scratches the surface of its potential…

Categories: Behavioural Economics, Disruptive Innovation, Employee Engagement, Incremental innovation, Mergers & acquisitions, new product development

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