In a recent Ask Me Anything session with Rita McGrath, one of the key themes that emerged during the conversation was the need to get leadership support for innovation.

Rita suggests you approach your leadership through the lens of your portfolio activities.

When discussing innovation with your CEO or CFO, you will have to address two levels of uncertainty:
- Uncertainty about the market, which encompasses who your customer is, how you get to them, and what products and services they want.
- Uncertainty about technologies and capabilities, which takes into account feasibility, execution, scaling, and critical mass.

When you think about it, you have three different levels of business to consider when driving innovation:

  • Core Business, which is your established business. You know what you to do and who you’re doing it for, and that can be very innovative, but it has low uncertainty
  • Near-Field Businesses, which are your candidates to be your next generation core. These are your innovations with 8-months to 2 years generation that you might be planning for today.
  • Strategic Options, which are small investments you are making today that open up opportunities for the future.

It is interesting to note that it is easier to measure and quantify your ROI with your core business than with strategic options, but the options have much higher ROI potential. This is largely because by definition the core already has a lot of uncertainty driven out of it, so you’re not going to get those types of venture capital returns from investing in your core business.

This is a conversation Rita often has with CFOs because they talk about options as a license to loot. On the contrary, you can be disciplined in your pursuit of options, but you have to have them in your portfolio because that’s where your future returns are.

A snippet from Rita McGrath’s session during the Innov8rs Connect Unconference, June-September 2020. To watch the full session recording, join Innov8rs Community with a Content or Premium Pass.

The Case For Investing In Innovation

Once you have your audience with the CEO or CFO, you need to provide them with reliable evidence that your company needs innovation, and ways that innovation will help. Rita usually follows these three steps:

Survey

Rita uses a survey to find indicators that their existing business is in decline. Examples of a failing business may include investing the same amount, but not getting the same return, customers purchasing the same product for less elsewhere, customers not paying more for added features, and inability to attract new talent you want to keep.

If the answer to many of these situations is “Yes”, then they’re on the wrong end of a fading competitive advantage.

At that point there is no choice but to invest in what the next competitive advantage is or the business is going to become irrelevant. To make your case, you have to make them feel that dissatisfaction, that all is not well in the core business.

Process

Then, you need to encourage them to understand that innovation is not magic. There’s a systemic process where you can look at metrics for investment and progress, so you can reassure them that this isn’t license to just go crazy. It is an actual process that you follow.

Imagination Premium

For publicly traded companies, Rita uses a metric called the “Imagination Premium”. It is a metric that shows how much of your market capitalization can be explained by operations; in other words, what you’re delivering today, versus your growth aspiration. If you take the value of growth divided by the value of operation, you get what Rita calls the Imagination Premium or TIP.

This is an interesting number, because it says that the operations are valued at the current state of your company. If you’re a highly innovative company, however, your investors are willing to pay more for your shares than if they were just looking at what you generate on a cash flow basis.

If you are very high on Imagination Premium, it means that very high expectations are baked into your share price, so being too high in Imagination Premium can be very risky. If you’re too low on Imagination Premium, you begin to attract activist investors, you start to become takeover bait, your board is under questioning, and your CEO may lose their job. So, you want to be somewhere in the middle. You want a balance between what you’re doing today and what you’re planning on doing tomorrow.

The Effects Of Timing

In a crisis of survival, it is very difficult to think in the long term. When discussing innovation and the current crisis, there is often a lot of discussion about shareholder returns and pressure, but what I actually think we have is a crisis of timing. We have allowed forces that favor the near term to overwhelm forces that favor the longer term. The Business Roundtable made a point last year that business has to be run for the benefit of all stakeholders, and Rita thinks that is directionally correct. However, the problem in my view is not necessarily that we run businesses for shareholders, it is that we run businesses for short-term payoffs to shareholders.

After all, given a long enough time horizon, the interests of all stakeholders necessarily align – if your workers are impoverished and your communities are languishing, that is not going to be an environment of generous returns in the long run. Reframing this discussion from a timing perspective can help you to encourage the C-team to support your innovative efforts.

This is a piece from The Innovator’s Handbook 2021. If you’re keen to dive into the best and latest on corporate innovation, request your copy here. To discuss anything Strategy, Leadership & Governance, join our upcoming Innov8rs Connect online event, 16-20 November.