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A conversation with
20+ Chairs and
CEOs from major
corporations on the
state of innovation
in Australia.
2016
Innovation
Report
LINDA LEUNG, NATALIA NIKOLOVA,
JOCHEN SCHWEITZER, TONY GOLSBY-SMITH,
TRACY WHYBROW, AND KEVIN JURD
2/ VIEW FROM THE TOP
We wanted
to accelerate
the innovation
journey in
Australia,
so we took
a different
approach
* THIS REPORT IS BASED ON RESEARCH CONDUCTED IN
COLLABORATION WITH DR LINDA LEUNG, DR NATALIA NIKOLOVA,
AND DR JOCHEN SCHWEITZER AT THE UNIVERSITY OF TECHNOLOGY
BUSINESS SCHOOLWITH APPROVAL FROM THE UTS HUMAN RESEARCH
ETHICS COMMITTEE (REFERENCE NUMBER 2015000439).
2016 INNOVATION REPORT / 3
We spoke to 21 leaders of Australian
business, 9 CEOs and 12 Chairs of top ASX-
listed companies. We had a semi-structured
agenda for the conversations, but we wanted
them to ow naturally so that deeper
concerns and insights could emerge.*
These conversations are the data for our
research - and they oer a unique look into
the hearts and minds of leaders in Australia
and their experience of innovation in their
companies, as well as their observations
on the systems and structures supporting
innovation.
OUR
FOCUS
What is the role of
Boards & CEOs in
fostering innovation?
What are their
current practices &
concerns?
Where do we look
to map the best way
forward?
4/ VIEW FROM THE TOP4/ VIEW FROM THE TOP
Design research gets closer to the
action and is more suitable for the topic
of innovation. It relies on qualitative
methods – wide ranging conversations,
scenarios, examples and stories – to
discover the culture and behaviours that
are driving results.
It yields rich ideas and solutions in a way
that surveys cannot.
OUR
APPROACH
There have been many quality ‘innovation surveys’ undertaken
in Australia recently. Most of these provided a ‘fty-thousand
foot’ macro-economic view of innovation and relied on
traditional ‘tick box’ survey techniques to gather data.
We wanted to go deeper. We wanted to look under the hood, get
practical, and go beyond descriptive analysis to the heart of
innovation.
So we did two things:
1. We chose to focus on the role of Boards and CEOs in
driving large-scale innovation. This allowed us to
limit our research to the insights and impact of senior
leadership on innovation in Australia.
2. We took a ‘design research’ approach rather than a
more usual quantitative approach. We interviewed
Chairs and CEOs in broad one-on-one conversations
that stretched from one to two hours each. This gave us
detailed insights into what leaders of large businesses
are thinking and doing.
2016 INNOVATION REPORT / 5 2016 INNOVATION REPORT / 5
Where is Australia
placed in the global
innovation economy?
/Our natural resources are a
blessing and a curse
We face some deep challenges to innovation
due to our history and the present structure
of our economy. Our wealth to date has
been based on vast mining and agricultural
resources. While, on one level, this is
fortunate, it has a lso inhibited our drive
to innovate, simply because we can get by
being complacent. If ‘necessity is the mother
of invention’, do we currently share a sense
of urgency and need sucient to drive us
to invent? This question is put into stark
contrast by the recent success of similar
size (or smaller) countries that do NOT have
natura l resources to leverage. Hong Kong
and Singapore lack our material wealth
and all have achieved greater ‘innovation
eciencies’ (how much innovation a given
country is getting for its inputs) than we have
in Austra lia.*
/We tend to be nationally
introverted
Austra lia is also hampered by its geographical
size and relative isolation. We don’t meet
face-to-face with markets and customers
at an international level and this lack of
direct proximity has fostered introversion; if
markets a nd competition drive innovation,
our isolation does not ser ve us well.
/Yet we are on the doorstep of the
biggest market of all
In Austra lia we also enjoy huge advantages.
We are on the doorstep of Asia, have stable
and fair legal and political structures, and
possess an increasingly educated populace.
We have a long and successful tradition
in pure and applied scientic research,
examples of world-class technologies being
developed here, and a la rge university sector.
We have a diverse multicultural population,
and we are an attractive place for people to
live and work. By and large, our economy is
ethical, so fair play can thrive and markets
can be transparent.
/So the big question is what can
big business do to lift innovation
nationally?
Acknowledging Australia’s challenges a nd
opportunities in this way, we were drawn
to a series of questions around innovation:
How large a role does business culture -
particularly large corporate business culture
- play in innovating in Austra lia? Are our
largest businesses creating a n ecosystem
for innovation to ourish? Are they leading
the way? Do they think innovation is
importa nt for them and for the country?
What blockers a nd enablers do they see and
experience daily?
* PALMER, C., SHILTON, D., JEYARATNAM, E., & MOUNTAIN W.
“AUSTRALIA’S INNOVATION PROBLEM EXPLAINED IN 10 CHARTS”
LAST MODIFIED DECEMBER 7, 2015. HTTP://THECONVERSATION.
COM/AUSTRALIAS-INNOVATION-PROBLEM-EXPLAINED-IN-10-
CHARTS-51898.
THE
BACK
STORY
6/ VIEW FROM THE TOP
Can corporate
giants learn to
dance?
This paradox provided the background for our
inquiry. In particular, we focused our research
around the following major questions:
1. What are Boards and CEOs of la rge
Austra lian businesses doing to drive
innovation?
2. How are they doing it?
3. Are their actions enough to shift the
dial on innovation - at a national sca le?
/The challenge of the status
quo and the ‘ambidextrous’
organisation
It is not easy for large businesses to
innovate. They are not natural hosts for
innovation. Almost by denition, they
are mature organisations that long ago
grew out of their entrepreneurial roots.
They have developed systems of control
and risk management that can discourage
the kind of risk-taking that is so central
to innovation. A seminal article in The
Academy of Management Review* explored
how many large businesses are built
around an ‘exploitation’ logic, which
focuses on process management and
control and, by extension, preserving of
the status quo. In contrast, the logic to
meet future challenges lies in ‘exploration’,
which requires the kind of variation,
experimentation and play that is at odds
with exploitation. Hence, successful
large businesses in the twenty-rst
century need to learn to operate in an
‘ambidextrous’ way, managing the paradox
of exploiting their present ways of working
and creating value while simultaneously
exploring new ones.
* BENNER, M. J. & TUSHMAN, M. L. (2003). “EXPLOITATION,
EXPLORATION, AND PROCESS MANAGEMENT: THE PRODUCTIVITY
DILEMMA REVISITED” THE ACADEMY OF MANAGEMENT REVIEW. VOL
28. NO 2. 238-256.
2016 INNOVATION REPORT / 7
THE
OVERVIEW
ON-A-PAGE
We have
begun the
journey, but
we are not
masters of
innovation
– yet
8/ VIEW FROM THE TOP8/ VIEW FROM THE TOP
1/ THE AUSTRALIAN CONTEXT
• On the global stage, we are too cosy and comfortable
• Markets encourage a conservative approach
• Capital rules make it easier to buy than to build
• Regulations hamstring innovation
2/ FOCUS OF INNOVATION
• Innovation is important but not always central
• Large businesses want to defend the core, then invent
• Small bets and incrementalism reign
• Short-term thinking drives decision making
• Innovation is stied by the demand for certainty
3/ METHODS OF INNOVATION
• There are few integrated approaches to innovation
• Culture is seen to trump formal practices
• Everyone is responsible for innovation but the CEO must lead
4/ ROLE OF BOARDS
• Boards want to encourage, rather than initiate, innovation
• Boards want to look outside and bring lessons inside
• Boards can communicate the va lue of innovation to markets
5/ LEADING THE WAY
• Become an ‘ambidextrous’ organisation
• Create ‘specia l purpose vehicles’
• Invest in eective innovation methodologies
• Strateg y, strateg y, strateg y
6/ OFF THE RADAR
• What we didn’t hear but expected to...
Here is what we heard and
what we diagnosed
2016 INNOVATION REPORT / 9
1/
THE
AUSTRALIAN
CONTEXT
On the global stage, we are too
cosy and comfortable
Is the overseas context more exciting for young executives?
Interviewees had dierent perspectives on the various challenges for
innovation in Austra lia. There was a sense that the more exciting and career-
building experiences working for innovative organisations were to be had
overseas.
They do think longer term overseas.... American companies are much
bigger, and the bigger you get, the more you can do smaller time
innovation . The smaller you are,...you can do [innovation] because no one
is watching, but if people are watching, it’s a problem.
(CHAIR / INTERVIEWEE 9)
Is our economy too oligopolistic and our markets not
competitive enough?
When ex-pat chief executives have ‘earned their stripes’ and come to the
end of their ‘adventure years’ abroad, they return to Austra lia for an easier
and more comfortable life. This translates at an industria l level to the way
Austra lia does big business.
Australia is a great country for creating cocktails, which usually then
stifles innovation. I don’t know whether it’s because we are just the
right size for two big supermarkets, four big banks and two airlines. It
means they tend to end up pretty profitable, with strong positions of
incumbency. There is no doubt that that stifles innovation. It’s dicult
for externals to come and compete there, and it turns out to be quite
dicult for us to go and be really good everywhere else. So you look at
industry after industry that are characterised by a small number of very
profitable incumbents.
(CEO / INTER VIEW EE 18)
It might just be our size and maybe there’s a little bit of laziness - and a bit
of comfort factor that ’s come into Australia.
(CEO / INTER VIEW EE 5)
1/ THE
AUSTRALIAN
CONTEXT
2016 INNOVATION REPORT /11
Markets encourage a
conservative approach
Boards and markets reward a conservative approach
There was little reference to being ‘best in world at…’ or aspiring to be so. Nor
was there discussion about companies’ positioning in a global marketplace:
It seems to me that if you do nothing, from a PR point of view, your
reputation is fairly safe. Because doing nothing probably won’t wreck the
company immediately, it would be done in the next person’s lot. But doing
something not only can wreck your reputation now, but can wreck your
reputation down the line, because they all blame it. The next generation
of directors will say, ‘It goes back to what you were’. As Boards, it’s really
not in our interests to be innovative. The market doesn’t respond quickly
on it, the market likes short term things in general. Finally, there is a fear,
be it publicity, be it liability, be it class actions, be it takeovers, etc., the
whole structure is against the innovative thinking.
(CHAIR / INTERVIEWEE 9)
We are missing a large innovation community of practice in Australia
Such a community of practice would enable people running big, established
businesses to interact and collaborate with entrepreneurs. To compensate
for this lack, most of the respondents interviewed ta ke senior executives
and Board members to other countries that do have a ourishing innovative
communities. However, this has its limits, as it does not enable the ongoing
exchange of ideas, views, and perspectives:
We have got a big job in this country to connect properly the innovation
centres. We are still too tribal, and certainly the people that run
businesses are not properly or suciently connected with the leaders
of innovation in this country. We have pockets of innovative excellence.
There is no doubt of that, in my mind. The problem is they are pockets and
we don’t have that nationwide culture. That is the bit that’s missing.
(CHAIR / INTERVIEWEE 8)
1/ THE
AUSTRALIAN
CONTEXT
12/ VIEW FROM THE TOP
Capital rules make it easier to
buy than to build
“Impact on earnings” is the biggest inhibitor of large investments in
innovation
Importing innovation and ‘squeezing suppliers’ for good ideas was seen as
better for the company’s bottom line than building or growing a company
through innovation.
It’s a lot easier for a Board to go and buy capability, because there’s no
immediate earnings impact…. Often what you are better o doing is to
build capability. Take $100 million, you split it up, spread it over 10 years
and spend $10 million a year. You will end up with a better result at the
end. But what happens to earnings? They go down by $10 million a year.
But if you write a cheque for $100 million, earnings don’t go down.
(CEO / INTER VIEW EE 5)
Large organisations don’t do much R&D today – they outsource it
There was acknowledgement that building capability from within was a better
option, yet big corporates are not doing enough of their own R&D a nd, as a
result, disruptive innovation was coming from smaller businesses.
Disruption is coming from smaller companies, but the people who know
what that means to them are usually big companies…. The problem is, [the
big companies] don’t know how to make the innovation .
(CHAIR / INTERVIEWEE 9)
The issue about R&D is that larger organisations do not doa lot of it
now. So you do it through smaller organisations. Only four percent of all
businesses are working with a research institution. Larger organisations
are certainly outsourcing their R&D.
(CHAIR / INTERVIEWEE 3)
1/ THE
AUSTRALIAN
CONTEXT
2016 INNOVATION REPORT /13
Regulations hamstring
innovation
Regulatory structures restrict innovation and take up most of your
time
From a Board perspective, the time required to address compliance issues
at Board meetings restricts the capacity to engage with issues of strategic
innovation:
There are so many things that actually restrict your ability to be
innovative, and a lot of it comes from the regulatory structure that you
have then got to deal with, because more often than not, if you want to
do something dierent to the way you have done it before, you’ve got
to go check to make sure that there is no regulatory intervention that
might occur down the track, or something that is going to give you some
problem .
(CHAIR / INTERVIEWEE 16)
Our reform agenda has to be globally ambitious yet both sides of
politics are weak on it
From a CEO’s viewpoint, Austra lia must compete with other countries for
big business and international talent. Regulation and taxes will inuence the
movement of multinationa l corporations and the innovation catalysts who
work in and with them.
We know we have got problems with the tax system.... So the reform
agenda has to be huge. At the moment there is a lack of appetite from both
sides of politics to address those reforms. I think that is a real problem for
the country.
(CEO / INTER VIEW EE 19)
1/ THE
AUSTRALIAN
CONTEXT
14/ VIEW FROM THE TOP
2016 INNOVATION REPORT /15
2 /
FOCUS
O F
INNOVATION
Innovation is important but
not always central
Everybody recognised the need for innovation and there was a thirst for
fresh ideas. However, the underlying tone suggested ‘it’s interesting’
rather than ‘it’s central to our strategy.’
Interviewees were well aware of the need to innovate constantly. However, the
comments below convey a sense of polite interest, as opposed to urgency a nd
priority:
Innovation is not something you just do at one point in time - it has to be
continual. You can’t stop still, and particularly in this day and age, with so
many changes and the advent of the internet, and the Internet of Things. It
really is controlling so much of what is going on in the world today, that you
need to be continually upgrading yourself and making sure that you are fit for
market in every sense of the word, which means continually changing your
procedures, changing your - or upgrading your people, developing your people.
(CHAIR / INTERVIEWEE 16)
There’s a very strong recognition from the Board that if we don’t innovate we
will become irrelevant. There’s a real thirst for knowledge on the Board. So, we
spend a lot of focus at the Board on outside stimulus and learning and dierent
perspectives.... [Our industry] can be very, very insular and we can talk to
ourselves all day long and convince ourselves of this is how the world is.
(CEO / INTER VIEW EE 1)
The scope of real interest was more ‘incremental’ than ‘game changing’
Because incremental innovations are less risky and generate quicker return on
investment, many companies prefer to focus on these:
If it’s incremental , we would probably go for it. If it’s incremental, your
investors will follow and we will be able to get the money.
(CHAIR / INTERVIEWEE 13)
Few of the participants were envisaging the scenarios of the digital world
threatening their business model. The following comment was typica l of most:
We don’t see the disruptive threats immediately. We are worried that it could
always happen. We see the opportunities. We know the Board is supportive of it.
Do we really have a handle on what a true budget is going to be? We don’t yet.
(CHAIR / INTERVIEWEE 11)
2/ FOCUS
OF
INNOVATION
2016 INNOVATION REPORT /17
Large businesses want to
defend the core, then invent
Innovation needs to feel relevant and to defend the current business
model, which narrows its scope
Many inter viewees framed innovation in terms of what is known and
familiar, as it must add value to the existing business and provide a
competitive advantage:
I don’t think innovation requires [betting] the business. Innovation now
is much more about improving, constant change, constant improvement.
(CHAIR / INTERVIEWEE 4)
Our transformation program was leveraging a whole series of new ideas
and dierent ways of doing things that really improved our performance.
We see innovation covering probably just about everything that you do
from the marketing of the company to the transformation of your core
business to the new businesses.
(CEO / INTER VIEW EE 19)
Basically [innovation is] doing what you do more eciently and
measuring it and benchmarking…you quite often go through periods of
change and you identify better ways of doing things generally in tough
environments. The trick is not going back to bad habits when things
improve…weare not being disrupted digitally.
(CHAIR / INTERVIEWEE 6)
Sometimes it’s hard enough just managing current complexities
Innovation was regarded as a defensive strategy that kept core business safe
from disruption by others:
We are quite good at trying to play the game rather than changing it at the
moment.... We are not even good at what we currently do, let alone getting
into something else and creating a separate set of competencies. Maybe
in three years’ time when we are crash hot at what we do now then it’s a
dierent conversation. But at the moment we are just not there.... If we
are going to spend an extra million bucks here, how do we find a million
and a half in cost savings elsewhere to fund what we are doing over here?
(CEO / INTER VIEW EE 12)
2/ FOCUS
OF
INNOVATION
18/ VIEW FROM THE TOP
Small bets and
incrementalism reign
Funding proceeds in small bets rather than deep investments
Firms made small bets rather than deep investments in innovation, which
were then deemed ‘nice to have’ because the companies were not in crisis:
I am publicly committed to not raiding the cookie jar of its [separate]
budget. But we are not in crisis, so it’s all very nice to say…. But you are
not going to get $1 million and eight people in six months. You are going to
get $200 and go out and try something and come back with learnings and
try something else and come back with learnings.
(CEO / INTER VIEW EE 1)
You need to do [innovation] when the business can aord it…if you have so
many current fires to fix, then it becomes almost impossible to get people
to try. Every organisation has a limited capability. If an organisation has
got so many fires…then the Chief Executive and the executive team are
focused on fixing fires. Then they don’t have the luxury of looking forward
too much.
(CHAIR / INTERVIEWEE 4)
Innovation needs to prove itself and so is usually in a precarious
position
Interviewees acknowledged that experimental products or programs are the
rst to be culled because they do not demonstrate protability:
Innovative ideas are all well and good but when a project gets under
pressure or an investment gets under pressure, the manager is going to
stop it. They are going to value manage it out.
(CEO / INTER VIEW EE 1)
2/ FOCUS
OF
INNOVATION
2016 INNOVATION REPORT /19
Short-term thinking drives
decision making
Quarterly reporting drives short-term thinking and endangers innovation
Participants acknowledged a bias towards short-termism as a result of accountability
to investors. The obligation of quarterly reporting was seen as a restriction to
innovation:
Boards are encouraged to be short term. So if you are looking as to what your
returns are going to be, sometimes quarterly, that does constrain enormously the
innovation I can do. I have to trade-o the short- and long-term, and the short-
term is much encouraged by our investors. As such , we respond by being short-
term, and that cuts the innovation.
(CHAIR / INTERVIEWEE 9)
Even where Boards seek to educate their investors about the need for exploration in
order to develop a long-term vision and strategy for the company, the personal risk to
Board members is another factor in the current model being the default:
A director’s life is not worth living if you preside over an insolvent company,
because the debts of the company become yours.
(CHAIR / INTERVIEWEE 9)
Others put the short-term thinking down to the self-interest of management
Some interviewees attribute an excessive focus on exploiting immediate
opportunities to the self-interest of management. There is no real interest in ta king a
risk that may pay o in the long-term, as the CEO may not be there to see the project
come to fruition:
People try and blame shareholders, but it’s not. It’smanagement saying, ‘Am I
really going to be here in 10 years’ time when this actually kicks o ?’
(CEO / INTER VIEW EE 5)
Focusing and exploiting what the companies do well was considered mandatory while
radical innovation could only be done when the company could aord it:
Catch up is 1,000 times harder than actually defending what you have, leading
it, and being proactive. Because you start with a customer base and once they
have gone, it’s really hard to drag them back. Because they have gone to something
better.
(CHAIR / INTERVIEWEE 7)
2/ FOCUS
OF
INNOVATION
20/ VIEW FROM THE TOP
Innovation is stifled by the
demand for certainty
The metaphors people use to describe innovation are revealing
A cautious approach to innovation is well illustrated by the metaphors some of the
participants used when reecting on the nature of innovation. One CEO referred to
‘squeezing the lemon of the business’, that is, thinking innovatively about how to get
more out of the current business model. Likewise, a Chair talked about ‘playing the
hand that has been dea lt, while trying to gure out the next set of cards and assess
whether to go to another table’. Yet another Chair described strategic innovation as
‘crystal ball gazing’:
I think it’s really important that the CEO [does strategic innovation] and the
COO, if you have one, and the CFO, if possible. Beyond that, I think, certainly in
the size team we have got, I would be a bit nervous about having too many other
people crystal ball gazing and things like that.
(CHAIR / INTERVIEWEE 13)
Innovation has to satisfy business case criteria and a demand for certainty
Rather than having the space to be exploratory, innovations had to be weighed up
according to shareholder return, productivity, or sustainability. In other words,
initiatives had to be justiable in those terms, or, better still, demonstrate likely
success, before they were supported.
I tend to think if we are making long-term decisions we have to explain why we
are doing them and if we are explaining them properly to the market that will
satisfy a lot of our shareholders.
(CHAIR / INTERVIEWEE 15)
We look for markets that are large and growing, where the competition is
rational, and where we think we can have a significant competitive advantage.
If you don’t have any competitive advantage, why be there? So that’s really our
test. What are the markets that fulfil those four characteristics?
(CEO / INTER VIEW EE 18)
So I think there’s a core competency question and also a confidence question,
that you have almost got to converge and that will hopefully give you an idea of
whether something can work or not work for you.
(CEO / INTER VIEW EE 12)
2/ FOCUS
OF
INNOVATION
2016 INNOVATION REPORT /21
3/
METHODS
O F
INNOVATION
There are few integrated
approaches to innovation
Suggestion schemes and incentives not connected to strategy
Some companies had programs that incentivised innovation through awards
schemes. However, these were usua lly small investments relative to the nancial
health of the company that were not necessarily intrinsic to or integrated with
company strategy.
We have this internal award system where we nominate, I can nominate, or other
people can, an individual for coming up with an idea. We do an award ceremony
each year to promote the innovation and the successes of these things. Then it’s
well known around the company that we celebrate that. Celebrate successes and
keep on celebrating, and keep on reinforcing them. Then people will learn that
that’s the right thing to do in an organisation .
(CEO / INTER VIEW EE 19)
Investment in innovation is mostly ad hoc
There were no standard protocols for allocating CapEx to innovation projects,
with funding seemingly made on a case-by-case basis and in an ad hoc manner.
Investment in innovation was not tied to revenue, and instead had to be justied
through cost savings:
We don’t tend to allocate capital that way. It tends to be on returns, more than
anything. Defensive capital in a lot of cases has a pretty low return. That’s where
you need the innovation, to actually make it even.
(CHAIR / INTERVIEWEE 7)
In growth years you are actually expected to spend more. In fact, you fail if you
don’t spend the right level of investment in research and development, because
you are not going to get the three- or four-year payback.
(CEO / INTER VIEW EE 14)
There was a sense that the more protable a company was in any given year, the more
investment there should be in innovation, but this was not practised consistently.
3/ METHODS
O F
INNOVATION
2016 INNOVATION REPORT /23
Culture is seen to trump formal
practices
Clear innovation methods are the exception, not the rule
Organisations that identied clear methodologies for innovation practice, such as
Lean Startup and Design Thinking, were exceptional:
We are wedded to the principals of Lean Startup methodology and so we spent a
year thinking about what were the things we wanted to innovate around because to
us, it’s certainly not sitting on a bean bag dreaming up ideas. It’s quite disciplined
how you go about innovating. You don’t just look out the window and have a light
bulb and there’s your innovation.
(CEO / INTER VIEW EE 1)
Most favoured informal ‘culture’ over formal ‘practices’
There was a lack of clearly ar ticulated and formalised practices or processes of
innovation. Instead, there was much talk of creating the right ‘culture’ in which
innovation can happen:
There wouldn’t be a measure that I could actually put my finger on. So it’s not
something written down and mandated. Not structured. I just think it’s the
mindset.
(CHAIR / INTERVIEWEE 7)
The culture to encourage and to promote risk taking is really key…. We then take
an approach of trying to encourage people and celebrate success when they try
new ideas instead of actually penalising it.
(CEO / INTER VIEW EE 19)
3/ METHODS
O F
INNOVATION
24/ VIEW FROM THE TOP
Everyone is responsible for
innovation but the CEO must lead
The CEO is the key gure to drive enterprise-wide innovation
There was consensus that the CEO was the person best suited to driving innovation
throughout the organisation, although interviewees also maintained that it should
not be a specialist role, for exa mple, a Chief Innovation Ocer.
My instincts say that it should be embedded, innovation, it’s not somebody’s job,
it’s everybody’s job. We as an organisation need to support innovation in every
part of our organisation.
(CEO / INTER VIEW EE 2)
Everyone is expected to think about how we do things dierently or better or
whatever.... [The CEO] recognises the changing world and is prepared to adapt
and sees a necessity to adapt and is encouraged by the Board to do so. T here’s an
alignment there.
(CHAIR / INTERVIEWEE 4)
It is vital to look beyond today’s portfolio
Accountability for innovation remainswith the CEO, and the expectation from the
Board was that senior management must go beyond managing today’s portfolio of
businesses:
We had a Chief Executive who was a Chief Operating Ocer. He wasn’t a Chief
Executive who looked forward, had a vision, understood what that required. He
was a strong Chief Operating Ocer.
(CHAIR / INTERVIEWEE 4)
Innovation at that level has to be owned by the most senior people in the
organisation .
(CHAIR / INTERVIEWEE 11)
3/ METHODS
O F
INNOVATION
2016 INNOVATION REPORT /25
4/
ROLE
O F
BOARDS
Boards want to encourage,
rather than initiate, innovation
Management brings ideas forward and the Board is a sounding board
Advocating for innovation was unequivocally seen as part of the role of the CEO, who is tasked with
bringing forward proposed new directions for the company and making the ca se to the Board.
I think it is management’s role to bring it forward and the Board to be open-minded and stimulated
and then to be a sounding board as well as a real Board and to be able to take the discussion and the
debate and the review to a much higher level.
(CHAIR / INTERVIEWEE 11)
If you don’thave a CEO who pushes innovation, you have a big problem. If a Board doesn’t respond
then you have a bad Board.
(CHAIR / INTERVIEWEE 10)
CEOs see Boards as both supportive and cautious
The Board has a ‘check and ba lance’ function in ensuring the risk is justiable. While all CEOs
interviewed felt their Board was supportive of their proposals, external pressures a lso encourage risk
aversion:
The Board is very supportive and encouraging innovation but also wants to keep control of...
innovation [not] becoming a black hole.
(CHAIR / INTERVIEWEE 4)
One step away from our current core competencies - yeah, that’s probably fine. If you go two steps,
then that is a much bigger hurdle.
(CHAIR / INTERVIEWEE 7)
Boards help create the right culture by asking the right questions
There was general agreement that the role of the Board extends beyond governance. Rather, the Board
must also challenge the CEO to be adapting the business to a changing world:
I think all Boards have to own innovation…you have got to be encouraging the business to always
challenge what it is doing today and trying to find a better way of doing it tomorrow.
(CHAIR / INTERVIEWEE 7)
4/ ROLE
O F
BOARDS
2016 INNOVATION REPORT /27
Boards want to look outside
and bring lessons inside
Boards want to learn about innovation from diverse sources
In order to do stimulate innovation, the Board requires diversity to generate
new perspectives. Boards routinely visit Silicon Valley or other innovation
hubs to observe how new businesses scale, operate and govern dierently to
their own.
We take the Board away twice a year and we try and expose the Board
to things that are happening, things that are going on. Dierent things,
dierent people. Either the Board is better able to ask questions, or when
management is actually talking about something, then you have better
hope of the Board understanding the implications of that in terms of
potential business models.... The more sensing you can do the more you
can bring in to the conversation dierent things and the greater the
hope that the patterns will emerge and that people will see the patterns.
Because it needs more than one person to see a pattern, otherwise the
immune response of the organisation is too eective.
(CHAIR / INTERVIEWEE 3)
4/ ROLE
O F
BOARDS
28/ VIEW FROM THE TOP
Boards can communicate the
value of innovation to markets
The ability to communicate a strategy clea rly to sta keholders - shareholders,
employees, customers, suppliers, government, as appropriate to the business - is
an essential component of being able to invest in innovation. Boards can help the
executive team communicate to the ma rket that the company is ma king long-term
investments in innovation. They can contribute to persuading the market and
shareholders of the value of innovation:
I think it’s all about ensuring that you don’t fall into that trap of short-termism
and having the courage to say to a market, ‘Look, you’re investing in us and
some things we don’t produce short-term results. If you want to invest in
companies that only are motivated by short-term results, it’s not us’.
(CHAIR / INTERVIEWEE 8)
You get the investors you deserve. [You need] a coherent and sensible strategy,
articulate it well, explain it to the various stakeholders and particularly
the shareholders in this case, but also your employees and , if it’s relevant,
your customers and suppliers, whoever it is. Or it could be very relevant to
government, depending where it is, which business you are in, or to the local
communities. Articulate the policy, explain it to them, and then start to get
some runs on the Board, and then I think you will actually have a runway to
implement that strategy and begin it.
(CHAIR / INTERVIEWEE 11)
4/ ROLE OF
BOARDS
2016 INNOVATION REPORT /29
5/
LEADING
THE
WAY
Become an ‘ambidextrous’
organisation
You have to actively manage the ‘exploit-explore’ paradox
Developing and implementing both incremental a nd radical types of innovation
require dierent skills and capabilities:
We are trying to do two things at once: owning the now and owning the
future at the same time. They are quite dierent ways of thinking. As an
organisation , we have to be somewhat ambidextrous to be able to [do that].
(CEO / INTER VIEW EE 1)
Create ‘special purpose
vehicles’
Sometimes innovation only succeeds outside of existing structures
Interviewees acknowledged that companies often experience ‘tissue rejection’
of innovation, whereby experimental products or programs are the rst to be
culled because they do not demonstrate protability in the short-term. As
result, it was necessary to establish separate entities outside of the business in
order for innovation to take place:
We havedeliberately established dierent governance. [Innovative projects]
are run on, if you like, a more agile model so they are very much connected
but they are not absorbed. It’s pretty clear that if we tried to integrate them
we would have killed them. We may yet kill them but we are trying not to.
(CHAIR / INTERVIEWEE 3)
Having [innovative projects] in a separate division with a separate
president, with a line of sight to the Board and with a very specific cap
allocation [ has been very positive for innovation]; there have been a lot of
small purchases which have been bolt-ons.
(CHAIR / INTERVIEWEE 11)
5/ LEADING
THE
WAY
2016 INNOVATION REPORT /31
Embrace Design Thinking as a formal
approach
One or two organisations were investing
in a specic methodology – usually ‘Design
Thinking ’ - as the ‘how to’ of innovation:
The two components to that are the
human-centred design process, which
is really about problem definition
and building the hypothesis. Then,
an agile delivery mechanism, which
is about, how do we get to what we
call a minimum buyable oer into the
marketplace as soon as we possibly can.
So that’s really changed the way we
run programs in the organisation… we
run a two or three day HCD (Human
Centred Design) program that we’ve
now put 300 or 400 people in the
business through to basically say
we want new solutions. We call it a
solutions-innovation process.
(CEO / INTER VIEW EE 18)
5/ LEADING
THE
WAY
ON DESIGN & INNOVATION
Innovation is a n outcome not a method. Around
the world, the most innovative business schools
and businesses are turning to ‘Design Thinking ’
as the way to give structure a nd method to
innovation. Design Thinking combines the
creative ar ts of design with the psychology of
human experience. It focuses on inventing new
products and services that delight customers.
Hence it moves well beyond customer service into
making the customer experience the new basis
for creating value and advantage.
The Design Thinking movement began in the
1990s but it really took over on the back of
Apple’s unprecedented success – which was built
squarely on Design Thinking and a supreme
focus on the customer. As a result, many more
conservative organisations began to think “If this
worked for Apple, perhaps it can work for us....”
Proctor & Ga mble and Sa msung are two major
examples of where such musings can lead.
Now the most innovative business schools are
combining Business topics with Desig n skills
to produce more creative graduates a nd post-
graduates. Some business schools in Australia
are following suit but generally we lag behind
the intensity of the overseas programs and
initiatives. For instance, the Government’s
Innovation Agenda made almost no mention of
Design Thinking in its ideas and approaches –
a sure sign of its naiveté and short sightedness.
Invest in eective innovation
methodologies
32/ VIEW FROM THE TOP
Split the Board agenda to separate
strategic issues from operational ones
There was acknowledgement that
innovation must be intrinsic to the
organisation and happen at a strategic level
in order for it to move beyond idea suggestion
schemes and good intentions. In response
to these needs, one interviewee described
how strateg y was visibly prioritised over
operations and governance at their Board
meetings:
The first day is all strategy and longer
term and the second day is operations,
oversight and governance, with
compliance happening right at the end
of the second day, unless there is an
issue, in which case it will come forward
to the beginning of the second day. But
it does not contaminate the first day.
(CHAIR / INTERVIEWEE 3)
In another case, a CEO and senior executives
claimed to spend 50% of their time on
strateg y on the proviso that there a re no
immediate threats to the business:
The senior group - myself and the
strategy group and these key leaders -
spend half of our time on strategy. Now
it’s a silly thing to say, but it’s hard as
a CEO to do that if your business is
not performing well, because you are
actually constantly worried about the
burning platform.
(CEO / INTER VIEW EE 14)
5/ LEADING
THE
WAY
ON BOARDS & STRATEGY
Boards get bogged down in risk management and
operations – and being a Board Director is now
heavily constrained with liabilities. Most Board
meetings that we have seen a re overcrowded
with operational management information – and
Directors are drowning in long-winded Board
papers. One Cha ir commented that it was a crisis
– 400-page long Board papers for one meeting.
This is not sustainable, as no human can absorb
that level of detail regularly and be responsible
for decisions based on it.
The majority of this information is not even
strategic. It drags the level of discussion down to
the wrong level for a Board - to the minutiae of
operational details.
Finally, and most alarmingly, Board meetings are
not composed and delivered in a way that plays to
the strengths of most Board members. These are
experienced leaders, often w ith diverse industrial
experience and a somewhat independent
perspective. In this sense, Boards become
prisoners of the system of Board reporting and
governance.
The alternatives to information overload we
heard about took a lot of eort, lifting the Board
out of the quicksand of information overload
and ensuring the agenda left large amounts of
time to report on strategic matters, especially
innovation.
Strategy, strategy, strategy
2016 INNOVATION REPORT /33
6/
OFF
THE
RADAR
PROFIT
MODEL
STRUCTURE CHANNELPRODUCT
PERFORMANCE
NETWORK SERVICEPROCESS BRAND CUSTOMER
ENGAGEMENT
PRODUCT
SYSTEM
What we didn’t hear but
expected to...
The following are ideas we know to characterise
global best practice around innovation. A few of them
were mentioned once or twice, but most interviewees
did not have them on their radar. We think they will
interest people.
A/ DEVELOP A SHARED LANGUAGE AROUND
INNOVATION
Nobody mentioned a shared language around innovation – although one or two
interviewees pondered how it should be dened. This leaves the word meaning lots of
dierent things to dierent people, and innovation suers as a result. We recommend
that ‘innovation’ be discussed and dened so that it means something specic for the
organisation. We think this Chair was thinking in the right direction:
Unless you are prepared to take risks, how will you innovate? Because if it’s all
incremental and predictable - I mean incremental is right and necessary but
I am not sure that’s innovation. It could be called innovation but incremental
improvement really maintains the status quo. So you have got to be prepared to take
a risk but it’s got to be a calculated risk and thought through.
(CHAIR / INTERVIEWEE 3)
6/ OFF
THE
RADAR
This model from the Doblin group usefully names and arranges ten possible types of innovation:*
EXPERIENCECONFIGURATION
The way in
which you make
money
Connections
with others to
create value
Alignment of your
talent and assets
Signature or
superior methods
for doing your work
Distinguishing
features and
functionality
Complementary
products and
services
Support and
enhancements that
surround your offering
How your offerings are
delivered to customers
and users
Representation of
your offering and
business
Distinctive
interactions
you foster
* FOR A FULL DISCUSSION OF THESE TYPES, SEE: KEELEY, L., PIKKEL, R., QUINN,
B., & WALTERS, H. (2013). TEN TYPES OF INNOVATION: THE DISCIPLINE OF
BUILDING BREAKTHROUGHS. HOBOKEN, NJ: JOHN WILEY & SONS.
OFFERING
2016 INNOVATION REPORT /35
6/ OFF THE
RADAR
B/ FOCUS ON THE CUSTOMER
Only one or two interviewees connected innovation to the customer
and their unmet needs. Most interviewees were concerned over
either interna l processes and costs, risk a nd compliance, or over
competition. While innovation can certainly help transform our
operating models, that is not where the real value game lies today.
Instead it lies in tra nsforming the customer experience – and then
letting that customer experience transform our business models.
This is a big theme in international markets a nd business schools –
including Asia and China – but less so in Australia . Focusing on the
customer increases empathy and, rather surprisingly, recent research
reveals that empathy is one of the key drivers of creativity and Design
Thinking.*
C/ DEVELOP AN INNOVATION STRATEGY
Most innovation gets domesticated inside the traditiona l business
planning process. Hence it gets pushed to the edges and becomes an
optional ex tra rather than a serious investment of mind, time a nd
money. Worse still, it gets constrained to the normal disciplines of
budgets and goa ls – and hence it becomes too conservative.
The best of practices separates out the ‘pla nning system’ into two
halves: a business plan to manage today ’s business and an innovation
strateg y to create tomorrow’s business.
D/ DEVELOP AN INNOVATION ECOSYSTEM
Organisations have a natural do-it-yourself bias, yet this is likely to
channel thinking down familiar boundaries. Some of the smartest
thinking a round innovation today moves outside the organisation
to create an ecosystem of innovation, complete with structured
pathways for introducing external perspectives and ideas. This
philosophy of innovation stresses open systems. Organisations
struggle to stay open because it means (or is perceived to mean)
losing control. Nevertheless, no matter how they are organised,
such ecosystems seem to be emerging as a vita l ingredient for
organisations to foster deep and challenging creativity.
* MARTIN, R. (2009). THE DESIGN OF BUSINESS: WHY DESIGN
THINKING IS THE NEXT COMPETITIVE ADVANTAGE. CAMBRIDGE MA:
HARVARD BUSINESS PRESS.
36/ VIEW FROM THE TOP
6/ OFF
THE
RADAR
E/ ALLOCATE CAPITAL FOR INNOVATION
No-one mentioned a policy of how much to invest in R&D and/or innovation
as a dedicated fund. This means that innovative projects have to be funded
out of operating expenses, subject to scrutiny by business case to prove their
potential return on investment in order to get funds. This puts corporate
innovators in a Catch-22 situation: they have to prove future revenues but
future revenues are predicated on as yet un-invented products. So how can
they ‘prove’ the future revenues?
An important study of 30 US entrepreneurial founders, ranging in size from
$200 million to $6.5 billion companies, revealed that they generally don’t
think like this. Rather than applying causal reasoning, focusing on expected
return, these expert entrepreneurs applied eectual rea soning, focusing on
aordable loss. This means they didn’t analyse markets and select customer
segments up-front; instead, they found a way to go directly to potential
customers to talk to them, even before anything was built. Based on this
early feedback, they would then pick markets to enter or new markets to
create.* In other words, they selected a nd funded ideas based on engaging
potential customers rather than the creation of elaborate market models and
business cases.
F/ SET ACCOUNTABILITIES FOR INNOVATION
If the old adage, ‘what gets measured, gets done’ applies to innovation, then
not much would get done. We heard that Boards expect senior executives to
lead innovation, but we did not hear a nyone talk about how that turned into
accountabilities or KPIs.
G/ EXPLORE HOW TECHNOLOGY CAN NOT ONLY
DISRUPT OLD BUSINESS MODELS, BUT ALSO
CREATE NEW ONES
Not many interviewees talked about how technolog y can change their
business models radically. Technology did not really come up in the
conversations as much as we expected. Technology – digital and big data –
has moved from being a servant of the business to being a disruptor of many
business models. It can also create very dierent business models. We think
there is huge space to develop scenarios and possibilities a round the kinds of
futures that technology can open up for a business.
* SARASVATHY, S. D. “WHAT MAKES ENTREPRENEURS
ENTREPRENEURIAL?” LAST MODIFIED OCTOBER 21, 2008. HTTP://
SSRN.COM/ABSTRACT=909038
2016 INNOVATION REPORT /37
LIST OF REFERENCES
Benner, M. J. & Tushma n, M. L. (2003). “Exploitation, Exploration,
and Process Management: the Productivity Dilemma revisited”.
The Academy of Managament Review. Vol 28. No 2. 238-256.
Keeley, L., Pikkel, R., Quinn, B., & Walters, H. (2013). Ten Types Of
Innovation: The Discipline Of Building Breakthroughs. Hoboken,
NJ: John Wiley & Sons.
Martin, R . (2009). The Design of Business: Why Design Thinking
Is The Next Competitive Advantage. Cambridge MA : Harvard
Business Press.
Palmer, C., Shilton, D., Jeyaratnam, E., & Mountain W. “Australia’s
Innovation Problem Explained In 10 Charts”. Last Modied
December 7, 2015. http://theconversation.com/austra lias-
innovation-problem-explained-in-10-charts-51898.
Sarasvathy, S. D. “What Ma kes Entrepreneurs Entrepreneurial?”.
Last Modied October 21, 2008. http://ssrn.com/abstract=909038
38/ VIEW FROM THE TOP
VIEW FROM THE TOP
2016 INNOVATION REPORT
A CONVERSATION WITH 20+
CHAIRS AND CEOS FROM MAJOR
CORPORATIONS ON THE STATE OF
INNOVATION IN AUSTRALIA.
PUBLISHED IN OCTOBER 2016
PLEASE CITE AS: LEUNG, L., NIKOLOVA, N., SCHWEITZER, J., GOLSBY-SMITH, T.,
WHYBROW, T., & JURD, K. (2016). VIEW FROM THE TOP – 2016 INNOVATION REPORT: A
CONVERSATION WITH 20+ CHAIRS AND CEOS FROM MAJOR CORPORATIONS ON THE
STATE OF INNOVATION IN AUSTRALIA. SYDNEY, AUSTRALIA: SECOND ROAD, SPENCER
STUART, UNIVERSITY OF TECHNOLOGY SYDNEY.
THIS WORK IS LICENSED UNDER THE CREATIVE COMMONS ATTRIBUTION-
NONCOMMERCIAL-SHAREALIKE 4.0 INTERNATIONAL LICENSE. TO VIEW A COPY OF
THIS LICENSE, VISIT HTTP://CREATIVECOMMONS.ORG/LICENSES/BY-NC-SA/4.0/.