The 3 pillars of innovation that will save large companies

The problem

97 out of 100 large companies in LATAM do not follow good innovation practices. Why is this important? Because those who don't are at a very high risk of dying.

You probably read this and thought, "It's impossible for this to happen to my company or the company I work for; we've been leaders in our industry for many years, and we're huge." Well, I have some good and bad news for you:

• The bad news:
  • 52% of the S&P 500 companies from the year 2000 no longer exist. I don't want to gloss over this fact… 52% of the world's most important companies in 2000 no longer exist today. If the world's largest and most established companies from 2000 no longer exist, why believe it couldn't happen to my company?
  • While short-term uncertainty and risk are low, in the long term, they are very high. Let's take these data as a reference: The average lifespan of companies in the S&P 500, which was 33 years in 1964, dropped to 24 years in 2016 and is projected to shrink to just 12 years in 2027.
• The good news:
  • If we implement best practices in the three pillars of innovation, our chances of surviving and differentiating ourselves increase drastically.
  • There is a studied and validated methodology on how to tackle this problem, and very few companies in LATAM are implementing it, but it's never too late to start.

If we look at this McKinsey chart, we can identify that those companies that innovated even in times of crisis performed 30% better than the rest (not counting those that fell by the wayside):

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Innovate to Differentiate

How can I know if my company is among the 3 that do well or the 97 that do poorly? There are 3 requirements we need to meet, but before that, I'd like to introduce a concept I learned from the world of startups and venture capitals: the MOAT.

MOAT is the moat that protected medieval castles from invaders, and today it is used to reflect the competitive advantage companies strive to build to defend themselves from competition, the market, macroeconomic forces, trends, and industry forces.

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Startups seek to create a MOAT from their inception to survive, which is the reason they exist. But established companies with a functioning business model and low uncertainty enter a comfort zone that makes them believe future changes cannot drastically affect them.

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Understanding this MOAT concept, the question is how do we create and expand ours? As we saw at the beginning of this post, history shows us that the answer is innovating, and it may sound a bit harsh, but digital transformation today is no longer innovation; it is a standard that every company must meet. Setting that aside, we must constantly design and test many new business models.

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The 3 Pillars of Innovation

To systematically and consistently innovate, continuously maintaining and expanding our MOAT to defend against external threats, our company must:

1. Have an innovation portfolio
2. Have an innovation program
3. Have an innovation culture

It sounds simple, but it's not. Let me tell you why:

1 - Innovation Portfolio:

First, it's not enough to have innovation initiatives or ideas. We must have a diversified portfolio with many bets on efficiency, maintenance, and disruption initiatives. This last concept is key, and we can briefly explain it using Amazon as an example:

• Efficiency: Robots that increase cost and time efficiency within logistics centers. This percentage improves the company's margins.
• Maintenance: Introduction of Amazon Kindle. Previously, you could buy books through e-commerce, but with Kindle, they opened a new vertical that modified their business model and brought good financial results.
• Disruption: Amazon Web Services, a completely different business model from the marketplace, but today generates 17% of the company's revenue, yet over 30% of its profitability!

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The most common mistake in large companies is only focusing on efficiency initiatives that improve the business percentage but do not bring significant new revenue to the company. Additionally, efficiency initiatives do not protect us from the risk of death in the long term, as they do not generate a significant differential that expands our MOAT.

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2 - Innovation Program:

Second, have a program with activities constantly feeding our portfolio and generating results. It is very easy to deceive ourselves here, as the vast majority of companies have activities, but very few generate results (in the last 6 months at Paisanos, we spoke with over 20 established companies, and none had a program ensuring results).

This chart, designed by Strategyzer, reflects how we can categorize them:

• Innovation theater: These activities are usually more aimed at creating an image of being innovative than generating concrete and sustainable results.
• Culture builder: Refers to initiatives and efforts aimed at creating and fostering a culture of innovation within an organization but do not necessarily bring results (which is what we want at the end of the day).
• Value engine: Refers to activities that generate results but do not necessarily transform or impact the culture.
• Transformation catalyst: These activities bring financial results to the company and, in turn, modify the DNA of the teams, generating a sustained innovation culture that generates results.

What we usually do at Paisanos with our clients is categorize all their activities, understand:

• Which ones need to be stopped immediately (usually those that fit into Innovation Theater)
• Which ones need to be done more because they promote culture or bring results
• And which ones we need to start or incorporate (usually related to Transformation Catalyst)

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3 - Innovation Culture

One of the most common mistakes in creating an innovative culture is the belief that innovating is synonymous with breaking the rules, and people who do so are rewarded. However, if 92% of new ideas fail and the company does not actively encourage everyone to innovate, but only those who "break the rules," we will never statistically achieve significant innovation. If we want our teams to constantly ideate and design new products and services, why not create a culture where innovating is part of the rules?

A good way to understand our standing on this point is to ask ourselves:

• What are the cultural blockages obstructing the creation of an innovative culture? (e.g., financially rewarding people who break the rules to innovate and generate some result)
• What are the cultural facilitators that promote the creation of such a culture?

Additionally, various studies from the world's best consulting firms show that if there is no commitment to these pillars and dedication from the C-level, significant results cannot be achieved.

At Paisanos, we are convinced of the key role innovation plays in LATAM to transform the region and generate a positive impact on the economy and people's lives. That is why, beyond helping these companies implement top-notch innovation programs, we will be creating exchange spaces with the ecosystem and uploading content discussing:

• How to become an ambidextrous company
• Return on investment vs. return on portfolio
• Tools for CFOs to better measure innovation program results
• How to run an innovation sprint to validate business ideas
• And much more

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