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Innovation vs. operational excellence: Which one will you invest into when your outlook is uncertain?

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Gianni Giacomelli

Chief Innovation Leader

February 22, 2013 - Innovation typically tops the  “CEO’s priority list” in most business surveys. But the world has changed: extreme volatility makes demand and supply fluctuate more and less predictably, which – due to the relatively rigid cost structures and slow decision-making practices of many enterprises - introduces significant “noise” in enterprises’ earnings, and destroys company value. To counter these conditions, and beyond obvious cost and asset cuts, enterprises are now trying to build agility into their business model, as well as attempting to keep the innovation spark needed for differentiation and growth. In a previous paper, we argued that agility cannot be achieved without next-generation operations excellence. A recent survey from The Conference Board confirms that hard-nosed operational excellence rising to the #2 focus areas for CEOs in 2013, innovation slipped to #3 except in high-growth countries (human resources is #1). 

Excelling at both operational excellence and innovation at the same time when growth slows seems hard, and is reflected in the dilemma of “growth vs. margin” that many CXOs face. 

There are three challenges for CXOs in this environment. First, trade-offs: the uncertain new conditions might force to balance investments and management attention between innovation and operational excellence investments. Secondly, operational excellence isn’t necessarily “agile”. Operations have traditionally been designed and built in less-volatile times and optimized for scale, not agility. And lastly, agility doesn’t come natural to many innovators in large enterprises, who dislike volatility because it pushes management and resources towards a short term focus, and reduces the average size of bets companies make on innovation. Only a few cash-rich private companies are somewhat spared.

 The key to reconcile the apparently conflicting capabilities and incentives of “Innovation” and “Operation” is, in fact, volatility itself. Volatility is enough of a threat to encourage organizations to think about the opportunity for synergy which is, in fact, enormous. Once this fact is established, and senior management involved in ensuring collaboration across the enterprise, data-focused process design can deliver its power.