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Networked innovation drives profits.

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EXECUTIVE SUMMARY

Growing demand for innovation is overwhelming manufacturers' ineffective invention-to-innovation processes. To match demand, firms must join an emerging market model--networked innovation--that lets practitioners co-invent with customers, source and market innovations anywhere, and anticipate as well as respond to supply and demand changes.

During the past three recession years, manufacturers focused single-mindedly on cost-cutting to stay afloat. But with economic recovery kicking in, these firms need to crank out innovative products and services to expand their top lines. Forrester Research defines innovation as occurring "when inventions intersect a business process and change the way something is done, experienced, or created."

Manufacturing firms recently interviewed by Forrester confirmed growing demand for innovation from customers, competitors, and government regulation. But while two-thirds of these respondents considered themselves more innovative, only 7 percent identified themselves as very successful in meeting their innovation performance goals. No wonder these firms expressed concern over their ability to meet growing innovation demand given their:

* Customer-blind innovations. Interviewees didn't use customer-focused metrics to measure the quality or the success of their innovations--despite the fact that 61 percent claimed the desire to make their innovation processes more responsive to customer requirements and 45 percent said that customers provide the main catalyst for today's accelerated innovation. Instead, the manufacturers used financial metrics that Wall Street comprehends--revenues, profits, and market share.

* Underfunded and risk-averse R&D. Despite growing pressure to innovate, recession-weary respondents have reined in their R&D efforts. Less than 7 percent expected a drastic increase in innovation dollars over the next three years. And conservative spending was joined by conservative sourcing--only 30 percent of interviewees had an R&D pipeline dominated by disruptive innovations and only 22 percent relied heavily on outsourced innovation to share the costs. In addition, a mere 5 percent tried to cover R&D expenses by licensing a big chunk of their inventions to others.

* Slow response to market changes. Barely 16 percent of companies boasted innovation processes that responded flexibly to changes in customer requirements. The pressure was there--67 percent expressed concern about improving time-to-market for their innovations--driven by unexpected events such as swift shifts in demand, out-of-the-blue competitive offerings, and rapid product obsolescence.

Failing to use technology

The manufacturers Forrester interviewed weren't convinced that their existing technologies will help them meet the demand for innovation. They confessed that their current IT:

* Dampens invention-to-innovation velocity Among respondents, miscommunications and haphazard coordination across the firm resulted in costly delays and wrong products marketed at the wrong time. Why? These companies relied on makeshift tools to manage every step in the innovation path from ideation to commercialization. For instance, marketing defines new product requirements in Excel spreadsheets and e-mails them to R&D. And engineering changes are relayed to manufacturing by fax. According to one food company, "Our existing tools were just not designed to support our current need for speed or agility. These homegrown tools were OK to support incremental innovation of our products, several of which are 100+ years old. But with drastic changes in customers' lifestyles--like the Atkins craze--our R&D needs must invent whole new products and these, in turn, need a market launch that's coordinated across both production and sales."

* Prevents knowledge discovery and dissemination. A lack of sophisticated collaboration and knowledge management tools hampered cross-unit interactions. The result? Distributed operations in these firms reinvented the wheel, failed to jointly develop and market new inventions, and couldn't cooperate to accelerate time-to-market. An aerospace manufacturer said, "We need an integrated collaboration platform that will allow us to share design ideas and reuse components across our energy, civil aviation, and defense businesses."

* Impairs enterprisewide innovation governance. The manufacturers we interviewed didn't manage R&D initiatives as an integrated, company-wide portfolio. Only 35 percent had either a formal governance committee or a senior executive responsible for funding and managing innovation initiatives across the enterprise. And they lacked tools that can track key milestones in the invention-to-innovation process or report the market success of past and future innovation investments. Reported one chemicals company, "Without a tool that gives us visibility into innovation projects going on at any...

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