How to include innovation in your corporate strategic planning?

"Generally, companies plan their strategy by only looking inward, always thinking about their core business. However, when a strategy is planned with innovation as an essential part, the work pace, environment, interactions, culture, focus, revenue, talent acquisition, acquisitions, and processes all change."

Arturo Jiménez Director Innovation and Strategy Director at Pivvot Consulting

Estructure of a strategic plan whith a emphasis on innovation

First, let's talk about how strategic planning works in a large company and its main elements. This process begins with a deep diagnosis of the organization and its business units. We want to investigate if there are business units with superior performance and others with inferior performance, and whether we are maximizing the use of our capital. The different business lines undergo a financial analysis, and we are interested in the following variables:

ROIC: Return of invested capital.

WACC: Weighted average cost of capital.

ROA: Return on assets.

We want to investigate which business units have a higher capital return on investment, taking into account the opportunity cost of investing in other types of businesses, asking ourselves:

Is it relevant to invest in this business, or would I prefer to invest in another that generates higher profitability?
Are we generating more revenue than the cost of raising capital to finance the business itself?

The goal of a typical company during a strategic planning process is to find business approaches that generate profitability above the cost of capital. To do this, we begin by analyzing the future, looking for strategic or tactical moves that allow us to grow better.

To do this, we can create a possible investment portfolio, and here’s a key change: if your company were innovative, would this investment portfolio include businesses that are not part of the company's core business? Let’s look at some scenarios.

Simplified portfolio structure IN A COMPANY THAT DOES NOT INNOVATE:

Growing businesses: obvious investments with high return on investment (part of the core) 60%
Declining businesses: with an uncertain future (part of the core) 20%
Business opportunities in the growth area, part of the core, unexplored: 20%

Portfolio structure of an INNOVATIVE company:

Growing businesses: obvious investments with high return on investment (part of the core) 50%
Declining businesses: with an uncertain future (part of the core) 20%
Business opportunities: growth area, part of the core, unexplored 20%

Formation of new platforms to grow through innovation

Growth platform 1: New thematic axis but close to the core (low risk) 5%
Growth platform 2: New thematic axis but far from the core (medium risk) 3%
Growth platform 3: New growth unit in innovation projects (high risk) 2%

By making the investment in innovation projects a priority (achieving this consensus is not easy and generally requires a consulting team driving this objective), the next step is to analyze potential growth opportunities.

Understanding where the opportunities lie is a discovery task in which capabilities, assets, technologies, intellectual property, processes, people, financial resources, and many other elements are analyzed. It's task of consulting teams to determine in which baskets they will place their eggs and evaluate them. Here’s an example.

Each growth platform should be analyzed by understanding its compound annual growth rate, as well as assessing whether the opportunity is large or not, and whether there are barriers to entry (i.e., the possibility of many competitors easily entering the market). Each opportunity has its own level of risk and represents short, medium, and long-term opportunities.

A strategic plan that includes INNOVATION in its portfolio generates a bit more risk, but with a diversified portfolio, investment returns have historically proven to be superior.

What has been explained so far is only the first part of strategic planning. The other elements involve having a corporate purpose aligned with a large percentage of the company's executives. Adopting and internalizing this requires a bit of philanthropy and organizational culture. On the other hand, the most important yet ignored aspect in 90% of companies is the execution of the strategy. Aligning people, cultures, geographies, and business units towards execution is no easy task. This is the part of the strategy that drives people towards generating results.

Author: Arturo Jiménez

Senior Innovation Consultant

If you want to learn more, schedule a meeting with the author: https://meetings.hubspot.com/arturo-jimenez