A few months ago, I was in a meeting with an executive team of a multi-billion-dollar organization that was working on how to build an innovation culture. This is a very successful organization that enjoys a great brand and profitable growth in a competitive field. As a company, they were approaching innovation not with their backs against the wall, but from a desire to continue their success—something that is often a greater challenge than when you’re in survival mode. Why change a winning recipe?

At some point during the group discussion, the CEO got up and spoke to the group. The CEO’s remarks were clearly unprepared, but nevertheless succinct. The first thing the CEO said to his leadership team was, “Each and all of you have it within your power to make the changes we are talking about here. Every day you make decisions about what to prioritize, how to spend your budgets and how your staff is spending your time.”

The CEO went on for a few more minutes, but the crux of the conversation was that if the leadership wanted more innovation, they already had the necessary power to allocate resources to new initiatives. It was up to them to break with status quo.

Reallocation works

The CEO was right. Fundamentally, if they wanted more innovation, more resources would need to be allocated away from the existing business portfolio toward new products and services. And, it turns out, there is a bit of an art to succeed in the reallocation game. In a study of the performance of 1,600 US companies between 1990 and 2005, McKinsey found that the top performers (measured by total returns to shareholders) earned on average 30% more than the bottom performers by shifting an average of 56% of capital between business units.

The study showed that a few criteria had to be met in order to achieve the best results:

  • Consistency: The best performers reallocate resources in both good and bad times.
  • Alignment: The reallocated capital portfolio has to be aligned with the innovation strategy.
  • Long-term focus: Reallocation hits profits early on so the top leadership must be able to keep focus on the prize.
  • Balance: Companies were better off with gradual changes to reallocation rather than dramatic changes.

Ultimately, those companies that more actively reallocated resources between business units enjoyed less volatility of their performance and higher returns.

If corporate leadership wants more innovation, it’s up to them to break with status quo.

Making reallocation happen

Going back to the story about our CEO and their leadership team, a number of options are available to help them break the inertia of the status quo and move away from the past.

Any CEO or leader that expects innovation from their organization needs to set targets in their operation plans that are linked to performance incentives. According to McKinsey, this is easier for new leaders to do, and they are recommended to move quickly in reallocating resources toward new initiatives. Speed and momentum seem to be more effective than finesse in making changes like this happen.

If the corporate culture is traditionally stable, then shifting behaviour toward innovation can be encouraged and reinforced through increased internal communication celebrating individuals and relevant projects. As is often the case, it can take time and effort to foster new ways of thinking and a move away from established mindsets. In a similar type of shift, publicly listed corporations need to change how they communicate with the stock market and incorporate a set of innovation metrics, such as ones measuring new products launched or the share of revenue from new products and business units.

Finally, never underestimate the power of leadership. If a CEO expects more people to spend time on innovative ideas, then the CEO also needs to dedicate their own time and resources. The former CEO of The Hospital for Sick Children (SickKids) in Toronto set a prime example of this—she created an innovation fund in her name to help seed new ideas.

Interested in learning more about innovation culture? Leadership and the motivation of innovation teams is among the topics that MaRS Verge will be covering in the “Innovation Intensive” sessions at the MaRS Verge conference on March 1, 2016.

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Jon E Worren

Jon E Worren is the senior director of venture and corporate programs at MaRS. He is responsible for identifying new innovation and entrepreneurship practices and creating tools and resources that help both intrapreneurs and entrepreneurs to be more successful. Jon is also an instructor in Entrepreneurship at University of Toronto School of Continuing Studies. He holds a Master of Science in Media & Communication from London School of Economics and a Master of Science in Business and Economics from the Norwegian School of Management. See more…