The Most Innovative Companies Have Long-Term Leadership
Call 2014 the year of innovation
If innovation is the foundation to building the future, this focus should be reassuring. To overcome disruption and remain relevant into the future, companies need to build the businesses that will replace their legacy offerings.
A Gartner survey of almost 500 executives at global corporations revealed that growth is this year’s top priority. Google Trends reveals that interest in disruptive innovation crept up to peak levels this year. It seems that every time you hop on a quarterly earnings call, the CEO mentions innovation. The M&A markets are frothy, corporations are investing in Silicon Valley labs, and even PhDs looking for jobs in business schools are finding it tough to find homes without “innovation” somewhere in their background.
And even with the best of intentions, most CEOs start off disadvantaged in building the next big thing. Many of the reasons for this are well documented. Executives have conflicting incentives, the wrong investment metrics, and enormous margin pressure. But sometimes, executives manage to overcome all of these structural challenges and push the right types of ideas regardless of the barriers. Companies like Apple, Amazon, General Electric, and IBM demonstrate the possibility for ongoing reinvention in pursuit of the next big idea.
The use of discounted cash flow (DCF) and net present value (NPV) to evaluate investment opportunities causes managers to underestimate the real returns and benefits of proceeding with investments in innovation.
The DCF Trap
Most executives compare the cash flows from innovation against the default scenario of doing nothing, assuming—incorrectly—that the present health of the company will persist indefinitely if the investment is not made. For a better assessment of the innovation’s value, the comparison should be between its projected discounted cash flow and the more likely scenario of a decline in performance in the absence of innovation
ackling big audacious problems take time. It’s why venture investors and entrepreneurs tend to be committed for the long haul. Big ideas start small.
The unfortunate truth is that most public company executives don’t last too long in their roles. Based on an annual survey conducted by the Conference Board, the average CEO departs her role with fewer than 9 years under her belt. If it takes a decade to build a big business, that’s already too short of a time to be the “executive sponsor” for the project.