Incremental and Radical Innovation at Rolls-Royce: Building a Culture of Agility
Recent years have seen the growth of new enterprises with a reputation for innovation backed up by unprecedented R&D budgets. With such vast sums at their disposal we can be sure that several have literally more money than sense - who cares if it's a bit hit and miss? But instead of ignoring failures the truly entrepreneurial organisation that is looking for longevity ought to be asking 'Is our innovation strategy fit for purpose - what if it all goes wrong?'
In the 1970s, Rolls-Royce Aerospace was structured to focus upon the deployment of fundamental research within their new products. This structure championed the adoption of a radical new carbon fibre turbine blade within their next generation products. However, this technology failed unexpectedly under testing and the organisation was nearly bankrupted by the massive over investment in what proved to be a too early stage technology.
Perhaps understandably following this experience the organisation reduced their radical innovation efforts but significantly also decided to compare their innovation structure with entrepreneurial organisations in widely differing industries, such as 3M, Whirlpool and Procter & Gamble. As a result of this benchmarking, over the next 40 years Rolls-Royce have built their own structure for innovation that has made the brand once more a synonym for excellence. Their structure is configured around three innovation horizons: 5, 10 and 20 years; seamlessly addressing incremental and radical innovation challenges they utilise a budget for R&D of £1.2 billion (5.8% of underlying revenue) resulting in over 600 patents filed in 2014.
So that's the gold plated approach. But it's not the only one - sometimes, if you are really good at the short term the long term tends to take care of itself. The 2012 Pasty Tax debacle was the direct result of the enterprise of a wonderfully entrepreneurial organisation as far removed from Rolls-Royce as it's possible to imagine. Greggs declares itself the UK's leading bakery food-on-the-go retailer. Note that expression 'food-on-the-go' - subtly different from a takeaway or café; especially subtle when it came to eligibility for VAT! It may not have the brand recognition of McDonald's but it has more outlets; likewise it may not have the style of Starbucks but it has twice the turnover and makes considerably more than double the profit. It's been around since the fifties; a major player for twenty years - when you consider that 88% of Fortune 500 companies in 1955 are no longer trading, that's longevity.
So how has it achieved such success in what is traditionally thought of as a red ocean? Firstly by good solid foundations: vertical integration is key to supply, exceptional customer engagement takes care of demand. But the crucial element must be Greggs' ability to react quickly and a willingness to take risks. A list of Greggs' failures would probably be longer than one of their successes - coffee shops, home delivery, airport terminals, even a drive through - all have been tried: if they fail they are pulled ruthlessly but when they succeed they break new markets and products in a way their rivals do not. What is the real cost of trying all-night opening? A bit of overtime, maybe some extra insurance, that's about it. The secret is not taking risks, it is calculating risks and coping with the consequences. 'Moving fast and breaking things' is alive and kicking on the High Street and that does not require a ten year horizon, it needs those other two buzzwords of agility and resilience.
So how does a firm like Rolls-Royce, which is dependent on long term strategy connect with these shorter term capabilities? Firstly, through their internal Innovation Awards which recognise that good ideas can come from anywhere in the organisation, not only those directly concerned with research. Secondly, by looking outward through Open Innovation. Thus Rolls-Royce builds agility and resilience into its culture. In many ways the starting point is still R&D but dynamic management of new and developing technologies ensures that an eye is always kept on forming compelling customer propositions that will create long term value. The result is a robust business with a healthy balance sheet that funds the research programmes - a virtuous cycle driven by the growth opportunities that are made possible by cutting edge research.