Importance of Strategic Management in Managing Innovation

Just as project management is necessary to successfully manage new product development (NPD) efforts, strategic management is an indispensable tool to manage innovation. Strategic management can hold the reins of innovation to give it a purpose and direction to make the innovation outcome successful and profitable. Innovation is an umbrella term that means it is a process that involves the contribution of many functional activities including strategy, research and development (R&D), manufacturing, and marketing to design, produce and market a new product or service to make a profit.

Running a successful business requires winning the battle over the competition to remain profitable in the long-run. No matter how powerful a company is, it will always have some weaknesses in some key functional areas. In my innovation management career, I have worked for small (including startups) and mid-sized companies, and research organizations. Some performed very well and some very poor. What I captured when I reviewed the performance of these organizations was that the successful ones had the strengths in product design, manufacturing, and marketing, and the ability to strategically manage and integrate the activities of the necessary functions to generate innovation and become successful. One such company was Recoton Corporation. As a marketer, manufacturer, and distributor of consumer electronics products, the company, in the 1990s, integrated backward by gradually establishing an offshore contract manufacturing facility to manufacture wireless products first and then incorporated the activities for new product development. The result was that the company introduced many successful wireless consumer electronic products, became a market leader, and grew to $45 million in sales from new wireless products in 5 years. This example demonstrates that when a firm chooses to grow through innovation and strategically manages it, the resultant value created by the firm can maximize so much that this value cannot be achieved by any other means of growth: growth by expanding internal operations or externally through acquisitions, mergers, and strategic alliances. The lesson is simple to grow faster through innovation, a firm must have strengths in at least 2 or 3 areas of its industry value chain. The lack of strategic management or not having the right level of maturity in strategic management can cause business failure. Often it has been seen that large companies and research organizations have created great technologies and applied them to create great products, but with no payoffs or on the negative side, they even incurred huge losses.

Companies can have difficulty in developing and marketing products if they do not have the knowledge and experience in managing innovation strategically. DuPont Company spent more than $13 billion on chemical and related research during the 1980s, but failed to create any tangible, profitable innovation.

Some of the problems organizations have experienced when they attempted to implement   a strategic change are listed here:

1. Too much bureaucracy in running the business.
2. Products took a long time to reach the market.
3. Lack of focus and direction.
4. Failure to convert research into manufactured products.
5. Conflicts among functional managers due to promoting their own agendas.

But why strategic management is necessary to manage innovation? As mentioned above, innovation necessitates the management, including coordination and integration of many activities to successfully design and market a product or service with an intention to make a profit. Strategic management can help to harness, nurture and exploit innovation, and therefore can become a superior source to create value and generate competitive advantage. Additionally, through the practice of strategic management, a firm can control the drivers of competition-the resources and capabilities through which a firm can create and capture value to generate a competitive advantage. The integrative nature of strategic management allows to integrate and align the innovation strategy, functional strategies, and goals with the business and corporate strategy of the firm. On the marketing side, once the product or service is introduced, the innovation output diffuses into the supply side and the demand side. On the demand side, customers purchase the good or service and on the supply side, competitors imitate it. Therefore, on the marketing side, the purpose of marketing strategy is to create market value, cope with competition, and improve the product’s overall marketing performance. From the above discussion, we can see that strategic management can help to manage innovation–by creating value and strategically responding to the competition to gain and sustain the firm’s long-term profitability.

The external environment of emerging and technology-based industries will tend to be more uncertain as the world moves further into the twenty-first century. Any changes in an innovative firm’s external environment that are driven by the forces of technology, economics, and other influences impede the ability of strategic managers to make strategic decisions to keep the firm in pace with the external environment. Despite these uncertainties, the companies which have clearly understood the sources of competitive advantages and combined the required resources and capabilities to exploit innovation have emerged successfully. One of the most arduous tasks of strategic management is to keep the firm in tune with its external environment to remain successful in the long-run. Established firms generally find difficulties in sustaining the advantage they had before due to a lack of strategic management. Nokia’s constant decline from 2008 to 2012, which lost 90% of its market value in four years, can be attributed to its strategy lacking consistency in its external environment: it ignored the growing consumer demand for smartphones. To manage innovation uncertainty, firms must constantly monitor their external environment to detect major changes and make strategic decisions to be in pace with it. Therefore, to overcome this issue, most large firms undertake periodic restructuring to stay aligned with their external environments. Companies can face difficulties in developing and marketing new products if they fail to embed strategic management in their innovation process.

Because a firm’s product innovation and technology strategy is a subset of its business strategy, and therefore, it should support the business strategy and align with it. To innovate successfully, firms must know how to strategically manage change (external and internal) and innovation simultaneously. To accomplish this, firms should emphasize innovation in their mission, demonstrate flexibility, and respond swiftly to changes.

When strategic management is used to manage innovation, it creates all three types of synergies: operational, managerial, and financial. Since the goal of innovation and strategic management is towards maximizing profitability, the highest form of financial synergy can be achieved by strategically managing innovation.

References and Further Reading

1. T. L. Wheelen & J. D. Hunger, Strategic Management & Business Policy (New Jersey: Prentice Hall, 2000), Chapters 1, 3, 6, 8, and 11.
2. R. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2013), Chapters 1, 8, and 9.
3. Scott B. Smart, William L. Megginson, and Lawrence J. Gitman, Corporate Finance (Ohio: Thompson South-Western, 2004), p.  858.