How much does your company need to invest in innovation? It seems like a simple enough question, but hbr_130x130answering it with a degree of rigor often highlights a gap that’s bigger than you think between your future financial targets and your current investments in growth.

Identifying this so-called “growth gap” is critical, because the bigger the gap, the more a company needs to look beyond its current offerings, markets, and business models to find growth opportunities.

And the more growth opportunities stretch beyond a company’s current capabilities, the more the company needs to build systems to manage the unique nature of these opportunities (the kind we describe in more depth in our recent article “Build an Innovation Engine in 90 Days” and our 2012 e-book Building a Growth Factory).

The exercise required to calculate your growth gap sounds commonsensical:

  1. Start by setting the growth target you wish to achieve some years in the future. (That could be any number of metrics — revenues, profits, total return to shareholders, or some combination — but for purposes of this discussion we’ll focus on revenues.)
  2. Calculate how much revenue your current business will generate by that time from its current offerings and improvements to them.
  3. Calculate the revenue your investments in on-going new growth businesses are expected to generate by that time.
  4. Add up the figures from lines two and three, and compare with the figures from line one.
  5. The difference is your growth gap.

In reality, though, each step is fraught with psychological difficulties and organizational complications, making the process as much an exercise in rooting out unspoken assumptions as a mathematical exercise.

Read the full article at Harvard Business Review

Scott Anthony is the managing partner of Innosight. David Duncan is a senior partner at Innosight. Pontus Siren is a principal at Innosight.

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