Why Finland’s Corporate Strategy is Stuck in Stagnation and Net Negative Innovation

Many Finnish companies seem to be stuck in a cycle of stagnation. The stagnation mode is a choice. This stagnation stems not from a lack of potential but from a series of strategic missteps and a narrow focus on incremental innovation, next quarter’s profits, and next year’s dividends.

The Innovation Paradox in Finland

Statistically, Finland is recognized as an innovative country, ranking 6th in the Global Innovation Index 2023. However, the reality within Finnish companies tells a different story. Investment activities, particularly in intangible assets like R&D, have been on the decline. In 2021, Finland’s R&D expenditure was 3.0% of GDP, with a target to reach 4% by 2030. Despite this, the actual investments in R&D have not kept pace, leading to a stagnation in innovation.

The Pitfalls of Incremental Innovation

Finnish companies more than often focus on incremental R&D, which aims to enhance competitiveness. However, this focus on competitiveness merely ensures a company’s right to participate in the market, not to lead it. The Finnish business discourse is heavily centered on competitiveness rather than competitive advantages. To truly lead, companies need to invest in adjacent or disruptive innovation, which can create new markets and redefine industries.

Misguided Public Funding

Public funding in Finland tends to support incremental core innovation initiatives, which typically yield a modest 10% return. This conservative approach has led to a situation where Finnish companies are effectively engaging in net negative innovation, especially as inflation and rising costs erode these minimal gains. Consequently, market caps remain stagnant, and corporate restructuring has become a common tactic to maintain interest in the stock exchange.

Net negative innovation in Finland is not only driven by conservative corporate strategies but is also boosted by public funding and endorsed by universities. Public funding often supports projects that are incremental in nature, reflecting a risk-averse approach and boosting political goals, not market demand. Universities, whose funding is tied to the total size of innovation projects, tend to bless these incremental initiatives, further entrenching the status quo. This symbiotic relationship between public funding bodies and academic institutions perpetuates a cycle of minimal innovation impact.

The Consequences of Stagnation

The stagnation in Finnish companies is further exacerbated by their tendency to become net savers. This conservative financial strategy, coupled with a global slowdown in labor productivity growth, has hit Finland particularly hard. Compared to other countries, Finland’s productivity growth has been exceptionally weak, with labor productivity growing by only 0.5% year-on-year in mid-2024. This highlights the urgent need for a strategic shift.

One of the fundamental strategic questions for any business leader is how to allocate the innovation budget. How much should be spent on improving existing business operations, and how much should be dedicated to exploring and transforming the business for the future?

The Ambition Matrix and Innovation Portfolio

A useful tool for assessing the allocation of innovation resources is the Ambition Matrix. This framework helps companies understand where their resources are currently focused and where they should be directed to achieve their strategic goals.

According to a classic HBR article from 2012 by Deloitte Partners Bansi Nagji and Geoff Tuff, high-performing innovation companies typically allocate their resources as follows:

• 70% on incremental innovation: Improving existing offerings and operations.
• 20% on adjacent innovations: Expanding offerings and attracting new customers.
• 10% on transformational innovations: Exploring completely new offerings and markets.

This 70-20-10 ratio has become a standard for many innovation consultancies, ensuring that companies not only improve current performance but also position themselves for future growth.

Aligning Innovation Efforts with Ambitions

When working with clients and discussed their current innovation portfolio, it often becomes clear that their projects do not align with their stated ambitions. Many projects labeled as “transformational” are, in reality, core innovation, such as upgrading enhancing current products. This misalignment underscores the need for a more strategic approach to innovation. A prime example is the hype surrounding decarbonization. While many tout it as the pinnacle of innovation, it often amounts to basic core innovation aimed at maintaining market competitiveness. Nothing less, nothing more.

Finding the Right Balance

The ideal innovation portfolio ratio will vary depending on the company, its competition, and the industry. It requires a deep understanding of the current innovation strategy and the broader market trends. By carefully balancing incremental, adjacent, and transformational innovations, Finnish companies can break free from stagnation and lead the market.

The “Benchmarking Innovation Impact 2023” report by InnoLead and KPMG provides valuable insights into how companies can set up innovation teams for success. The report highlights that innovation thrives when there is a clear vision, quantifiable metrics, and a culture that supports decision-making without political interference. It also emphasizes the importance of strong relationships throughout the organization to foster innovation.

According to the report, companies that excel in innovation allocate their budgets strategically, with a significant portion dedicated to transformative projects. This approach contrasts sharply with the conservative strategies observed in many Finnish companies, where the focus remains on incremental improvements.

A Call to Action for Finnish Executives

In conclusion, Finnish corporate leadership must shift their focus from mere competitiveness to achieving competitive advantages through bold, strategic innovation. Only then can they overcome stagnation and drive meaningful growth in the future. The current state of Finnish innovation, with its heavy reliance on incremental improvements and insufficient investment in R&D, is a clear indicator that a significant change in strategy is needed. Finnish executives must embrace a more ambitious and forward-thinking approach to ensure their companies not only survive but thrive in the global market.

It’s time for Finnish leaders to take decisive action:

1. Reevaluate your innovation strategy: Assess whether your current focus on incremental innovation is sufficient to drive future growth.
2. Invest in transformative projects: Allocate a greater portion of your budget to disruptive and adjacent innovations. Or at the very least, allocate some resources to disruptive and adjacent initiatives.
3. Foster a culture of innovation: Encourage risk-taking and support decision-making that prioritizes long-term gains over short-term stability.
4. Leverage public funding effectively: Advocate for policies that support bold, transformative innovation rather than incremental improvements.

By taking these steps, Finnish companies can break free from the cycle of stagnation and position themselves as leaders in the global market. The future of Finnish business depends on the willingness of its leaders to embrace change and drive innovation forward.