Developing an Innovation Strategy

    Michel van Hove

    As many as 94% of leaders say their organisation isn’t very good at game-changing innovation.

    At the same time every organisation innovates, but approaches vary, and so do the results. In some cases, we see CEOs communicate the importance of innovation publically. This usually leads to well-intended but ad hoc initiatives but not the results that most expect. The world’s top performers approach innovation strategically, and during this webinar we’ll show you how you can develop an innovation strategy.

    Below you will find the replay of our recent webinar on Innovation Strategy. If you have questions after watching the recording or want to learn how we can support you please get in touch with us at hello@strategos.com or go to the Contact Us page.

    We recommend the following publications after watching the webinar.

    1. Is there ever a good time to invest in strategic innovation?
    2. How do you harmonize and accelerate innovation in a corporate organization?
    3. Navigating innovation options.

    Below the video you can find the edited transcript.

    Below you will find the transcript of the webinar.

    Why do you need an Innovation Strategy?

    Every organization innovates but approaches vary and so do the results. In some cases, we see CEO’s communicate the importance of innovation publicly and this very often results in a lot of activity and enthusiasm. But we also know that a lot of business leaders that are actually disappointed in the results that they get from their investments in innovation. And we believe that it is largely because there was a mismatch between expectations, scope and investment. We also know that the world’s top performers approach innovation strategically.

    What is an innovation strategy?

    We’d like to offer you our definition. Innovation strategy is a set of choices we make about how we allocate resources and develop our capability to achieve the growth goals of the business. Our definition focuses on answering several crucial questions. If we unpack those there are three things that a strategy must include.

    Why do we need to innovate? This may seem like a trivial question, but it’s often one that is forgotten because it seems to be so important that we don’t have to ask ourselves why we are actually innovating in the first place. Because that drives really what our scope needs to be and the choices that result from that scope in terms of organizational and individual capabilities we need to build. And that, in turn, helps us to define the key changes that we need to make to what we call our innovation system.

    Professionalizing Innovation Management

    We believe that there is a need to professionalize innovation management. Most of our management practices have been developed almost a hundred years ago and you see the different curves when different practices were introduced such as project management and total quality. Innovation needs to be on that same curve. Today, innovation is often associated with creativity, fun, change and excitement. Culture is something that we often hear and of course entrepreneurial spirit.

    You wouldn’t necessarily associate these characteristics with project management or TQM. But to advance innovation and deliver the results that people expect, we need to really focus on professionalizing innovation just like any other business discipline. And we believe that that can be achieved without losing the creative and entrepreneurial qualities that are crucial to delivering value for customers in new and different ways.

    Companies like Nokia and Shell started to think more strategically about innovation a long time ago. Launching dedicated corporate innovation teams so that they could explore new opportunities that wouldn’t otherwise have been pursued.

    When you want to professionalize innovation, there are certain barriers that get in the way. Ask yourself what are your challenges to professionalize innovation? If you don’t have any, that’s great but also a very rare situation. Here is a starter list of challenges we have come across that you may recognize:

    1. Innovation initiatives are scattered across the company
    2. Innovation is largely a bottom-up effort but lacks top-down support
    3. No alignment within the leadership team on priorities for innovation
    4. Limited view of what innovation could mean for the company
    5. Digital gets all the attention and investment
    6. Short term focus, the markets demands fast returns
    7. Innovation is disconnected from the business strategy

    Three critical challenges you’ll need to address first

    We see three critical challenges that we have to address first to convince leadership that there is a need for an innovation strategy.

    There’s never a good time to invest

    The first one is “never a good time to invest”. A majority of 85% of organizations’ leadership teams believe innovation is key to the company’s success. And 41% believe they are at risk of being disrupted. That indicates that there is much interest but also a lot of momentum behind doing something about innovation more strategically. However, 78% only focus on incremental innovation. Basically, new product development or new service development. When we study companies that have strong revenue growth for over a decade or more, you’re likely to find evidence of world-class innovation. And this is the result of ongoing investment focus and support from the top in both economic upswings as well as downturns.

    In bad times there are arguments against investing in innovation as resources are scarce. The focus is on managing the core business and priorities are reducing cost and maintaining market share. When the economy’s booming, resources are available. But once more the focus is on managing the core business because it is scrambling to meet customer demand. It’s trying to get product and services to the customer and it’s fighting off existing and new competitors because the market has become even more attractive than before to new entrants.

    So paradoxically the goal and success of business growth can actually be lethal to innovation. The pressure to grow the top line while reducing costs never go away. And as a result, innovation can easily get squeezed into the nice to have category. As a result, there is never a good time to invest in innovation. That’s a challenge that you need to be able to address and understand that concern is there when you talk to the leadership team.

    Companies like shell and Whirlpool, who we have helped build their innovation capability, started their innovation programs in the 90s and the early part of this century. They’ve created a sustainable world-class innovation capability by holding their course whether the economy was booming or not. To these companies, innovation wasn’t just a project but a long term commitment to changing how they practised innovation.

    Innovation is everywhere

    The second one is what we’ve called “innovation everywhere”. Every organization innovates and there’s usually a lot of enthusiasm for it. There are individuals who really believe that innovation is important to do their work. And so, they start well-intended but very much ad hoc innovation initiatives.

    Imagine a business unit of a tech company, organizing a hackathon to find new ideas that help them deliver new solutions. At the same time, the HR department is organizing training on creative skills, entrepreneurialism, agile, you name it. Both are potentially worthwhile efforts, but it’s unclear how they link together and strengthen the organization’s overall innovation capability. Innovation is not viewed strategically.

    If you are in an organization and you’re tasked with advancing innovation, you’re never in a green field situation. How do you introduce an innovation strategy without stifling that enthusiasm of the people that already believe that they’re doing the right thing? That they are advancing innovation for the good of the company, for the good of themselves. And they’re really motivated. That’s a real challenge for people who are giving that task or responsibility to advance innovation inside an organization. 75% of the larger organizations do not have a well-structured innovation process. Innovation remains mostly ad hoc. And that’s a pretty large number considering that we’ve been talking about innovation for over 25 years.

    The silver bullet syndrome

    The third one is the silver bullet syndrome. In many cases, we see companies acting on the hope that implementing single tools and solutions will somehow make them innovative, that it will change their culture. While all of these point solutions can be useful in isolation, they almost never generating a significant and lasting result. Consequently, the enthusiasm for innovation wanes quickly. And we’re talking about really good approaches like design thinking and business model innovation, the lean startup and idea management systems. They’re all really good tools and solutions but there needs to be a bigger plan in order to make them really effective.

    When we talk to clients, culture always comes into the conversation. Management is very used to asking big questions but always expect very short and simple answers. Now the answer can be simple, but it’s not ever a single tool. While most people know this, it is very appealing to go for something simple that they can implement tomorrow, execute the day after and get some early results.

    Just to give you an example here, and we know that idea management, crowdsourcing solutions are very popular and they’re really good tools to have. What we see happening with clients is that it’s actually an easy way to start your innovation journey if you will, but it’s not the single solution that’s going to change it all. Often it’s only focused on tapping employees and customers for ideas. Employees and customers remain the top sources for ideas, but we also know that it mostly leads the incremental innovation. And as well you know, in this day and age a lot of people are talking about breakthrough and radical and new game-changing, disruptive etc. It usually leads to disappointment because what you get is mostly incremental.

    When you next have a conversation about innovation with anyone in your organization, you’ll actually have some of the arguments to make your case for strategic innovation.

    Top performing companies

    When you look at top performing companies, their CEOs actually paint a much bigger picture of how they expect innovation to contribute to the overall business success and where they want to focus their innovation efforts and what organizational changes they will start to implement to make that happen. In this case, strategy and innovation are closely linked and it is clear how innovation supports a more ambitious, longer-term goal. This is now where we actually get into the more strategic elements of innovation.

    Create your own path to success

    And there’s not one path to innovation success. Every organization has to make its own choices about what is right for them, understand why they want to innovate, what changes do they see out in the world that is going to affect them and how innovation and actually going into play a role in addressing those. In the next section, we’ll show you how to start developing your innovation strategy.

    Defining your innovation strategy

    In defining your innovation strategy, there are three things that you need to address. And the first one is to get the executive team on board. The reason for that is you want to engage them in conversation and make sure that they all speak the same language. They need to set priorities and outline the bigger picture, define a future state for the company and the scope for innovation.

    The second one is defining growth ambitions. Making sure that you look at the core and renewable businesses and how you’re going to split resources, what your expectations are, et cetera.

    And then the third one is how you’re going to implement and manage innovation. What’s your plan to develop your innovation system, that broader capability that’s going to deliver all that?

    Next, we’ll show you each of these elements in more detail to develop an innovation strategy.

    Get the executive team on board

    As the CEO, innovation may be part of your plan, but that doesn’t automatically mean that the rest of your team is on board. CEO’s talk about the importance of innovation but they still need to create the buy-in and alignment with their executive team. And in some cases, they themselves don’t really fully understand what innovation means, what it could deliver and how it’s going to deliver results.

    The question you need to address is what’s in it for them. So again, if you’re tasked with advancing innovation in your organization this is going to help you engage that leadership team in dialogue and make sure that everyone’s clear about what innovation means and what’s in it for them. How will the innovation efforts contribute to the performance of their parts of the overall business?

    If you’re a divisional head or a business unit leader, what’s the scope of innovation that we will focus on to make success happen? And ultimately this executive dialogue creates a shared vision of success, a future state of the company with innovation at the core.

    There are several questions you can ask to facilitate that conversation.

    Identify external changes

    The first one is to ask executives to look outside of the company, define what significant changes they see occurring around them now and in the future. What they believe the implications of such changes are for the company and then to prioritize those that they can and should address with innovation.

    The outcome of this exercise provides the foundation and it should be revisited periodically to assess whether that’s actually still valid.

    It’s very important that you engage the executives or leadership team in dialogue and help them create their own view of the future. Not something that they read in a report and not something that they buy from a research agency, but based on the information that you prepare for them, that they can form their own opinion and have their own beliefs and assumptions about how the future may unfold and what their role is going to be in that future.

    Like any other strategy, you need to constantly monitor your assumptions. You need to revisit those periodically to make sure that those assumptions are valid or whether you actually need to adapt your course. It provides a way to monitor whether what the company’s doing still makes sense and deal with the uncertainty associated with innovation and strategy.

    Set Innovation scope

    Next, we explore innovation scope. What types of opportunities, what stages of development, how broad should participation be? An innovation program designed to bring already identified ideas to market will look different from a broader capability building effort aimed at, for example, identifying white space opportunities and building new growth platforms. In many cases, the answer will lie somewhere in the middle. Innovation isn’t an either-or decision but a portfolio and resource balancing act.

    Focus on delivering results

    The third one is about business outcomes. Innovation should be about delivering results and we need to be clear up front what we expect it to contribute. This is where a lot of the disappointment comes from. There’s a mismatch if we expect disruptive and get incremental for example.

    It shouldn’t be just about financial results, but equally about other dimensions such as category leadership, segment leadership, social impact, new economic models. We’ve just named a few as thought starters to jump-start the conversation that you need to have with your leadership to make sure that people understand what the business outcomes are, what do we want innovation to contribute specifically.

    When we defined the future state with the leadership of a food and beverage company, their expectation was that innovation should contribute to its market leadership in sustainability. Because they really believed that was critical to longer-term survival. And so that ended up as a business outcome that innovation needed to deliver.

    At this point, you should give some thought to how you will measure the business outcomes you seek. Consider potential metrics for inputs, throughputs and outputs.

    The organization you’ll need to build

    Once they’ve looked at all the changes, defined the scope of innovation, understand what contributions they expect innovation to make, it’s then time to look at the organizational future state. What does the organization look and feel like in real terms to deliver that chosen innovation scope? We ask clients to describe this in terms of transitions, from a current state to a future state. We can then immediately identify gaps that must be closed to develop the cultural and organizational capacity to innovate.

    To give you an example, a recent client’s innovation scope was commercialization and scaling of opportunities that were outside of their core business. This required a specific set of skills around defining business models and experimentation and was less about front end discovery techniques. Those are important distinctions to make. Another client wanted to use innovation as leverage for cultural changes, including a shift in leadership behaviour from telling to asking, and the establishment of much deeper empathy for customers’ challenges and desires across the employee population.

    Goals drive the design of the innovation programs and leadership learning agenda, for example, skill building activities and certain metrics we implemented and organizational characteristics.

    Identifying barriers and enablers to innovation

    Now that we’ve looked at changes, we’ve looked at the scope, we’ve looked at outcomes, we’ve looked at organizational characteristics or changes and then the question is what might get in our way? What are some of the barriers and enablers? This is a first pass that you’ll make with the leadership team. What do they think enables that change and what do they think is a barrier? Here we’re just listing a few of the ones that we often hear.

    Identifying barriers and enablers for innovation is important to understand what the amplify, what we leverage and what we need to overcome.

    Often the most critical barriers are not tangible processes or resource constraints, but they are more embedded beliefs about how the business should operate. What we believe leads to success. These beliefs in turn influence how the organization is structured, it’s processes, policies and behaviours and this can prevent people from being effective in doing their work.

    In the worst-case innovation is stopped altogether. We have ways to identify barriers and enablers much more in-depth than simply asking people what do you think is going to block this or what do you think is going to actually help this?

    One of our clients was in industrial manufacturing and they observed that despite the ambition to innovate in areas beyond their core business, none of the ideas that they had identified ever made it through to the feasibility stage. We did a quick scan and it showed that resource allocation decisions were primarily being made on the basis of optimizing asset utilization. It was then obvious that only ideas that would fit that agenda were progressed. And so that’s, important to understand. That by identifying those critical barriers and enablers, including the belief-based ones, you can address them explicitly in the structure and resourcing of your innovation program.

    Defining growth ambitions

    The next element to address is distinguishing between core and renewal (business). If you’re a business unit manager and you have P&L responsibility you may see innovation as something that is going to harm or hurt your business more than it’s going to help you in terms of your day to day business operations. And so there needs to be a balance between operating that core business and renewal. And this is a challenging issue to address. But it can be solved partly by explicitly splitting resources between core business growth and new areas for growth and renewal.

    When investments in ideas for future growth compete head to head with opportunities that grow the business of today, the future usually receives the short end of the stick. This is probably something that you recognize. That example that I just mentioned about why certain ideas didn’t come through is because they’re competing for resources with ideas that are much more shorter term.

    Where do we play and how will we win?

    As part of the executive alignment there need to be decisions made about where to play and how to win, but equally how that translates into investments in core versus adjacent versus new areas of growth. We do something fairly simple with the executives that tries to pinpoint them on creating that balance, a guesstimate in terms of where they think the resources need to be in order to deliver that sort of growth agenda that they have in their business strategy. It’s a very simple but effective chart.

    Creating a balanced portfolio

    Basically, where do we play is about addressing markets, whether it’s a core, adjacent, or completely new (to the business). And on the horizontal axis is how do we win. This is about using your existing core competencies in your core business area, stretching and leveraging those core competencies to move into adjacent spaces and to actually develop completely new competencies to move to transformational growth areas.

    A couple of examples of the type of innovations you would think about in the core. Think about magnum ice cream for example or liquid washing detergent, or wireless headphones. When you move into adjacent think about the company Berlitz and how they leveraged their understanding of languages and cultures as a basis for publishing travel guides. Or Disney leveraging storytelling and experience design to move into theatre and cruise lines which were fairly new to them. And then when you move into transformational it becomes more like the DSM example or even Phillips, who transitioned from selling light bulbs to now being a major player in the medical space.

    It’s an interesting exercise to do, to see what people come up with in terms of numbers. You can use this as an analysis tool as well. Plotting all your current projects and seeing where you end up from a resource perspective. There are a few basic ratios or golden rules that you can use to guide you. This is from research that was published in HBR and shows you the ratios for different types of industries.

    Building an Innovation System

    The last of the three is to create an innovation system. It’s highly unlikely that you will have all the required innovation capabilities to deliver the growth ambition that exists in your company today or that the executives defined for the future. Innovation leaders develop policy and process-based organizational capacity, not just individual capabilities. This is coming back to that sort of single solution or silver bullet perspective and ensure that innovation success actually lasts.

    It’s not just about generating ideas. Identifying broad opportunity platforms, articulating winning business models, and executing commercialization through agile approaches are all prerequisites before the cash register begins to ring. Infrastructure to nurture ideas that do not immediately fit the core business, such as a corporate incubator or accelerator, may be part of what’s needed. Leadership needs to be able to navigate different innovation infrastructure options, understand which one is right in each situation, and execute a portfolio of coordinated approaches.

    Over the years we’ve developed our innovation system framework that helps us make innovation stick. We are creating a capability that lasts because it is embedded in the fabric of the organization.

    [for the Korea Telecom example please refer to the client case for in-depth analysis]

    Use a stepwise approach

    Creating an innovation system can seem a little bit daunting, too big to handle, too big to even start. It’s very much about a stepwise plan, assess and prioritize your barriers. Don’t roll a big rock up a steep hill but focus on the critical things first. Work on real innovation with multiple teams to develop individual and team capabilities while delivering value for the business.

    A stepwise plan shows you exactly what you’re going to do tomorrow but allows you to learn along the way so you can course correct if needed. But you’ll have something that is much more manageable than a big master plan that’s going to scare people from investing in the first place and accepting that an innovation strategy is what you need.

    Key components of an Innovation Strategy

    One is defining a future state of innovation that supports the growth ambitions of the business, engaging in that leadership dialogue, understanding why you want to innovate, what is the scope, what is the kind of organizational changes that you need to make.

    The second one is to design that innovation system so that when you do create a capability, it’s something that lasts and supports the growth ambitions of the company.

    And then lastly, it’s creating and executing a stepwise plan by taking on critical barriers first and then plan to implement that innovation system.

    Those are the three components of how you build an innovation strategy. Hopefully, we’ve given you some practical tools and advice on how you can get a conversation started and some key questions to ask your leadership.

    How we can help

    If you want to have us help you, we can provide you with that structured approach to develop an innovation strategy. We have tools and templates and obviously a lot of experience in managing those dialogues. The assessment of the state of innovation and design of all the system elements, how to implement, is something that we know how to do. And then finally that stepwise plan, how you create that, how you sequence things and do the critical things first and develop that world-class innovation capability over time.

    Closing

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    Have a great day if it’s still ahead of you, if it’s your evening, then have a wonderful evening. We hope to see you again.