This post was co-written with Tim Kastelle from Innovation for Growth.
What are the key innovation issues facing the business community right now?
When we met up in person recently we had a great talk about this question. We’ve continued the discussion over email, and these are the four innovation management issues that we believe people need to be thinking about right now.
Differentiated and integrative innovation concepts
Sustainable innovation cannot be achieved by one-size-fits-all and one-sided approaches. It requires a common understanding of what innovation is, classifying concepts in order to assure individual assessments as well as differentiated approaches for firms to strengthen their innovation capabilities and performance. Further, innovation is about balancing complementary, and often opposing, variables. Therefore, integrative frameworks may help to gain a more holistic perspective and direction of impact. Examples:
• The Innovation Matrix is supposed to help assigning firms to one of nine types of innovative organizations. Depending on the characterization, a tailored approach can be developed in order to define where innovation should sit in the business model and how to drive growth.
• The Three Horizons Model integrates a short, middle and long term view of innovation, often being in tension to each other. It enables generating a balanced innovation portfolio, consisting of activities with different time horizons. This model can be of great benefit when it comes to mixing incremental and radical innovation activities with regard to risk and strategic alignment.
• As outlined previously, firms need to ensure a balance of exploiting existing businesses with exploring new opportunities, i.e. they need to become ambidextrous in order to thrive sustainably. As each direction of impact requires dedicated culture, metrics, leadership, mindset and organizational setup, this is another tension to be managed. An integrative framework (below) can be useful to determine a firm’s inclination and how to move towards a balanced innovation capability. It’s important to note – particularly for leaders: Exploration and exploitation are different, but equally important!
Startups, typically positioned in the upper left quadrant need to move to the right direction for increased exploitation and optimization of new businesses. Bigger, established companies, in turn, aim at strengthening their exploration capabilities by moving from the bottom right box upwards. One of the main challenges for organizations to attain ambidexterity is to simultaneously enable separation and integration of both directions. While novel opportunities flourish best when they don’t interfere with core business, they must be linked to the firm’s core in order to scale successfully after validation.
A more detailed discussion of this issue is planned for an upcoming post. On a personal level, sustainable innovation requires integrative instead of either-or thinking. In order to be able to manage ambidexterity, Roger Martin suggests to balance reliability with validity by developing a design thinking mindset.
Reinvention and business model innovation
As the life times of business models steadily decrease and more radical innovation activities are about to enter the pipelines of most firms, the business model is the new unit of design. Indeed, research has confirmed that business model innovators outperform traditional innovators over time. One key issue here is to establish systematic approaches to business model innovation. While most companies have proven processes for product innovation in place, only few follow process models for innovating business models. Steve Blank has recently pointed out that generation of novel and reinvention of existing business models is imperative for corporations to succeed in the time to come. Some of his points are:
• For companies to survive in the 21st century they need to continually create a new set of businesses, by inventing new business models.
• Most of these new businesses need to be created outside of the existing business units.
• The exact form of the new business models is not known at the beginning. It only emerges after an intense business model design and search activity based on the customer development process.
Unlike execution of existing business models, the invention and validation of new business models is based on a scientific and emergent approach: defining and testing hypotheses through rapid iterative experimentation. This is what the Lean Startup approach is about. It also implies designing and testing solutions on a minimum viable basis to gain a high iteration and learning frequency through customer feedback. To develop the ever more important (re-) invention and search capabilities into new fields, existing companies are challenged to consider to implement the lean startup concept. Or as Eric Ries puts it: Entrepreneurship is the new corporate function.
Another key issue for existing, in particular larger companies, will be to build a structure, capable of successfully combining search (= generation and validation of new business models) and execution (= scaling and improvement of existing business models).
Co-creation through open and social approaches
Facing growing complexity, organizations are finding it increasingly impossible to be successful when entirely operating on their own. To move innovation forward more effectively and efficiently, they aim at building appropriate networks and partnerships. Findings of a recent IBM study confirm outperformers to be more inclined to innovate with external partners – including customers. It suggests a clear tendency to leverage openness, connectedness and co-creation. Combining internal and external capabilities is becoming crucial for organizations to survive and thrive. Interorganizational partnerships and distributed value networks can be formed to pursue open business models and complementary capabilities. One interesting example is the intensified partnering between startups and larger firms to achieve sustainable innovation by combining their natural strengths. There is one simple reason behind: customer value and continuous disruption don’t care about silos and boundaries. There is also a growing awareness of the benefits to make organizations more social. According to Nilofer Merchant, becoming social is about connecting things, people and ideas. Networks of connected people with shared interests and goals create ways that can produce returns for any company that serves their needs. This refers to both the organizational and the individual level. As for organizations, it’s all about moving from isolation to communities. Here is Nilofer again:
The social era will reward those organizations that understand they can create more value with communities than they can on their own. Communities of proximity, where participants share a geographic location (Craigslist is an example but co-working locations are another) will allow people to organize work differently. Communities of passion who share a common interest (photography, or food, or books) can inform new product lines. Communities of purpose will willingly share a common task to build something (like Wikipedia) that will carry your brand and its offer to another level. Communities of practice, where they share a common career or field of business, will extend your offer because it extends their expertise (like McAfee mavens). Communities of providence that allow people to discover connections with others (as in Facebook) and thus enable the sharing of information, products and ideas.
On the people level, connecting individual stakeholders through social business design – particularly involving customers – is on the rise. In social organizations, people are seen as most valuable asset to make a difference. As discussed here, a higher degree of connectedness in combination with making interaction workers more effective and efficient, seems to be a prerequisite for strategic advantage over industry peers. Moreover, social designs bear significant potential to help organizations in better tackling the complexity of business model innovation, adaptability and strategic reinvention.
Building a culture of experimentation
One of the best tools to use to improve innovation capability is experimentation. We often think that great businesses are built on great ideas. But the fact of the matter is that great businesses are usually built by tinkering until their great idea emerges – this is the story told in Little Bets by Peter Sims. Experimentation is an organisational skill that underlies all of the other issues that we have raised here. While there is no one-size-fits all innovation tool, experimenting is pretty close to being a one-size-fits all innovation skill. It is an approach that works best when it is used to test hypotheses – so that it enables structured learning. Experiments and hypothesis testing are an essential part of business model innovation. If we are trying to embed lean startup principles into larger organisations, this is a capability that must be there. Experimenting is also central to co-creation and other social approaches. Startups and smaller organisations often experiment naturally. The issue that we would like to raise is that this skill must also be nurtured in larger organisations as well. If you’re a manager, this means building experimenting into your organisational structure and routines. If you are reporting to someone, it means figuring out how much you can get away with, and using that scope of action to support experiments.
Other people may well come up with other innovation issues that are important, but these are the ones that seem most interesting to us right now. Now we just need to start making progress on them! Therefore, we’ll try to elaborate on these issues in the time to come, in order to provide further ideas to help make innovation more successful.