The Eight Essentials of Innovation

In a world that is rocked by the constant threat of change as technology grows at an unprecedented rate, innovation has become a buzzword everywhere, particularly in the business world.

Any company that is not prioritizing innovation is preparing to get run over or swallowed by the competition.

The case of IBM getting surpassed by Microsoft and Apple offers a good example of how important innovation is.

A related buzzword is “disruption”, which refers to the changes wrought upon an industry, market, or company by new technology or a younger company coming into the market with a revolutionary way of doing things.

Companies are right to fear disruption. Entire businesses have fallen by the wayside due to not innovating fast enough.

The only way for a company to sidestep disruption is by being one step ahead of the rest.

The company should take innovation seriously, invest in research and development, and keep an eye on what its competitors are doing to avoid being out-innovated.

Innovation is particularly challenging for huge, well established companies, whose success is typically driven by established ways of doing things and optimization of existing business rather than innovation and game-changing creativity.

So, how can established companies that want to remain ahead of the curve embrace creativity?

In this article, we are going to look at the 8 essentials of innovation that every company should keep in mind:

Source: McKinsey

1. ASPIRATION

To innovate, the company must first acknowledge that innovation is absolutely critical for growth.

This is not always the case in many companies.

Old ways of thinking and doing things dominate in many companies, causing them to perpetually lag behind, only adopting what others have already moved on from when it becomes inconvenient to continue using the old methods.

Such companies have already failed at the first step: acknowledging the necessity of innovation and then developing cascaded targets to reflect this.

It is not enough to accept that innovation is important. The company also has to demonstrate this in action by planning for it.

The main way a company shows its commitment to a certain course of action is in the plans it makes.

For instance, having a budget for R&D indicates that the company is serious about innovation.

Innovation is inspired by clear goals and targets. When a company has a big, hairy, audacious goal (“BHAG”) to chase after, it will stop at nothing to attain it.

For instance, J. F. Kennedy’s directive that America should “put a man on the moon” was responsible for the immense innovation that led to exactly that outcome: a man walked on the moon.

However, merely communicating a compelling vision is not enough.

The company should craft an innovation aspiration that answers the following question: “how much innovation does the company require to meet its financial growth objectives?

In other words, the innovation goals should be quantifiable. While a handful of companies incorporate this in their strategy and planning processes, most do not.

When the innovation aspiration is quantified, a manager can make appropriate trade-offs that will ensure innovation takes place alongside the rest of the business activities.

This is a company that walks its talk, unlike one where the CEO announces the company’s focus on innovation but other business activities dominate as usual in resource allocation.

The best innovators break down their lofty aspirations into specific targets: “What exactly should we do to put a man on the moon?”

The targets should have both quantitative and qualitative metrics.

The targets should be cascaded throughout the organization. It should also be clear who will be involved in innovation and what specific aspects of the overall goal they are tasked with delivering.

2. CHOICE

The second component of innovation concerns opportunity.

Organizations should find out where the best market opportunities currently and potentially in the future are located.

These market opportunities are known as innovation marketspaces.

They are the boundaries within which a company will look for the insights it needs to unlock new forms of value. The boundaries may be business-model parameters, technical limits, or other constraints.

The innovation investment choices the company makes should align with its long-term strategy. Ideally, these investments should form the foundation for the organization’s future growth.

Company leaders often have to grapple with these tough choices, asking themselves questions like: “Is this technology going to have the impact we think it will?” “Is it going to work or will we lose money?” These questions can erode confidence.

This uncertainty leads to procrastination in decision-making, which is lethal, given that younger, smaller, leaner competitors are probably not second-guessing themselves as much as the bigger companies (who have more to lose if they make the wrong bet).

This uncertainty is most common during moments of industry transition, when it is absolutely crucial that the company makes the right bet/investment, exploring the innovations that are emerging around its core business.

Decision makers in the company should sharpen their ability to recognize change signals and figure out which upcoming scenarios are most likely to increase positive outcomes and investment confidence.

Another aspect of choice in innovation is portfolio management.

This refers to the company’s ability to evaluate and prioritize projects. Highly innovative companies understand what the competition or potential disruptors are working on.

After a rigorous assessment of the expected risk, timing, and value of the different initiatives, these companies are able to figure out which innovations to invest in and at what ratio.

Successful portfolio management usually involves bringing in people with the relevant experience and decision-making authority to discuss the projects/innovation pipeline.

In many cases, innovation pipelines are filled with incremental projects rather than breakthrough innovations, mainly because of decision-makers allocating resources to their own passions when they are not checked by input from those who have relevant expertise.

3. DISCOVERY

Discovery is about taking an introspective look at the current reality of the market and extrapolating a potential future reality from that.

In other words, examine the existing context and imagine the most possible future scenarios, whether best case or worst case.

Discovery requires intuition, observation, and inspiration, working within the selected innovation space and developing the most critical problems the company should focus on going forward.

Uncovering actionable insights and identifying the problems worth solving requires skill and experience. Discovery involves merging different areas of knowledge in a creative, imaginative yet practical way.

For this examination, there are three different lenses that decision-makers should use: technology, market/customer, and business.

The technology lens is about the feasibility of new technology and the benefits to be gained from adopting it. Adopting the right technology will give your business a competitive advantage in the market.

Technology affects all spheres of innovation, including products, services, business models, and processes.

Most people think of software when someone mentions technology, but it could just as well be a service platform. Unfortunately, many companies have a narrow definition of technology.

The technology lens enables the company to identify the future possibilities arising from new ways of doing things.

These possibilities can bring about threats or opportunities, and it is up to the company to identify what each possibility means and how they can best react to it.

The market lens enables the company to identify the preferences of its customers.

Customer wants and tastes are ever evolving, and sometimes companies fail because they didn’t notice the change in their customers’ tastes – or they noticed, but did not make the appropriate adjustments to accommodate the changes.

Understanding customer preferences requires a careful observation of their behavior – this is the importance of customer data.

The business lens concerns the competitive context within which the company is operating, and the current economic conditions.

Examining these realities enables the company to competitively position itself in the value chain.

When a company gains a good understanding of its relative market position and the flow of profits in its industry, it can make better innovation investment decisions.

The company should go a step further and try to get a grasp of the developments in the competitive landscape, which includes any potentially disruptive emerging business models.

The business lens also considers the regulatory regimes and the influence they have on the profits and positioning of firms in the industry.

4. EVOLUTION

Evolution is the aspect that protects the company from disruption.

A good slogan that perfectly encapsulates the need for evolution is “evolve or die”.

For many businesses, this has become an all too real threat that they cannot wish away.

The biggest fear among most chief strategy officers is that of new entrants coming into the market and disrupting the established way of doing things with process innovations and disruptive technologies.

Product innovation is not enough to protect your company from competitors, not in this era.

Other factors like business models and business processes must also undergo evolution and improvement for the company to maintain a competitive advantage – or even just to survive.

Business model innovation is the kind of innovation that yields the most significant long-term value. An example of this is introducing new distribution and production methods.

An innovative business model will disrupt the current paradigm and also impose powerful barriers to competition.

For instance, when Coca-Cola realized that traditional distribution models such as trucks do not work well in the emerging urban areas of Africa, it partnered with local entrepreneurs who operate manual distribution centers (MDCs) – in this case, bikes and pushcarts.

This gave Coca-Cola an edge over other beverage companies in the region.

Ideally, companies should test new models before adopting them.

Pilot projects and experimentation is necessary because it reveals whether a model will work and the problems that might be encountered once the new model is implemented.

Experimentation also enables the company to make the best decisions, particularly on where to allocate resources.

Amazon is highly skilled at constantly evolving and diversifying its business model.

While retail is still the company’s core business, Amazon has improved billing options, added features for recommendation and personalization, and introduced other functions which enhance the customer’s experience.

5. ACCELERATION

If you are putting serious effort in innovation, your competition probably is too.

Multiple companies can come up with the same innovation at the same time.

In such a situation, the most likely winner of the race is the fastest mover – for instance, in filing critical patents and in bringing their product to the market.

Having a first-mover advantage accrues benefits such as customer loyalty, brand recognition, and distribution or manufacturing scale.

In some industries, having the first-mover advantage produces a winner-takes-all situation where the leader is able to capture anywhere between 50 and 100 percent of the market.

For fast acceleration, the company should ask itself this question during the development process: what barriers stand between its great idea and the end-user?

Internal barriers include lack of resources or functional silos.

External barriers include unwillingness by partners and suppliers to support the intended innovation.

In many cases, companies have developed overly elaborate “funnel” processes that involve committees which have to meet again and again to discuss and make decisions. In the process of going through the funnel, the idea gets watered down, losing its innovativeness.

By the time end-users or customers are interacting with it, the end product is no longer the revolutionary, disruptive thing it was intended to be.

To maintain high levels of innovativeness, the development process should ensure that the end-users test the idea early on – that is before corporate dilution ruins it.

Furthermore, the development team must maintain full focus on the customer value proposition throughout the process.

Acceleration requires a strong project management team led by a capable project manager.

Where there are multiple innovation teams, they should be structured in a cross-functional way, not just in paper but in reality. Cross-functional teams enable better work coordination under the authority of one leader.

The members of an innovation team should dedicate either their full time or half of their time to the innovation project.

This fosters a culture where the members are able to prioritize the success of the project over the success of their own function as a contributor.

Cross-functional project teams should be co-located – that is they should operate in the same physical space.

This makes co-ordination a reality, not just an ideal on paper.

6. SCALING

From the very beginning, the company must keep in mind the possibility of scaling its innovation.

The ability to function at scale must therefore be designed into the core architecture of the innovation.

For instance, at the time of Facebook’s launch in the US, a similar social networking startup known as Hyves was already in existence in the Netherlands. Both companies gained dominance in their local markets rapidly.

Facebook attracted a lot of funds which helped fuel its constant innovation. Hyves’ growth on the other hand plateaued.

The reason is that the architecture and set-up of Hyves was not designed to scale-up to several markets outside Holland which feature diverse languages and internet ecosystems.

Meanwhile, Facebook became firmly established as a dominant player that was impossible to beat.

Note, however, that not every innovative concept should be implemented at a global scale. The company should figure out the appropriate scale or reach of their idea. This will ensure it invests the appropriate amount of resources in it.

Figuring out the appropriate scale also helps determine the amount of risk the company will face in implementing the idea. Stretched beyond its natural boundary, any idea will fail.

On the other hand, there are some ideas that are successful only at large scale.

In such a case, the company has to make a big bet – if not, it should invest its resources elsewhere.

This point is well illustrated by the emergence of “winner-takes-all” digital businesses.

7. EXTEND

The world is changing, and not just in adopting new technology, but also in new ways of thinking and doing things.

For instance, innovation in a company has always been assumed to be a thing that should originate from the R&D (research and development) department.

However, things are changing, and organizations have begun to open their doors with the intention of spurring innovation.

Thanks to the rapid pace of technological advancement and to globalization and lower capital economies, a university student can today create a multibillion-dollar innovation that disrupts industries.

When companies extend their reach beyond the walls of the organization in looking for innovation partners, they can get greater returns on their investments. Collaborating with external partners is one of the established methods companies use to cut costs.

Such collaborations also ensure the company gets the product faster to the market.

Companies should learn to co-create with its business partners, and crowd source from its customers and other stakeholders as this can yield opportunities for more value to be extracted from the innovation investments.

This is easier said than done. For many companies, this requires a shift in the company’s collective mindset.

Such companies must learn to welcome ideas that come from elsewhere without any bias against innovations not developed in-house.

It is worth noting that useful innovations do not always appear useful when you first look at them. Ideas should therefore not be dismissed too quickly.

It is even rarer for companies to find exactly what they need or want from an external source.

As a result, companies will need to tightly manage their interfaces with the external innovation community.

In most cases, what is said by the external sources needs to be translated for the internal development team to accept it and use it.

Companies must devote processes and resources towards the management of ideas flowing from outside.

The company must also create formal and informal partnerships that will help ensure the organization has a steady pipeline of ideas.

By forging strategic networks, companies can ensure a steady supply of novel perspectives, insights and ideas. Such networks include connecting with think tanks, universities, and research institutes.

8. MOBILIZATION

It’s all well and good to aspire for innovation, but these aspirations and plans must be turned into actual action.

Mobilization is aptly captured by the Thomas Edison quote that innovation requires 1 percent inspiration and 99 percent perspiration.

The point is that the company must put in effort to create a culture of innovation.

The desire for innovation may be held by the company’s top management, but it will require considerable effort to get everyone else in the company to adopt the pro-innovation approach.

Company executives have the responsibility of creating a culture and environment that stimulates the intense, long, tedious work that is often required to create something innovative.

Of all the essentials of innovation, having committed leadership is the most important. It is also the best predictor of innovation success.

It is the leadership’s job to motivate the entire organization and provide the tools different people need to contribute to the work of innovation.

One way of motivating employees to adopt a culture of innovation is through corporate innovation competitions.

The company should have dedicated innovation resources which can act as a catalyst that motivates the entire organization.

An example of such dedicated resources is an innovation team at the business-unit level, whose task is to frame opportunities and come up with new value propositions based on the market and on insights developed from observing customer behavior.

There should be very clear roles and responsibilities in the company where the innovation agenda is concerned. Everyone should understand his/her expected contribution to creating innovation.

Of course not everyone at the company will be directly involved with the innovation project. Those who are directly involved require meaningful incentives and rewards.

The company must ensure the right people are working in the right positions and foster a supportive culture that encourages them to give their best.

Every innovation needs at least one top management sponsor.

This will ensure the idea as implemented by the team does not lose sight of the big picture.

Employees in the lower levels of the company may tend to focus on their area of expertise alone.

The top management sponsor, if he/she has done his/her homework, can see with clarity all the aspects of the idea and how they fit together and will give good advice to the team to ensure success.

WRAPPING UP

Disruption is a constant threat today, even when you think your company is safe.

Consider that many disruptive companies such as Apple and Amazon were started in their founders’ garages.

This means you have no idea who is out there working on the next big thing.

Therefore, every company should put a lot of focus on innovation, unless it is comfortable with playing fiddle to competitors who are more innovative.

It is not enough to experiment and call that “innovation”. In a world where everyone else is prioritizing innovation, particularly the industry leaders, companies must be smart about innovation.

The 8 essentials listed here provide a useful structure for thinking about innovation.

They ensure a company covers all the important elements in its pursuit of innovation.