You’d be hard-pressed to find any company that doesn’t want to innovate. Virtually every organization wants to develop new ideas, products, services, business models or processes that can create value and financial returns.
But innovation is elusive for many companies, even when they embrace and encourage it. According to Gary P. Pisano, Professor of Business Administration at Harvard University and author of Creative Construction: The DNA of Sustained Innovation, “Innovation initiatives frequently fail. And successful innovators have a hard time sustaining their performance.”
In fact, a PwC Innovation Benchmark study found that 72% of global business executives say their companies are not out-innovating their competitors. This number is particularly striking given that PwC found that 62% of them are embracing open innovation to generate new ideas, 59% are employing design thinking, and 55% are co-creating with customers, partners and suppliers in an effort to innovate.
Why aren’t these companies achieving better results, and why do leaders express such a lack of confidence in their companies' capacity to innovate?
As PwC’s study and Professor Pisano suggest, it’s usually a lack of strategy. PwC’s survey found that 54% of companies struggle to align their business and innovation strategies, while Pisano points out that many companies lack an innovation strategy altogether.
“Despite massive investments of management time and money,”Pisano says, “innovation remains a frustrating pursuit in many companies. The problem with innovation improvement efforts is rooted in the lack of an innovation strategy.”
Companies don’t typically develop, execute and continuously evolve an innovation strategy, and they often fail to align their innovation efforts with their overall business strategies.
For example, without an innovation strategy, companies can engage in a hodgepodge of improvement efforts, ranging from embracing open innovation and design thinking to creating decentralized and autonomous teams and implementing rapid prototyping.
These efforts can spin off in many directions without a coherent set of processes and structures to guide their activities and how the company should search for novel solutions. There’s often no guidance on how synthesize ideas into concepts and designs, determine which projects get funded, and ensure that the entire innovation process is aligned with larger business objectives.
The end result is often failure. But a proper innovation strategy system and its alignment with business strategies can generate real results. As PwC’s report found, strategy was the greatest determining factor in the success of any innovation initiative.
There are a number of crucial reasons why having an innovation strategy is so important and how it works. Pisano delves deeply into the details and specific case studies in his 2015 Harvard Business Review article, “You Need an Innovation Strategy.” But he also offers some quick advice on how to start defining an innovation strategy with three key questions.
3 Questions to Help Define Your Innovation Strategy
1. How will innovation create value for customers and for our company?
Innovation will never create value unless potential customers are willing to pay for a resulting product or service, or it helps them save money or experience a larger societal benefit. Of course, innovation can also help improve an existing product or service, making it easier to use, more reliable, durable, less expense, and so on.
Choosing the value your innovation will create and sticking to it is critical, because the capabilities required for each innovation are quite different and take time and cost to produce. They’re also costly to modify.
2. How will our company capture the value our innovations generate?
Innovation attracts imitation. Once a value-creating innovative product or service is introduced, imitators can create price pressures and dramatically reduce its value. Supplies, distributors and other companies required to deliver an innovation may also have enough bargaining power to capture much of its value.
This is why Pisano insists that companies must think through which assets, capabilities, products or services could prevent customers from defecting to rivals. Think about how to keep your company’s position strong.
One way to do this is by continuing to invest in innovation and develop new designs or sophisticated process technologies that help defend against would-be rivals. Apple is a great example of this. The company protects itself by designing complementary and innovative devices and services that keep customers loyal to its products.
3. What types of innovations will allow our company to create and capture value, and what resources should each receive?
In thinking about opportunities to innovate, Pisano says that companies have a choice about how much they focus on technological innovation versus business model innovation. For example, Apple has achieved considerable success through technological innovation, whereas Netflix and Amazon have focused largely on developing innovative business models.
The type of innovation you choose will ultimately impact the value you can create and capture, and it will determine the resources, funding, time and effort you’ll need to develop and execute an effective innovations strategy. A company’s innovation strategy should specify how the different types of innovation fit into the business strategy and the resources that should be allocated to each.
One way to think of different innovation types is through four categories that Pisano and his fellow researchers have defined. These categories are based on two dimensions: a change in technology and a change in business model.
Routine innovation builds on a company’s existing technology competencies and fits within its existing business model. Pisano cites Intel as a perfect example with its ongoing development of increasingly powerful microprocessors that help fuel its growth and maintain high margins. This is why companies shouldn’t interpret such “routine”as somehow antithetical to change and success. Since its last major disruptive innovation in 1985, Intel has earned more than $200 billion in operating income, mostly from next-generation microprocessors.
Disruptive innovation requires a new business model but not necessarily new technology. It often challenges or disrupts the business models of other companies, such as Google’sAndroid operating system disrupting Apple and Microsoft. It’s not a matter of technology as much as it is a completely new business model, where Android is available for free and as an open-source system, whereas Apple and Microsoft’s operating systems are not.
Radical innovation is generally the opposite of disruptive innovation and involves purely technological innovation. A good example is the emergence of genetic engineering and biotechnology as a way to approach the discovery and development of new drugs. This posed difficulties for established pharmaceutical companies who had spent decades working on chemically synthesized drugs and needed to develop competencies in molecular biology. But the resulting drugs were a good fit with the companies’ business models, so they chose to innovate and invested heavily in R&D, with funding provided by a limited number of high-margin products.
Architectural innovation combines technological and business model disruptions. A good case study is Kodak and Polaroid’s transitions away from traditional photography and an emphasis on consumables to the world of digital photography.This meant not only mastering new competencies in solid-state electronics, design, software and display technology: it also required finding new ways to earn profits from cameras rather than disposable products such as film, paper, processing chemicals and services. As you might expect, this dual-dimension innovation is the toughest for established companies to pursue.
According to Pisano, developing an innovation strategy should start at the senior level of the company. Every function will naturally want to serve its own interests, so “only senior leaders can make the choices that are best for the whole company.”
At Graphite, we’ve also seen the benefit of bringing in our independent consultants to provide an objective, third-party perspective and help guide the strategy process. Experts in innovation and corporate strategy can provide timely advice, insights and assistance to help leaders navigate the challenges of innovation.
Once a company has defined an innovation strategy, it must explain that strategy to the organization. A high-level plan should then be created to allocate resources to the different types of innovation. And Pisano also stresses the importance of managing trade-offs, since some strategies and approaches may provide excellent opportunities to create value and create technological or business model change, but they might also create new challenges that may need to be assessed and overcome.
As Pisano puts it, “Any strategy represents a hypothesis that is tested against the unfolding realities of markets, technologies, regulations, and competitors. Just as product designs must evolve to stay competitive, so too must innovation strategies. Like the process of innovation itself, an innovation strategy involves continual experimentation, learning, and adaptation.”