Future proofing your organisation
When people think of innovation, they tend to think of a new product, like the iPhone, or the driverless car. Think a little harder, and a company might think of making a process more efficient, like Toyota did with car making, or changing a business model, like Uber.
Some of these are incremental, and some are breakthrough. To future-proof their organisations; firms need a balanced portfolio of innovation activities. Why?
If you are only looking at incremental, step by step innovations and short-term results, you can miss the big opportunities of a market breakthrough or a radical innovation that your competitors might make. You are also a target for scores of well-funded start-ups like Airbnb, Uber and Netflix. Incremental steps are no defence against disruption.
If you are only looking at long-term, lab-based innovations you are probably trying to predict the future. You are making big bets on technologies and changes in what people might want that may never happen. You can end up missing revenue you could make in current operations, by not responding to immediate customer needs. You could end up losing money in the core of your business by neglecting it.
In this short piece, we look at how companies can look at a spectrum of innovations across 1 to 5-year time horizon and recognise that each initiative requires a different discipline to innovate, incentivise and progress through to commercialisation. We also look at the role that the leadership has to play in supporting all of them simultaneously.
Up to 1 year – Incremental innovation
Incremental innovation is where firms improve their products and processes step by step. They are innovations that bring better products and services, possibly quicker to their customers, protecting their core offering.
There is a distinct set of strategies a firm can deploy. Edge strategies that look at the firm’s customers journeys to find greater wallet share. Digital strategies that map customers’’ engagement journey with the firm to transform the customer experience. That way they gain loyalty and advocacy that drives both new customer revenue and greater lifetime value from existing customers. Lean strategies focused on process innovation that takes the waste out of the production and fulfilment process, bring more reliable services quicker to the customer base, again improving customer satisfaction and retention.
In incremental innovation, the role of leadership is to encourage the grassroots within their frontline teams, those that interact with customers on a daily basis. It means redefining their day jobs, training them to be spotters of operational innovation opportunities, and creating the time and space for these employees to test them.
Once a distinct value is created for the customer, the firms can decide how to monetise it. There is a range of pricing strategies that look at additional revenue and margin generation. Pricing strategies and monetization of innovation are both an art and a science.
1-3 year horizon – Building on adjacencies
Of course, a firm can grow simply by launching existing products into new geographies. Here, however, we are going to look at growth strategies based on innovation.
When firms are innovating over 1-3 years, they tend to be launching new products and services, clearly differentiated from the competition, that reach newer market segments and customers that are presently not well served.
These innovations may be technological advancements. Blue ocean strategies increase the market pie by bringing in new customers that value different attributes and are willing to pay for them. One example is the Galaxy Note – a phone with a pen. Firms can also bundle and unbundle products, like a phone with a contract.
Often more powerful is business model innovation, where new revenue streams could from different monetisation strategies. Think to move from ownership of an asset to consumption models (don’t sell a coffee machine, charge for number of cups consumed), or moving from a one-off sale to subscription models (Adobe changed its licensing model to subscription a few years ago bringing it more predictable annuities)
The role of leadership here is to create new business teams with dedicated resources to build these product innovations and allow them to build, test, launch and operate with managed autonomy. The leadership team needs to train these (cross-functional) teams in leading-edge design thinking and frugal innovation techniques to take a fresh consumer-oriented perspective on innovation and break the mindset of pure incremental innovation.
3-5 year horizon – Future proofing the organisation
This isn’t about predicting the future. It is about creating it. Whatever you start building, you will end up creating something else. It is an iterative process of experimentation, learning from the market, and going again. Right now, for example, Facebook is running a small-scale experiment with Facebook TV called Watch.
To make this happen, leaders need to develop and promote a mindset that if we don’t cannibalise our business someone else will!
How? For example, by selecting innovation champions and creating teams around them. Then deploy scenario planning activities to track multiple futures and build a strategy around lean experimentation, pushing a number of initiatives through a funnel.
They will need to challenge the firm’s status quo and current revenue streams, and educate finance teams that techniques like cash flows and NPV analysis won’t work in this case. Instead, an ethos of patience, all the way to shareholders, is important to allow innovations of this nature the time to grow and create profit. Nespresso is a huge revenue stream to Nestle today, but it took 20 years to build and was almost killed off several times
One way is to create a positive crisis to drive action for the future, even if the threat is not that obvious today. Leaders need to build an ambidextrous organisation and create the discipline of managing the portfolio of initiatives, actively managing the paradoxes and tensions that come with both protecting the core and challenging it at the same time.
Going for moon shots, tracking them and narrowing down to a handful of future-focused initiatives, building the mindset and organisation of skills for reinvention – it all lies at the core. It’s not easy, and that’s the reason a number large well-established firms failed (remember Kodak?). A number of others have reinvented themselves completely, like IBM.
Through a number of reference studies carried out across a large number of firms (ref), it is not geography, IP, patents, national culture or R&D spend that drives the firm’s ability to innovate. The largest contributor by far is the firm’s culture, which has distinct attitudes of being future focused, a willingness to cannibalise their existing revenue streams and revised tolerance for risk and managing ambiguity. The leaders of these firms also create the disciplined environment that allows the many in the firm to innovate successfully.
Organisational: Evaluate how you can innovate today. Innovation is not limited to R&D, its product, process, business model, strategic and management innovation. Make a start today. Some options on innovation here: https://www1.essex.ac.uk/ebs/business/executive-education/