Matt Chinworth/theispot.com
Many businesses launch on the strength of an innovative product or service. But somewhere along the line, most successful companies become more focused on protecting the business they have than in creating new streams of growth that position the company for the future. To enjoy long-term success, businesses need to develop the capacity for systematic strategic innovation, just as they have built out their operational capabilities.
We define strategic innovation as the discipline that transforms creative discoveries into new platforms of business that bring significant value to the market and the organization. Unfortunately, this is a capability that few companies have managed to build. For most, innovation comes in the form of process improvements to reduce costs and enhance current product lines to fill niches and match competitors’ offerings — what we call incremental innovation. Innovation outside the core product lines tends to be accessed through acquisition or venture investment and is often poorly integrated into the mainstream product portfolio. None of these practices secure the company’s future.
It doesn’t have to be this way. Over years of research and work with successful innovators, we’ve seen how exemplary companies practice strategic innovation to reinvigorate themselves and get on the path to long-term growth. We have found a set of eight common practices that, when combined, build a sustainable strategic innovation capability. While it’s rare to see the full complement of practices in a single organization, many are working toward just that. In this article, we’ll explain what goes into each of the practices and how leading innovators are executing them.
Set Direction and Establish Commitment
Building a strategic innovation capability is a major undertaking. The first three strategic innovation practices we’ll discuss ensure that there’s a coherent vision for strategic innovation and a dedicated organizational function responsible for driving it. These practices provide clarity around the work to be done and how it will be carried out — which is why it’s important to begin by building a shared understanding of the effort’s objectives.
1. Adopt a common language for defining the innovation landscape. Establishing a framework and terminology to discuss innovation activities is critical because different kinds of innovation happen on different timelines and need to be managed differently. Even simple terms, such as incremental innovation and breakthrough innovation, are not always clearly defined or understood, and more comprehensive frameworks are helpful. For example, the horizons of growth framework that originated at McKinsey considers three different time horizons for innovation.1 Horizon 1 describes near-term opportunities captured via incremental improvements to core product lines; Horizon 2 refers to emerging opportunity areas that require investment to develop; and Horizon 3 covers growth possibilities that are further off and require more experimentation and seed investment.
Other companies we have studied have built a shared internal understanding of the innovation landscape using terms such as today, tomorrow, and beyond; incremental, evolutionary, and game changer; or incremental, platform, and breakthrough. Leaders need to watch out for definition creep, though: Once people see the importance of strategic innovation, they’ll be tempted to relabel whatever they’re doing as “Horizon 3,” a “moonshot,” or a “breakthrough.”
Regardless of the labels a company adopts, the definitions should be clear and the distinctions between them well understood. A common language helps organizations classify projects according to the management strategies, tactics, and resources appropriate for each.
2. Set the domains of innovation intent. Senior leadership must scope out and articulate the opportunity areas where the company will focus its innovation efforts. The scale of ambition has to be big, and the company needs to be creative about how it can influence those opportunity spaces.
This exercise, which begins with horizon scanning and imagining future scenarios, can be a challenging task for leadership because it requires shifting from decision-oriented thinking to imaginative exploration. Executives must avoid the temptation to extrapolate from present trends to a predictable future state, because the future doesn’t unfold neatly from our assumptions about the present. Exploring future scenarios begins with considering factors that aren’t normally part of business planning for many companies — societal shifts, population issues, emerging technologies, geopolitical dynamics, culture, and more. This work opens up thinking to what opportunities may arise in a future world that’s very different from today’s. Combined with rigorous internal analysis and reflection on the company’s mission, this exploration will generate a set of opportunity domains that will be the long-term focus of innovation.
Driving this kind of exploration is a key leadership responsibility that is often abdicated. In one company, the strategy team analyzed senior leaders’ calendars to understand how they allocated their time. They found that only 5% of leaders’ time was focused on the future. While a horizon-scanning team might lay the groundwork and propose domains of innovation intent, it’s critical that C-suite executives engage with their work, choose domains they believe will become the company’s businesses of the future, and commit to them.
When Grundfos, the world’s largest manufacturer of pumps, did this, it recognized that an emerging context was likely to be crowded, densely populated cities and associated water shortages. The opportunity domains it identified included developing sustainable solutions for water management and improving the environmental aspects of large, centralized water treatment plants. Its focus on these domains yielded entirely new families of product offerings over the decade that followed.
3. Treat strategic innovation as a permanent function. Executives often try to boost innovation through special initiatives like a call for moonshot ideas or offering incentives to participate in an innovation contest or hackathon. This is like trying to create new growth platforms via suggestion box. To become an enduring organizational capability, strategic innovation needs to have two important characteristics. First, it must be treated as a full function supported by a comprehensive set of management practices. Those practices must then be designed to support one another. If one element conflicts with the others, it won’t work.
The power of establishing strategic innovation as a distinct function rather than a program or arms-length unit is permanency. Ambitious innovation initiatives last only four or five years, on average, and that brief time frame is growing shorter.2 It’s usually cyclical: shutting down in lean times and then, years later and with new leaders, skittishly trying again. Stopping and starting prevents organizations from developing the expertise they need and reaping the benefits of their strategic innovation investments.
Managing innovation-driven growth includes standing up both the structure and governance necessary to reach that objective. (See “Managing Incremental Innovations Versus Strategic Innovations.”)
It’s particularly important to establish an innovation council — a small team of senior executives that typically includes the chief strategy officer, the CFO, the head of research and development, and, occasionally, the CEO. The council commits to the domains of innovation intent and sets the mandate for the strategic innovation function accordingly. It ensures that the function is funded, gives it organizational legitimacy, and guides decision-making as the domains progress to commercialization.
The strategic innovation function, often led by a chief innovation officer, must have resources — the people, processes, and systems it needs to do the hard work of breakthrough innovation. That work is steered by metrics that align with the function’s mandate and the highly uncertain context in which it operates.
Building this system isn’t easy. Our research shows that it is often a two- or three-year process, though meaningful progress, including first revenues, is usually seen within that time frame. Senior leaders need to view developing this organizational capability as an iterative, entrepreneurial process itself. Companies need to recruit employees who can and want to do this work. As they are assembled into a cohesive strategic innovation function, that team will help develop processes and establish relevant metrics and meaningful incentives.
IBM’s now-defunct Emerging Business Opportunity (EBO) program illustrates both what can be achieved by setting up a well-resourced function and what opportunities might be missed by not making it permanent.3 Its practices were designed to fully support the strategic innovation mandate and delivered unprecedented outcomes as a result. Over the course of the program’s first five years, 25 projects were launched; five of those each achieved more than $1 billion in revenue within three years. Altogether, more than $15 billion in revenue was attributed to the EBO program — but it was considered a program and therefore temporary. By 2009, it was gone. IBM’s revenue peaked in 2011 at $107 billion. By 2020, it had hit a low of $55 billion.4 Imagine what 2020 might have looked like for IBM had it made the EBO program a permanent function.
Build the Capabilities
Many organizations have instituted new-venture teams along with some practices to advance those ventures, but few have succeeded in consistently delivering major new growth opportunities that sustain the organization. Adopting practices designed for startups has not proved to be a successful approach to meeting these objectives, nor has outsourcing the work to external parties such as venture studios or accelerators. Clarifying the work to be done and developing people who are willing and able to undertake it are critical practices that enable companies to build and sustain this capability.
4. Develop each domain into a portfolio of opportunities. Successful innovators spread their bets across several different domains of innovation intent simultaneously to hedge against risk. Within each domain, the strategic innovation team aims to identify and explore a range of opportunities. Operating at the domain level is crucially important for realizing the potential of strategic innovation, because it yields a portfolio of related opportunities rather than a pipeline of independent projects that are each subjected to a go/kill decision.
While project pipelines have traditionally been managed by employing stage gates, ranking projects by likelihood of success, and making go/kill decisions, the high degree of uncertainty in strategic innovation calls for treating each opportunity in the portfolio as an experiment. As the team learns from each experiment, it gains a clearer picture of the domain on which it’s focused. What would be considered failure in a pipeline is considered learning in the portfolio. Domain leaders find that some opportunities within the portfolio combine into bigger plays and others fade away. Some domains may be revealed as less strategically aligned with the company’s mission as discovery and incubation take place. Having multiple domains gives the company more potential shots on goal.
5. Develop the three organizational competencies of discovery, incubation, and acceleration. These are three distinct activities, each of which will require dedicated staff members in newly defined roles.
Discovery. This activity involves creating, recognizing, elaborating, and articulating opportunities. For each domain of innovation intent, the strategic innovation team generates a portfolio of opportunities. Discovery activities include hunting — internally via R&D and externally through scouting — to find novel approaches for addressing problems identified in the domains of innovation intent. While desk research is required, discovery is primarily a field exercise. Discovery teams attend research conferences, industry association meetings, and trade shows. They visit university and industrial labs and venture studios and check their assumptions on use cases with potential customers. Spotting opportunities and articulating them in a manner that is understandable and compelling requires keen skills. Success at the discovery stage is judged by the richness and diversity of the opportunity portfolio that is developed for a given domain of innovation intent.
In our research, we’ve seen successful discovery in companies that established teams of just a few people and then gave them time-based constraints or opportunity quotas. At Sealed Air, for example, a small team undertook six-month sprints to explore the opportunity space for a given domain. And at Corning, teams of two, known as exploratory marketing and technology teams, were tasked with developing one business concept per month. For each concept, they wrote a short white paper that described the opportunity, how the company’s current capabilities could help support it, and competency gaps that would need to be addressed.
Incubation. This is the work of developing the business concepts that emerge through discovery. Successful incubation teams amass evidence that guides strategic direction for a particular domain. Use cases, value propositions, technological approaches, business models, and organizational enthusiasm are tested. The output is a business proposal with recommendations for market entry points, applications, and business models for a family of products and services.
A key challenge in building incubation capabilities is finding people who have experience beyond planning for the rollout of new versions of existing products. One company we’ve worked with succeeds in this area by having a specialized set of incubation team members — some of whom work on the projects together with the subject matter experts — and others who coach them. These incubation specialists are skilled and experienced at identifying the most critical uncertainties and designing tests that allow them to learn the most using the fewest resources.
Companies should avoid the temptation to skimp on incubation capabilities and to rush ideas into the acceleration phase, taking them to market before they’re ready. In our experience, domains of innovation intent yield singles and doubles rather than home runs when incubation is sacrificed.
Acceleration. This activity involves ramping up the new business to the point where it can stand on its own alongside ongoing lines of business in an existing operating unit. Acceleration also links the strategic innovation work to areas of the company that are normally focused on incremental innovation, preparing the new business to succeed within a management system that has been designed to support ongoing businesses.
Many organizations send incubated opportunities to business units too early, only to see them wither because they’ve been starved of resources. Innovation councils can prevent this by ensuring that acceleration funds are used as intended rather than diverted to support the unit’s operational requirements. Other companies have opted to scale the emerging businesses within the strategic innovation function until they can demonstrate a path to profitability and identify where it would fit best within ongoing operations. Seeing high revenue growth, ironing out the glitches in operations, and achieving critical mass on the team are good indicators of the appropriate time to transition. The key outcome for acceleration is to successfully scale a domain of innovation intent into a growth business and transition it to ongoing operations.
As noted above, discovery, incubation, and acceleration are new organizational competencies that will require businesses to create new roles and performance metrics. Read on for more on those activities, which happen in tandem with developing the competencies above.
6. Clearly define innovation roles. The work described above requires distinct skills, and companies will need to create career paths to both develop and retain new business creation talent. That means moving away from scenarios where new business opportunities are led by project champions whose careers will be sidelined if their venture fails, and designing career paths that allow people to rise to positions of influence in the strategic innovation function.
Fortunately, not all roles must be put in place at once. Some companies we have worked with waited to formalize roles for discovery, incubation, and acceleration until there was a portfolio of work to be carried out. One company identified five domains of innovation intent and staffed three of them with small discovery teams. As two of the domains advanced into incubation, the core team incorporated subject matter experts to carry out technical and market experiments. Meanwhile, members of the strategic innovation leadership team acted as coaches and network connectors and ensured that the domain leaders met with the innovation council to determine which paths to continue pursuing and which to close off. Eventually, the company created permanent discovery, incubation, and acceleration roles and defined their required skill sets and performance criteria.
Manage the Dynamics of the Innovation System Over Time
The cyclical patterns of internal corporate venturing activities are well known: Leaders see growth falter, call for game-changing innovation, and establish a new team to make it happen. When the team fails to quickly deliver on expectations, the initiative is shuttered. Our research indicates that this is often largely a consequence of constraining the innovation team to a narrow scope and to processes that demand premature go/kill decisions. The following practices help create a longer runway for testing potential growth opportunities.
7. Proactively manage four dimensions of uncertainty. Mature companies are good at managing risk to mitigate the likelihood of an undesirable outcome. In the world of strategic innovation, however, it’s important to investigate uncertainties about technology, market structure and receptiveness, resourcing, and the organization itself in order to carve out new business territory.
Processes and tools such as design thinking, lean startup, and the business model canvas can help project teams explore technical, market, and — occasionally — resource uncertainties. However, we’ve found that organizational uncertainty is the most common cause of strategic innovation failure in mature companies. Great business ideas can die due to internal resistance, lost support, or disagreement over business models; successfully transitioning into a mainstream business unit can be one of the great uncertainties in strategic innovation.
Organizational issues can result in stalled projects and a deterioration of the innovation culture. While the remedy is to address such issues openly and proactively, the conversations necessary to resolve them typically need to occur at more senior levels. The leadership of the strategic innovation function and even the innovation council may need to step in to assist the strategic innovation team. Senior corporate leaders in particular can address anxieties about organizational change by keeping all members of the organization apprised of potential new business areas and how they might eventually contribute to them.
Note that other elements of these eight practices help address organizational uncertainties too. Domains of innovation intent help maintain commitment to focus areas and avoid continual changes to priorities. The acceleration competency enables the transition to a business unit at the point where it can be supported rather than starved for resources. And ongoing support for strategic innovation is enabled through the tuning of the innovation function.
8. Tune the innovation function. While financial pressures can dampen an organization’s appetite for investing in strategic innovation, adjusting budgets and activities rather than sidelining the function is critical. Unfortunately, innovation is often the first to go in challenging times: The portfolio of opportunities is discarded, and accumulated expertise is lost. Continual stops and starts prevent organizations from developing the necessary expertise and reaping the benefits of their investments. Instead of abandoning big bets, companies can adapt the size and pacing of a portfolio to what’s feasible in a more constrained environment.
The company mentioned earlier that identified five domains of innovation intent responded to tightened resources by staffing three of those for discovery and carrying only two of them forward into incubation. The strategic innovation team and its council remained aware of the other domains even though they lacked the resources to commit to them. Companies may choose to pace their work differently as resources fluctuate, but they should pace their portfolios rather than cutting budgets to zero in difficult times. And key innovation team members and the council should remain in place, progressing their domains and continuing to improve innovation capabilities.
Sequencing Strategic Innovation Practices
We are often asked whether there’s a specific sequence that companies should follow when instituting the eight practices described above. From a practical perspective, we find that it doesn’t matter that much. The point is to start and commit. Leaders need to understand all eight principles and commit to implementing them. Each of the three practice areas into which we’ve grouped the principles is ongoing and requires simultaneous attention: Direction and intent evolve with learning, capability-building is always a work in progress, and the innovation system must be tuned to demands and resources.
Domains of innovation intent are extremely important, but we often find that the first time company leaders attempt to develop them, they aren’t well thought through. That’s to be expected with any new capability. Similarly, we would not expect the full complement of innovation roles to be instituted at the outset, when the portfolio is small. The most important aspect is to persist, monitoring successes and vulnerabilities on each of the eight practices to continuously improve the strategic innovation function.
Building a strategic innovation capability allows mature companies to create new streams of business and secure organizational health in highly uncertain times. The eight practices we have shared are achievable but require strategic vision and commitment. Leaders who engage with them should find that their organizations become more energized about creating the future rather than afraid of oncoming disruption. As with any new organizational competency, it takes practice to achieve excellence in this area, but it’s well worth the investment. This work can transform businesses from staid, at-risk enterprises into exciting, vigorous companies that serve the needs of their broad array of stakeholders for years to come.