Creating Disruptive Differentiation with Innovation Management

Ask a CEO and he or she will tell you that innovation is critical to the organization's long-term growth prospects. Ask the same question of people who work in that organization and the answer won't be quite so positive. Without continued innovation, companies are likely to be relegated to the low-end commodity business (where returns are sure to be unattractive). Staying ahead of the product life cycle through effective and intelligent innovation and complexity management is a highly rewarding strategy, provided you can anticipate what the customer wants or - as was the case with Apple's iPhone - your company can be in a position to drive what the customer wants.

What distinguishes enterprises that understand this from those that don't? In the latter, innovation most frequently is part of an executive's mindset but not part of day to day reality. After nearly 20 years of being in the innovation business, I could share a list of dozens of reasons why innovation isn't implemented in organizations. I have found that if the commitment to change isn't truly embraced on all levels, the organizational impact is diluted. A key obstacle to innovation implementation is improper formulation. Organizations need to "formulate to innovate" by blending the right combination of essential innovation ingredients that fit their current culture and lay the foundation for the desired culture.

Some people in large companies view innovation as another new "flavor of the month" initiative that will be replaced by a new flavor focus next month. However, the leaders who sustain a competitive advantage realize that innovation is the most important "flavor" that will enhance the success of all aspects of a business or organization.

When Innovation is Missing

Some of the commonly cited reasons or excuses I hear for not implementing innovation, such as risk aversion, leadership culture, technology, environment, etc. However, one important reason is that innovation initiatives are not integrated with activities throughout the entire organization. In short, organizations need to "integrate" to innovate.

So the question becomes, how do you embed innovation into the corporate DNA? How do you optimize innovation within a complexity and portfolio prioritization framework?

Innovation has been cited as the main growth driver by many successful companies. In fact, companies with sophisticated innovation management programs have experienced distinctly higher profitability growth than their less innovation-inclined competition. Innovation management's success relies on the ability to shorten the time to profit and prolong the profitable phase of a product's lifecycle by minimizing overall costs. This characteristic stems directly from effective complexity reduction optimization - being able to reduce new problems into other problems that we've already solved and then use those solutions to address the new problems. Innovation management and complexity optimization are highly connected; only in an effective pairing will they achieve optimal results and contribute positively to the bottom line.

When the economy hums along, innovation loses its focus and is usually relegated to the background (why should we invest?), to be dusted off when economic realities stymie growth. A company's ability to innovate - to tap the fresh value-creating ideas of its employees and those of its partners, customers, suppliers, and other parties beyond its own boundaries - is anything but a fad. In fact, innovation has become a core driver of growth, performance, and valuation. And it should be an integral part of both short- and long-term planning processes.

If your organization doesn't have a shared definition of innovation, it's very difficult for employees to talk about it. I have been very surprised by the number of different definitions of innovation I've collected during the past decade - I have several hundred of them. Many of them are too complex and lengthy. Some definitions confuse innovation with creativity. The communication confusion makes it difficult for employees to talk about what innovation is and how innovation can help.

A shared vision helps leadership and everyone in an organization communicate to innovate. If a vision for innovation isn't communicated, then it may be difficult for people to be motivated. Having everyone in an organization on the same page is always the key to success with any innovation initiative.

Incorporating Innovation into the Strategic Portfolio

Pcubed's experience confirms that there's a distinct differentiation between economically-driven innovation realities (innovate or die) and corporate culture and mindset. When performing portfolio management and strategy prioritization/alignment exercises with our clients, a large majority of executives say that innovation will be at least one of the top three drivers of growth for their companies in the next three to five years. Other executives see innovation as the most important way for their company to accelerate the pace of change in their market environment.

But should innovation be limited to products? Should we not move beyond traditional product and service categories to pioneer innovations in business processes, distribution, value chains, business models, and even the functions of management - to eliminate unnecessary complexity? Further conversations reveal that most executives are generally disappointed in their ability to stimulate innovation. Most of our client organizations' senior executives confess that they're only "somewhat," "a little," or "not at all" confident about the decisions they make in this area.

So how do you make sense of the inherent complexity? With pressures on margins and marketshare retention, how do you incorporate innovation within your strategic portfolio?

One way to start is by asking some fundamental questions.

• What are the root drivers of competitive advantage in your industry? Is it R&D capabilities, innovation in marketing or advertising, innovation in manufacturing processes, or something else altogether?
• Do you truly understand your core capabilities? Does excellence in manufacturing position your organization for competitive advantage? Can manufacturing be third-party relegated, allowing the organization to focus on core competencies instead on manufacturing and supply chain complexity (thus positioning it to focus better on selling more at higher margins)?

Bridging that gap between an organization's aspirations and its execution of innovation management is often far more frustrating than most executives could ever imagine. Mimicking the approaches of the most successful practitioners is frequently an ineffective path. Sustaining innovation to create real value at scale - the only kind of innovation that has a significant financial impact - is even harder.

The Building Blocks of an Innovation Culture

Our experience shows us that there really are no best-practice solutions to seed and cultivate innovation. The structures and processes that many leaders instinctively use to encourage it are important, but insufficient. On the contrary, most executives we work with would say that people and corporate culture are the most important drivers of innovation.

How do you build an innovation-driven organization? How do you embed innovation in corporate culture? In working with senior executives to sort out and prioritize innovation complexity within the context of multiple other strategic initiatives and requirements, I'm convinced that a disciplined focus on three people-management fundamentals may produce the building blocks of an innovative organization.

First, formally integrate innovation into the strategic-management and portfolio agenda of senior leaders - something few companies have done. In this way, innovation can be not only encouraged but also managed, tracked, and measured as a core element in a company's growth aspirations.

Second, executives can make better use of existing (and often untapped) talent for innovation. This doesn't require implementing disruptive change programs. It does require creating the conditions that allow dynamic innovation networks to emerge and flourish. Indeed, you must make the presumption that everyone in the company will be expected to participate.

Third, they can take explicit steps to foster an innovation culture based on trust among employees. In such a culture, people understand that their ideas are valued, trust that it's safe to express those ideas, and oversee risk collectively, together with their managers. Such an environment can be more effective than monetary incentives in sustaining innovation.

These three fundamentals are a practical starting point to improve an organization's chances of stimulating and sustaining innovation where it matters most - among its people.

While senior executives cite innovation as an important driver of growth, few of them explicitly lead and manage it. About one-third say they manage innovation on an ad hoc basis when necessary. Another third manage innovation as part of the senior-leadership team's agenda. How can something be a top priority if it isn't integrated into a company's core processes and the leadership's strategic agenda and - above all - behavior?

Amazingly, in a large number of organizations we work with, we see neither growth nor innovation as being part of the strategic planning process. That process is focused solely on budgeting and forecasting. Most claim that innovation is integrated into the process informally. A minority say that innovation is fully integrated into it. Most senior executives don't actively encourage and model innovative behavior. If they did, they could give employees the support needed to innovate.

Practical Steps to Innovation

Advancing innovation in the organization requires taking a number of practical steps.

Define the Kind of Innovation that Drives Growth and Helps Meet Strategic Objectives: When senior executives ask for substantial innovation in the gathering of consumer insights, the delivery of services, or the customer experience, for example, they communicate to employees the type of innovation they expect. In the absence of such direction, employees will come back with incremental or familiar ideas.

Add Innovation to the Formal Agenda at Regular Leadership Meetings: We observe this approach among leading innovators. It sends an important signal to employees about the value that management attaches to innovation.

Set Performance Metrics and Targets for Innovation: Think about two types of metrics: the financial (such as the percentage of total revenue from new products) and the behavioral. What metrics, for example, would have the greatest effect on how people work? One company required that 20 percent of its revenue come from products launched within the past three years. Another established targets for potential revenues from new ideas in order to ensure that they would be substantial enough to affect its performance. Another approach is to set metrics to change ingrained behavior, such as the "not invented here" syndrome, by requiring that a certain percentage of all ideas come from external sources.

Incorporate Innovation into Your Corporate Portfolio and Program Management Initiatives: Clearly defining how innovation will drive revenue and margin growth should be a first priority when assigning funding to the many initiatives, projects, and other requirements in the corporate portfolio.

Embrace Innovation as an Executive Team: It's not enough for the CEO to make innovation a personal goal and to attend meetings on innovation regularly. Members of the executive team must agree that promoting it is a core part of the company's strategy and ways of working. They need to reflect on the way their own behavior reinforces or inhibits it and decide how they should model the change and engage middle management.

Turn Selected Managers into Innovation Leaders: Identify managers who already act, to some degree, as network brokers and improve their coaching and facilitation skills so that they can build the capabilities of other people involved in innovation efforts more effectively. The goal: making networks more productive.

Create Opportunities for Managed Experimentation and Quick Success: Not surprisingly, this approach is typically the best way to start any change effort in large organizations. Quick success matters even more with innovation; people need to see results and to participate in the change. A positive experience will make all the difference in building the organization's capabilities and confidence.

Here's an innovative thought: Develop an internal trading system where all employees can trade ideas and bet on their success or failure rates, much as if they were betting in the stock market on corporations. Buy and sell shares in thoughts and innovation initiatives. It's astonishing how accurate employees will predict the success or failure of any initiative.

Innovation is a big idea with a big potential. But it's wise to approach it in small steps, implementing just one or a few of the ideas we propose and building from there. For many companies, the initial steps on this value-creating journey are the most critical of all. So we recommend that you bring in a trusted advisor to help you understand your company's true core values and capabilities and map them against capabilities of key competitors as well as likely trends and shifts in the market. The ultimate goal in all of these efforts is to develop breakthrough innovation strategies that can fundamentally change an industry - yours.

Hans Casteels recently joined Pcubed as VP in the Communications Sector, based in Toronto. He has worked for France Telecom, AT Kearney, and Canada 3000 Airlines among other international firms. Reach Hans at (226) 339-4792 or hans.casteels@pcubed.com.