The eight fundamentals of innovation (2023)

It is no secret:Innovation is difficult for established companies. By and large, they are better performers than innovators, and most succeed less through breakthrough creativity than through optimizing their existing businesses.

But as difficult as it is for such organizations to innovate, organizations as diverse as Alcoa, the Discovery Group, and NASA's Ames Research Center actually do. What can other companies learn from their approaches and characteristics? This question formed the core of a multi-year study that included in-depth interviews, workshops, and surveys with more than 2,500 executives at over 300 companies, including both top performers and laggards, across a variety of industries and countries (Figure 1). What we found was a set of eight essential attributes that are either partially or fully present in every large company that is successful at product, process or business model innovation.

SinceInnovation is a complex, enterprise-wide endeavor, it requires a set of cross-sectoral practices and processes to structure, organize and facilitate it. Taken together, the basics described in this article represent exactly such an operating system, as shown in Figure 2. These often overlapping, iterative, and non-sequential practices defy systematic categorization, but can nonetheless be divided into two groups. The first four, which are strategic and creative in nature, help establish and prioritize the conditions in which innovation is more likely to thrive. The next four key points address how innovation can be delivered and organized repeatedly over time and with enough value to make a meaningful contribution to overall performance.

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Certainly, there is no proven recipe for success, especially when it comes to innovation. While our years of customer service experience provides strong evidence for the existence of a causal relationship between the attributes reported by respondents and the innovations of the companies we study, the statistics described here only do soproveCorrelation. However, we firmly believe that when companies assimilate and apply these essential elements – in their own way, in accordance with their specific context, skillset, organizational culture and risk appetite – they are more likely to find the lost spark from rekindle innovation. In the digital age, the pace of change has become hyper-paced, requiring companies to properly leverage these strategic, creative, executive, and organizational factors to innovate successfully.

striving

President John F. Kennedy's audacious desire in 1962 to “go to the moon within that decade” motivated a nation to innovate like never before. A far-reaching vision can be a powerful catalyst, provided it is realistic enough to inspire action today.

But in a corporate setting, as many CEOs have discovered, even the most inspirational words, no matter how many times they're repeated, often don't cut it. It helps combine high-level aspirations with estimates of the value innovation should generate in order to meet financial growth goals. Quantifying an “Innovation Goal for Growth” and explicitly including it in future strategic plans helps to reinforce the importance and accountability of innovation. The goal itself must be big enough to compel managers to include innovation investments in their business plans. If they can make their numbers using other, less risky tactics, our experience suggests they will (quite rationally) do it.

However, establishing a quantitative claim to innovation is not enough. Target value must be allocated to relevant business owners and communicated to their organizations in the form of performance targets and timelines. Anything else risks encouraging inaction or the belief that innovation is someone else's job.

For example, Lantmännen, a large Nordic agricultural cooperative, was challenged by flat organic growth and directionless innovation. Top executives created an ambitious vision and strategic plan linked to financial targets: 6 percent growth in core business and 2 percent growth in new organic ventures. To encourage innovation projects, these quantitative targets were downgraded to business units and finally to product groups. During the development of each innovation project, it had to demonstrate how it helped achieve the growth goals for its category and markets. As a result, Lantmännen increased annual growth from 4 percent to 13 percent, underpinned by the successful launch of several new brands. In fact, just four years after entering it, it became the market leader in prepackaged food and created a new premium segment in this market.

Such performance metrics can seem painful to managers more used to the traditional approach. However, in our experience, CEOs are only likely to move on if they don't use reviews and rewards to evaluate and recognize the contribution that all top managers make to innovation.

Choose

Fresh, creative insights are invaluable, but in our experience, many companies struggle less with a lack of new ideas than with a struggle for purposewhichsupport and scale ideas. For larger companies, this can be particularly problematic during market disruptions when supporting the next wave of growth seems too risky, at least until competitive dynamics force painful changes.

InnovationIsinherently risky to be safe, and getting the most out of a portfolio of innovation initiatives is more about managing risk than eliminating it. Because no one knows exactly where valuable innovation will emerge and it's impractical to look everywhere, leaders need to put some constraints on the spaces of opportunity they want to explore. The process of identifying and delimiting these spaces can range from intuitive visions of the future to carefully considered strategic analysis. By carefully prioritizing these spaces, companies can also assess whether they have enough investment behind their most valuable opportunities.

During this process, companies should get more projects off the ground than they can ultimately fund, making it easier to kill off those that are proving less promising. For example, RELX Group runs 10 to 15 experiments per key customer segment each year, each funded with a preliminary budget of around $200,000, through its innovation pipeline and subsequently decides to invest larger funds in one or two of them, and lets this fall rest. "One of the hardest things to figure out is when to kill something," said Kumsal Bayazit, RELX Group's chief strategy officer. "It's much easier when you have a portfolio of ideas."

Once opportunities are defined, organizations need visibility into what people are working on and a governance process that constantly assesses not only the expected value, timing, and risk of the initiatives in the portfolio, but also its overall composition. There is no single mixture that is universally correct. Most established companies tend to overload their innovation pipeline with relatively safe, short-term and incremental projects that stand little chance of meeting their growth targets or remaining within their risk parameters. Some spread thinly across too many projects instead of focusing on those with the highest potential for success and resourceing them to win.

These tendencies are reinforced by a sluggish resource reallocation process. Our research shows that a company typically reallocates only a tiny fraction of its resources from year to year, condemning innovation to a stagnant progression of incrementalism.1

Discover

Innovation also requires actionable and differentiated insights—the kind that delight customers and create new categories and markets. How do companies develop them? Brilliance is always an appealing approach if you have it or can get it. Fortunately, innovation gives way to other approaches alongside extraordinary creativity.

The rest of us can look for insights by methodically and systematically examining three areas: a valuable problem to solve, a technology that enables a solution, and a business model that monetizes it. It could be argued that almost every successful innovation emerges at the intersection of these three elements. Companies that collect, synthesize, and "collision" them effectively have the highest probability of success. "If you understand what the customer is struggling with, while also gaining a deeper knowledge of the new technologies that are coming and finding a mechanism for how those two things can come together, then you will see good returns," says Alcoa's chairman and chief Executive Klaus Kleinfeld.

The insight discovery process, which extends beyond the confines of an organization and includes insight-generating partnerships, is the lifeblood of innovation. We won't go into detail here, though, as it's already been the subject of countless articles and books.2One thing we can add is that discovery is iterative, and actively using prototypes can help companies continue to learn as they develop, test, validate, and refine their innovations. In addition, we firmly believe that without a mature innovationSystemTaking into account the other elements described in this article, large organizations are unlikely to innovate successfully, no matter how effective their process of generating insights.

Develop

Business model innovations – that change the economics of the value chain, diversify profit streams and/or modify delivery models – have always been an essential part of a strong innovation portfolio. As smartphones and mobile apps threaten to upend old industries, business model innovation has become even more urgent: incumbents need to reinvent their business before technology-driven newcomers do. Why, then, do most innovation systems emphasize new products so directly? The reason, of course, is that most large companies are reluctant to risk manipulating their core business model until it is visibly threatened. At this point, they can only hope it's not too late.

Leading companies are combating this troubling trend in a variety of ways. They up their game in market intelligence to better separate signal from noise. They set up financing vehicles for new companies that do not fit into the current structure. They are constantly reassessing their position in the value chain and carefully reviewing business models that could add value to priority groups of new customers. They sponsor pilot projects and experiments outside of the core business to challenge narrow notions of what they are and do. And they test emerging value propositions and operating models against countermoves from competitors.

Amazon is doing a particularly strong job of expanding into new business models by addressing the evolving needs of its customers and suppliers. In fact, it has added many of its suppliers to its customer base, offering them an ever-widening array of services, from hosted computing to warehouse management. Another strong performer whofinancial times, was already experimenting with its business model in response to the increasing digitization of media when it launched an innovative subscription model in 2007, revolutionizing its relationship with advertisers and readers. "We resisted the then wisdom of popular strategies," says Caspar de Bono,FTBoard Member and Managing Director of B2B. “We very consciously anticipated the structural change that was emerging, and the decisions have turned out to be very successful.” In the heyday of printing, 80 percent ofFTThe income of came from print advertising. More than half of that now comes from content and two-thirds of circulation comes from digital subscriptions.

Accelerate

Virulent antibodies undermine innovation at many large companies. Careful governance processes make it easy for bureaucracies in marketing, legal, IT, and other functions to find reasons to stop or delay approvals. Too often, companies simply get in the way of their own innovation efforts. A surprising number of impressive corporate innovations have actually been the result of their mavericks bypassing their early approval processes. Of course, there's a balance to be struck: bureaucracy needs to be kept in check, but the rush to market shouldn't undermine the cross-functional collaboration, continuous learning cycles, and clear decision-making paths that enable innovation. Do managers with the right knowledge, skills and experience make the critical decisions in a timely manner so that innovation continues to move through an organization in a way that creates and maintains competitive advantage without exposing a business to unnecessary risk?

Companies also thrive by testing their promising ideas with customers early in the process, before internal forces make changes that blur the original value proposition. To finish with thatInnovation originally planned, it is necessary to break down the barriersstanding between a great idea and the end user. Businesses need a well-connected manager to lead a project and be accountable for the budget, time-to-market, and key specifications—someone who can say yes rather than no. Also, the project team needs to be cross-functional in reality, not just on paper. This means locating its members in a single location and ensuring they devote a significant portion of their time (at least half) to the project to support a culture that prioritises the success of the innovation project above the success of any function.

Cross-functional collaboration can help ensure end-user involvement throughout the development process. In many companies, the role of marketing is to represent the interests of end users when development teams create products, and to help ensure that the end result is what everyone first envisioned. But that responsibility is more often honored in breach than in compliance. Other companies, meanwhile, argue that consumers don't necessarily know what they want until it's available. That may be true, but customers can certainly say somethingnotHow. And the faster and more frequently a project team receives—and uses—feedback, the faster they achieve a great end result.

Scale

Some ideas, like luxury goods and many smartphone apps, are intended for niche markets. Others, like social networks, operate on a global scale. Explicitly considering the appropriate scale and scope of a given idea is important to ensure the right resources and risks are included in the pursuit. The seemingly safer option of scaling over time can be a death sentence. Resources and skills must be assembled to ensure that a new product or service can be delivered quickly in the desired quantity and quality. Manufacturing plants, suppliers, distributors and others need to be prepared for rapid and complete adoption.

For example, when TomTom launched its first touchscreen navigation device in 2004, the product flew off the shelves. By 2006, the TomTom line of portable navigation devices was selling about 5 million units a year, and by 2008 the annual volume had grown to over 12 million. "It's faster penetration than mobile phones," says Harold Goddijn, CEO and co-founder of TomTom. While TomTom's initial achievement was to combine a well-defined consumer problem with widely used technology components, rapid scaling was critical to the product's continued success. “We've doubled down on managing our cash, our operations, maintaining quality, all those parts of the iceberg that nobody sees,” adds Goddijn. “We were super organized”

Expand

In just a few years, companies in almost every industry have acknowledged that innovation requires external workers. Talent and knowledge flows are increasingly crossing corporate and geographic boundaries. Successful innovators achieve significant multiples for every dollar invested in innovation by accessing the skills and talents of others. In doing so, they accelerate innovation and unlock new ways to create value for their customers and ecosystem partners.

However, intelligent collaboration with external partners goes beyond the mere collection of new ideas and insights; it can share costs and find faster routes to market. As is well known, the components of Apple's first iPod were developed almost entirely outside the company; By efficiently managing these external partnerships, Apple was able to go from initial concept to marketable product in just nine months. NASA's Ames Research Center is not only working with international partners to launch joint satellites with nations as diverse as Lithuania, Saudi Arabia and Sweden, but also with up-and-coming companies like SpaceX.

High-performing innovators are working hard to develop the ecosystems that help deliver these benefits. In fact, they strive to become preferred partners, which increases the likelihood that they will encounter the best ideas and people. This requires a systematic approach. These companies first find out which partners they are already working with; surprisingly few companies know this. They then decide which networks – let's say four or five – they ideally need to support their innovation strategies. This step helps them narrow and focus their collaboration efforts and direct the flow of opportunities from outside the organization. Strong innovators also regularly review their networks, expanding and pruning them as necessary, and using sophisticated incentives and contract structures to motivate high-performing business partners. Part of becoming a true partner of choice is clarifying what a partnership can offer the junior member: maybe brand, reach or access. It's also about behavior. Partner of choice act fairly and transparently.

In addition, companies using external networks have a good idea of ​​what is most useful at which stages of the innovation process. In general, they cast a relatively wide net in the early stages. But the closer they get to the commercialization of a new product or service, the narrower and more specific they become in their procurement, since the design of the new offering is relatively fixed by then.

Mobilize

How do business leaders stimulate, encourage, support and reward innovative behavior and thinking among the right groups of people? The best companies find ways to embed innovation into the fibers of their culture, from the core to the periphery.

You start where we started: with endeavors that forge strong connections between innovation, strategy and performance. When a company sets financial goals for innovation and defines market spaces, minds become much more focused. When these aspirations are brought to life through individual projects across the organization, innovation leaders clarify accountability with appropriate incentives and rewards.

Discovery Group, for example, is disrupting the medical and life insurance industries in its home country of South Africa and also has operations in the UK, US and China, among others. Innovation is a standard measure in the company's semi-annual divisional scorecards - a process that helps mobilize the organization and affects approximately 1,000 of the company's leaders. "You all have to innovate every year," says Adrian Gore, Discovery's founder and CEO, of the company's executives. "They have no choice."

Organizational changes may be necessary not because structural panaceas exist – we've searched extensively for them and don't think they do – but to encourage collaboration, learning and experimentation. Businesses need to help people share ideas and knowledge freely, perhaps by getting teams in one place to work on different types of innovations, reviewing the structure of project teams to ensure they always have fresh blood, and making sure they learn from success and failure will be grasped and assimilated, recognizing efforts at innovation even when they are unsuccessful.

Internal collaboration and experimentation can take years to establish, especially in large, established companies with strong cultures and ways of working that have served them well in other ways. Some companies set up “innovation garages” where small groups can work on important projects outside of the normal work environment, while building new ways of working that can be scaled and integrated into the larger organization. NASA, for example, has ten field centers. But the space agency is relying on the Ames Research Center in Silicon Valley to sustain what its former director, Dr. Pete Worden calls "the character of rebels" to function as "a laboratory that is part of a much larger organization".

Large companies do not easily reinvent themselves as innovation leaders. Too many set routines and cultural factors can get in the way. For those who dare to try, innovation excellence is often built in a multi-year effort that involves most, if not all, parts of the organization. Our experience and research suggest that any company wishing to embark on this journey will maximize its likelihood of success by closely studying and appropriately assimilating the leading practices of high-performing innovators. Taken together, these form an essential operating system for innovation within a company's organizational structure and culture.