I’ve had a chance to read a very well researched report on corporate innovation conducted by KPMG in coordination with Innovation Leader. The report, Benchmarking Innovation Impact 2018, is exceptionally thorough and provides good insights into the current state of innovation.
While the work is good, those of us who have been in the innovation space for a decade or more can tell you that the information the report provides and the opportunities and challenges it defines could have been lifted from a similar one from 2010. Not to disparage the KPMG work, which was well done, but rather to suggest that many of the challenges and opportunities that were present almost a decade ago exist today. My analysis is reinforced by Accenture’s new report on innovation, Make your Wise Pivot to the New. The Accenture report recommends transforming the core business while simultaneously pivoting to a new business.
Again, this is useful, valuable insight but not new. In fact, the Accenture report’s three key recommendations are:
- Build sufficient investment capacity for change
- Enable the organization to innovate by design
- Seek and create synergies between the old and the new
Strikingly, although you’d think that “build investment capacity for change” would be focused on improving innovation skills and change capacity, the Accenture report recommends cost cutting and divesting of under-performing assets to free up capital for new opportunities. While freeing up capital is important, if there is no change in strategy or skills, that new capital will simply be invested in old business models and products. Accenture’s second and third recommendations are more in line with what you’d expect in a paper recommending more innovation. But again, these aren’t especially new insights.
If the insights aren’t particularly new, and if much of the information and the statistics about innovation and innovators seem relatively unchanged over the last few years, then we ought to query why there is so little change in corporate innovation. In this short paper I identify a few reasons why innovation is both important and too often stagnant in larger organizations.
Three categories of corporate innovators
First, I suggest that what we are seeing is a divergence into three categories of corporations that are practicing or considering becoming more innovative. Obviously, when anyone attempts to reduce a complex subject like corporate innovation to three categories there will be some generalization, but I think we can safely pack many different innovation styles and methods into a grander categorization.
The three categories of corporate innovation I see are:
- Established innovators (at most 20% of mid-sized and large corporations)
- Evolving innovators (perhaps another 30% of mid-sized and large corporations)
- Nascent innovators (the rest)
With this model in mind we can go into greater detail, rather than speak with superficial generalities. Clearly some firms are investing in innovation much more aggressively, while others languish or hang back. Taking a slightly more granular approach to understanding these corporations helps illustrate what is happening and why.
The good news in corporate innovation is that some companies have aggressively pursued innovation as a core capability or skill. Every company talks about the importance of innovation. Some exercise what we politely call “innovation theater” to appear to have the trappings of innovation. However, there is a core group of companies across geographies and industries that has truly implemented innovation as a competency and a repeatable process. I suggest this category represents approximately 20% of corporations, many of which are found in very fast moving, rapidly changing industries (high tech) or in industries or products with high exposure to customers (CPG).
These established innovators are more often focused on business to consumer (B2C) models. I think that B2C provides more focus and discipline for innovators because of the proximity to end customers and the insights that proximity produces that many business to business (B2B) companies lack. This isn’t to say that B2B companies don’t innovate; rather they often lack visibility or insight into their customer’s customer and thus feel it is difficult to innovate beyond lower cost.
In these established innovators we are seeing different outcomes. Some, like Apple, appear to be resting on their laurels and will end up, if they aren’t careful, as the owners of very valuable but narrow niche markets, and out-innovated by more aggressive and hungry competitors. If Apple were toppled as a leading innovator it will be the classic case of Christensen’s Innovator Dilemma and disruptive innovation.
Other established innovators are exploring how to move innovation decisions ever closer to the customer using agile processes, lean startup models and design thinking. They are morphing innovation from a somewhat nebulous but very segmented management process into a more free-wheeling, nimble and agile activity that anyone in the organization can master. Further we will see established innovators fully connect to a larger ecosystem and seek to extend their reach by building or joining industry-wide platforms which enable more innovation while establishing more unity and control held by a few large competitors.
Established innovators cannot stand still, because the urgency and speed of innovation continues to increase. Once innovation becomes a corporate capability, these established innovators must constantly update innovation skills, examine new innovation models and methods, and seek to broaden the range of innovation outcomes, focusing on intangible services, experiences and business models.
In the middle tier sit the evolving innovators, those companies who have recognized that innovation is a necessary component of their strategy and operations, but haven’t incorporated innovation as a consistent capability or practice. For many, innovation remains an activity that is conducted haphazardly at a product, group or business unit level. In these companies, innovation hasn’t yet advanced to the status of a strategic capability or consistent executive sponsorship. Innovation never fully takes root because major successes are countered with significant “failures”. Management teams’ focus and corporate culture resistance do not allow innovation or innovators to gain the credibility or critical mass they deserve. These evolving innovators exist at a saddle point – they could advance toward more innovation proficiency with more executive leadership, cultural change and skill development. Alternatively, they could slip back to occasional, episodic innovation that is exceptionally incremental.
In the last tier, and subject to major disruption, are the nascent innovators. These are companies that for one reason or another have not embraced innovation at any level in the organization. That is not to say that these organizations have never conducted innovation activities, or attempted tasks like brainstorming or idea generation. Rather, for various reasons including a well-defined niche, a well-established brand, a very slow moving or evolving industry or other reasons, the management team simply hasn’t prioritized or encouraged innovation as a competitive force.
These nascent innovators are just now coming to grips with how far behind they are from an innovation point of view and weighing the investments necessary to close the gap on innovation leaders. For many of them, innovation hasn’t been a significant focus because these nascent innovators don’t face consumer markets directly (B2B companies), they don’t work in rapidly evolving or changing markets (outside high tech) or they compete in closely defined or highly regulated markets. Other nascent innovators have focused narrowly on innovation as new tangible products and have ignored opportunities for innovation beyond the product (as services, experiences and business models). For a variety of somewhat defensible reasons, these nascent innovators have not emphasized innovation, haven’t communicated its importance to the organization and have tolerated some attempts to innovate within small teams focused primarily on tangible products, with very limited results. The organizational culture, bureaucracy, funding and approval mechanisms make it difficult to start a new or innovative activity and actively discourage discovery and exploration.
When we stop thinking about how innovative an industry is, or how innovative corporations in general are, and start thinking about the differences between established, evolving and nascent innovators, we can see that for the vast majority of companies, their innovation commitment, strategy and capability really haven’t changed much in the last 10 years. It is true that many are attempting to do more innovation, but most haven’t made significant changes to skills, processes, strategy or culture to create an environment where innovation embraced and encouraged. While CEOs may desire more innovation, many have yet to make the investments and organizational and cultural change necessary to sustain it.
As we consider the organizations trying to innovate and their successes to date, we need to look at the focus of the innovation efforts and how that will change. The general rule of thumb across the three innovation horizons (incremental/breakthrough/disruptive) is that approximately 70% of the work will be incremental, 20% breakthrough and 10% disruptive.
In KPMG’s and Innovation Leader’s Benchmarking Innovation Impact 2018 that I referenced earlier, the authors claim that this 70/20/10 allocation has changed to a ratio of 50/30/20. Having worked in the innovation space for years I can tell you that the supposition is true; there is more focus on breakthrough and disruptive innovation, but much of this is a shift in definition. What corporations define as breakthrough and disruptive has become more conservative, so that activities that some define today as breakthrough and even disruptive might not have seemed quite as aggressive in the past.
There is a need for more breakthrough and disruptive innovation, on the part of established innovators and evolving innovators, for several important reasons. The first is that the pace of change is accelerating, which means that product cycle times and even corporate life cycles are contracting. Standing still is no longer an option. Corporations must transform and adapt at the pace of change (at a minimum) to remain viable. Rapid, iterative incremental innovation will build a sustainable competitive advantage.
The second reason that corporations must conduct more breakthrough and disruptive innovation is that more technologies and capabilities are entering the market, and more competitors are entering the market. We are in a truly global economy, and good insights and research from universities and research labs will enter the market consistently. As these new technologies emerge, there are increasingly more competitors that can acquire and implement them on a global scale. There is less time to identify, acquire and implement rapidly emerging technologies, and far more capability to bring these new technologies to market on a global basis.
Finally, consumer demands drive needs for more breakthrough and disruptive innovation. As demands shift in advanced economies and as a growing middle class emerges in Southeast Asia and India, consumer demands and markets will cause major shifts in the products and services business can or need to offer.
Established and evolving innovators have mastered incremental innovation, but many don’t have the experience or risk tolerance for the pace and scope of consistent disruptive innovation. Nascent innovators may, unintentionally, be the most apt at occasional disruptive innovation because of their desire to “catch up” or rapidly close the gap on innovation leaders. Very few firms have the culture, human capital, insight and capacity to do disruptive innovation well, even on a very occasional or periodic basis. But the need is greater than ever before. Established innovators will be able to grow into this demand by leveraging third party talent and building from established innovation capabilities and programs. Evolving innovators may be left behind, because the gap between their capabilities and the demands of disruptive innovation are large. Nascent innovators may benefit by conducting some ‘big bet’ innovations, but overall disruptive innovation is probably a reach for many of these companies.
If this analysis is correct, it suggests that many new companies with new business models, service offerings, experiences or operating models will emerge to serve a rapidly shifting global customer base. We’ve seen this play before, as firms like Airbnb, Uber and others emerged and scaled rapidly to serve unmet or underserved needs. A second wave of firms like these is almost entirely predictable, because many established corporations can’t meet and in some cases won’t anticipate customer demands. Simply improving incremental innovation in a time when product and technology adoption is accelerating means you are only keeping pace with the industry.
Looking to the future
With these points in mind It’s time for more corporate investment in the future. This includes carefully watching emerging opportunities and customer segments as well as emerging competitors. Most companies don’t have enough resources and people assigned to help them understand how the future will unfold and how it will impact their businesses, and how to create new innovations to take advantage of emerging opportunities while fending off emerging threats. Far more innovation work needs to be done in horizons two and three, and far more emphasis paid to future forecasting, trend spotting and scenario planning. This careful examination of the future will lead to the identification of more horizon 2 (breakthrough) and horizon 3 (disruptive) innovation opportunities, which calls into question a company’s ability to not only spot opportunities but to build capable innovation processes and culture that allow them to act on the opportunities.
Moving beyond the product
With a hat tip to Doblin, it’s time to think beyond product innovation. Doblin’s Ten Types of Innovation model describes the range of innovation outcomes, from products to services and customer experience and onward to value networks and business models. Understanding and implementing this framework divides the established innovators from the evolving and nascent innovators, and in the future, will divide the companies that dominate industries and markets from those that are barely able to compete.
Established and evolving innovators understand how to innovate to create tangible and intangible ‘products’. This is the core of most innovation activity, but most organizations behave as if it is the only potential outcome. Significant disruption happens when firms like Airbnb innovate around business models or experiences, rather than around the core product. Increasingly, established innovators will need to broaden the scope of their innovation work, to embrace many more innovation outcomes and options. Doing so will sustain the viability of larger companies which are under constant attack from many competitors. Failing to innovate beyond the product will mean that larger companies become hemmed in to markets and industries that they once defined, but that are now being redefined by upstarts and new competitors who reshape business models and customer experiences.
Evolving and nascent innovators must scale their ability to innovate consistently before choosing which outcomes seem most important to them. Established innovators have the experience, while narrow, of a complete end to end process for product innovation which can be expanded to incorporate other types of innovation outcomes. This successful experience at product innovation can be a limiting factor or can be the basis for different types of innovation outcomes. Since evolving and nascent innovators lack a proven end to end process for innovation and don’t have experienced innovators, they must build their processes and teams around an innovation outcome or type and demonstrate success before they can either scale innovation or broaden their definitions.
Innovation and its adjectives
Beyond the concept of core innovation – that is, discovering new needs, developing new ideas and creating and providing new products and services – is the plague that I call the “adjectification” of innovation. Yes, that is a word I invented.
Rather than accepting innovation as a capability or entity on its own, many corporate teams want to label or adorn innovation activities by shaping them with familiar adjectives, such as “lean”, “agile”, “open”, “rapid” and a host of other familiar methods. Overall, these adjectives aren’t necessarily dangerous, as long as the core tenet is innovation. What often happens, however, is that the “innovation” work in lean innovation or agile innovation gets lost, and what results is a lean activity or an agile activity that is at best incremental in nature, at worst simply reinforces the status quo. There is no benefit to conducting rapid or agile innovation that fails to deliver innovative new ideas and in turn creates more resistance or barriers to innovation activities. This rush to dress or adorn innovation shouldn’t be a surprise.
When any new thinking arises in a corporate setting, the natural tendency is to describe it in terms and models the corporation or team is already familiar with. Since the corporate world has adopted a lot of new thinking (lean, agile, outsourcing, right sizing, etc.) over the last decade, and has invested a lot of time and effort into implementing these ideas, it’s natural to want to relate new methods and ideas to solutions or activities to known models, to reinforce existing concepts rather than layer on new ideas. However, innovation needs to stand apart to operate effectively. Allowing existing models or methods to define or restrict innovation limits its range and its power.
The concept of lean, rapid or agile innovation, is not incorrect, if the core focus is on innovation, and not on lean or agile methodologies. The goal is not speed but the creation of valuable new products and services. When the emphasis is on speed or lean approaches, the innovation scope can shrink.
Other factors can creep in as well – specific definitions of innovation, such as design thinking. In and of itself, design thinking, human centered design or other innovation frameworks are very valuable, but may again shape or limit innovation range and options. Far too frequently teams adorn innovation with a lot of adjectives before truly understanding the base principles and goals of innovation, thus hampering innovation and driving far more incremental outcomes.
Getting back to the basics
Both the Innovation Leader/KPMG and the Accenture reports seek to place corporate innovation in a positive light, and much good work has been accomplished over the last decade. Their findings and recommendations, however, suggest that while a small percentage of companies has taken major steps toward innovation as a corporate capability, many remain mired in haphazard or half-hearted experimentation at a product or business unit level. Their innovation is constrained in a narrow scope, with too little investment and too many prefixes or adjectives describing what innovation is in relation to existing and trusted methods.
Much of this incomplete implementation rests at the feet of current executives, who came of age in the Jack Welch years, and who learned their craft in a time and competitive landscape that no longer exists. Today corporations need far more learning, experimentation, visibility into the emerging future, agility to adapt to rapidly changing conditions and the ability to quickly and concisely innovate products, services and business models. These new demands are shaping a new generation of leaders who I think will embrace innovation as a consistent corporate capacity, rather than an occasional business unit or product line project. For innovation to thrive in more large companies, it will require:
- More and more consistent executive leadership, and more involvement and engagement from those leaders
- Changes to corporate culture, to encourage the organization to embrace more change, more uncertainty and more experimentation
- Improved innovation models and methods, and a far larger scope of innovation outcomes
- A much better understanding of the near- and mid-term future and the emerging opportunities and competitors, and the ability to react quickly and effectively to that knowledge
- Better hiring, retention and training of people with innovative skills and bias, and who are comfortable with risk, change and ambiguity
- Openness to ideas, technologies and products, regardless of their provenance, and the ability to work with channels, partners and even competitors to find, implement and commercialize the best ideas.
I’ve labeled this section “getting back to basics” because the recommendations above, which focus on the core elements of building a truly innovative company, aren’t new. These are the same “basics” that have been highlighted by innovation consultants and industry experts repeatedly. Whether you are setting out to build a new company or trying to reframe and refocus an existing company, these are the building blocks that will shape a company and a culture and help generate far more innovation success.
Takeaways from Taking Stock
There is good news about innovation. Many companies have successfully adopted innovation as a core tenet or strategy, and these firms are recognizing the benefits of investments they made in innovation methods, skills and culture. However, as the most recent research is demonstrating, there are a lot of companies that haven’t yet made the transition from nascent or evolving innovator to established innovator. The reason the reports from Innovation Leader/KPMG and Accenture seem so familiar is because the clear majority of companies haven’t embraced innovation as a strategic capability. Rather, they continue to conduct incremental innovation experiments, or they get caught up in adjective innovation (lean, agile, rapid, etc.) which provides faster incremental results.
Even good innovators focus too narrowly on product or process innovation, ignoring significantly better opportunities in business model, customer experience and other innovation types. Moreover, good innovators have perfected incremental innovation (Horizon 1) while paying lip service to more disruptive innovation opportunities in horizons 2 and 3. They are achieving good results but not risking much in the process.
The ultimate outcome is that we can expect companies that are nascent and evolving innovators to be overtaken by smaller, more nimble and agile competitors who are willing to explore and experiment and introduce new business models. Airbnb and Uber are two examples and they are defining a path for other business model and customer experience innovators to follow.
To win at innovation in the near future, companies need to:
- Expand their definitions of innovation – moving beyond Horizon 1, exploring and creating new solutions in Horizon 2 and 3. And not simply redefining the meaning of Horizon 2 and 3.
- Broaden the desired outcomes of innovation – from product innovation to service, channel, customer experience and business model innovation.
- Stay true to what innovation is, and not get lost in the adjectives that so desperately want to redefine and simplify innovation.
- Make changes to organizational culture, rewards and recognition programs to stimulate and encourage more innovation.
- Incorporate innovation as a component of business and operational strategy.