I recently read a couple of excellent articles by Nick Skillicorn and Prof. Rita McGrath, where both discuss the challenges and intricacies involved in structuring and governing innovation within a large organisation.
This is a classic topic that every corporate innovator has, without a doubt, come across, and it’s also one where the “right” approach is often quite elusive.
Inspired by those articles, we’ll present the most common archetypes, and then dig a little deeper to share our thoughts and experiences to help you figure out how innovation should be structured within your organisation.
Why organising innovation is challenging
Before we dive into the different models for governing and organising innovation, it’s important to understand why this is such a challenging topic to begin with.
That’s of course quite a lengthy and nuanced topic, but in short, there is no such thing as a perfect organisational structure or governance model. The bottom line is that a large organisation is simply such a complex entity that structuring everything perfectly just isn’t very realistic. If you’ve ever worked in a large organisation, you’ve certainly come across some of these challenges.
Now, most of these challenges are likely to be worse with innovation than with “business as usual”. By definition, innovation means introducing changes. And most organisations simply aren’t designed for constant change.
What’s more, businesses are naturally very different from one another. A structure that works for a single product software company probably isn’t ideal for a CPG manufacturer or a house of brands. Not only are their industries different, so are the innovations they are going after. So what works well for some organisation probably won’t be ideal for you.
This means that benchmarking and then applying “best practices” likely won’t work too well. Unfortunately, there just isn’t a single correct way to organise innovation.
Exploring the organisational archetypes for innovation
Having said that, there are a handful of common approaches–which we like to call “archetypes”–that most organisations use as the foundation for their efforts to organise and govern innovation.
Both McGrath and Skillicorn have done an excellent job in presenting many of these approaches, so a lot of credit for the following descriptions goes to them and I’d warmly recommend you read their takes too. Regardless, we’ve summarised their main points and combined them with our own experiences to create the following archetypes.
We’ll next explain each of these briefly, along with a quick summary of the key strengths and weaknesses for each.
No in-house innovation
The first and simplest way to organise innovation is to not do it, or to completely outsource it. Perhaps the most common method here is to simply keep tabs on promising startups and then acquire them, or to collaborate with universities and other research institutions.
While this obviously keeps things simple organisation-wise and minimises fixed costs, it also means that you no longer have control over your own destiny, and are instead reliant on third parties. This puts you in a very vulnerable position in the long-term. Furthermore, in the last decade, we’ve seen a huge inflow of capital to startups, which means that valuations for promising startups have skyrocketed, and acquiring them on the cheap is simply no longer a feasible strategy.
Suffice to say, if you want to build an organisation that thrives in the long run, I wouldn’t recommend this approach.
- Low fixed costs
- Structurally simple
- Lack of strategic control and ability to build the future of the organisation
- Lack of differentiation
- Reliance on third parties for both execution and especially exploration
- Acquisition of promising innovations has become expensive
Perhaps the most common way large organisations set up innovation is by creating a centralised department that serves the innovation needs of the entire organisation including each business unit, such as IT or HR. This can be a subdivision within R&D, but these days it’s typically a separate cross-departmental unit serving the innovation needs of all business units.
Either way, such a unit is quick and easy to set up, and the approach has some other advantages, such as innovation expertise being built and managed centrally, which speeds up learning, as well as management and reporting being easy to organise.
It’s these advantages that make centralisation the obvious choice for many who are just starting out with innovation. This is also an especially common approach for large industrial companies that already have a strong R&D tradition.
However, in the long run, this approach is also one that is likely to significantly limit your innovation potential. The reason is simple: if all of the innovation has to go through a single team, that team will inevitably become a bottleneck for innovation. No matter how large or skilled the team, they’ll never have enough resources. What’s more, this will also disincentivise everyone else in the organisation from innovating and that prevents you from creating a true culture of innovation.
- Quick, easy, and cheap to set up
- Dedicated resources for working on innovation
- Easy to govern, manage, and report on the overall innovation portfolio
- Centralisation can speed up learning
- Poor scalability as centralised team will inevitably become a bottleneck for innovation
- Likely to be pulled into too many projects, which leads to poor execution
- High risk of degenerating into a support function serving business unit requests instead of strategically building the future of the organisation
- Likely to disincentivise others in the organisation from innovating
- Conflicting interests between business units can make prioritisation difficult
- Typically lack authority to make important, hard decisions
Popularised by Clayton Christensen as a solution to the Innovators’s Dilemma, dedicated business units for innovation have become increasingly popular in large organisations that are looking for the next stage of their growth. Sometimes these units have proper P&L responsibility, and they might even report directly to senior management, but at times they can also be innovation labs responsible primarily for testing and piloting new ideas before they are to be integrated into the core business.
Regardless of the particularities, these approaches have some specific strengths, but also clear weaknesses. The good thing is that because the unit is independent, it can usually avoid being held back by the restrictions of the business as usual and can build their talent and approaches from scratch.
If innovation is the job of a select few, it will be incredibly hard to build a pro-innovation culture.
The downside is that they also don’t necessarily play to the strengths that the organisation has already built. Without strong and clear leadership, these kinds of innovation efforts are likely to have an equally poor success rate as your average startup – but without the asymmetric upside.
The reason is simple: if you already have millions or billions in revenue, most new businesses just don’t move the needle enough – unless they can quickly grow to a massive size or be combined with the strengths and competitive advantages of the core business.
And just like with the centralised model, this model again limits innovation to one part of the organisation. As before, that will likely prevent you from creating a true culture of innovation, thus leading to bottlenecks down the road.
- Freedom to operate independently from processes of existing business units, which is essential for trying new things and creating disruptive innovations
- Ability to hire and organise specifically for innovation
- If led well, ability to focus on the long-term instead of short-term performance
- High profile innovation unit can also be used for marketing and employer branding purposes
- Conflicts of interest and lack of cooperation between core business and innovation unit likely to lead to politics, tension, and other challenges in integrating innovations into core business
- Independence and lack of communication between business units might hurt strategic alignment and prevent the innovation unit from benefiting from the existing strengths of the organisation
- Can easily degenerate into a cost center performing ”innovation theater” without a clear strategic focus, strong leadership, and evidence-based processes
- Likely to disincentivize innovation in other parts of the organisation and thus prevent the creation of an innovation culture
- High initial investment with lots of uncertainty can make the business case for investing in innovation look bad
Many organisations have relatively independent business units or product and brand teams, and for them it can often make sense for innovation to be embedded within these units.
Traditional examples of such an approach are companies like P&G and other CPG companies with strong brands. These companies are working hard to keep up to date with evolving trends and consumer needs to innovate and create new products for the consumer. However, the same can also be true for many other kinds of businesses, such as software companies with multiple products.
Depending on the industry and organisation, these units might have varying levels of control over their innovations once they are on the market. For example, in CPG companies manufacturing, logistics and many other functions would likely be managed by core business operations instead of this unit.
- Better able to focus innovation on things that matter for each business, be they strategic projects or emerging customer needs
- More control over innovation resources and ability to get talent that meets specific needs
- Parallelisation over different units can increase innovation throughput of the organisation overall
- Easier to align innovation with business needs and plans within the unit
- The business case for investing in innovation is typically easy to make as you can start from low-hanging fruits that provide immediate value
- Innovation likely to be biased towards more applied and incremental projects due to focus on immediate business needs
- Some efforts may be duplicated between teams, especially if more long-term R&D work is being done
- Can lead to a silo-effect, extra need to focus on facilitating knowledge transfer between units
Our fifth approach is usually referred to as the ambidextrous organisation. We’ve also seen it be referred to as the Hybrid model, and it’s quite a natural evolution from the previous archetypes as it seeks to combine the best of both worlds.
In a nutshell, the idea is that innovation should happen across the organisation with existing business units focused on exploiting their current position through incremental innovation, and a separate dedicated unit being responsible for exploring and building the future of the organisation through more radical or disruptive innovation.
In the ambidextrous model, existing units use incremental innovation to exploit the current position and new units are set up to explore and build the future.
In practice, a new P&L responsible division will be setup for new non-core businesses, and the more incremental innovation will then be organised either as Embedded or centralised.
If an organisation does successfully implement such an approach, it can lead to exceptional long-term performance, but that’s of course easier said than done. For most organisations, this is likely to require a significant transformation, and it can be challenging to get everyone onboard, build the right processes, as well as to align goals and incentives the right way across the organisation.
- Easier to build a balanced innovation portfolio with both strong short and long-term performance
- Enables building an innovation-oriented culture across the organisation
- Enough resources for key projects across the organisation
- Makes it easier to communicate the innovation strategy with clear roles and responsibilities for each part of the organisation
- Can customise governance models to meet the needs of different types of innovation in different parts of the organisation
- Expensive and difficult to build, as well as to maintain
- Requires clear leadership and a commitment to a transformation from the top
- Can demotivate innovation-oriented employees that are in the core business
- Usually requires extensive changes to processes and the re-skilling of managers and employees across the organisation
- While easier than with most other models on paper, prioritisation and division of responsibilities can still be challenging in practice
Our final model is the decentralised approach. If you look at any of the best innovators in the world, be it Apple, Tesla, SpaceX, or Amazon, this is closest to the model they use. None of these organisations has a centralised or dedicated team responsible for all innovation in the organisation.
Instead, the organisation decentralises the responsibility for innovation to happen in individual teams (which are typically cross-functional and relatively small) across the organisation. Each team is focused on figuring out how they could help the organisation better reach their strategic goals, and innovation is just one of the key tools in that process.
If a team (or an individual leader or employee) comes across a big idea that shows promise but would require significant additional investments, they’ll apply for additional resources from management via a quick and streamlined process. If approved, that typically leads to another team being set up to pursue that idea.
This approach is sometimes called the permissionless model due to the significant freedom each team possesses to make decisions affecting their own work. The obvious advantages are that they usually know the problems intimately and have the resources, incentive, and know-how to solve them, and have fewer dependencies to other parts of the organisation. That leads to an extremely high pace of innovation and innovation throughput for the organisation, which together create a tremendous competitive advantage.
Having said that, this too isn’t exactly an easy model to implement for most organisations. Typically, this would require a fundamentally different mindset, leadership philosophy, and a significantly higher talent density. For the average organisation, that means a full-blown transformation where most fundamentals in the organisation would need to change, which of course isn’t feasible for many.
- Extremely high output and pace of innovation
- Ability to adapt, re-organise, and meet changing demands quickly
- Strong focus on execution and value creation
- Clear roles and responsibilities
- Would require a fundamental transformation for most organisations
- Requires strong communication and strategic clarity from management
- Active management involvement required to remove barriers and to organise teams so that the portfolio remains balanced
- Requires high talent density across the organisation, which can be very challenging to achieve in practice
- Continuously evolving and rapidly changing landscape might be too intensive for some employees
- Some work often initially duplicated across teams, but can be managed by creating horizontal support teams
Choosing the right approach for your organisation
As you can see, every approach has their benefits, but also their disadvantages. In our experience, the Hybrid and especially Decentralised are the likeliest approaches to lead to sustained levels of high innovation performance in the twenty-first century. But implementing either isn’t exactly a walk in the park for a large organisation. If you have the luxury of meeting (or are close to meeting) the prerequisites, these are the models I’d personally go for.
However, for many, that just isn’t the reality. Even if you’re like most organisations and don’t quite have the talent, leadership, or other prerequisites needed for these approaches, I’d keep either the Hybrid or Decentralised approach as your eventual goal to build towards.
Move control and decision-making down in the organisation to be able to move faster, make more informed decisions, respond to changes quicker, and to simply innovate more.
However, instead of a major overnight transformation, you should be prepared for a set of smaller, gradual steps that build your capabilities and culture towards that future while solving the current problems with your processes and structures.
While not ideal in theory, in practice, the journey towards becoming a mature top innovator typically first leads towards centralisation for most incumbent organisations. They need to build their innovation strategy, knowledge and capabilities before they can successfully decentralise and move control and decision-making down in the organisation to be able to move faster, make more informed decisions, respond to changes quicker, and to simply innovate more.
With that background, if such an approach is used, it’s crucial that this centralised innovation function understands and embraces their temporary role so that they are willing to relinquish control and power over innovation to others. All too often we see these leaders clinging on to the team, budget and power they’ve built long after it would’ve been in the organisations’ best interest to re-organise.
Best practices for organising innovation
As we’ve discussed, if you’re planning to make changes to the way you organise innovation, most decisions will depend on your context. Still, there are a few things that are good to keep in mind regardless of the approach you end up choosing. Here’s my top three:
The best innovators continuously evolve
The first, and perhaps the most important point to remember is that the best innovators continuously evolve and improve the way they work. They don’t just pick one organisational structure and go with that forever. Instead, they are constantly looking for ways to re-organise their efforts so that they work on whatever is likely to best help them reach their goals. This is of course one of the fundamental strengths of the Decentralised model, but it applies to other approaches too.
This is also in line with how the most successful organisations approach re-organisations in general. They don’t just wait until the old structure is burning, they act proactively to position themselves for the future they want to create.
Clear roles and decision-making structures
It’s pretty obvious, but if people don’t know who can make a decision on an idea that they may have, or even whose responsibility it would fall under, odds are that not a lot of innovation will happen. The reality is that there will always be some ambiguity and overlap, especially in fast moving environments, but clear roles and decision-making structures are regardless important for an organisation that wants to innovate.
If projects or decisions seem to get stuck, or turf battles seem to consistently pop up in your organisation, unclear roles and ambiguous decision-making are likely to be the main culprits.
Organise according to strategy and plan for the execution
Again, it might sound obvious, but especially with innovation, the differences can be dramatic. organisation is the link between your strategy and your execution, so make sure it isn’t detached from the realities of what it will take to reach your goals with innovation.
To use a bit of a simplified example, if your strategy is focused on creating new business from emerging disruptive technologies, then the Embedded model probably won’t cut it. Your innovators will be kept busy by the priorities from the core business.
Planning for the execution, on the other hand, means that each team should have the resources and the freedom needed to reach your goals. If, using our previous example, you allocate just a few engineers to the team and then hope that sales will magically turn those technologies into booming businesses, odds are very much against you.
In other words, try to allocate resources so that the team has everything they need to reach their goals. While this sounds super basic, we still see these mistakes frequently when innovation is a bit of an afterthought for management.
As is probably evident by now, no structure or approach to governing innovation is ever going to be perfect, at least for long. As your goals change or your business and industry keep evolving, you will need to change and evolve too.
Even though organising innovation doesn’t seem to get the same kind of attention as innovation strategy or culture, it’s extremely important, nevertheless. Get it wrong, and it will be almost impossible for your organisation to succeed at innovation. Get it right, and you’ll at the very least have a realistic shot at that.
Hopefully this article has provided you with more thoughts on the topic, and some views on what to do and not to do.
This article was originally published in Viima’s blog.