There is a lot of talk about the different stages of the innovation funnel. But are we not forgetting about something? I am thinking about the driving forces that propel the innovation funnel in the first place. This is what I call the innovation wheel.
But before showing you the inner workings of the innovation wheel, here is a brief rehearsal on the innovation funnel:
THE INNOVATION FUNNEL
Large corporations may have 100’s if not 1000’s of ideas tucked away in drawers or lost inside some idea management tool. The key during exploration is to decide which ideas to move forward with. This stage can be approached in different ways.
One way is to embrace Design Thinking, which is a human-centered and iterative process to help guide you through the following steps:
Another approach that has been gaining traction is Outcome-Driven Innovation (ODI). ODI is a rigorous data-driven process to gain a deep understanding of the customer’s job-to-be-done (JTBD).
The classic example of a job is the customer who wants a hole in the wall – not the drill.
The ODI process employs both qualitative, quantitative, and market segmentation research methods to reveal hidden opportunities for long-term growth.
With JTBD, segmentation is no longer based on products or customer demographics or psychographics, but on the struggles that customers experience when they try to get the job done. And competitors aren’t companies that make products like yours, they are any solution being used to get the job done.
By adopting a JTBD perspective you will start to look at customer needs and strategy in completely new ways, thus unlocking new ways to create and generate value. Although ODI (pioneered by Tony Ulwick and his company Strategyn) consists of 84 steps in total, there are light-versions of ODI that can be applied to good effect.
TESTING & VALIDATION
Some of you may rightly argue that Design Thinking and ODI should also appear under Testing & Validation. However, I have reserved this space for Lean Startup & Business Modeling. There are no water-tight departments between each stage. Tools and methods keep evolving with certain overlap being inevitable.
But the general approach is to begin by understanding who is the customer and what job they are trying to get done followed by the business model you are aiming for followed by how do we test and validate our business model before building and scaling.
This is where agile software development, e.g., Scrum, XP, Kanban, FDD, and DSDM come into the picture. To save costs and to increase the chance that we are building the right “it” before we build “it” right (kudos to Alberto Savoia), the key is to exhaust step A and B before diving deep into step C. Unfortunately, people often cannot avoid the itch to start coding right away.
With Design Thinking, ODI, Lean Startup and Business Modeling the focus is NOT on coding the solution (yet). By using customer observations, interviews, surveys, rapid prototyping, and business modeling techniques, we focus primarily on the customer and their struggles to get the job done, and in extension how the solution addresses those issues and how it fits within a functioning business model.
Someone who knows a thing or two about how to successfully scale a business is Reid Hoffman. Reid is the co-founder of PayPal and LinkedIn and an early investor in Facebook. He has also written a book called Blitzscaling, which I highly recommend.
According to Reid, Blitzscaling is “the science and art of rapidly building out a company to serve a large and usually global market, with the goal of becoming the first mover at scale.”
He argues that in markets dominated by network effects the speed at which you scale is inversely correlated to the chances of you ending up as the market leader. And as we know, in a “winner takes it all” market, it’s only the top two or three companies that make any money, and with the leader taking the lion’s share.
Blitzscaling may not be for everyone. But if you’re building a business that’s heavily dependent on network effects, Blitzscaling is the name of the game.
THE INNOVATION WHEEL
Finally, we have arrived at the innovation wheel. Unfortunately, many large corporations make a poor job of clearly defining and working through each step of the innovation wheel.
Instead, they try to short-cut or hack innovation by running workshops on Design Thinking or Lean Startup or hiring inspirational speakers who talk about innovation and entrepreneurship.
If you are truly interested in moving the needle with innovation you must be prepared to do some heavy lifting and be persistent over the long run (years, not days).
If you’re still with me, let’s go through each step of the innovation wheel:
🍰 SLICE 1: TREND ANALYSIS & INNOVATION THESIS
If you want to innovate you need to know where to start searching. Which key search areas are relevant to your company? To make a wise choice you must first understand the megatrends that will be shaping our society for decades to come.
One such megatrend is increasing carbon emissions driving global warming and the implications that will come from that, e.g. the massive shift from oil and coal to clean energies and a revamping of infrastructure, transportation and food production.
Other megatrends are that of robotics, automation, data and A, which will have a disruptive effect on large parts of the jobs market.
Which of the megatrends will your company focus on and what is your company’s view about the future? By carefully studying the megatrends and writing down your thoughts on the future, i.e. your innovation thesis, you will have created the much-needed frame within which to focus your innovation efforts.
🍰 SLICE 2: INNOVATION STRATEGY & ECOSYSTEM
Understanding megatrends and having a written innovation thesis does not tell you what role you want to play in the future or what levers you must pull to get there.
That’s where the innovation strategy and ecosystem come into play. Ideas that are explored during the first stage of the innovation funnel must be aligned with this slice of the innovation wheel. If it’s not you’ll just end up ‘treading water’.
Some people confuse strategy with goals, while others think it’s a detailed plan. A strategy is much more than simple goal setting and quite different from a detailed plan.
The strategy shows the areas that the company should focus on to win in the market but it doesn’t tell you in detail step-by-step how to do it (like a plan). When strategizing a lot of thought goes into how the different areas interconnect and help to strengthen one another.
As an example we can use Jim Collins Flywheel to visualize Amazon’s strategy:
Your innovation strategy goes one step further and informs how you intend to build on and adapt your key strengths so your company will keep winning in the future as envisioned by your innovation thesis.
Aspects to look at when crafting your innovation strategy:
Distribution of funds shows leadership’s ambition level. Are they primarily using the company’s cash flow to pay dividends, buy back shares, or invest into innovation?
The innovation ecosystem is all the components (internally and externally) that you need to coordinate to effectively execute your innovation strategy. The best ecosystems keep a win-win mentality in mind, where each part of the ecosystem understands their role and is happy with the risk/reward relationship that they have been given.
🍰 SLICE 3: LEADERSHIP PRINCIPLES & MECHANISMS
“Leadership principles & mechanisms” is long-form for “culture”. When companies grow quickly or become complacent post-growth, culture often suffers. This is extremely unfortunate since the right culture is your strongest competitive advantage, impossible for competitors to copy in its entirety.
World-leading companies such as Amazon, Apple, Netflix, and LinkedIn all put tremendous focus and effort into building and nurturing their cultures to make sure they remain agile and innovative.
In the case of Amazon, some of their leadership principles (there are 14 in total) are:
- Customer Obsession – Leaders start with the customer and work backwards. They work vigorously to earn and keep customer trust. Although leaders pay attention to competitors, they obsess over customers.
- Ownership – Leaders are owners. They think long-term and don’t sacrifice long-term value for short-term results. They act on behalf of the entire company, beyond just their own team. They never say, “that’s not my job.”
- Invent and Simplify – Leaders expect and require innovation and invention from their teams and always find ways to simplify. They are externally aware, look for new ideas from everywhere, and are not limited by “not invented here.” As we do new things, we accept that we may be misunderstood for long periods of time.
Etc…. (the above three points is an excerpt from another book that I highly recommend called “Working Backwards” by Colin Bryar and Bill Carr).
But for culture to take root it’s not enough with written leadership principles. You also need mechanisms to ensure that they are lived by every day of the week and every hour of the day.
In the case of Amazon, some of the mechanisms include single-threaded teams (full-time teams focused on solving one big problem at a time) instead of part-time teams, written narratives instead of powerpoint presentations, and so on. Amazon’s mechanisms cover all facets of their business, all the way from hiring, performance management, planning, operating cadence to career development.
Most companies will run a workshop to jot down some hastily put together “value words” on post-its but stop short of putting in the hard work of incrementally developing mechanisms over time.
🍰 SLICE 4: TALENT SOURCING
Focusing only on leveraging your core competencies is no longer enough in today’s fast-changing environment. The leadership must also hire talent that enables and catalyzes the necessary transformation towards a new future landscape.
This means involving HR in the implementation of your innovation strategy. It starts by being open to questioning the status quo.
Some of the world’s most innovative leaders don’t waste time pouring over applicant’s CVs but instead use heuristics or short-cuts to help identify the ablest performers.
Questions are often asked that focus on performance and problem-solving capabilities rather than on roles, titles, or the number of people managed in the past. When hiring engineers Elon Musk likes to ask the applicant to explain in detail how they have solved a specific tough problem in the past.
Those who were in the trenches doing the hard work will be able to tell you in detail what they did and how they overcame the challenge. Such detail is often missed in interviews that ask general questions that give no real guidance on performance, e.g. “tell me about your biggest weakness”.
Jeff Bezos is known to have asked key hires to tell him about something that they have invented. The answer to this question tells a lot about the individual. For example, if they are actively observing the world around them and have taken concrete steps towards improving some part of it. High-performance individuals are curious and with a bias for action.
These types of reasoning should be covered by your leadership principles and mechanisms should be created for HR and talent sourcing to ensure that leaders and innovators are hired and not just managers.
🍰 SLICE 5: TRAINING & COACHING
It’s not enough to say “go off and innovate”. People who have been in line function all their lives and never have run a business often lack the right mindset, processes, and tools to innovate.
To work effectively within the field of innovation you need a disciplined and data-driven iterative process that can take several years to master.
Employees need training and coaching to feel empowered enough to do the job. They also need the resources (time, budget, people) to do the job.
Last but not least they need a framework within which to innovate. Put differently, a clear and comprehensive innovation thesis and innovation strategy act like a lighthouse that shows the direction that you need to focus your efforts.
🍰 SLICE 6: INNOVATION ACCOUNTING
If you are not measuring what you are doing, how can you know how well you’re doing?
Innovation accounting is a term coined by Eric Ries in his book The Lean Startup. Eric defines innovation accounting as:
“a way of evaluating progress when all the metrics typically used in an established company (revenue, customers, ROI, market share) are effectively zero.”
Just as we have a financial accounting system (mostly lagging indicators) to measure and incrementally improve our core business, we also need an innovation accounting system (mostly leading indicators), to measure and incrementally improve our innovation system and each project or bet within that system.
🍰 SLICE 7: PORTFOLIO MANAGEMENT
Often people are perplexed by the sheer number of bets that you need to have any real chance of producing one unicorn (a startup worth more than USD 1 Billion).
According to data available from Y Combinator and others we are looking at something like 1 to 1 000. Not 1 to 10 or even 1 to 100. But 1 to 1 000. And if you would remove the highest valued startup from the portfolio you would cut the value of that entire portfolio by 50%. This result would be repeated if you removed the 2nd highest valued startup.
I wonder if corporates that run accelerator programs with two to five projects realize what staggering odds they are up against!
I am not saying you should not run accelerator programs, but don’t be surprised if your first batch does not produce the results that you may be hoping for. Such a program may or may not form one part of your overall innovation strategy and ecosystem. But let it not be the only thing that you do.
Coming back to culture, I strongly believe that is where corporates have the greatest chance of creating differentiation that matters to the customer. That’s how you build a strong competitive moat that can last for ages. But it requires a long-term commitment to make sure that all the slices of the innovation wheel play nicely together – don’t just jam them together.
🍰 SLICE 8: ANALYTICS, TOOLS & PLATFORMS
Last but not least we have analytics, tools & platforms. Although it’s fine to noodle around in Excel at the beginning, sooner or later you’ll need to become more sophisticated in how you approach innovation management.
For each slice of the innovation wheel and each part of the innovation funnel, there are dedicated tools and platforms that you can use to measure, visualize and communicate what you do.