– In todays globalized and digitalized world, Innovation capability is emerging as the most crucial success factor for companies that wants to master sustainable growth and profitability! Never before has boards and board members faced a larger challenge than todays need for effective linking between innovation and corporate strategy. In doing so, they must of course also follow the law and obey the ”code of conduct” but this may in fact very well kill their companies unless they learn how to govern the risky and experimental nature of world class Innovation! We perceive this as a dilemma, and we will share our point of view on the topic here in our blog about the “competence gaps” of today’s boards.

At Innovation 360 Group, we help client companies all over the world to improve their innovation capability through innovation assessment, analysis and recommendations. Among others we use our own developed assessment tool InnoSurvey^TM and our innovation database which today provide us with benchmark data from more than 1000 corporate measurements done over the last few years. In other words, we believe we have an unprecedented insight in the state of innovation capability among companies of the world today.

It is from this perspective we have observed that although many companies have excellent management teams that do their outmost to master the challenges of innovation, their boards have at least two significant competence gaps to manage and support innovation, namely anthropological competence and innovation management competence, and this is what we would like to elaborate on and share with you in this blog.

The winning strategies of top innovators

According to both our own innovation measurements and recent articles and research, there are two strategic directions that more than anything else seems to correlate strongest with top innovators:

The first strategic direction is to pursue the customer oriented strategy called ”Need Seeker” as opposed to being either ”Market Driven or ”Technology Driven”. (Source: Jaruzelski, Staack and Goehle, Strategy&)

According to their data and analysis (figure 1)companies that pursue the Need Seeker strategy show a much better alignment between business and innovation strategies and they also financially outperform their competitors that pursuit other strategies.

Figure 1, The Success of Need Seekers. (Strategy + Business, Global Innovation1000, 2014, Proven paths to innovation success: Exhibit 2.)

The second strategic direction is to apply the so called three horizon model for innovation governance (McKinsey, McKinsey Quarterly report, 2009) in multiple and parallel time perspectives (figure 2). In this model, the shorter perspective, the current (core) business, is called Horizon 1(H1). In H1 you need traditional leadership styles, such as the Spiral Staircase (Loewe, Williamson, Chapman and Wood, 2001), focusing optimization of existing business and incremental innovation. In the mid-term perspective, tomorrows growth business, called Horizon 2 (H2) you need more entrepreneurial and risk willing leadership styles for innovation, such as the Cauldron or the Fertile Field, focusing on expansion of the current business and more radical innovation. In the long term perspective, the future business, Horizon 3 (H3), you need a leadership style, such as the Explorer, that are more characterized by exploring options, betting on opportunities and radical innovation, i.e. more like how venture capitalists work today

Figure 1, The Success of Need Seekers. (Strategy + Business, Global Innovation1000, 2014, Proven paths to innovation success: Exhibit 2.)

The second strategic direction is to apply the so called three horizon model for innovation governance (McKinsey, McKinsey Quarterly report, 2009) in multiple and parallel time perspectives (figure 2). In this model, the shorter perspective, the current (core) business, is called Horizon 1(H1). In H1 you need traditional leadership styles, such as the Spiral Staircase (Loewe, Williamson, Chapman and Wood, 2001), focusing optimization of existing business and incremental innovation. In the mid-term perspective, tomorrows growth business, called Horizon 2 (H2) you need more entrepreneurial and risk willing leadership styles for innovation, such as the Cauldron or the Fertile Field, focusing on expansion of the current business and more radical innovation. In the long term perspective, the future business, Horizon 3 (H3), you need a leadership style, such as the Explorer, that are more characterized by exploring options, betting on opportunities and radical innovation, i.e. more like how venture capitalists work today.

Figure 2, Applying the Three Horizon Model

Bottom line, this all comes down to the need for mastering and governing multiple parallel modes of innovation, leadership styles, risk willingness etc., in all three Horizons at the same time!

In other words, the modern board must be able to define, align and control the companies’ innovation strategy in the necessary “balance point” between short (H1) mid (H2) and long term (H3) perspectives at the same time as they follow the law and fully comply with the code of conduct. Indeed, a very tuff challenge, but that also provides a potentially huge upside for those that succeed!

There are also numerous articles written about the shortcomings of the Code of Conduct, primarily about its lack of support for business development, including innovation. You can read more about this in e.g. Mr. Jason Lunday’s featured column about Typical Weaknesses of Codes of Conduct; http://corporatecomplianceinsights.com/typical-weaknesses-of-codes-of-conduct/

Two concrete competence gaps of today’s boards

The first gap is that the Need Seeker strategic direction requires a good and deep understanding of human needs and driving forces, i.e. anthropological competence, across all aspects of human diversification (e.g. ethnic, religion, gender, sexual orientation and age) as well as different cultural backgrounds.

The second gap is the risk willingness and industry awareness required to master the three horizon innovation governance model. Here the board must collectively have very good knowledge about their industries, the current business climate, as well as the opportunities that lies in current macro drivers such as globalization and digitalization.

This is also described and discussed in more details in Magnus Penker’s recent article for the Drucker Forum: Organizing for Simultaneous Innovation Capability – key findings from +1,000 companies.

http://www.druckerforum.org/blog/?p=1188

To bridge these two competence gaps, tomorrows boards should, as we see it, be assembled with a variety of competences and a level of diversity that matches the societies that they are active in. Their focus should be primarily on establishing vision, setting direction in terms of strategies and goals and appointing resources to run the company and govern innovation in all three horizons. Apart from that, the board should also inspire, stimulate and support the management team to perform great deeds in order to maximize profit and growth as opposed to micromanaging operative issues in horizon 1. Although this is changing as we speak, this is not how we perceive the typical characteristics of traditional boards and board members!

The shortcomings of today’s boards

According to our experience, many traditional boards have been appointed by the owners with the clear task to minimize risk and maximize short turn, i.e. horizon 1, profit.

This H1 over focus is also, according to our experience, further reinforced by the fact that the competence of traditional boards and board members largely has its roots in the ”schools” of the north American and British economies. The underlying theories of those schools assume that every individual is an egoist acting from a selfish standpoint in order to gain as many personal advantages as possible, even when that means to be dishonest or acting illegally! With that as a starting point, it becomes natural for boards to primarily control corporate managers, to prevent them from using their position to gain personal advantages, to the detriment of the company, its business and its owners.

So, who dare to look up and around to get the necessary insight, take a deep breath and then handle the enormous change needed to assemble these new boards of tomorrow? It is all about disrupting the traditional board models by creating new boards consisting of truly diversified teams with different roles (personas), capabilities, multiple leadership styles, multiple time-perspectives (H1- H3), clear visions and goals etc. As we said before, indeed a both adventurous and challenging task but with a strong potential upside for those that succeed.

Our observation here is that we find that many privately held companies are better at this than public listed companies as they by instinct look longer term and generations ahead and thus more naturally manage their company in the three horizons. We have also observed that many of the public listed companies, with large institutional, and not seldom more anonymous, owners, more often align with the quarterly economy model, with clear signs of H1 over focus leading to red oceans of declining growth and profit margins!

Challenging as it may be, we strongly believe that further down the line, all of this will no longer be regarded as neither adventurous nor challenging but rather a hygiene factor as the customers/markets will expect or even demand this!

How do you start the journey?

As we see it, it all have to start with the nominating committees! They must understand these new needs when they nominate board members for the digital innovation era.

Here are 5 concrete tips on how you can build a board for the digital innovation era;

• Start with the nominating committee – and make them look for the required competencies as opposed to already known people in their own networks
• Assemble the new board to match the diversity, culture and values of the markets you serve
• Be careful how you define roles, responsibilities and duties of the new board
• Demand continuous competence development in areas such as innovation, innovation strategies and innovation governance from all new board members
• And last but not least, do an innovation assessment to identify your specific competence gaps as a starting point of reference

Martin Hultqvist and Sten Jacobson
Innovation 360 Group