Strategic goals and design principles for establishing innovation centres
In many assignments, we see that the client has already established an innovation centre, or may be planning to do so. But often such centres do not deliver on expectations and instead can turn out to be very cost inefficient structures that clash with the rest of the organization. However, ignoring innovation and the capability it can give an organization is not a viable option in today’s marketplace, so the question is how can we better design such capabilities to drive forward innovation?
First let´s recap and set out some basic innovation concepts. Steve Coley defined in 2009 how innovation can be divided into three parallel horizons, each evolving along a predictable S-curve. The first horizon (H1) concerns smaller, incremental innovations that build on existing business models, extending the existing S-curve of the company. These can normally be accomplished with little structural change or lead time. The second horizon (H2) is more creative and proactive and involves expanding and building new businesses into new directions. The third horizon (H3) is sometimes characterized as “moon shots” or “skunk works.” This is a much more explorative approach to future S-curves, which can be commercialized in H2 and end up producing significant cash flows in H1. Ideally, a company should be working on all three horizons simultaneously. The biggest failure of many contemporary strategies is that they are stuck in H1. Some studies indicate that up to 99 per cent of businesses are trapped in H1 due to “spiral staircase” leadership, whereby in the interest of safety and risk aversion, leaders mandate step-by-step projects with narrowly-defined goals and a predictable ROI. This strategy has also been compared to arranging deckchairs on the Titanic, a futile action in the face of an impending catastrophe. In this scenario, large H1 projects tend to get prioritized to such an extent that they can generate internal traffic jams, holding back projects that must vie for the same resources. The result is too many, too big and too cautious projects get the go ahead that don’t create real value for the firm or their customers.
Often a more successful approach is seen in companies that deploy their limited resources more optimally through nurturing today’s profit (H1), developing new ideas for tomorrow’s profit and market share (H2) and taking part in building the future (H3). To link strategic direction and business modelling in a hyper-competitive market with change and transformation programmes for driving successful business development in several horizons, one must have a thorough understanding of what innovation management means within the context of your own organization.
Setting strategic goals and how to make the correct design choices
To gain a full understanding of what innovation management means to an organization, the strategic goals must first be defined. According to Peet van Biljon (Senior Advisor, Innovation360), there are ten typical strategic goals driving why an organization might establish an innovation centre, namely, to:
- Create a critical mass of skills and knowledge
- Obtain new consumer/user insights
- Adopt and adapt new technologies
- Collaborate externally (external networks, partnerships, JVs)
- Identify new business opportunities
- Establish a footprint in new or emerging markets
- Scale innovations faster
- Build a test bed for rapid experimentation
- Provide a showcase of new offerings
- Create a base for future acquisitions.
Outlining the strategic goals is the first step to follow when considering the possible design choices. Based on the work of Peet van Biljon and Magnus Penker, there are are a number of design choices to be made:
- How to link to “parent’s”/“owners” growth strategy
- Choice of geographic location
- Governance and reporting structures
- Details of parent involvement (formal and informal)
- Operating model
- Parent’s involvement in major decisions
- Talent management, such as talent identification, selection and incentives.
When designing an organization’s innovation strategy, its strengths and weaknesses need be considered, and not just overall at the organizational level, but rather by examining the innovation characteristics throughout the organization, including exam leadership, strategy for innovation, capabilities and competences for adopting the best solutions. By analyzing +1,000 companies using InnoSurvey™, we have seen how organizations are not homogenous and how insights on their specific characteristics is essential to making the right design chooses.
Design decisions should be based on an external and internal analysis as well as on the initial plans for removing blockages and amplifying the strategic direction of the organization. Typically decisions are based on one of three approaches:
- Best Fit, where decisions are based on how the current situation looks and what’s possible without any major changes. Typically, these decisions are based on the current conscious strategy, leadership, type of innovation, and the capabilities and competences that need to be strengthened.
- Best in Class, where decisions are based on the best companies that have the same strategic intent you are aiming for. These recommendations focus on the changes needed in strategy, leadership, type of innovation, personas (the culture), capabilities and competences.
- Resource-based View, where decisions are based on the company’s current capabilities, personas and competences, focusing on what is realistically possible and how that can be aligned with the company’s existing overall strategic direction by elaborating the innovation strategy, leadership and type of innovation.
When it comes to implementing an innovation centre, there are three typical possibilities, and the decision on which to apply should be made based on the organization’s strategic goal, design choice and an analysis of the internal and external context by using a defined strategy for outlining the recommendations related to one of the three approaches outlined above: Best Fit, Best in Class or Resource-based View. The three typical possibilities are:
- as a central department
- as a fully integrated unit within the existing organizational chart
- as several collaborating satellites.
The innovation centre could also be implemented as a combination of all three of these choices. Each one has its pros and cons. The centralized model is efficient, but innovation often occurs in other parts of the business or in the marketplace. Integrated innovation is easier to implement in first horizon strategies, but very often hard or impossible to execute efficiently in second and third horizons due to daily prioritizations. Satellites are a mix of both and can be very efficient, but it can be hard to coordinate among them as they usually tend to be highly autonomous or allied with a specific part of the market or the organization.
Every organization must choose among these options based on its own horizon strategy, its industry and market, current level of innovation and other unique internal and external factors. However, after many years working with companies of all sizes in many different markets, we have found that innovation systems are often better implemented in small steps and not as a formal, full-blown initiative from day one.