Innovation Leadership Network

Note: This is part of a series of posts explaining the individual parts of The Innovation Matrix. See this post for a description of the full model and what can be done with it.

Bewildered

Organisations that are Thinking About Innovation have two directions they can take. Ideally, they will improve their Innovation Competence, which moves them up to the Fit For Purpose Category. This is a good outcome. The other direction is more dangerous. The other option is to look at the increase in they’ve made in their Innovation Commitment, realise that they are still not getting the results that they want, and so they increase commitment some more. But in doing so, somehow they still fail to improve their Innovation Competence.

This leaves the firms Bewildered.

Characteristics

Bewildered firms share all of the characteristics that identify firms that are Thinking About Innovation – they just have more of everything – except actual innovation. These firms have full processes to in place to support innovation. This can include things like a stage-gate process to manage new product development, a well-funded R&D department, or an extensive and well-documented idea management system.

They have tried to integrate innovation with their overall strategy, they have some sort of innovation metrics, they’ve got everything you can think of, really.

And yet, to their immense frustration, the are still not very successful at innovating.

This might sound like an improbable situation to you, so let’s look at some examples.

Examples

This is bad place to be, and the firms that find themselves tend to be very frustrated. They understand the need for innovation, they have invested time and money into building processes to support innovation, and they are committed to doing it successfully. And yet, for some reason, they can’t.

Most of the time, this is due to some kind of fundamental error, such as:

• Mistaking ideas for innovations: this is by far the most common error I see from firms in this situation. When this happens, all of the process that has been put in place to support innovation is organised around generating ideas, or collecting them from people in the firm. If you believe that innovation is all about having great new ideas, then your high level of commitment to innovation will result in you having a lot of great new ideas. The problem is that they still need to have some sort of selection process to identify the best ones, which will require time and money to develop, and then more time and money to diffuse.

  One great example of a firm that was in this position was Procter & Gamble prior to the introduction of their open innovation Connect & Develop initiative. I’m going to talk about this as a case study, but briefly, the story is that around 1999, P&G evaluated the outcomes from a major increase in R&D spending over the previous five years. What they found was that they had greatly increased the number of patents (ideas!) that they held, but that less than 10% of these patents were being used in commercial products. They weren’t executing. Their commitment to innovation was enormous, but their success rate was unusually low.

• Your main problem actually isn’t innovation: another mistake is to not recognise what your main problem is. Often, the reason that the high levels of Innovation Commitment are not paying off is because the people in the firm are completely disengaged. This is Nilofer Merchant’s Air Sandwich at its worst. When you’re in this situation, you keep asking people for ideas, but you never get any good ones. Why? Because people don’t care.

  If this is the case, you face a much bigger problem than innovation. And the management issues must be addressed before you can make any progress with innovation.

• The processes you have aren’t working right: a while ago now I was in charge of the stage-gate process in the firm for which I worked. We had just introduced it. For the better part of a year, I dutifully applied the screens that we had put in place to the new ideas that came in. And for all that time, not one single new initiative advanced to the testing and development stage.

  Our problem is that we had completely screwed up the stage-gate process. The hurdles were set too high, especially the required potential financial return. So it was impossible for any new project to get up.

  Once we realised this, we changed the system, and then things started to work a lot better. But for most of that year, we were Bewildered.

Innovation Strategies

All of the strategies that we discussed in the Thinking About Innovation section apply here as well. You need to focus on improving your Innovation Competence as soon as possible – by doing things like managing innovation as a process, getting rid of your air sandwiches, and devoting resources to idea execution and diffusion.

However there are two other things that you need to do here that are probably even more important. The first is that you need to correctly diagnose the problem. Are you making one of the mistakes that I just outlined? Or have you made a new mistake? The next step to take will be different depending on what is causing the failure to innovate.

The second thing that you will almost certainly need to do is to dismantle and then rebuild part of your innovation processes. This is hard to do. You already have a lot of processes in place to support innovation. Taking them apart and rebuilding them require time, effort and money. Worse, it means that you’ll be publicly admitting to a mistake.

The critical point though is that these processes aren’t working. P&G became a leader through open innovation only after they radically changed their R&D process – particularly the steps around innovation testing and diffusion. Connect & Develop was designed to do this in partnership with smaller, more dynamic firms, rather than managing it all internally as P&G had been doing.

This was a huge step. But it was very successful. These were the outcomes after six years:

The model works. Today, more than 35 percent of our new products in market have elements that originated from outside P&G, up from about 15 percent in 2000. And 45 percent of the initiatives in our product development portfolio have key elements that were discovered externally. Through connect and develop—along with improvements in other aspects of innovation related to product cost, design, and marketing—our R&D productivity has increased by nearly 60 percent. Our innovation success rate has more than doubled, while the cost of innovation has fallen. R&D investment as a percentage of sales is down from 4.8 percent in 2000 to 3.4 percent today. And, in the last two years, we’ve launched more than 100 new products for which some aspect of execution came from outside the company. Five years after the company’s stock collapse in 2000, we have doubled our share price and have a portfolio of twenty-two billion-dollar brands.

That’s not bad.

And it shows how The Innovation Matrix is really about dynamics. P&G started out Bewildered, and in six years they became a World Class Innovator.

So wherever you are in The Innovation Matrix right now, you won’t necessarily be there forever. Which is pretty good news if you’re currently Bewildered.

Note: This is part of a series of posts explaining the individual parts of The Innovation Matrix. See this post for a description of the full model and what can be done with it.

Thinking About Innovation

If you are starting out with no innovation capability, what is the first step that you should take to get better at innovating? The most common first step that I see from firms is an increase in their Innovation Commitment. However, there is often a lag between this increase in commitment, and the desired increase in Innovation Competence.

Firms in this position are Thinking About Innovation.

Characteristics

The most common move for firms in this square is to come from a postion of not innovating very much. Someone in management decides that they need to innovate more. Consequently, they start building things to support innovation. Often, the first step is symbolic, and Innovation is added as one of the firm’s core values (or, if these aren’t published, the high-level managers start talking about it a lot more). It’s rare for firms in this category to take the next step and embed innovation into their strategy.

Firms here will also usually put in some sort of process in place to spur innovation. This is most frequently something based on idea generation or idea capture – things like brainstorming, asking employees for ideas, or even buying some idea management software.

These firms are also often lacking some of the other components of Innovation Commitment. The number of active resources (time and money) devoted to executing ideas is often very small. If there are any innovation metrics in place, they usually only track the number of ideas generated or collected. Top level management participation in the actual process of innovation is often limited.

One of the key features of firms that are thinking about innovation is that they often conflate generating ideas with innovation. So all of their Innovation Commitment goes into generating more ideas. This is what leads to the other key feature of firms in this category: their Innovation Competence is low.

They’re not very good at actually executing ideas and getting them to spread.

Examples

Ending up in this square is the outcome of a process. Consequently, there aren’t many broad classes of firms that all tend to fall into this category, unlike firms that are Not Innovating Very Much or Accidental Innovators.

So the key criteria that lead to examples are those based on the path firms take to end up here – these include:

• Established firms in industries with changing environments: as environments change, the need to innovate increases. Many of the firms that we see here are in industries like electricity. This industry has been stable for a long time, but as we start to see more changes in their environment such as increasing use of clean energy, increasing power generation by customers, and the development of smart-grid based distribution networks, the future is now starting to look much more uncertain than it has in the past. Other industries like this are health care, universities, newspapers, etc.
• Firms reacting change but without a strong incentive to change themselves: these are firms that lack a “burning platform.” They want to change, but they don’t really have to. This is part of what makes public sector innovation so challenging.
• Established firms trying to remember how to innovate: often there is overlap between this group and firms with changing environments, but not always. Kodak is a great example of a firm that has probably in this category for a while. They have seen a need to innovate, but they have underestimated the speed with which their industry was being disrupted.

Innovation Strategies

Obviously, the ideal evolutionary path through the innovation matrix is to move up the diagonal – as you increase your Innovation Commitment, your Innovation Competence should also increase. So being in this box is not ideal. And the danger is that many of the mistakes that lead to ending up here can be amplified. If this happens, you can end up Bewildered – the most dysfunctional category.

That said, increasing your Innovation Commitment is a very logical first step in trying to improve your innovation capability. So you might just be here temporarily, and when your Innovation Competence improves you move up to be Fit For Purpose.

Consequently, the strategies that you want to pursue are those that will increase your Innovation Competence. These include:

• Start managing innovation as a process: like I said, the one big mistake that can put you in this box is to mistake generating ideas for innovation. Idea generation is just one part of innovation as the process of idea management. To innovate, you need to generate ideas, select the best ones, execute these, and then get the ideas to spread. As you build support for innovation, concentrate on the last three. Only working on idea generation is a classic symptom of firms that are just thinking about innovation, but who are not innovating.
• Get rid of the air sandwich: firms in this category have what Nilofer Merchant calls an Air Sandwich:
  

  An Air Sandwich is a strategy that has clear vision and future direction on the top layer, day-to-day action on the bottom, and virtually nothing in the middle—no meaty key decisions that connect the two layers, no rich chewy filling to align the new direction with new actions within the company.

  She’s written an entire book devoted to solving this problem – The New How: Creating Business Solutions Through Collaborative Strategy, so if you are in this category or Bewildered, that is definitely worth checking out.

• Devote resources to idea execution and diffusion: another way to address the “innovation = idea generation” mistake is to allocate resources and effort to actually executing ideas. If you’re collecting ideas from employees, there is nothing more demotivating to them than seeing nothing happen with their great ideas after they’ve submitted them. The best way to start building an innovation culture is to act on these ideas – make them real! The more you do this, the more your Innovation Competence increases.

This is a tricky state to be in. It might be the first step in the right direction, but it is also the first step towards being Bewildered, which is the worst state to be in. You have to proceed carefully.

The most important thing to do is to ensure that you’re not making the “innovation = idea generation” mistake. Avoiding that error is the best way to make this a positive first step rather than a misstep as you start your innovation journey.

Note: This is part of a series of posts explaining the individual parts of The Innovation Matrix. See this post for a description of the full model and what can be done with it.

Accidental Innovators

This is a very interesting category. It includes firms that have little Innovation Commitment but who nevertheless actually have a reasonably good level of Innovation Competence.

Characteristics

The important issue with these firms is that they are pretty good at executing ideas. They may be in a position where they have to do new things just to survive, or they have developed a culture that supports experimentation, or they are good at learning. Experimentation and learning from failure are two of the elements of Innovation Competence, and it’s possible to do these without explicit processes in place to support them. And some organisations are naturally good at generating, selecting, executing and diffusing ideas.

But for whatever reason, these firms don’t have much organised support for innovation, leading to a low level of Innovation Commitment. They may not have the resources (time and/or money) needed to develop formal processes to support innovation. And they don’t do any of the other things that indicate a commitment to innovation.

Examples

This seems to be a counterintuitive quadrant to be in, but there are actually quite a few types of firms that end up here. These include:

• Firms in industries that require experimentation and learning: the two industries that spring to mind here are universities and medical institutions. Both hire a lot of pretty smart, creative people. Neither tends to have much of an explicit commitment to innovation, leaving people to experiment and learn on their own. In the case of medical institutions, experimentation is often required in order to respond to unusual and urgent situations. These firms usually don’t manage innovation as a portfolio, nor do they manage all of the components of the idea management process very well. Typically, they are not very good at all at diffusing ideas (a problem universities try to address with commercialisation offices), and they are also often poor at idea selection.
• Most startups: some startups are terrible at innovation, but most actually have some ability to execute new ideas, or they don’t survive. However, because they are focused entirely on survival, even the innovative startups usually don’t have the resources to put processes in place to support innovation. Also, such processes seem too much like management, an idea that many entrepreneurs avoid The Four Steps to the Epiphany: Successful Strategies for Products that Winby Steve Blank and The Lean Startupby Eric Ries both include many strategies designed to address precisely this issue – encouraging startups to develop the processes they need to support innovation.
• Firms that innovate accidentally: the firms that give this category its name come from a variety of industries. They are those that end up being pretty good at executing a large number of incremental innovations, usually in a bottom-up manner. Many of the resources firms that John and I run into here in Australia fall into this category. In one that we’ve worked with, everyone in their head office said “we don’t innovate at all.” But out in the field, we found people all throughout the company coping with operational problems creatively and innovatively. The lack of support from management indicates no Innovation Commitment, but the firms end up being ok at executing ideas.

Innovation Strategies

What should your approach to innovation be if you are in this box? The first thing to do is to think about the potential pitfalls of being in this category. The big one is that few firms here have an innovation portfolio. Consequently, they are bad at consciously developing game-changing innovations.

This is why universities, which in the normal course of operations generate many potentially big ideas, are doing such a poor job of dealing with the potential disruption of the internet on higher education. In fact, many of them are actively resisting innovation in the teaching space.

In order to embed innovation as a repeatable process, these firms need to increase their commitment to innovation. The genuine accidental innovators often don’t care enough about the issue to do this, but the other two groups often do – they just don’t know where to start.

For startups, building a firm is an important step in their development. This is why Blank and Ries spend so much time in their books talking about how to do this effectively. In addition to building processes to support a mainstream, scaled-up business, it is also crucial for startups to build innovation processes as well.

For the first group, they often don’t realise that their strengths in experimentation and learning can lead to increased innovation skill. I can clearly remember a conversation that I had with a medical administrator last year. I was called in to help the organisation develop an innovation strategy. When I described incremental innovation, he said “But we already do that really well.”

He was right – they do. The next step that they need to take is to build some processes to take advantage of the innovation skills that they already have.

The prescription for most of the accidental innovators is precisely that – look at how you can increase your Innovation Commitment. If you do that, if might make a Fit For Purpose innovator, but it could also move you up diagonally into the Star box – which is a pretty good outcome.

Note: This is part of a series of posts explaining the individual parts of The Innovation Matrix. See this post for a description of the full model and what can be done with it.

Not Innovating Very Much

Firms that have no Innovation Commitment and no Innovation Competence unsurprisingly have limited innovation capability.

Characteristics

Firms that fall into this category have none of the processes or skills in place that are needed for innovation. Management exhibits no Innovation Commitment – innovation is not addressed in the firm’s strategy or values, no resources are allocated to innovation and no official effort is expended on getting better at innovation.

However, this isn’t always the kiss of death for innovation. As we’ll soon see, it is actually fairly common for firms to lack Innovation Commitment but still be reasonably good at executing ideas. It’s just that firms with no innovation capability aren’t any good at executing new ideas.

They simply lack any innovation capability.

Examples

When we often hear things like “Innovate or die” it might seem like this is a very bad place to be. But this is not necessarily true. Some firms that don’t innovate are actually reasonably safe, at least for the time being. Here are some examples of firms that end up in this category:

• Well-established firms in stable industries: if you fit in this category, then it might be ok to ignore innovation. Ignoring innovation is fine as long as your are meeting your objectives, and, more importantly, the environment isn’t changing around you. Many government departments fall into this category, which is part of what makes public sector innovation challenging.

  Some other examples include: television broadcasters before the advent of cable TV, US automakers before they got hit by the OPEC oil embargo and then Toyota, and Newspapers before the rise of Craigslist and the internet.

  A lot of the major resource-extraction companies fall into this category right now too.

  If you’re in this category, it’s ok to ignore innovation, as long as your environment isn’t changing. But if you think it isn’t, are you sure?

• Monopolies and oligopolies: rarely think about innovation. In fact, this is one of the stronger arguments against monopolies. In addition to extracting rents from customers, monopolies and oligopolies tend to strangle innovation in their fields. Examples include: many government departments (again), firms with legislatively-protected markets (Telmex-telephones in Mexico, EMBRAER-plane manufacturing for many years in Brazil, CSL – vaccines in Australia), banks in most countries (see the big 4 here in Australia).

  If you’re a monopoly, putting any effort into innovation takes away from the profits that you’re making from your market position, so why bother?

• Some startups: most startups don’t fall into this category. Schumpeter was one of the first to argue that all new firms are founded on an innovation, but there are two groups that don’t: startups in bubbles and startups in trouble. Startups in bubbles don’t need to do anything new or special – they can often get by just by jumping in and doing what everyone else is doing (see The Property Ladder Theory of Bubbles for an example). One of the characteristics of a bubble is that everyone investing in them looks really smart, right up until the bubble pops.

  Startups in trouble is the other group here. These are ones that are entering into new markets with no new ideas. Why do so many new restaurants fail? It’s usually not because the food or service is lousy. It’s usually because they’re not doing anything that’s in any way distinctive.

• Established firms that have forgotten how to innovate: one of the features of The Innovation Matrix is that it looks at dynamics. Most of the firms in this category were not born un-innovative, they evolved their lack of innovation capability. This can be driven by several factors: an increasing focus on efficiency, forgetting what made you successful in the first place, losing all of your creative people (is this happening with Google right now?) and so on. This is what Jeffrey Phillips frames so well as the Business As Usual problem.

Innovation Strategies

What should you do if you are in this category? In part it depends on why you’re here. If you are a well-protected monopoly, then you don’t really need to do anything. I don’t think innovation will ever be a big priority for Carlos Slim and Telmex.

However, I actually end up working with a lot of firms in this box. For many of them, the first step is to start thinking about how they can put some innovation infrastructure in place. They start increasing their Innovation Commitment. I’ve also seen a few firms move out of this box by improving their innovation capability in a more bottom-up way, by getting better at executing new ideas.

If you are in this category, there are two critical questions to consider:

1. Is there a gap between your current performance and where you’d like to be?
2. Is your environment changing?

If you are performing well in a stable environment, then maybe you don’t need to do anything about innovation.

But if you face a performance gap and/or a changing environment, then you need to develop a strategy for building your innovation capability.

Note: This is part of a series of posts explaining the individual parts of The Innovation Matrix. See this post for a description of the full model and what can be done with it.

Innovation Competence

Innovation Competence is the second axis of The Innovation Matrix.

One of the key insights from The Innovation Matrix is that Innovation Commitment and Innovation Competence do not increase together in lockstep. It is possible for firms to improve along one dimension without seeing any difference in the other.

At its simplest, Innovation Competence measures how good a firm is at executing ideas and getting them to spread. This is something that is supported by the culture of the organisation. Consequently, it is harder to manage this element directly than it is to manage Innovation Commitment.

Elements of Innovation Competence

As is the case with Innovation Commitment, we don’t have a system yet for quantifying Innovation Competence. While the core metric should be something like how many new ideas you execute and diffuse successfully, here are some questions you can ask to assess where you currently are along this dimension:

1. How many new ideas do you successfully execute and diffuse? All the other measures should be supporting this. If you’re executing ideas, and getting them to spread, then that is the main component of Innovation Competence.
2. Are you good at all the components of the idea management process? Innovation is the process of idea management. To innovate effectively, you must be able to: generate great news ideas, select the ones that are most likely to work, implement these ideas, and then get these new ideas to spread. Morten Hansen and Julien Birkinshaw have developed a good survey that you can use to assess this. Building skill in all of these areas is essential to building innovation competence.
3. Do you practice different forms of innovation? Joseph Schumpeter identified five forms of innovation:
   • New product or service
   • New method of production
   • New source of supply
   • New market or application
   • New method of organising your firm or industry

   Research has shown that firms that innovate across more than one of these categories are more successful at innovation in general, and more profitable. In fact, the more areas that you innovate in, the better your overall outcomes are.

4. Do you practice both small and large innovation? One way to develop an effective innovation program is to encourage both smaller incremental innovation, and larger, more disruptive innovation. You can do this by using the Three Horizons approach. This is also referred to as ambidextrous innovation.
5. Do you have an innovation portfolio? An innovation portfolio allows you to look at both innovations that extend your competence in your core markets, as well as working on ideas that extend you into new markets. Here is one way to picture this, based on the example of how Google allocates resources across their portfolio:

   

6. Does your firm have a culture of systematic experimentation? One of the best ways of figuring out which ideas are good, and whether or not they will work is to experiment constantly.
7. Does your firm learn from failure? This is also a critical part of building an innovation culture.

As is the case with the questions for assessing your Innovation Commitment, these are a mix of questions that are yes/no and questions that are answered along a spectrum. By looking at your answers, it will give you a bit of an idea of the level of Innovation Competence within your firm.

Unlike Innovation Commitment, it is unambiguously good to be higher on this scale. The whole point of trying to manage innovation is to make your firm more effective at actually executing ideas. The danger in increasing your Innovation Competence without also increasing Innovation Commitment is that both are needed to be sustainably successful at innovation.

Higher levels of Innovation Competence combined with lower levels of Innovation Commitment mean that you are at risk of losing your skill at innovation – it is the commitment that makes your success repeatable.

When you combine higher levels of both, then you are on your way to successful innovation.