A Model for Dual Corporate Innovation Management

As rightly pointed out by Tim Kastelle recently, it’s imperative to distinguish discovery from execution when it comes to startup and innovation activities – bearing in mind that both purposes are complementary and equally important. Along with the case made in my previous post, this suggests following a dual approach to balanced corporate innovation management. The main objective of dual approaches is to sufficiently separate exploration-/discovery-oriented initiatives from exploitation-/execution-oriented ones (e.g. in terms of  dedicated tools and metrics to be applied) while at the same time ensuring an appropriate degree of connection and proper interplay among both parts.

In the following, I will outline a model that attempts to help organizations implement a dual approach to innovation management. This model uniquely condenses and combines learnings from recent research in this field as well as experiences of my own work with diverse companies in various industries. It aims to integrate objectives, activities, requirements and inherent tensions along the innovation spectrum as well as enabling aspects, often being discussed independently from each other. Therefore, it’s titled a model for integrative innovation management.

Essential premises for balanced and sustainable innovation management   

In my view, sustainably successful innovation management systems in organizations are required to be based on a couple of essential premises – all of which can be considered necessary conditions. As successful innovation management also relies on additional factors, they are no sufficient conditions, though.

Premise 1: Innovation management follows a balanced portfolio approach. The entire innovation portfolio is divided into exploitation-oriented and exploration-oriented innovation initiatives, where following characterizations hold:

• Exploitation-oriented initiatives are related to running core business by executing and enhancing existing business models or technological capabilities. The primary direction of impact is value capturing (commerzialization). Examples: Product, service or process innovation, portfolio extension, innovation of selected business model components (e.g. channel or operations), market research.
• Exploration-oriented initiatives are related to developing future business by searching for novel, and often disruptive, business models or technological capabilities. The primary direction of impact is value creation (configuration). Examples: Business model development, platform/ecosystem innovation, basic technology research & development, startup engagement, innovation intelligence.

The target portfolio including new initiatives is derived from a strategic growth gap analysis. In order to fill an identified growth gap, a company needs to start exploitation- or exploration-oriented inititatives with corresponding sizes and time horizons.

Premise 2: Board of Directors and executive management are committed to attributing equal importance to exploitation and exploration initiatives as both are vital for a company to thrive sustainably. This particularly implies receiving a long term mandate and adequate resource allocation for exploration and its initiatives. Probably the most critical requirement for explorative initiatives to flourish is staffing them with dedicated, high-quality full-time workers. Given that the vast majority of startups fail despite mobilizing dedication from a team that has nothing to lose, not dedicating adequate quality and quantity of workers will ultimately consign explorative ventures to failure. The appropriate ratio of resource allocation between exploitation and exploration depends in particular on a company’s strategy and environment, among other criteria. The CEO (in alignment with the entire board) is in charge to define this high-level ratio for the entire company.

Saul Kaplan has suggested some debunking questions to check whether – or not –  you have a company’s executive management, first and foremost the CEO, on board. Some of them are listed in the following, slightly rephrased for our context here:

• Does your CEO/executive management agree that innovation goes beyond breakthrough products to include business model innovation – entirely new ways to create, deliver, and capture value?
• Will your colleagues tell me that failure is a career-limiting move, or will they tell me that the company celebrates experimentation?
• How much time does your CEO/executive management spend strengthening and protecting the current business model, versus designing the next one?
• Does your CEO/executive management have clear and discrete objectives for both exploitative and explorative innovation? Do you organize differently for each?
• Do internal ideas and projects that threaten to cannibalize the current business model get squashed – or nurtured?
• Does your CEO/executive management have a process for allocating resources for explorative innovation projects that lies outside of the control of business units?
• Do executives with responsibility for explorative innovation report to the CEO/executive management, or to another line executive responsible for today’s business?
• Is your CEO/executive management willing to create a sandbox for exploration, even if it means carving out a part of the current business/market to serve as an ongoing real-world innovation lab?

Note: It’s mandatory to receive CEO commitment and alignment among executive management before putting systematic effort in truly explorative activities – otherwise exploration-oriented innovation will eventually be doomed, resources be wasted and people be frustrated.

Premise 3: Exploitation- and exploration-oriented initiatives are separated in terms of organizational anchoring, governance and funding. The distinct setups are proposed as follows:

• Exploitation-oriented initiatives are anchored in the operational business units. Innovation governance is carried out by a business unit’s executive management as overall responsible and a dedicated innovation board as supporting structure. Funding is covered by the annual budgeting.
• Exploration-oriented initatives are anchored in a dedicated exploration unit, headed by a “chief Explorer” who reports to the CEO – just as the business unit leaders. He is also in charge for governance, supported by a dedicated “corporate innovation board” which is staffed by innovation-related stakeholders across the entire company – in particular all business units are to be represented. Financing is covered by a corporate fund, following a staged investment approach.

This ring-fenced setup enables each of both “camps” to operate as if the company’s future depended on it alone. The operational units pursue prolonging success of their existing businesses. The exploration unit aims at identifying and scaling novel – and often disruptive – opportunities to build cutting-edge businesses. These mutually complementing purposes correspond well to distinct types of transformation efforts, recently outlined by Scott Anthony:

• Exploitation  <=> core transformation, i.e. doing what you are currently doing in a fundamentally different way
• Exploration <=> strategic transformation, i.e. changing the very essence of a company

In the end, this ambidextrous approach involves the highest impact on corporate development. Moreover, it avoids exploration to fall victim to common and dangerous organizational traits: short termism and resource prioritization in favor of core business.

Premise 4: Fostering an innovation portfolio is enabled by a proper idea management system which allows to either assign an internal or external idea to the corresponding unit or to reject it. One common mistake of organizations is to ask employees and external contributors to generate ideas without putting mechanisms in place to act upon them. Therefore, it proves crucial to develop criteria by which to judge and process ideas – particularly including the “crazy” ones. A good example of how an idea management process could look like, is given below. The original figure is slightly adapted for our context.

Adapted from: http://sloanreview.mit.edu/article/institutionalizing-innovation/

Whereas the upper path is taken by exploitation-oriented ideas with high proximity to the core business, the lower path holds for exploration-oriented ideas with no (immediate) fit with the core business. In order to feed the idea management system with potent and explorative ideas, a company needs to be based on an open, collaborative culture, leveraging a cross-pollinating and serendipity-friendly infrastructure and startup engagement.

Three horizons as distinct playgrounds for innovation intiatives

Exploration- and exploitation-oriented innovation initiatives can be assigned to three strategic horizons. As displayed below, the horizons address different proximities to the core business with regard to business model or technological capabilities – and therefore indirectly time scale. The horizons’ strategic objectives can be put in a nutshell:

• H1 – Core: Optimization of existing business models and technologies, addressing of existing markets
• H2 – Growth: Acceleration and scaling of new business models and technologies, adaptation of existing business models
• H3 – Future: Discovery and validation of new business models and technologies, shaping of future markets

Moreover, each horizon is based on dedicated conditions in terms of accounting, metrics, approaches and instruments, as well as organizational and personal requirements. Upcoming posts at my blog are planned to elaborate on this more in detail. In average, the ratio H1:H2:H3 for resource allocation amounts to be roughly 70:20:10. Although this might be a good rule of thumb, a company’s actually required ratio needs to be adjusted necessarily according to its individual context and environment.

Whereas H1 represents the realm of purely exploitation-oriented and H3 the domain of purely exploration-oriented innovation initiatives, H2 can be regarded as interface between both “worlds” – which makes it even more demanding. Main issues in this regard are the integration of exploitation and exploration focus as well as exchange of capabilities between business units and exploration unit for mutual benefit. Consequently, each horizon requires dedicated leadership and management in order to succeed. H1 needs a traditional style if the business environment is stable and rather predictable (e.g. automobile or food industry, public transportation), or a more adaptive style if the environment is highly dynamic and unpredictable (e.g. technology or fashion industry). H3 needs an entrepreneurial one. H2, in turn, relies on a challenging, ambidextrous style at the intersection of H1 and H3. The H2 pipeline is fed from two directions:

• Existing H1 businesses are to be adapted and extended by partially renewing the existing business model or applying new technological capabilities (Adapt).
• H3 initiatives have been validated in terms of their success potential and are supposed to be scaled up. Scaling inititiatives are intended to either end up as new H1 core businesses in case of disruptive innovation or getting integrated in an existing division in case of sustaining innovation (Scale).

Depending on the type of environment a division operates in, either direction tends to be pronounced. If the environment is highly stable and malleable (e.g. offers a potential for disruption), deliberate, and occasionally revolutionary, opportunities from H3 will eventually enter H2. In case the environment is unpredictable and difficult to shape, a more evolutionary and agile approach is indicated: innovation is primarily operationally embedded and driven out of the core business towards H2, where experimentation within the existing business is leveraged to adapt to the changing conditions. In contrast, feeding from both directions is more balanced if the environment is in between those extremes. As most H2 initiatives pose a transformational character, usually coming along with significant organizational change and pain, it’s critical to launch as few of such initiatives as possible at the same time.

Takeway: A suggested model for integrative innovation management

The points made above can be framed in the following model for integrative innovation management:

The model reflects some key takeaways:

• Structural separation of exploration and exploitation is crucial for established companies in oder to pursue revolutionary innovation, i.e. to create novel businesses (e.g. through white space opportunities) and disrupt existing ones, mostly operating in mature industries, respectively.
• Prolongation of established businesses is accomplished through evolutionary innovation within existing business models. It requires integration of optimization and adaptation by means of an operationally embedded, agile organizational structure.
• Appropriate integration interfaces between exploration and exploitation structures have to be designed for collaborative scaling of initiatives and mutual capability leverage.
• Pursuing both complementary directions of impact in parallel entails a balanced innovation portfolio and therefore the highest likelihood for company success over the short and long term.