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A Model for Dual Corporate Innovation Management

by Victor Muchemwa on
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by Ralph Ohr

A Model for Dual Corporate Innovation Management - Innovation Excellence

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.

Integrative Innovation Model - premises

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.

Idea Management

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

Three Horizons - BM vs. Tech

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:

Integrative Innovation Model

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.

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Diaspora Matters

4 Visionaries Who Saw Far into the Future and How They Did It

by Victor Muchemwa on
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Successful people solve problems.  Look at any great fortune, whether it be Carnegie, Ford or Gates and you find that the source of their vast accomplishment was a problem solved.  Even more prosaic executives spend most of their time solving one problem or another, with greater or lesser skill.

The contrast in outcomes can be attributed to the scale and difficulty of the problems they tackled.  All too often, we get so mired down in day-to-day challenges that the bigger issues fall by the wayside, being left for another day which never seems to come.  That, in the final analysis, is the difference between the mundane and the sublime.

So we should pay special attention to those whose ideas had impact far beyond their own lifespan.  It is they who were able to see not only the problems of their day but ones that, although they seemed minor or trivial at the time, would become consequential—even determinant—in years to come.  Here are four such men and what we can learn from them.

Vannevar Bush and the Emerging Frontier of Science

By any measure, Vannevar Bush was a man of immense accomplishment.  A professor at MIT who invented one of the first working computers, he also co-founded Raytheon, a $30 billion dollar company that prospers to this day.

Yet even these outsized achievements pale in comparison to how Bush fundamentally changed the relationship of science to greater society.  In the late 1930’s, as the winds of war began to stir in Europe, Bush saw that the coming conflict would not be won by bullets and bombs alone.  Science, he saw, would likely tip the balance between victory and defeat.

It was that insight which led to the establishment of Office of Scientific Research and Development (OSRD).  With Bush at its helm, the agency led the development of the proximity fuze, guided missiles, radar, more advanced battlefield medicine and, not least of all, the Manhattan Project which led to the atomic bomb.

As the war came to a close, President Roosevelt asked Bush to write a report on how the success of the OSRD could be replicated in peacetime.  That report, Science: The Endless Frontier, outlined a new vision of the relationship between public and private investment, with government expanding scientific horizons and industry developing new applications.

He wrote:

Basic research leads to new knowledge. It provides scientific capital. It creates the fund from which the practical applications of knowledge must be drawn. New products and new processes do not appear full-grown. They are founded on new principles and new conceptions, which in turn are painstakingly developed by research in the purest realms of science

Bush’s report led to the foundation of the NSF, NIH, DARPA and other agencies, which have funded early research in everything from the Internet and GPS, to the Human Genome Project and many of our most important cures.  It has been Bush’s vision, perhaps more than almost anything else, that has made America an exceptional nation.

Oh, and he also wrote an essay in 1945 that not only laid out what would become the Internet, but influenced many of the key pioneers who designed it.

Marshall McLuhan and the Global Village

Where Vannevar Bush saw the transformative potential of science, Marshall McLuhan was one of the first to see the subtle, but undeniable influence of popular culture.  While many at the time thought of mass media as merely the flotsam and jetsam of the modern age, he saw that the study of things like newspapers, radio and TV could yield important insights.

Central to his ideas about culture was his concept of media as “extensions of man.”  Following this line of thought, he argued that Gutenberg’s printing press not only played a role in spreading information but also in shaping human thought. Essentially, the medium is the message.  Interestingly, these ideas led him to very much the same place as Bush.

As he wrote in 1962*, nearly 30 years before the invention of the World Wide Web:

The next medium, whatever it is—it may be the extension of consciousness—will include television as its content, not as its environment, and will transform television into an art form. A computer as a research and communication instrument could enhance retrieval, obsolesce mass library organization, retrieve the individual’s encyclopedic function and flip into a private line to speedily tailored data of a saleable kind.

McLuhan argued further that the new age of electronic media would disrupt the private experience and specialization that the dominance of printed media brought about and usher in a new era of collective, transnational experience that he called the global village.  Anybody who watches global news networks or surfs the Web can see what he meant.

Importantly, however, he did not see the global village as a peaceful place.  Rather than promoting widespread harmony and understanding, he predicted that the ability to share experiences across vast chasms of time and space would lead to a new form of tribalism, a result in a “release of human power and aggressive violence” greater than ever in history.

It has become all too clear what he meant by that as well.

Richard Feynman Sees “Plenty of Room at the Bottom”

When Richard Feynman stepped up to the podium to address the American Physical Society in 1959, he had already gained a reputation as both an accomplished scientist and an iconoclast (during his tenure at the the Manhattan project, he became famous for his safecracking and other pranks).

His talk, modestly titled There’s Plenty of Room At The Bottom would launch a revolution in physics and engineering that continues to play out to this day.  Starting from a seemingly innocent question about shrinking an encyclopedia down to the size of a postage stamp, he proceeded over the next hour to invent the new field of nanotechnology.

The talk, which is surprisingly easy and fun to read, also gives a fascinating window into how a genius thinks.  After pondering the problem of shrinking things down to the size of molecules, he proposes some solutions, then thinks some more about what issues those ideas would create, proposes some more fixes and on and on until a full picture emerged.

One of the most astounding things about Feynman is that his creation of nanotechnology was not a one-off, but part of a larger trend.  He was also a pioneer in parallel computing and did important work in virology.  All of this in addition to his day job as a physicist, for which he won the Nobel prize in 1965.

Tim Berners-Lee Creates a Web of Data

Tim Berners-Lee is most famous for his creation of the World Wide Web.  In November 1989, he created the three protocols—HTTP, URL, and HTML—that we now know as the “Web” and released his creation to the world, refusing to patent it.  Later, he helped set up the W3C consortium that continues to govern and manage its growth and further development.

The truth is, however, that the Web wasn’t a product of any great vision, but rather a solution to a particular problem that he encountered at CERN.  Physicists would come there from all over the world, work for a period of time and then leave.  Unfortunately, they recorded their work in a labyrinth of different platforms and protocols that didn’t work well together.

So Berners-Lee set out to solve that problem by creating a universal medium that could link information together.  He never dreamed it would grow into what it did.  If he had, he would have built it differently.  He wrote at length about these frustrations in his memoir, Weaving The Web.  Chief among them was the fact that while the Web-connected people, it did little for data.

So he envisioned a second web, which he called the Semantic Web.  Much like his earlier creation, the idea outstripped even what he imagined for it.  New protocols, such as Hadoop and Spark, have made data central to how today’s technology functions.  Increasingly, we’re living in a semantic economy, where information knows no bounds and everything connects.

The Best Way to Predict the Future is to Create it

Take a hard look at these four visionaries and some common themes emerge.  First, all except McLuhan took an active role in bringing their ideas into realities.  Bush played a central role in implementing the scientific architecture he designed.  Feynman offered prizes for people who could make things at nanoscale and Berners-Lee continues to take an active role at W3C.

Another commonality is that, while their ideas didn’t meet with immediate acceptance, they stuck with them.  McLuhan’s ideas made him an outcast for much of his career until he became an international celebrity in his fifties.  Berners-Lee created the Web partly out of frustration after the hypertext community wouldn’t pursue it.  Bush and Feynman met less resistance but were already prominent in their fields.

Probably most importantly, none of them were following trends.  Rather, they set out to uncover fundamental forces.  It was that quest for basic understanding that led them to ask questions and find answers that nobody else could imagine at the time.  They weren’t just looking to solve the problems of their day but sought out problems that transcended time.

In effect, they were able to see the future because they cared about it.  Their motivation wasn’t to beat the market, impress a client or attract funding for a startup, but to understand more about how the universe functions and what could be made possible.  In doing so, they helped us see it too so that we could also join in and make the world a better place.

 

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