The eight essentials of innovation
Strategic
and organizational factors are what separate successful big-company innovators
from the rest of the field.
It’s no secret: innovation is difficult for
well-established companies. By and large, they are better executors than
innovators, and most succeed less through game-changing creativity than by
optimizing their existing businesses.
Yet hard as it is for
such organizations to innovate, large ones as diverse as Alcoa, the Discovery
Group, and NASA’s Ames Research Center are actually doing so. What can other
companies learn from their approaches and attributes? That question formed the
core of a multiyear study comprising in-depth interviews, workshops, and
surveys of more than 2,500 executives in over 300 companies, including both
performance leaders and laggards, in a broad set of industries and countries
(Exhibit 1). What we found were a set of eight essential attributes that are
present, either in part or in full, at every big company that’s a high
performer in product, process, or business-model innovation.
Since innovation is a
complex, company-wide endeavor, it requires a set of crosscutting practices and
processes to structure, organize, and encourage it. Taken together, the
essentials described in this article constitute just such an operating system,
as seen in Exhibit 2. These often overlapping, iterative, and nonsequential
practices resist systematic categorization but can nonetheless be thought of in
two groups. The first four, which are strategic and creative in nature, help
set and prioritize the terms and conditions under which innovation is more
likely to thrive. The next four essentials deal with how to deliver and
organize for innovation repeatedly over time and with enough value to
contribute meaningfully to overall performance.
To be sure, there’s no
proven formula for success, particularly when it comes to innovation. While our
years of client-service experience provide strong indicators for the existence
of a causal relationship between the attributes that survey respondents
reported and the innovations of the companies we studied, the statistics
described here can only prove correlation. Yet we firmly
believe that if companies assimilate and apply these essentials—in their own
way, in accordance with their particular context, capabilities, organizational
culture, and appetite for risk—they will improve the likelihood that they, too,
can rekindle the lost spark of innovation. In the digital age, the pace of
change has gone into hyperspeed, so companies must get these strategic,
creative, executional, and organizational factors right to innovate
successfully.
Aspire
President John F.
Kennedy’s bold aspiration, in 1962, to “go to the moon in this decade”
motivated a nation to unprecedented levels of innovation. A far-reaching vision
can be a compelling catalyst, provided it’s realistic enough to stimulate
action today.
But in a corporate
setting, as many CEOs have discovered, even the most inspiring words often are
insufficient, no matter how many times they are repeated. It helps to combine
high-level aspirations with estimates of the value that innovation should
generate to meet financial-growth objectives. Quantifying an “innovation target
for growth,” and making it an explicit part of future strategic plans, helps
solidify the importance of and accountability for innovation. The target itself
must be large enough to force managers to include innovation investments in
their business plans. If they can make their numbers using other, less risky
tactics, our experience suggests that they (quite rationally) will.
Establishing a
quantitative innovation aspiration is not enough, however. The target value
needs to be apportioned to relevant business “owners” and cascaded down to
their organizations in the form of performance targets and timelines. Anything
less risks encouraging inaction or the belief that innovation is someone else’s
job.
For example,
Lantmännen, a big Nordic agricultural cooperative, was challenged by flat organic
growth and directionless innovation. Top executives created an aspirational
vision and strategic plan linked to financial targets: 6 percent growth in the
core business and 2 percent growth in new organic ventures. To encourage
innovation projects, these quantitative targets were cascaded down to business
units and, ultimately, to product groups. During the development of each
innovation project, it had to show how it was helping to achieve the growth
targets for its category and markets. As a result, Lantmännen went from 4
percent to 13 percent annual growth, underpinned by the successful launch of
several new brands. Indeed, it became the market leader in premade food only
four years after entry and created a new premium segment in this market.
Such performance
parameters can seem painful to managers more accustomed to the traditional
approach. In our experience, though, CEOs are likely just going through the
motions if they don’t use evaluations and remuneration to assess and recognize
the contribution that all top managers make to innovation.
Choose
Fresh, creative
insights are invaluable, but in our experience many companies run into
difficulty less from a scarcity of new ideas than from the struggle to
determine which ideas to support and scale. At bigger
companies, this can be particularly problematic during market discontinuities,
when supporting the next wave of growth may seem too risky, at least until
competitive dynamics force painful changes.
Innovation is inherently
risky, to be sure, and getting the most from a portfolio of innovation
initiatives is more about managing risk than eliminating it. Since no one knows
exactly where valuable innovations will emerge, and searching everywhere is
impractical, executives must create some boundary conditions for the
opportunity spaces they want to explore. The process of identifying and
bounding these spaces can run the gamut from intuitive visions of the future to
carefully scrutinized strategic analyses. Thoughtfully prioritizing these
spaces also allows companies to assess whether they have enough investment
behind their most valuable opportunities.
During this process,
companies should set in motion more projects than they will ultimately be able
to finance, which makes it easier to kill those that prove less promising. RELX
Group, for example, runs 10 to 15 experiments per major customer segment, each
funded with a preliminary budget of around $200,000, through its innovation
pipeline every year, choosing subsequently to invest more significant funds in
one or two of them, and dropping the rest. “One of the hardest things to figure
out is when to kill something,” says Kumsal Bayazit, RELX Group’s chief
strategy officer. “It’s a heck of a lot easier if you have a portfolio of
ideas.”
Once the opportunities
are defined, companies need transparency into what people are working on and a
governance process that constantly assesses not only the expected value,
timing, and risk of the initiatives in the portfolio but also its overall
composition. There’s no single mix that’s universally right. Most established
companies err on the side of overloading their innovation pipelines with
relatively safe, short-term, and incremental projects that have little chance
of realizing their growth targets or staying within their risk parameters. Some
spread themselves thinly across too many projects instead of focusing on those
with the highest potential for success and resourcing them to win.
These tendencies get
reinforced by a sluggish resource-reallocation process. Our research shows that
a company typically reallocates only a tiny fraction of its resources from year
to year, thereby sentencing innovation to a stagnating march of incrementalism.1
Discover
Innovation also
requires actionable and differentiated insights—the kind that excite customers
and bring new categories and markets into being. How do companies develop them?
Genius is always an appealing approach, if you have or can get it. Fortunately,
innovation yields to other approaches besides exceptional creativity.
The rest of us can look
for insights by methodically and systematically scrutinizing three areas: a
valuable problem to solve, a technology that enables a solution, and a business
model that generates money from it. You could argue that nearly every
successful innovation occurs at the intersection of these three elements.
Companies that effectively collect, synthesize, and “collide” them stand the
highest probability of success. “If you get the sweet spot of what the customer
is struggling with, and at the same time get a deeper knowledge of the new
technologies coming along and find a mechanism for how these two things can
come together, then you are going to get good returns,” says Alcoa chairman and
chief executive Klaus Kleinfeld.
The insight-discovery
process, which extends beyond a company’s boundaries to include
insight-generating partnerships, is the lifeblood of innovation. We won’t
belabor the matter here, though, because it’s already the subject of countless
articles and books.2One thing we can add is that
discovery is iterative, and the active use of prototypes can help companies
continue to learn as they develop, test, validate, and refine their
innovations. Moreover, we firmly believe that without a fully developed
innovation system encompassing the other elements described in this
article, large organizations probably won’t innovate successfully, no matter
how effective their insight-generation process is.
Evolve
Business-model
innovations—which change the economics of the value chain, diversify profit
streams, and/or modify delivery models—have always been a vital part of a
strong innovation portfolio. As smartphones and mobile apps threaten to upend
oldline industries, business-model innovation has become all the more urgent:
established companies must reinvent their businesses before technology-driven
upstarts do. Why, then, do most innovation systems so squarely emphasize new
products? The reason, of course, is that most big companies are reluctant to
risk tampering with their core business model until it’s visibly under threat.
At that point, they can only hope it’s not too late.
Leading companies
combat this troubling tendency in a number of ways. They up their game in
market intelligence, the better to separate signal from noise. They establish
funding vehicles for new businesses that don’t fit into the current structure.
They constantly reevaluate their position in the value chain, carefully
considering business models that might deliver value to priority groups of new
customers. They sponsor pilot projects and experiments away from the core
business to help combat narrow conceptions of what they are and do. And they
stress-test newly emerging value propositions and operating models against
countermoves by competitors.
Amazon does a
particularly strong job extending itself into new business models by addressing
the emerging needs of its customers and suppliers. In fact, it has included
many of its suppliers in its customer base by offering them an increasingly
wide range of services, from hosted computing to warehouse management. Another
strong performer, the Financial Times, was already experimenting
with its business model in response to the increasing digitalization of media
when, in 2007, it launched an innovative subscription model, upending its
relationship with advertisers and readers. “We went against the received wisdom
of popular strategies at the time,” says Caspar de Bono, FT board
member and managing director of B2B. “We were very deliberate in getting ahead
of the emerging structural change, and the decisions turned out to be very
successful.” In print’s heyday, 80 percent of the FT’s revenue came
from print advertising. Now, more than half of it comes from content, and
two-thirds of circulation comes from digital subscriptions.
Accelerate
Virulent antibodies
undermine innovation at many large companies. Cautious governance processes
make it easy for stifling bureaucracies in marketing, legal, IT, and other
functions to find reasons to halt or slow approvals. Too often, companies
simply get in the way of their own attempts to innovate. A surprising number of
impressive innovations from companies were actually the fruit of their
mavericks, who succeeded in bypassing their early-approval processes. Clearly,
there’s a balance to be maintained: bureaucracy must be held in check, yet the
rush to market should not undermine the cross-functional collaboration,
continuous learning cycles, and clear decision pathways that help enable
innovation. Are managers with the right knowledge, skills, and experience
making the crucial decisions in a timely manner, so that innovation continually
moves through an organization in a way that creates and maintains competitive advantage,
without exposing a company to unnecessary risk?
Companies also thrive
by testing their promising ideas with customers early in the process, before
internal forces impose modifications that blur the original value proposition.
To end up with the innovation initially envisioned, it’s necessary to knock
down the barriers that stand between a great idea and the end user. Companies
need a well-connected manager to take charge of a project and be responsible
for the budget, time to market, and key specifications—a person who can say yes
rather than no. In addition, the project team needs to be cross-functional in
reality, not just on paper. This means locating its members in a single place
and ensuring that they give the project a significant amount of their time (at
least half) to support a culture that puts the innovation project’s success
above the success of each function.
Cross-functional
collaboration can help ensure end-user involvement throughout the development
process. At many companies, marketing’s role is to champion the interests of
end users as development teams evolve products and to help ensure that the
final result is what everyone first envisioned. But this responsibility is
honored more often in the breach than in the observance. Other companies,
meanwhile, rationalize that consumers don’t necessarily know what they want
until it becomes available. This may be true, but customers can certainly say
what they don’t like. And the more quickly and frequently a
project team gets—and uses—feedback, the more quickly it gets a great end
result.
Scale
Some ideas, such as
luxury goods and many smartphone apps, are destined for niche markets. Others,
like social networks, work at global scale. Explicitly considering the
appropriate magnitude and reach of a given idea is important to ensuring that
the right resources and risks are involved in pursuing it. The seemingly safer
option of scaling up over time can be a death sentence. Resources and
capabilities must be marshaled to make sure a new product or service can be
delivered quickly at the desired volume and quality. Manufacturing facilities,
suppliers, distributors, and others must be prepared to execute a rapid and
full rollout.
For example, when
TomTom launched its first touch-screen navigational device, in 2004, the
product flew off the shelves. By 2006, TomTom’s line of portable navigation
devices reached sales of about 5 million units a year, and by 2008, yearly
volume had jumped to more than 12 million. “That’s faster market penetration
than mobile phones” had, says Harold Goddijn, TomTom’s CEO and cofounder. While
TomTom’s initial accomplishment lay in combining a well-defined consumer
problem with widely available technology components, rapid scaling was vital to
the product’s continuing success. “We doubled down on managing our cash, our
operations, maintaining quality, all the parts of the iceberg no one sees,”
Goddijn adds. “We were hugely well organized.”
Extend
In the space of only a
few years, companies in nearly every sector have conceded that innovation
requires external collaborators. Flows of talent and knowledge increasingly
transcend company and geographic boundaries. Successful innovators achieve
significant multiples for every dollar invested in innovation by accessing the
skills and talents of others. In this way, they speed up innovation and uncover
new ways to create value for their customers and ecosystem partners.
Smart collaboration
with external partners, though, goes beyond merely sourcing new ideas and
insights; it can involve sharing costs and finding faster routes to market.
Famously, the components of Apple’s first iPod were developed almost entirely
outside the company; by efficiently managing these external partnerships, Apple
was able to move from initial concept to marketable product in only nine
months. NASA’s Ames Research Center teams up not just with international
partners—launching joint satellites with nations as diverse as Lithuania, Saudi
Arabia, and Sweden—but also with emerging companies, such as SpaceX.
High-performing
innovators work hard to develop the ecosystems that help deliver these
benefits. Indeed, they strive to become partners of choice, increasing the
likelihood that the best ideas and people will come their way. That requires a
systematic approach. First, these companies find out which partners they are
already working with; surprisingly few companies know this. Then they decide
which networks—say, four or five of them—they ideally need to support their
innovation strategies. This step helps them to narrow and focus their
collaboration efforts and to manage the flow of possibilities from outside the
company. Strong innovators also regularly review their networks, extending and
pruning them as appropriate and using sophisticated incentives and contractual
structures to motivate high-performing business partners. Becoming a true
partner of choice is, among other things, about clarifying what a partnership
can offer the junior member: brand, reach, or access, perhaps. It is also about
behavior. Partners of choice are fair and transparent in their dealings.
Moreover, companies
that make the most of external networks have a good idea of what’s most useful
at which stages of the innovation process. In general, they cast a relatively
wide net in the early going. But as they come closer to commercializing a new
product or service, they become narrower and more specific in their sourcing,
since by then the new offering’s design is relatively set.
Mobilize
How do leading
companies stimulate, encourage, support, and reward innovative behavior and
thinking among the right groups of people? The best companies find ways to
embed innovation into the fibers of their culture, from the core to the
periphery.
They start back where
we began: with aspirations that forge tight connections among innovation,
strategy, and performance. When a company sets financial targets for innovation
and defines market spaces, minds become far more focused. As those aspirations
come to life through individual projects across the company, innovation leaders
clarify responsibilities using the appropriate incentives and rewards.
The Discovery Group,
for example, is upending the medical and life-insurance industries in its
native South Africa and also has operations in the United Kingdom, the United
States, and China, among other locations. Innovation is a standard measure in
the company’s semiannual divisional scorecards—a process that helps mobilize
the organization and affects roughly 1,000 of the company’s business leaders.
“They are all required to innovate every year,” Discovery founder and CEO
Adrian Gore says of the company’s business leaders. “They have no choice.”
Organizational changes
may be necessary, not because structural silver bullets exist—we’ve looked hard
for them and don’t think they do—but rather to promote collaboration, learning,
and experimentation. Companies must help people to share ideas and knowledge
freely, perhaps by locating teams working on different types of innovation in
the same place, reviewing the structure of project teams to make sure they
always have new blood, ensuring that lessons learned from success and failure
are captured and assimilated, and recognizing innovation efforts even when they
fall short of success.
Internal collaboration
and experimentation can take years to establish, particularly in large, mature
companies with strong cultures and ways of working that, in other respects, may
have served them well. Some companies set up “innovation garages” where small
groups can work on important projects unconstrained by the normal working
environment while building new ways of working that can be scaled up and
absorbed into the larger organization. NASA, for example, has ten field
centers. But the space agency relies on the Ames Research Center, in Silicon Valley,
to maintain what its former director, Dr. Pete Worden, calls “the character of
rebels” to function as “a laboratory that’s part of a much larger
organization.”
Big companies do not
easily reinvent themselves as leading innovators. Too many fixed routines and
cultural factors can get in the way. For those that do make the attempt,
innovation excellence is often built in a multiyear effort that touches most,
if not all, parts of the organization. Our experience and research suggest that
any company looking to make this journey will maximize its probability of
success by closely studying and appropriately assimilating the leading
practices of high-performing innovators. Taken together, these form an
essential operating system for innovation within a company’s organizational
structure and culture
By Marc de Jong, Nathan Marston, and Erik
Roth
McKinsey QuarterlyApril 2015
https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-eight-essentials-of-innovation
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