What is Innovation Management?
Welcome to Pondr’s complete guide to innovation management! Before we dive into all the details, theories and approaches, let’s start with an intro to the concept itself, and why it’s such an important field of research to study and discover.
Described simply as the introduction of something new by the Merriam-Webster dictionary, the definition or concept of innovation can often feel abstract and immeasurable. However, the purpose of this article is to share the systematic ways we can approach such a vast topic, helping to contain it within a tangible framework.
Innovation at its core is simply a change, whether that is a fresh idea, an incremental improvement or a brand new direction for an organisation. It is also a vital part of any successful business. It not only helps a company to survive in our current environment - which is so competitive due to constant changes and disruption - but it also lays the groundwork for a company to flourish and thrive according to its own unique visions.
To make sure innovative practices are being implemented, there needs to be a management framework in place. We often tend to think innovation management belongs to the research and development area of a company, but it actually spans the entire spectrum, from ideation, to product development and all the way through to marketing. Management innovation is also a term used to study and develop the art of management itself. Progressive and forward thinking organisations will make sure the management process is constantly being assessed and reinvented.
Organizing Innovation Management: Key Terms and Methods
The Impact Level
While innovation as a concept seems abstract, it can actually be measured and tracked, and this field of study is continually growing. In order to make sense or measure anything, it must be broken down into parts, paying attention to each subcategory in close detail. From the most zoomed out perspective, innovation can first be categorised by its impact level. There are four main types within the innovation matrix:
This term is used to describe gradual or slow changes to a product or service over time. Because it is the most conversative path, it is also the most common, widely used and accessible for most companies. Rather than creating a new market, it builds on the already existing product. An example might be Coca-Cola, where the core function of the product remains the same, but new flavours and additions are added to keep customers interested.
This category is similar to incremental in that the core function of the product or service remains the same, however this category refers to a product slowly being improved over time. An example would be smartphone technology, where each new release is an improved version of the last. This form of innovation is the most low-risk path to high profit.
This is the term used to describe the introduction of an entirely new value network. It is the most risky form of innovation, but also has the biggest pay-offs if successful. An example would be the trajectory of Netflix, which began as an undesirable alternative to Blockbuster, but over time the technology matched the consumer need and it transformed the entire industry of movie distribution.
This area is where the revolutionary and more highly inventive innovation happens. True to its name, it’s effect changes the way society functions, such as the introduction of the steam engine, electricity, or the internet. The near future will see even more radical leaps as artificial intelligence becomes more pervasive, or the ways in which we use and store energy. This type of innovation not only has the potential to change markets, but also entire economies.
The Key Aspects on the Inside
Looking now towards the subcategories within a business, there are four key elements to be aware of: Capabilities, Structure, Culture and Strategy. Below is an introduction to each element, and why it’s such an important component of the innovation process.
The Capabilities aspect refers to the people involved in the innovation process: the team. Arguably the most important asset, people (or employees) are the fabric of a business. The collective alignment of a company’s employee base and the skill set within the team is referred to as ‘Organizational Capabilities.’ When we say skill set, we are referring not only to the knowledge and abilities of each person, but also their experience. Paying attention to the intricacies of each employee means understanding what motivates them and understanding what they believe in. Focusing on an individual’s skill is generally referred to as ‘competency’, whereas capability is used to refer to a more zoomed out perspective of how a team functions collectively. Asking questions such as “is there strong team collaboration?” or “is everyone focused on the same values behind the brand?” will help to pinpoint the strengths and weaknesses spanning the whole organisation.
Structure refers to how a company organizes its approach to business strategy. It is commonly said that the most innovative companies employ an ambidextrous form of organization, which means that multiple approaches are utilised. This allows businesses to use incremental innovative practices to safeguard against incoming competition, while also making space for their own disruptive strategies. However, it is a very fine balancing act: if a company focuses too much on the disruptive vision, it could risk destroying its existing (and successful) model, but if you focus solely on incremental change, you risk getting disrupted yourself. For a company to remain competitive and dynamic in today’s markets, it must have tentacles in each strategy, both looking towards the future while also keeping things steady where change is not needed. The four main approaches to ambidextrous organization are:
- Putting an external ecosystem in place; this is when a business outsources other people externally to collaborate with, who have specialized skills in a niche area
- Self Organization: each unit of a team manages itself
- Separation: One management team oversees operations from a top-down system, but separate units within the company run independently
- Switching: this is a mix of all three, and the process of ‘switching’ on a regular basis to keep things fresh
A company’s values, habits, practices and structures can loosely be defined as innovation culture. As with the definition of culture itself, the focus is on the shared customs of a social group or institution. As Michael D. Watkins once wrote on the power of incentive within culture, it is an ever-shifting and dynamic being. Because culture is never static and always changing, the study of it also needs to reflect this. To make sure innovation has a place to thrive, the environment and the right conditions must be thought about. It is important to always ask questions like, “what is my company doing to curate the right atmosphere for innovative thought? What systems are in place for my team to collaborate, discuss and come together? Is everyone being heard? Is everyone motivated?
This is the term used to describe the blueprint for how ideas will be put into practice. This brings the whole team together onto the same page, and also allows investors or other collaborators to see the project from a birds-eye view, giving more transparency and control over the key milestones and initiatives which will make the goal a reality. The important question to ask of anything before you start is, “why am I doing this and what do I want to achieve?” Once there is long term focus set in place, it is easier to choose which form of innovation or impact level is most appropriate for its lifespan. After this is when you would assess the team’s capabilities, and have an awareness of what skills are actually needed in order to make the vision a success.
The Workflow Processes
Looking into strategy more deeply, the process of innovation is the term given to the way in which innovation moves forward, from idea into reality. There are three main frameworks to help the workflow, and each choice will again be dependent on the needs of the idea or product:
The Phase-Gate Process
The words ‘phase-gate’ in this term can be thought of as doors or portals through which an idea must be granted access. It can only move to the next stage, or through the next door, until it has been successful thus far on its journey. This is a good technique when resources are tight and a business wants to keep strict control over its workflow.
The Push vs Pull Process
Push vs Pull refers to the simultaneous approach of two opposing strategies. Push refers to the internal workflow such as research and development activities through technology. Pull refers to the external workflow, where the focus is on customer and market driven models. The product is then continually tested through a back and forth conversation of both processes, one supporting and affecting the direction of the other.
The Lean Startup Process
Opposite to the phase-gate, this process actually allows full freedom for the idea to be explored, with all the resources it may require. The word ‘start-up’ refers to the purpose of this process: to test the product or service and introduce it into the market quickly. This process is actually best suited for new companies, often with fewer resources, who want to respond to a fast-paced and ever shifting marketplace.
Measuring Innovation through KPI’s
A recent McKinsey & Company podcast has noted that although 77% of CEO’s see innovation as a top priority, only about 22% actually have a system set up to measure it. However, as more and more company’s begin to realise the importance of studying innovation at every stage and every area of a business, we will definitely start to see these statistics rise.
Using KPI’s (Key Performance Indicator which is a measurable value) will give you better insight into how successful your projects are, will create a healthier culture as it holds employees accountable and makes them feel included in the larger vision, and also reduces resource and time wasting. KPI’s can first be measured through two types of metrics: Input and Output:
Input Metrics: Input Metrics measures what has been put into a company or product. Examples of this would include employee time, research and development, investments in new technology or the allocation of resources. In the early stages of creating a business, all the KPI’s would be heavily focused on input, as there would be no external market factors to study yet. Within this area, the four main metrics to study would be the key aspects we covered up above. Here are some example KPI’s for each:
- Capabilities; how strong is your team in finding new recruits? Do you have an organised method for tracking employee idea contributions? Is there transparent communication about what is expected of employees? Is everyone involved in the ideation process? How much money is a business spending in employee education for innovative methods?
- Structure; when strategizing which ambidextrous approach is best, you could use the capabilities area to analyse how your team functions together. Does your company prefer to switch things up often or do they work better with structure and routine? Would it be more beneficial to have separate units or teams that manage themselves? Do you need to outsource talent?
- Culture; what idea management software do you have in place to track innovative ideas? Is there a system set up to make sure everyone's voice is being heard? Do employees feel safe and comfortable to collaborate and discuss with one another? Is there an area, either online or off, where this can happen? What are you doing to make sure there is symbiosis and shared motivation?
- Strategy; study the employee capabilities - what assets are needed to succeed? Who needs to collaborate to make this happen? How do you measure where you sit in the market? Does management undergo regular, innovation or industry training programs?
Output Metrics: Output Metrics measures the impact, or what a business is getting out of its investments. This is studied by analysing the outcomes once a product has been released into the market. This could be measured by looking at revenue, how many products are being launched, growth over time, or return on investment. It is important to note that focusing on this area too soon will prove highly ineffective, which we will discuss in the next section as ‘The Innovator’s Dilemma.’ With this area, the metric to study would be under the umbrella of:
- Business and product; some KPI measurements might include studying the domestic and international markets, finding out exactly where your revenue is coming from, studying similar products and their growth rates, or studying the profits from your patents or other royalties.
Choosing which KPI’s to use is a unique process, and there is no one-size fits solution or roadmap to this. Knowing which measurement process to use will require you to study your industry, know your customer and investor expectations, have a grasp of the maturity of your business and assess the strength or weakness level regarding the innovative culture of your business. Some tips: have an awareness of the innovation life cycle and what stage you are at, make sure each team or unit has their own unique set of metrics which will benefit them, stay focused and remember less is more. Don’t overdo the KPI’s, you will get a more accurate result if you keep to a few, and regularly use them over a long period of time.
Theories of Innovation
Now that we’ve got a handle on all the terms and aspects, let's go a little deeper and learn from some very influential theories that can be used to help your company succeed. The four main theories of innovation are The Innovator’s Dilemma, The Technology Adoption Lifecycle, The 3 Horizon’s and The 70-20-10 Rule which are outlined in more detail below.
The Innovator’s Dilemma
This is a theory developed by Clayton Christensen - a Harvard professor and businessman - in his 1997 book by the same name. He studied disruption to explain why traditional methods of measuring innovation (which only look at profit), does not give an accurate picture for the potential trajectory of a company. As we noted earlier, Netflix is a great example of disruptive innovation, but had Netflix measured its innovation methods through solely output metrics and profit in the beginning, it would be enough to make any company give up and quit. The numbers were dire to begin with, but their understanding and trust that the market would one day shift in their favour had great pay-off. He also notes that it is often ‘good management’ which can get in the way of disruptive strategies, such as listening to current needs of customers instead of thinking about what they don’t know they need yet, or tracking competition too closely. Disruption is all about the bigger picture, and often it is younger and smaller companies with less to lose who can play this game well.
The Technology Adoption Lifecycle
This theory, closely related to The Innovator’s Dilemma, was developed by Geoffrey Moore. Introduced in his book Crossing the Chasm, the theory explains how and why disruptive products or services have a hard time getting past the early stages of the market. Looking at why an innovation might not be accepted early on, he draws on another theory by Everett Rogers in his 1962 concept ‘Diffusion of Innovation’ who categorised the psychology of consumers and the degree to which they are likely to ‘adopt’ a new idea or product:
Innovators -> Early Adopters -> Early Majority -> Late Majority -> Laggards
Innovators and Early Adopters are seen as visionaries or tech enthusiasts, and Laggards represent the other end of the spectrum; the last customers to adopt a new product, and only once it has become mainstream. Moore zoned in on the space - or chasm - between Early Adopters and Early Majority (more pragmatic). It is in this space where the largest gap exists, and getting over this particular hurdle is the toughest. Once it is adopted by the Early Majority, it snowballs towards the mainstream. His book offers insights into how these hurdles can be worked with, such as focusing heavily on the niche market of the Early Majority and making a product this group of people adopt in full force. Focusing on them, rather than jumping to the Laggards, allows more momentum to grow at the core.
The 3 Horizon’s
This theory is actually a growth management strategy introduced by McKinsey & Company for projects within a company’s portfolio, and lays out a framework for simultaneously working between short and long term projects and goals. This strategy is closely linked to ambidextrous forms of organisation we discussed above, in that its purpose is to operate at different risk frequencies at the same time. This allows a company to maximise its growth potential, while also maintaining a steady focus on incremental change.
- Horizon 1: This horizon is based in the one to three year range, where short term projects can be explored. Measuring the innovation of this area can be assessed annually.
- Horizon 2: Within the range of two to five years, this horizon is for projects that explore and discover new terrain for the business, such as adopting or creating a new technology or process, or exploring a new market.
- Horizon 3: This is the highest risk area where brand new possibilities are explored, given a frame of five to twelve years. This area could be heavily invested in research and development towards long term projects, and where the more radical and disruptive innovations are given space.
The 70-20-10 Rule
This is a more simplistic but highly effective time management tool developed by Eric Schmidt, the former CEO of Google, and can be coupled with The 3 Horizon’s framework. An adaption from the Theory of Learning (which notes that you learn 70% by doing work, 20% from social interactions and 10% from reading), he suggests.
- 10% for anything new, unrelated or transformational.
- 20% can be given to related or adjacent projects.
- 70% of the company’s time should go towards the core of the business.
Staying one step Ahead: Challenges, Risks and Success Factors
While each innovation lifecycle will be wholly unique depending on the company’s vision and the varying strategies they implement to make that idea come to life, there are ways we can make this journey easier through being more prepared. It is important to study both the challenges and the successes of innovation management so you can get a more holistic view of where you place yourself on the spectrum, and what to keep an eye on:
Challenges to Avoid
- One of the greatest barriers to innovation being able to flourish is a stifling workplace culture. This is when there is no growth mindset, and the company does not value the importance of constant ideation, collaboration and acquiring new skills.
- Not taking any risk to improve may lead to the greatest risk: your company going out of business. If you continue without any form of incremental change, it is generally agreed that it will only be a matter of time before you get swallowed up within a fast-moving market. This is referred to as ‘The Risk of not Improving.’
- Having no focus or vision for the long term goals, whether that's for the company as a whole or the individual projects in a portfolio, can have detrimental effects. Your strategies will lack coherence and you’re much more likely to waste resources and employee time.
- Poor management is another huge factor in why many innovations fail. If a company’s structure is too top-down and hierarchical, it leads to a passive workforce of employees who don’t bother to share their ideas. The most important part of a thriving team is making sure every voice is heard!
Methods for Success
- Good management is able to both inspire and empower the members on a team, while also holding them accountable. Make sure the management team have a clear vision, understand the importance of implementing a direct strategy, and are aware of the tools and capabilities needed to move things forward.
- Everyone on the team has a shared desire to make continual improvements for the company. Improving the methods of how you get things done will also lead to more time for ideation, and in turn creates more value for the business.
- In order for an idea to take flight, it needs the right allocation of resources. Make sure you are taking the appropriate risks necessary, while constantly measuring your returns so you are not wasting any unnecessary time and money.
- Just as a bad workplace culture will have a dulling effect, a good culture will have endless benefits for a company. The team, and the people who make up that team, are the root of the business. When we properly nourish that root, it will affect everything from quantity of ideas, motivations, new directions and high energy. It is a healthy feedback loop which cannot be ignored.
If ever unsure of where to start, or where to pinpoint your efforts, it’s usually a good idea to follow the innovation lifecycle. With a quick google search, you will find hundreds of variations and countless diagrams of this cycle. But generally speaking you begin by identifying a problem ----> you then generate ideas of for a solution ---> develop proposals through a case and a document which can be assessed → implement a strategy or project plan ---> evaluate and measure the project at various stages → and finally you learn from the lessons through new information and reflection.
There are many ways to implement innovation, and one avenue is not better than another. The most important thing is that you’re constantly engaging with methods of innovation on a daily basis. Doing so will not only provide the seeds necessary for small incremental and continuous points of change, but will also lead to breakthroughs and seismic shifts.