Chief Innovation Officers frequently ask me what I think of the programs they have launched: Are they likely to succeed technically and, more important, are they likely to pay off for the company? What metrics do I suggest they use? And, can I recommend ways to improve their organization’s capacity to innovate and grow.
I invariably begin my reply by reminding them that innovation strategy is not some separate and distinct plan but, rather, an integral part of their firm’s business strategy. I will also acknowledge the formidable tasks their CEO has charged them with:
- Stem the commoditization of their current products and services.
- Identify new areas of growth and profitability.
- Create a new social compact with employees by rekindling the creativity and verve that characterized the organization when it was younger.
CEOs recognize that innovation is the answer to these challenges. But the way they choose to implement innovation leaves a lot to be desired. And, the responses their Innovation Officers describe to me are tactical and frankly quite meager. Moreover, they are usually confined to what the Innovation Officer (usually a staff assignment) can directly control: Things like establishing “innovation champions,” conducting “ideation sessions,” to designating one day a year as “innovation day” where employees gather to share their ideas, tend to dominate the discussion. Seldom do I hear from these people that they are developing a comprehensive and integrated strategy—with the rest of the business units—that will motivate and direct the firm’s innovation activities.
Connecting Business and Innovation Strategy
This all-too-common shortcoming got me thinking: How could I/CIMS best help these people and their firms? The answer we have come up with is a step-wise, progressive approach to help organizations define and implement an integrated Business and Innovation Strategy (B&IS).
Most established companies are complex organizations, with certain innovation responsibilities and resources located in the function of Chief Innovation Officer (CIO, or CNO in Prof. Gina O’Connor’s report here); while others are located in the business units themselves. A B&IS recognizes all innovation activities and connects them to targeted, high-value market segments.
The core of any business strategy— connecting the company’s internal processes to improved outcomes with customers—is the “value proposition” delivered to the customer. The value proposition describes the unique mix of product, price, service, relationship, and image that the company intends to offer. A company’s business strategy lays out exactly how the organization intends to differentiate itself, in the targeted segments, relative to competition.
All companies employ one, or a combination, of these business strategies:
- Customer value-centric—leverages customer relationships; builds bonds with its customers; knows the people it sells to and the products and services they need. Examples: Nordstrom, Starbucks, Whole Foods, Virgin Atlantic.
- Innovation-centric— pushes its products to the realm of the unknown, the untried, or the highly desirable. Examples: Apple, Porsche, Netflix.
- Production-centric—leverages scale and efficiency to deliver a combination of quality, price and ease of use or purchase that no one else can match. Examples: Toyota, McDonald’s, Amazon.com.
Ultimately, all differences between companies in price, function or cost derive from the hundreds of activities required to create, produce, sell, and deliver their products and services, i.e., how the company innovates and creates commercial value. Differentiation arises from both the choice of activities and how they are performed. The innovation strategy is not some separate and distinct plan; it is integral to the business strategy.
The solution I recommend to CIOs (illustrated above) is based on
the CIMS Innovation Management Maturity Model (IMMA). This novel tool identifies the specific practices and behaviors organizations exhibit as they progress through a five-level scale of increasing maturity and proficiency.
The IMMA tool has proven invaluable to firms that need a roadmap for building strong, enduring innovation capabilities. BASF, Eisai, Pentair’s Pool & Spa Division, and Pitney Bowes are already using IMMA. BASF’s experience is described on page 8, and you’ll find more on IMMA in my Spring 2011 column, “Updating our Tool for Competing in the Information Age.”
A clearly stated strategic direction provides the ultimate target for the firm’s B&IS. Elements of strategic direction (and drivers of the B&IS) are the firm’s:
- Vision statement
- Mission statement
- Future business goals
- List of key business drivers
- List of target wants and needs
- Key value propositions
- List of strategic market positions
- Critical success factors
- Distinctive competencies
- Critical capabilities
- Key projects to deliver capabilities
Minimally, the company’s vision, mission and goals should be understood and documented.
At the highest level, the purpose of the B&IS is to define the goals of the total new product and services development effort and to state the role that innovation plays in achieving the company’s overall business objectives.
A “good” B&IS answers the question: How exactly does innovation fit into the business’s overall plan? For example, “By 2013, 30% of business profits will come from new products.” It identifies the specific roles and responsibilities of all major stakeholders required to develop and implement the strategy, e.g., the CIO function, R&D, SBU Marketing, as well as the Corporate Strategy and Finance functions.
Tip for Tech Firms
Stay connected with the market and customer buying preferences. That’s important because many companies I hear from invest heavily in research and new technology development but fail to realize any leverage from that effort. Only when technology research is targeted at a focused market, or customer set, does one gain leverage from a new technology.
Successful companies keep an inventory of technological assets, and conduct an ongoing competitive evaluation of technology leverage in the marketplace. This enables them to identify strengths and weaknesses in their technology roadmap and take subsequent corrective actions.
That’s why it’s essential to develop a new technology/product roadmap in concert with market planners and competitive analysts who understand the changing market and customer buying behaviors.
Climbing the Maturity Levels
In IMMA, there are 5 levels of maturity: 1 = Ad hoc, 2=Defined, 3=Managed. 4=Leveraged, and 5=Optimized. These levels describe the specific practices (identified by CIMS research) to progress from a minimal level of proficiency in developing innovative products to world class in driving growth through innovation.
Maturity Level 2 is the level at which the Business Innovation Charter (BIC) is established. The BIC defines the contribution of the CIO and the SBUs in achieving the firm’s objectives and the key activities required by each organization, and ensuring that the R&D priorities are in line with the market needs.
The BIC should account for four key factors in the market environment: the rate of change of technology for the company product line, the rate of change of customer needs, the rate of change of product life cycle, and increasing world competition.
Building a BIC requires three actions:
- Define Target Business Arenas (Markets/Technologies)— Understanding marketplace change dynamics is essential to prioritizing R&D to those segments that face a competitive threat from not having new technologies.
- Define Innovation Goals and Objectives—These goals address the technology roadmap and the financial value to be derived from new products and services in the target arenas. The goals are explicitly defined in terms of technology milestone achievements, and in percent of business revenue and profit contribution from new products when compared to that derived from mature product products.
- Identify Activities To Achieve Goals—Achieving aggressive financial goals for development’s contribution typically requires changes or increased focus on selected activities, organizational dependencies and external organizational interactions. These need to be explicitly described. The technology development projects should be prioritized according to the market needs.
Subsequent maturity levels and activities deal with the important issues of SBU integration and corporate optimization.
According to the PDMA (Product Development and Management Association), successful high technology companies have found that more than 50% of their current sales come from new products. In the case of the most successful, this figure exceeds 60%. This demonstrates the payoff from setting goals for product and service innovations that contribute to achieving BU and corporate financial objectives (Maturity Level 3).
These goals can be tailored to each business unit given the market dynamics related to each business arena but must be consistent with those established at the corporate level. The goals are explicitly defined in terms of the percent of business revenue and profit contribution compared to that derived from mature products.
Corporate actions will be required to ensure that business units are aligned with goals. These actions in all likelihood will generate cross-business unit dependencies that must also be explicitly described.
Maturity Level 4
Development investments across all business units are made in Maturity Level 4, consistent with the importance of each business unit’s contribution to corporate business and innovation goals. The optimal investment must be determined at the corporate level, especially for research spending, which is invariably constrained. The investment priorities should now be tied to company-level revenue and growth opportunities.
Finally, resources are allocated across strategic arenas at a level sufficient to execute the BIC mission. The CIO, VP of Strategy, and CFO should be the corporate-level sponsoring executives.
Strike the Balance
Innovation Officers I have shared this with see the sense in this scheme. No innovation strategy is distinct and separate from the business strategy— they are one in the same. The trick is finding the right balance between the corporate and SBU objectives; when it comes to strategy, it always is.
Want more information about how the IMMA tool can help to optimize your innovation strategy? If so, please contact me, Paul Mugge at firstname.lastname@example.org.