Let’s face it, the word “innovation” means nothing on its own anymore. We use the word so much--R&D, technology innovation, business process innovation, business model innovation, product innovation, etc.--that the core of its meaning has been lost or blurred. It might seem academic to discuss the meaning of this word, but it actually has substantial implications for innovation strategy. Let me explain.
I’m definitely not the first person to point out that “innovation” has become a meaningless buzzword. When I was at the Drucker Forum last November, a talk by Harvard professor Clayton Christensen reminded me of the importance of a more fine-grained definition of innovation. Christensen highlighted the substantial difference between incremental, sustaining and efficiency innovation versus growth innovation. He then explicitly connected it to growth.
When a car company invents a new car, the new car will rarely create substantial new growth. It mainly replaces older models to sustain sales levels. On the other hand, growth-focused innovation has the potential to create entirely new growth engines for a company. When Amazon started Amazon Web Services (AWS), the project transformed the company from a business-to-consumer focus in e-commerce, to a business-to-business expansion in IT infrastructure. This business model innovation created an entirely new growth engine for Amazon. In 2016 Amazon will make over $10 billion USD in revenues from AWS with substantially better margins than e-commerce.
So why should we care? Because different types of innovation activities have strategic and organizational implications. They have different strengths and weaknesses; and more importantly, different types of innovation require different ways of working.
In this post I first outline how innovation is a spectrum from exploiting innovation to exploratory innovation. Then I define different types of innovation; and lastly, I show how to test if your organization takes growth innovation seriously.
Innovation activities take place on a broad spectrum. This spectrum ranges from better exploiting and improving a successfully established and operating business (model), all the way to inventing and exploring new horizons in the form of new and potentially disruptive business (models).
The exploit side of the spectrum largely focuses on innovation activities that create efficiencies or incremental changes that sustain the company. Most companies master this side relatively well. Examples include business process re-engineering, cost cutting activities or the replacement of products and services with newer, better ones. Unfortunately, focusing on this alone is not sufficient as Kodak, Nokia, or Blockbuster have shown.
The explore side of the spectrum focuses on entirely new value propositions, business models, and other types of growth engines. This is where the innovation activities happen that result in substantial new growth. Established companies rarely master these types of innovation activities, because they require a very different way of working. The culture, skills, processes, and even incentive systems that work well for efficiency and sustaining innovation simply don’t produce more radical innovations that result in fresh growth.
These types of innovation activities also require a different set of business tools. The strategic planning tools and processes to exploit a business model are ineffective and sometimes even counterproductive when it comes to growth. In fact, the tools and processes required to create new growth--such as the Business Model Canvas, Customer Development, and Lean Startup--are more likely to be found in startups.
The companies that want to win in the 21st century need to perform innovation activities across the entire spectrum from “exploit” to “explore". Pundits call this the ambidextrous organization. This is so difficult to achieve because it means nurturing an “exploit” culture and “explore” culture simultaneously under the same roof. Each culture requires different organizational structures, processes, and tools. That’s why it’s so important to differentiate between different types of innovation activities and their implications.
There are basically three different objectives when it comes to innovation:
Increase the efficiency of the established business: e.g. by improving business processes or increasing people’s productivity with collaborative technologies.
Sustain the established business: e.g. by introducing new products and services that replace old ones or by implementing marketing and advertising innovations.
Create new growth engines: e.g. by experimenting with entirely new value propositions or business models.
Efficiency and sustaining innovations are generally a lot easier to perform, because there are more known than unknown variables, which means less uncertainty. The first two are on the exploit side of the spectrum. The last is on the explore side of the spectrum.
When you innovate to increase efficiency you are dealing with a proven and established business model. You have data from the past that shows what works and what doesn’t. There is no need to change the business model, just to make it better.
When you innovate to create new growth engines historical data is often useless and you might need to question the value propositions and business model(s) that worked marvelously so far, but might not be a fit for the future. There are a lot more unknowns to deal with. Uncertainty is a lot higher. Hence, the risk of failure is also more important.
Finally, the time horizon to create new growth engines is normally a lot longer than for efficiency and sustaining innovations. The former might require a substantial incubation period, while the latter can often be done in the short term.
There are several different types of innovation activities. Some that companies have been performing for decades and master well. Some that are new and more challenging for most organizations. Here is a list of some of the most important innovation types:
Business Process Innovation: e.g. the automation of manufacturing.
Technology and Science Innovation: e.g. inventing new and faster microchips for mobile phones.
Product and Service Innovation: e.g. the expansion of barbie dolls to eight skin tones and a variety of body sizes by toy company Mattel, or when Emirate airlines service that picks up business class travelers before a flight.
Marketing and Advertising Innovation: e.g. by using new technologies to market products and services.
Business Model Innovation: exploring new ways to create, deliver and capture value by changing several elements of the Business Model Canvas.
Each type of innovation activity focuses on different aspects of the company. Each type of innovation contributes to the business in different ways. Each type of innovation requires specific ways of working, skills, and tools.
Should everybody be an innovator?
I often hear experts and CEOs say that everybody in a company should be an innovator. That blanket statement is not very helpful. Of course everybody should innovate, but in very different ways. Some people in the company should focus on efficiency and sustaining innovation, while others in the company should focus on innovation that leads to new growth engines.
As we learned above, each type of innovation activity requires specific ways of working, skills, and tools. Hence, you want to train and equip people with different innovation goals in different ways. You also want to make sure you allocate resources strategically across those different innovation activities on the exploit-explore spectrum.
There are several ways to look at how seriously companies take different types of innovation. The most obvious way is to look at resource allocation in terms of time, money, and people. . What you will learn is that most resources are dedicated to efficiency and sustaining innovation. Very rarely do you see companies that invest in new value propositions, business model innovation, or management innovation.
What people also tend to forget is that even successful technology and science innovations alone don’t automatically lead to growth. It’s in combination with the right value propositions and business models that new technologies create substantial growth.
Here’s another way to test if a company is serious about creating new growth engines: ask how much face-time executives who are focused on new value propositions and business models get with the CEO.
Recently the business model innovation team of a large European company visited me at my office. The organization has its tentacles in a few major industries that amount to €70 billion in revenues. The team leader tried to convince me that their CEO was fully committed to creating new growth engines.
I asked, "How much face time with the CEO do teams focused on new growth engines get every quarter?". I was actually tempted to ask how much time they get every week or month, but didn’t want to frustrate them too much. The response was something like three hours. Three hours! To quote Steve Blank, my friend and initiator of the Lean Startup movement: “That sounds like innovation theatre to me.”
The reason I’m highlighting this is because it’s not enough to initiate activities on the exploit side of the innovation spectrum. If you don’t give sufficient resources, power, dedicated organizational structures and top leadership face-time, all you’ll get is innovation theater. It’s not the real thing!