How can leaders and teams close the gap between innovation aspirations and innovation capabilities?
Innovation success is repeatable and scalable with the right system. Companies must move beyond the occasional launch of one or two successful innovations, many of which rely on luck.
To remain competitive, leaders need to develop innovation as a key organizational muscle and overcome innovation theater. By the time a crisis arrives, it is too late to start exercising it.
Truly great companies find a way to balance the reliability of proven methods with the excitement and potential of new ideas. Invincible companies use tools like Portfolio Maps in order to visualize the workstreams of each process.
To learn firsthand from our experts, check out our virtual masterclass: Building Invincible Companies
No company is invincible.
While this is technically true, it doesn't mean you shouldn't aspire to become one. Striving to create an invincible company will allow you to support, improve, and scale up all the things that make you successful, while mitigating risks and disruptions.
Even if truly invincible companies are a hypothetical, all good companies should try to achieve some measure of invincibility. Those that come closest are the ones that constantly reinvent themselves before it becomes obsolete.
An invincible company:
How to become an Invincible Company…
The search to define what a business actually goes as far back as 1994, when Peter Drucker introduced the theory of the business was a set of assumptions about what a business will and won’t do in an article for the Harvard Business Review. He speaks about how companies fail to keep up with changing market conditions, as well as their duty to identify customers and competitors, their values and behaviour. Now considering that we've had businesses for over hundreds of years - it's pretty remarkable we only just came up with the term 'business model' a few decades ago!
In the middle of the 2002 dot com crisis, Joan Magretta built on Drucker’s business definition to exclaim that business models are “at heart, stories. Stories that explain how enterprises work. A good business model answers Peter Drucker’s age-old questions: ‘Who is the customer? And what does the customer value?'
The shift from a business plan to business model goes hand-in-hand with the rise of personal computers and the use of spreadsheets. Entrepreneurs used to plan their businesses year by year, quarter by quarter, and write it down in a document almost like a book who’s copy is final. The change occurred hand in hand alongside the introduction of powerful new technology such as Microsoft Excel, enabling people to model them digitally and more accurately. Being able to calculate your entire profit and loss for a business was now available to you on a single Microsoft Excel page. This now meant businesses could be modelled before they were actually launched. Products or services could be done ahead of time in terms of calculating the business' recurring revenue, profit, marketing costs, advertising spend etc. in order to model the framework of the business.
This change in approach prompted the likes of Alexander Osterwalder and Yves Pigneur to invent the Business Model Canvas in 2005, the first ever visual business tool of its kind. Long gone are the days of having to come up with a long & highly unrealistic business plan, trying to predict what product or service you'll be selling at the company five years from now!
Constantly reinvent Yourself
To stay ahead of everybody else and beat disruption; you need to constantly reinvent yourself. Business Models expire faster than ever before and you don’t want to become obsolete alongside them.
Competition increasingly comes from unexpected places like insurgent startups in addition to traditional incumbent rivals. Invincible Companies constantly reinvent who they are and where and how they compete in order to stay relevant and ahead of the game.
Compete on Superior Business Models
It is a rat race to compete on new products, services, price, and technologies alone.
Take advantage of market opportunities, new customer needs, and emerging technologies by embedding them in superior business models. Design, test, and build superior business models that disrupt others and are hard to disrupt themselves.
Transcend Industry Boundaries
The most successful organizations aren’t confined by industry boundaries or industry forces. In fact, they often crush industry boundaries and disrupt others.
Their business model or portfolio of businesses is not the result of the area they work in; it comes from an organization that constantly explores new ways to create value around market opportunities.
Invincible Companies do not prioritize exploitation over exploration. They are world-class at simultaneously managing the entire continuum; from exploring new businesses to exploiting existing ones.
They keep a culture of “day one”, maintaining a start-up spirit, while managing thousands or even hundreds of thousands of people and multi billion-dollar businesses. Increasingly, this ability to manage exploration and exploitation is not just limited to large established companies. It is also a matter of survival for SMEs and start-ups with the shortening lifespan of business models across industries.
Great business model portfolios should be composed of two distinct types, in order to avoid disruption and ensure longevity. These two types have completely different logic and are referred to as the Explore Portfolio and Exploit portfolio.
The Explore portfolio encompasses the search for new ideas, value propositions, and business models to ensure the future of your company.
The search, in this case, involves maximizing expected returns and minimizing innovation risk:
The Exploit portfolio is about keeping your existing business models on a growth trajectory.
This includes:
You ensure growth by improving returns and minimizing disruption risk.
This is best achieved by shifting all of your business models to an updated and more holistic approach.
Good management includes taking action to design and maintain a balanced portfolio that protects you from disruption.
This includes continuously growing and improving existing business models by shifting outdated to new business models and protecting those that are established. It also includes exploring completely new business models, of which many will fail, but some will produce outsized returns and ensure your future.
Use the Portfolio Map to visualize, analyze, and manage your existing businesses and the new ideas that you are exploring.
In order to design and maintain a strong portfolio, you need to provide a clear innovation strategy. This will define where to play and how to win, so your portfolio can have a clear direction and context.
We call this your Portfolio Guidance
Your portfolio guidance helps you define the resource allocation and portfolio actions. It provides explicit boundaries to understand what to focus on and what not to, where to invest and where to divest, or what to explore and what not to explore. In essence, it is a playbook for repeatable and sustainable success.
It should consists of:
Fundamentally, your two portfolios are very distinct and should be managed differently. How you choose to manage them will be shaped by the kind of innovation your organization wants to pursue.
Not all innovations are equal. Different types of innovations require different skills, resources, experience levels, and support from the organization. Ideally, they also live in different parts of the organization and have different degrees of autonomy in order to succeed.
We distinguish between three different types of innovation, heavily borrowed from Harvard professor Clayton Christensen: efficiency, sustaining, and transformative innovation.
Often the most difficult to successfully implement, Transformational Innovation requires a lot of resources and time. This type of innovation can be useful for reinventing a product or launching something new, and is often done with the intention of creating something long-term.
Transformational innovation is most frequently seen in large companies that have the capacity to handle failure. Having a safety net in case of a botched product launch can prevent severe damage to your revenue and reputation, so it's important to have a fallback in case your new project is a bust.
Companies that engage in transformational innovation usually have innovation teams separate from the business units, providing them with the autonomy that they need without diverting resources from proven successes.
Sustaining innovation is all about supporting your existing products and services.
This method focuses on:
As this method takes advantage of existing product success, there is very little risk involved. The work is often less strenuous, as your team is building on something, rather than starting from scratch.
Sustaining innovations can help to keep a product in the public eye for longer periods, provide an edge against competitors, and can help to further optimize great products.
This method of innovation calls for a dedicated team that is strongly supported by development and business departments in order to get the most complete and clear insights on their product.
This innovation method focuses on improving your company's business model.
This doesn't mean you start reworking the entire plan, simply that you find ways to improve processes and cut down on blockers.
These process innovations can range from sweeping reforms to small housekeeping habits, and often have an immediate impact. Since these innovations help to improve existing products, the risks are very low, and you can often accurately predict project outcomes.
Efficiency innovation is certainly a worthwhile endeavor for any company, but it does little to position a business for future successes, as it relies on existing work. This form of innovation can occur anywhere in the business.
For exploration, adopt a more venture capital-style investment approach, as opposed to the relatively rigid annual budgeting cycles practiced in Exploit projects.
The enemy of innovation is the business plan
Companies that still require business plans from project teams maximize the risk of failure.
The business plan is a document that describes an idea and its execution in detail. This drastically increases the risk of executing an unproven idea that only looks good on paper and in spreadsheets.
Conversely, innovation is about admitting risk and uncertainty. It is about iterating and adapting ideas based on evidence from experiments until they are likely to work. This minimizes the risk of executing a flawed idea
Here, we outline four key principles to manage your innovation portfolio:
Invest in a portfolio of projects, rather than individual projects, to spread your bets and manage risk.
Statistics show that the majority of early-stage investments won’t return capital or will only provide small returns.
This means that you can’t pick the winner without investing in some projects that will fail. The larger the return that you expect, the more small sums you will need to invest across different projects.
Start with small bets (i.e., investments/funding), while risk and uncertainty of project success are high.
The traditional investment process equips teams with a large budget upfront so as to implement a full project. This leads to large risky bets with unproven ideas.
In innovation, you can’t know what will work, which is why it's prudent to invest small amounts in many ideas.
Metered funding means Increasing your bets incrementally and providing follow-up funding when evidence from experiments suggest risk reduction and real-world project potential.
In the start-up and venture world, risk and uncertainty are acknowledged as investments and are spread over a portfolio of projects. Combining multiple small bets with metered funding equips teams with capital over a series of rounds.
With metered funding, only the ideas with traction are retained and get follow-up funding to continue. In other words, a large number of ideas obtain small amounts of money to get started. Ideas that don’t work or project teams that don’t have it in them are weeded out
In 2006, Spotify launches a free online music service to compete against freely available, pirated music. Its main revenue source comes from users upgrading to a premium subscription.
Spotify is a music streaming platform that gives users access to a large catalog of music. It uses a freemium revenue model that offers a basic, limited, ad-supported service for free and an unlimited premium service for a subscription fee.
Spotify relies heavily on its music algorithms and its community of users and artists to keep its premium experience delightful. Its premium subscriber base has grown from 10% of total users in 2011 to 46% in 2018.
From the start Spotify saw itself as a legal alternative to pirated music and paid song purchases on iTunes. Spotify pays a significant portion of its revenue in the form of royalties to music labels. It has paid close to $10 billion in royalties since its launch in 2006.
The company accelerated the shift from music downloads to streaming and disrupted Apple iTunes in the process. For the first time in company history, Spotify made a profit in 2019.
An important aspect of funding like a venture capitalist is the constitution of an investment committee that is dedicated to growth and innovation.
It’s crucial to create a dedicated committee, because the investment logic and investment style substantially differ from investments in execution projects.
The committee should be composed of a small number of leaders who have decision making authority when it comes to the budget. Ideally, it includes both members who are fully dedicated to exploration, as well as members who are more preoccupied with exploitation.
Investment decisions usually take place every 3 to 6 months, depending on the type of organization. Investments are mainly in internal teams, but may also include start-ups.
What are the key activities of a growth and investment committee?
In order to properly fund Explore projects, you need to incrementally increase your investments in projects that produce evidence from testing, and shelve those that don’t.
This is why we came up with the Innovation Framework; to guide Explore Portfolios to systematically reduce risk while also increasing investment.
In the discovery phase, you invest small amounts of money into a large number of tiny teams to explore ideas.
The key components of the Discovery Phase are customer understanding, customer centric value proposition and their willingness to pay.
The Discovery Phase is where you begin to reduce risk through testing:
Discovery prototypes at this stage do not need technical skills. Examples are storyboards, videos, and mock brochures.
In validation, you increase your investment in those 30% to 50% of the teams that produced evidence during discovery.
The key components of the Validation Phase are proven interest and indications of profitability
At this stage, you search for more solid evidence that shows interest for your products and services (desirability).
Common methods of assessing desirability are:
In acceleration, you continue to trim your portfolio and once again invest in only 30% to 50% of the teams.
The key component of the Acceleration phase are proven model at limited scale
At this stage, you aim for a working prototype or initial products and services to test your value proposition in a limited market. You are searching for evidence that shows that you can create and deliver customer value at a limited scale and with a profit.
Your search for evidence is designed to justify larger investments to scale customer acquisition and retention, and to test profitability at scale.
Business R&D are the activities a company undertakes to spot, create, test, de-risk, and invest in a portfolio of novel business opportunities. Opportunities range from improving the existing business(es) to exploring radically new ones.
The heart of business R&D is the art and science of shaping value propositions and business models, as well as the identification and testing of desirability, feasibility, viability, and adaptability risks for each opportunity.
It complements traditional technology and product R&D, which mainly focus on feasibility.
Business R&D doesn’t replace traditional technology and product R&D.
It’s complementary.
Its purpose is to create, explore, and research new value propositions and business models as well as reduce the risk for the business hypotheses underlying them. Business R&D may draw on traditional R&D, which focuses more on the technological aspects of feasibility.
This is the activity of scanning the environment for promising opportunities to improve the existing business or to explore completely new ones.
Opportunities may come from:
Read more on How To Scan Your Business Model Environment For Disruptive Threats And Opportunities.
Download our Card Deck to conduct your own business environment scan
The majority of Business R&D is dedicated to testing opportunities and turning them into real businesses. This consists of shaping, testing, and adapting value propositions and business models until customers care and evidence shows that you can build and scale the business model profitably.
To explore ideas systematically, work through two iterative loops: shape ideas with business design and reduce risk with testing. We refer this to the Design-Test Loop.
Business Design Loop
In the design loop, you shape and reshape your business idea to turn it into the best possible business model. Your first iterations are based on your intuition and starting point (product idea, technology, market opportunity, etc.). Subsequent iterations are based on evidence and insights from the testing loop.
Ideate
In this first step, you try to come up with as many alternative ways as possible to use your initial intuition or insights from testing to turn your idea into a stronger business. At this stage, it’s important to not fall in love with your first ideas.
Business Prototype
In this second step, you narrow down the alternatives from ideation with business prototypes. When you start out, you might use rough prototypes like napkin sketches.
Subsequently, use the Value Proposition Canvas and Business Model Canvas to make your ideas clear and tangible. You constantly improve your business prototypes in future iterations with insights from testing.
Assess
In this last step of the design loop, you assess the design of your business prototypes with the Questions for Leaders assessment sheet . Once you are satisfied with the design of your business prototypes, you can start testing in the field or go back to testing if you are working on subsequent iterations.
Test Loop
Every (radically) new business idea, product, service, value proposition, business model, or strategy requires a leap of faith. If proven false, these important and yet unproven aspects of your idea can make or break your business.
That’s why it’s important to break down your idea into smaller chunks that you can test. You achieve this by making the uncertainty and assumptions underlying your idea explicit in the form of hypotheses. Then, you prioritize these hypotheses to test the most important ones.
Hypothesize
The first step of testing a business idea is to understand the risks and uncertainty of an idea. Ask: “What are all the things that need to be true for this idea to work?”
This question allows you to make the assumptions underlying an idea explicit in the form of testable hypotheses. In other words, you break down a big idea into smaller, testable pieces.
Experiment
To reduce the risk and uncertainty of your ideas, it’s not sufficient to make your hypotheses explicit.
Don’t make the mistake of executing business ideas without evidence.
Test your ideas thoroughly with experiments, regardless of how great they may seem in theory. This second step will prevent you from pursuing ideas that look good in theory, but won’t work in reality.
Learn
In this last step of the testing process, you analyze the evidence from experiments in order to support or refute your hypothesis. Your insights will inform your decision to persevere with, pivot, or kill your idea.
This last activity of Business R&D consists of protecting your company from disruption by maintaining a business (model) portfolio.
This includes spreading your innovation bets across all types of innovation projects and incrementally investing in those that produce evidence, while shelving those that don’t. This diversifies risk and lets the best ideas and project teams emerge.
Mastering the tools of innovation radically facilitates the search for new growth engines. We suggest a toolbox of integrated tools to shape, test, and grow ideas in your organization.
Business Environment Map
A foresight and scanning tool to map the environment in which you conduct business. It captures the trends that might disrupt your organization, or represent new opportunities for growth and transformation.
Business Model Canvas
A strategic management tool to make explicit how you create, deliver, and capture value at the business level. Used to improve existing business models or invent new ones. Serves as the foundation to identify hypotheses to test new business ideas.
Value Proposition Canvas
A product management tool to make explicit how you create value for customers. Used to assess and improve existing value propositions or to invent new ones. Serves as the foundation to identify customer and product/service hypotheses.
Business Model Patterns Library
These are a series of repeatable configurations of different business model building blocks in order to strengthen an organization’s overall business model.
We have codified them into a series of patterns to help you think through how to compete against superior business models beyond the traditional means such as product, service or price.
The best business models incorporate several patterns to outcompete others.
Assessment Questions for Leaders
Assess your existing and new business models with the Assessment Questions for Leaders. Visualize your strengths and weaknesses and unearth opportunities with the resulting score.
No business model achieves a perfect score. Simply be conscious about where you score well and where you don’t, and use the trigger questions continuously to spark ideas of improvements.
Assumptions Map
Use the Assumptions Map to identify the hypotheses you need to test first.
Use the Test Card to design sound business experiments in order to test your business hypotheses. Download the test card.
Use the Learn Card to capture insights from your business experiments, and to define decisions and actions.
Among the many skills required in entrepreneurship and innovation, three are learnable and crucial on your journey from big idea to real business:
Master the business model canvas (BMC):
The ability to inspire a team and overcome the biggest obstacles.
Dollar Shave Club (“DSC”) disrupted the market for shaving products by selling directly to consumers through its online store. Because they cut out the middleman (retail), they can pass on savings to customers. DSC makes up for the lack of established brand and distribution reach by harnessing the power of viral videos and internet marketing.
Could you access your customers in an unprecedented and scalable way? How could you cut out the middleman and create direct access to your end-customers?
Today’s rapidly changing business environment has revealed the challenges that companies deal with when facing change and disruption. Leaders more and more understand and see the value of innovation with a majority of them now ranking innovation as one of their top three priorities.
Unfortunately, there is a gap between innovation aspirations and organizational capabilities. Results in terms of growth from innovation rarely live up to expectations. This, despite an abundance of innovation activities.
To bridge this gap and achieve results, we believe the right ecosystem can make innovation success repeatable and scalable.
These are the three pillars to drive innovation with tangible results
Innovation portfolio composition matters. It is what drives long term growth. Build a diversified innovation portfolio that aligns with your overall strategy. Systematically produce winning ideas and teams from efficiency, to sustaining, to growth innovation.
We work with leaders to help them make conscious and strategic portfolio allocation decisions. Our visual tools make these choices explicit. We help leaders understand where they are now and what’s missing, so they can make informed decisions about what to do next.
Using the Portfolio Map, we facilitate the assessment and design of the right innovation portfolio by asking some fundamental questions.
When assessing the portfolio
When evaluating the portfolio
When setting portfolio aspirations
Innovation programs can be a powerful driver of culture change and value creation. Shift from mere innovation activities to strategically integrated programs that predictably deliver results. Great innovation programs shift mindsets and reliably generate the growth for which you plan.
We work with leaders to help them evaluate the performance of their current programs based on our expertise. We then support them in designing strategically integrated programs. This consists of improving, retiring, or adding completely new programs to their ecosystem.
We facilitate the assessment and design of strategically integrated innovation programs by evaluating each program’s performance in terms of its ability to achieve:
The right culture is the foundation for a repeatable and scalable innovation ecosystem. Invincible Companies actively understand, design, and manage culture. They create world-class innovation and execution cultures that live in harmony.
Driving cultural change is the key role of a company’s leadership. We work with leaders to help them evaluate their culture based on our expertise. We then support them in removing innovation blockers and designing innovation enablers.
Using the Culture Map, we facilitate the assessment and design of the right innovation culture to drive repeatable innovation.
In a strong innovation culture, everybody understands how they enable or block innovation. Leaders shift mindsets and teams take entrepreneurial risks and explore bold new ideas.
In this section, we outline the three main levers that you can work on to create a world-class innovation culture.
To build an exploration culture, leaders need to understand how innovation works and then invest a substantial amount of their time into innovation. They provide clear, strategic guidance for innovation projects and regularly review a company-wide Exploit and Explore portfolio.
Innovation leaders are eager to explore new growth opportunities and understand how the related risk is managed.
Strategic Guidance
In companies with clear strategic innovation guidance, leadership communicates the strategy at important meetings at least once a quarter.
The innovation guidance is completely aligned with the overall strategy and is widely understood across the organization. Good examples of clear guidance are Amazon and Ping An.
Resource Allocation
In Invincible Companies, resources for innovation are institutionalized and leaders commit an important proportion of their time to innovation.
Resources include:
Leadership Time: In companies that innovate, the CEO or a co-CEO invests 50% or more of their time on innovation. A great example is Bracken Darrell, CEO of Logitech or Ping an’s co-CEO Jessica Tan.
Innovation Funds: Money that is invested in internal and external innovation teams that start with small bets and get follow-up investments based on evidence. These funds differ from R&D investments.
Innovation Core Team: a team of professional and experienced innovators who lead projects or coach project teams across an organization.
Time: One of the scarcest resources in organizations is time. Systematically testing and de-risking ideas requires a substantial time investment from project teams.
Prototyping resources: Innovation teams run experiments and need access to resources for physical or digital prototypes, graphic design, videographers, and so on.
Access to Customers, Brand, and Skills: Innovation teams need access to resources controlled by the core business. Testing requires access to customers, the use of the company brand, and often other skills and resources of the core business.
Portfolio Management
In Invincible Companies, leadership is eager to pioneer. Leaders invest in a large innovation pipeline of small bets of which the best get follow-up investments. The portfolio covers the whole range of exploration, from efficiency innovation to breakthrough growth innovation.
In Organizations with an exploration culture, nobody gets in trouble for experimenting with new growth opportunities that fit the strategy.
You find innovation on the agenda of the most important meetings, and people choose innovation as a career path. Innovators understand the constraints of leaders and managers of the existing business and they, in return, do their best to help innovators.
Exploration and execution form a true partnership to manage the present and explore the future.
Legitimacy and Power
Companies that can repeatedly produce tangible innovation results ( like Amazon or Ping An) give innovation power and legitimacy. To have an impact, innovation needs to feature in the organizational chart, and at the very top.
Either the CEO, a co-CEO, or somebody reporting directly to the board needs to be responsible for growth and innovation, as well as spend serious time and energy on it.
Talking about it at the top level is not enough.
Unfortunately, innovation still lacks legitimacy and power in most organizations. We see a lot of heads of innovation who are two to three levels down in the org chart. They are the sub-department
of a leader who is the sub-department of another leader — guess how much impact that creates?
When growth and innovation lack power and legitimacy, that sends a very strong signal to the company and often leads to severe consequences with long-term impact:
Bridge to the Core
In Invincible Companies, Explore and Exploit operate as equal partners that live in harmony. There are clear policies that help innovation teams and the core business collaborate. Innovators get easy access to valuable resources from the core.
When there is no clear bridge to the core, innovation teams have only limited, conflicting, or no access to customers, resources, and skills of the core business.
In the worst case, innovation projects are blocked from getting access to what they need to explore and test ideas.
They basically have to operate like a start-up in chains: with the same limited resources as start-ups, but without the impetus.
We therefore advocate for a so-called Chief Internal Ambassador and a supporting team who explicitly manage the relationship between Exploit and Explore on behalf of the CEO or the board.
Rewards and Incentives
In our advisory work, we often hear that the drive to innovate is intrinsic to innovators and entrepreneurs.
Imagine an innovator who gets punished every time they try something out that was not in the plan. Now, imagine an innovator who repeatedly creates new multimillion-dollar businesses for an organization and gets rewarded with promotions and pay raises.
Will they perform to the very best of their innovation talent?
Will they stay at your organization?
We argue that a dual strategy to reward and incentivize works best. First and foremost, eliminate all the downsides that prevent innovators from innovating in your organization. Once you’ve achieved that, develop a reward system for innovation.
Innovators pursue ideas based on evidence from experiments, not their opinions or their boss’s opinions. Risk and uncertainty of ideas are systematically measured, and projects start with cheap and quick experiments.
Experiment time and costs increased with supporting evidence and decreasing uncertainty. People accumulate skills over years of practice and learn and grow from failures in any projects.
Tools & Resources
Innovation professionals need to master a set of dedicated tools, just like a surgeon commands a set of operating tools. We believe the quality of the innovation toolset you use has a substantial impact on the quality of your growth and transformation work.
Tools are not neutral.
They heavily influence the quality of your results. That’s why it’s incredibly important to carefully select the tools you use and learn how to apply them correctly.
Process Management
Invincible companies have dedicated processes and decision-making that are both optimized for innovation. They measure the systematic and effective reduction of risk in new ideas, rather than on-time and on-budget delivery, which are typical execution KPIs.
Skills Development
Managing the existing and inventing the new are two fundamentally different professions.
Innovators are typically comfortable with high uncertainty and radical pivots to adapt to the reality of new market insights. Invincible companies systematically develop world-class innovation talent with extensive innovation experience across the organization.
Schedule a quick call to evaluate where you are and see if we can help:
You'll acquire the tools and processes needed for world-class strategy and innovation: