There are several good case studies out there on how large organizations have implemented a corporate innovation strategy, one of those is Building a Growth Factory, by the team at Innosight. In their short ebook (96 pages), they describe how P&G and Citi discovered concerns over their ability to increase innovation, and did something about it. What then follows are a set of good practices, reminders, and self-assessing questions, which roll-up into a kind of framework / self assessment for creating sustainable innovation.
Source: Building a Growth Factory
It breaks down into four components, each of which contain a number of activities. Let’s go through them with a little detail.
1 - Growth Blueprint
What is it that you expect to achieve with innovation in your organization? You’ll want a mixture of answers to that: some innovation to protect your core business, some which extends the core business, and some that completely transforms it. These strategic areas help to organize the efforts, and provide a clear distinction for where ideas and projects should live. An example comes from P&G, with their four types:
- Commercial - increase trial and usage of existing products without changing the product itself.
- Sustaining - innovations that take existing solutions and make them better, faster, cheaper.
- Transformational - step-changes whose dramatic improvements reframe a category.
- Disruptive - new brands or business models that win through simplicity or affordability.
The McKinsey Horizons Model is another way of thinking about the strategic organization of innovation efforts.
Growth Goals and Guidelines
To support the growth types there should be clear goals set to measure the output. Typically these break down into four targets:
- Company performance targets - both short and long term overall goals.
- Growth type specific targets - how much will each type contribute?
- Operational targets - break down growth targets by business unit and region.
- Strategic opportunity areas - a list of potential sources of growth, such as new technologies, regulatory changes, customer pain points.
Growth guidelines are then needed to help teams and individuals make clear decisions about what to pursue and what not to invest any time in. You’ll often hear managers say they are open to any kind of idea, but in reality we all know this is not the case - it’s far better to set some honest boundaries so that innovation can happen in relation to what the company wants to achieve. What is a clear “yes”, what is a clear “no”, and what sits in the middle requiring some level of management discussion?
These guidelines can be very hard to nail down. Take a look at the visual below: green is a clear yes, yellow requires discussion, and red is a clear no. Determining the definitions for aspects like Ease of Execution, Revenue Model, and Distribution Channel can be hard - especially when you don’t want to limit yourself too much. But the effort is worth it; consider that this view informs resource allocation and investment decisions.
Source: Building a Growth Factory
2 - Production Systems
Robust Innovation Processes
Most companies have an established stage and gate process for moving new products and services through a funnel, eventually to market. But innovation often doesn’t flow too well through these guarded gates. It’s therefore important to have flexibility built into your processes so that innovation has some room to breathe. Specifically this means having the ability to:
- Spot opportunities - innovation always starts with the identification of a problem to be solved.
- Design solutions - a holistic approach to solving the problem, including the design of a business model and customer experience.
- Test and learn - the more uncertain the innovation, the more the need for iterative steps to explore the uncertainties and make informed adjustments.
- Scale - big companies need big products, and big revenues; when an idea is ready it needs to be scaled across the market.
The next four items are considered ‘production structures, and it’s important that the processes interface smoothly with these structures. For example, an idea that comes from an external source needs to find a home in the process, and not be neglected because of the ‘not invented here syndrome’.
Idea Supply Chain
To drive innovation forward you need ideas, and although ideas are often the easy part (defining the problem, and executing upon ideas are often harder), you still need a well-oiled idea supply chain, which ideally takes input from inside and outside the organization.
Many companies suffer from ideation problems, from stagnating creativity (employees submitting the same ideas over and over), to only tapping into a small percent of the whole collective potential (often only seeking R&D ideas for example), or good ideas exist but there is no clear way to channel them into the appropriate process and allow for a period of incubation.
Hunting at the periphery can significantly help here:
“Companies need to have a way to get outside their industry domain to immerse themselves in external ecosystems of innovators and entrepreneurs … P&G employees - from the chairman down - make a regular habit of visiting consumers in their homes, shopping alongside consumers, or working with consumers.”
Crowdsourcing and idea management tools are also a vital part of the idea supply chain. They allow for the structured capture of input around key topics (growth types), and for a focused and limited period of time to best utilize the corporate energy and attention. It also means more employees are able to participate, bringing diversity into the innovation process.
These tools also enable you to build a process for handling ideas, so that small quick wins can be put through one process, and larger breakthrough ideas another - but both are transparent and enable the participants to see how their idea is handled.
Many large companies have created internal incubators, a safe place to test and grow high-uncertainty ideas. Lockheed Martin was famous for its “Skunk Works” group, which developed the XP-80 fighter jet in only 143 days. Since then the group has also developed the U-2 spy plane, SR-71 Blackbird, and the F-22 Raptor. In 2010 P&G formally created two new-growth groups, who were kept separate from the core business.
It’s perhaps something of a luxury for a company to be able to create dedicated groups, with their own resources and management authority. But not everybody does it this way:
“Some big companies have large multifunctional teams; others dedicate just a few employees to new growth; other companies where innovation is truly embedded within the culture, like 3M or Google, don’t have any separate groups.”
For those groups which have survived more than a decade, three principles emerged from their success:
- Separation - if the processes, resources, talent, and governance are not unique to the group, then they will churn out the same output as the rest of the company. Something has to be different to flourish different results.
- Linkages with the core business - separation should not be absolute, there needs to be a clear understanding of how to hand over ideas to the core business and scale them up. There should be a ‘capabilities exchange’ between core and new-growth groups.
- External orientation - the group must work with outside idea contributors, entrepreneurs, external specialists, and be able to run small market tests.
Little Bets Labs
One of the most common success factors in any innovation program is the ability to experiment and test ideas quickly, and iterate through the build-measure-learn cycle. Following the scientific method, of defining a hypothesis, creating the test, and analysing the results, enable companies to try more things, and move closer to a winning solution.
“It is important that companies have mechanisms to capture and share learning. Experiments often surface unanticipated learning that can affect other part of the business. Without sophisticated knowledge management systems, this kind of soft learning often ends up locked in the heads of a few employees.”
M&A and Partnership Engines
Companies like Apple, Cisco and P&G use acquisitions as a key part of their innovation strategy. In 2005 Apple acquired FingerWorks, who had a unique gesture-recognition technology; other examples include Siri and Beats. In 2005 P&G paid $57 billion for Gillette, giving it access to parts of the retail store it had previously forgoed. Cisco acquires more than a dozen companies a year, and is known as one of the most prolific and adept at M&A.
Despite these good examples, $2 trillion a year is invested in M&A, and three-quarters of them reportedly fail. In today’s environment it is almost impossible for a single company to own all the necessary technology for driving growth in new markets, therefore an ability to identify, acquire, or form partnerships with external solutions is critical for innovation.
3 - Governance and Controls
Idea Governance Systems
Typical governance systems don’t work well for innovation, a degree of flexibility is needed. But going the other direction and not having any discipline is not the answer either. Innovation is not random and unpredictable - but with high uncertainty you need a different kind of discipline. P&G has different governance systems for each of its four growth types mentioned earlier. Additionally:
“...[P&G] went as far as creating a process manual for transformational and disruptive ideas. The manual is a step-by-step guide to creating these kinds of businesses. It includes over-arching principles as well as detailed procedures and templates to help teams describe opportunities”
IBM has a dedicated new-growth group, the milestones and measurements for this group are more focused around learning and testing assumptions, rather than on traditional financial metrics and ROI.
It also makes sense to have a different group of people making decisions around new-growth ideas, rather than having all types of ideas decided upon in the same meeting, by the same people. Four key characteristics should apply to this group:
- Not a replication of the executive committee in order to ensure that issues related to the core business don’t creep in.
- At least one outside representative.
- At least one representative with experience investing in low-knowledge, high-assumption situations.
- Relatively small, to facilitate quick decisions.
Portfolio Tracking Systems
A portfolio system should include all of the company’s growth ideas, not just one type. It should provide real-time data, so that decisions can be made efficiently. It’s not just quantitative data that is important, but also qualitative, learning-based information, is important for review. Ideally these systems are mostly automated, requiring low manual intervention.
You should be able to see how strategy matches the allocation of resources, and also easily see projects that require intervention. “Zombie projects” are a classic problem for large companies, with limited potential, these projects continue to take up resources and shuffle along. Your portfolio system needs to flag these up and allow for resources to be freed up.
Resource Allocation Systems
Resource allocation is at the root of the innovator’s dilemma. Where should people spend their time? Should they invest in this customer over that one? This new product over the existing one? Collectively the decisions might be good (indeed good management breeds the innovator’s dilemma), but they allow for the status quo to win. Resources and cash need to be consistently spread across the different growth goals. Furthermore:
“The default decision in many companies is to spread their best people across a range of initiatives. However, our experience is that the more novel or disruptive the project, the more important it is to have at least one or two people who are fully dedicated to it. It is hard to be a part-time business builder.”
Continuous Improvement Systems
Usually the first bottleneck to appear in an innovation process is at the front end, with a lack of good ideas that allow for innovation. But once over this initial challenge of building a supply chain of ideas, the problem then bounces around from place to place. Whether it be in IT, legal, regulatory, competing resources, or distribution. A continuous improvement system should play a role in identifying these bottlenecks and removing them as they show. Within the CTO’s group at P&G, there is a team focused on innovation productivity. Their job is to innovate the innovation systems.
The continuous improvement process should also:
- Map out and connect current and planned innovation capabilities.
- Help to spread best practices.
- Ensure overall corporate strategy links to innovation processes.
4 - Leadership, Talent, and Culture
P&G’s CEO A. G. Lafley described his role within the company as co-chief innovation officer, demonstrating that innovation had top priority, and the work started with him. Lafley was an innovation cheerleader, and was diligent about hiring the next generation of innovation leaders, such as Bruce Brown and Bob McDonald. McDonald took over from Lafley, and began making innovation a purpose for P&G:
“There needs to be an emotional component [to innovation] - a source of inspiration that motivates people to contribute in ways that are far greater than themselves … we know from our history that while promotions may win quarters, innovation wins decades.”
A sense of purpose is crucial to motivating employees, Dan Pink has shown how financial incentives can actually decrease performance on creative tasks. Pink argues that giving people autonomy, providing a path to mastery, and instilling a sense of purpose in their work, are the strongest components to building employee engagement and motivation.
“Many companies’ very best people are in fact the exact wrong people for many types of innovation challenges.”
Typically, a company will recruit its best core operators to build the new growth businesses, but this is often a mistake. Those individuals are adept at running the existing business, but may not be suitable for new ways of working required for high uncertainty growth work. The authors suggest looking at the Innovator’s DNA as a starting point for choosing the right people. The five key behaviours needed for successful innovator’s are:
- Associating - seeing connections between unrelated ideas
- Observing - intensely looking at the world to gain insights
- Questioning - especially the status quo
- Experiments - good at constructing tests to discover insights
- Networking - to broaden and diversify perspective.
Measurement and Reward Systems
As mentioned above, financial incentives can actually decrease motivation for creative work, so how then do companies reward employees for innovation?
- Unique career opportunities - providing the chance for innovators to work with their idea all the way through the process, to have a sense of ownership for it. Also offering up assignments to work on other new product launches.
- Public recognition - P&G has its Victor Mills Society, for distinguished scientists who advance innovation in the company. A media company holds an innovation Academy Awards, people dress up and it’s treated as a big deal inside the company.
- Failure is supported - often the fear of failure, or how it is perceived, is enough to stop people taking the necessary risks to innovate. Companies should be careful not to punish those who tried to experiment and learn.
Warning signs for companies are: short term reward systems which don’t promote the right behaviours for innovation; micro incentives ($500 for an idea!) instead of providing mastery, autonomy and purpose; and perceived penalties for failure.
Top companies build a common language around innovation, and in particular you need a common understanding of the growth types described earlier on; these should be crystal clear to every employee.
“P&G’s innovation transformation has involved a substantial investment in language definition and training. Key terms such as “disruptive innovation,” “jobs to be done,” “business model,” and “critical assumptions” were clearly and consistently defined”
As part of this effort P&G also established a disruptive innovation college, with over a dozen courses employees can choose to take. Citi has a similar virtual suite of training courses. Immersive design thinking workshops allow employees to get up to speed on the language and key concepts of innovation, while also building a degree of creative confidence.
Does your company have a common definition of innovation, and what it means specifically to your business? Is there a mind-set focused on the customer, discovering opportunities? And are there formal programs to spread language and build capabilities?
This book and many others in recent years have started to propagate that innovation is not totally unpredictable and mercurial - rather it’s a business process like any other, but with different properties:
“Research and field work have begun to show that innovation can be a predictable discipline that companies can master and manage.”
But reading Building a Growth Factory can give you the feeling that so much needs to be done to obtain results - the efforts listed above might be OK for a P&G, with the ability to invest millions into their innovation programs, but for most companies this is unrealistic. The authors end the book acknowledging as much, and provide three areas which are most important for a company of any size to start with:
- Build a common language - this is a key enabler for a systematic approach to innovation.
- Assess your current state and build a road map - use this book, or others to assess where you currently stand, and where you want to be.
- Work on demonstration projects - find those in the company who are working on progressive ideas, try to work closely with those teams, and help to build organization confidence in building new growth.