If I had read “The Innovation Edge: How Large Companies Lose It and How to Get It Back”, earlier, I would have included it in my “Building the in-company change muscle: intrapreneurship, innovation, transformation & strategy“—a book about books about innovation and transformation. The “Innovation edge” hits all the notes.
The age of innovation
At the beginning of this twenty-first century, we are entering the dawn of a new age—the Age of Innovation. The twenty-first century will be notable as a period of time when professional managers learn how to produce innovation consistently and repeatably. Innovation Leadership, however, goes beyond that. Innovation Leadership is about taking an organisation to a point where it develops the repeatable ability to move to new paradigms. That becomes the ultimate form of renewal and sustainability. It becomes the Innovation Edge.
Forget incremental
Innovation cannot be some program that is “bolted on” to the side of the organisation. It is more than just telling the members of the organisation that they can spend 10% of their time on new ideas, as some organisations have historically done. Incremental innovation will also not get the organisation out of the stalemate it is in. It only helps optimise it.
Innovation is core
The book is about innovation as the core strategy. Innovation as a fundamental part of the culture and leadership. Because strategic innovation (breakthrough, radical, step-change, disruptive, etc.) requires a major shift in management approaches. It is an attitude. It is second nature. Like breathing.
Heuston
If it is not, you will have a problem. The diffusion and adoption rates of new technologies are at an exponential rate. You are facing hyper competition. Product life cycles are getting shorter. Old (incremental) innovation will not be able to keep up. Ongoing reinvention is the only way forward. Strategic innovation is the only sustainable competitive advantage. By creating new value that didn’t exist previously. Constantly.
The obstacles
Size gets in the way. Efficiency is no longer enough. Growth today is not enough. The real challenge is managing today’s growth while initiating actions that will assure tomorrow’s growth. A combination of tomorrow thinking and managing the time zones. To be efficient, to scale, grow, manage, but also innovate in the core businesses and build new ones simultaneously. To maintain a founder’s mentality , to continuously experiment, to be in a perpetual discovery mode. With a high internal clock speed.
The S-Curve Paradox
The paradox comes from the fact that, at the very point in time that an organisation should be most attuned to looking for new opportunities (and threats from innovative competitors), it is the point in time when they are least inclined to do so. The reality is that this comfort zone is actually a danger zone. Even with knowledge of this paradox, it is extremely difficult for a large organisation in a successful, mature business not to get very comfortable. It is also the point in time when the organisation has developed significant expertise in the way it is currently doing business—the current paradigm under which they are operating. It has attracted people with the highest levels of expertise for this particular technology, business model, or this industry as it is currently structured. Managers in the mature stage of the S-curve are often pressed to focus only on the near-term bottom line and concentrate only on those action steps set up to achieve that bottom line. It is, however, a ticking time bomb.
Inward vs outward
Another characteristic of organisations at this point in the life cycle, organisations have become very inwardly focused at the very time that the management team should be exploring the next set of competencies. Without realising it, they are moving toward a point of skilled incompetence.
Risk aversion
The role of risk, more importantly, risk aversion, is another major factor that comes into play when companies are large and mature. We observe that ambitious managers, when they are junior managers, are often more aggressive as they work to be noticed in the crowd of managers. That aggressiveness will often result in promotions to higher-level positions. However, when they reach a certain level (such as the vice president level), they start to get more conservative. There is a common, unspoken perception in many large corporations, whether it is real or perceived, that the managers who get promoted are the ones who make the fewest mistakes.
The competency levels
The level of innovation competency within mature organisations can vary widely. Organisations tend to fall into four general levels of innovation competence.
Level 1—Slow Death (Rigour Mortis). The Level 1 organisation displays the least innovation. It is essentially a slow death because it will sooner or later die or be absorbed into another organisation.
Level 2—Traditional Mindset (New Product Orientation). This organisation is like the Level 1 organisation in that it is not innovative as an overall organisation. It is different in one aspect, however, in that it believes that it must continually develop new products.
Level 3—Emerging Awareness (Kinda Get It). Level 3 organisations are characterised as organisations that recognise that innovation can and should occur anywhere and everywhere in an organisation. Level 3 organisations recognise, to some extent, that they can create success with innovation coming from different parts of the organisation and beyond just new products. A Level 3 organisation is usually self-aware and often understands some innovation principles.
Level 4—Innovation Organisation (Hitting on All Cylinders). The Level 4 organisation is the organisation that truly gets it. The Level 4 organisation generates innovation in any and all parts of the organisation from all members of the organisation all the time. Innovation is at the core of everything it does. It can innovate in any and all areas: its mission, its business models, its strategies, its processes, its systems, its structures—even its ability to develop new skills and expertise. It is an organisation that is unrelenting in its innovation. They find ways year after year to set aside the necessary resources that are needed to fund strategic innovation. The Level 4 organisation is skilled at generating profit from its current operations while investing in future innovations. The Level 4 organisation is skilled at and comfortable with change. Level 4 organisations are not just waiting for opportunities. They are also seeking to create opportunities. The Level 4 organisation can be referred to simply as an Innovation Organisation.
Creating the innovation organisation
Essentially, four areas of change must occur to create an innovation organisation.
- Building a New Management Mindset.
- Creating an Innovation Culture
- Establishing the Processes, Systems, and Structures
- Developing the Skills and Competencies
Management first
The management team is the nerve centre of the organisation. The organisation cannot change until that nerve centre gets realigned. It must be, by necessity, the first step. It begins with the senior management team, but ultimately must include the entire management team. Innovation must be ever present in the communications and must be reflected in many of the actions of the key managers.
The risk mindset
Many innovation authors and consultants focus on creativity as a key element in innovation. However, the most critical component to achieving true strategic innovation is the management of risk and failure. Organisations, however, can only become successful in producing strategic innovation if they learn to actively manage uncertainty and risk.
The predict-and-control mindset
Strategic innovation initiatives involve going into areas and domains where the organisation does not have previous experience. The fallacy of predict and control is the mindset that, if you do enough number crunching up front, you effectively eliminate uncertainty and risk. You cannot control most exogenous variables, such as what competitors do or how markets will change. While you may be able to influence the environment, you can never fully control it. Strategic innovation projects are characterised by the fact that they are journeying into unknown areas. As a result, these types of projects can contain several major unknowns (risks), one or more of which can cause the project to result in total failure.
VCs
Successful venture capitalists, for example, will analyse a potential major opportunity differently, and the decision-making process will look very different. They recognise that at a certain point, more up-front analysis will do very little to further eliminate uncertainty and reduce their risk. They know that they will never have all the answers in advance. As a result, they tend to think in terms of multiple scenarios, contingencies, and different pathways that can help them achieve success.
VC principles
Venture capitalists rely on four key principles:
- Only invest in opportunities that have the potential for very large payouts (payouts that are sufficiently large and commensurate with the high levels of risk)
- Diversify risk with a portfolio of such ventures.
- Only bet on entrepreneurs who have the ability to adjust strategically as they run into challenges and hurdles
- Be disciplined about shutting down a project as soon as it indicates it cannot succeed.
Intelligent Failure
It is all about intelligent failure. Intelligent failure is a potential failure that is anticipated as part of an ongoing, methodical planning process and a disciplined but flexible process of execution to determine a path to a successful innovation outcome. You also attack the most significant risk first, and the risk you are taking is bite-sized.
The proof point process
Like poker, you never know with absolute certainty whether you have a winner until the end of the hand. However, you are getting progressively better indications with each card that is dealt. Managers pursuing high-risk, high-potential-return innovation projects must be equally disciplined. The Proof Point Process is structured around key action steps. We refer to each action as an Advancing Action. Each Advancing Action propels the project to the next Proof Point.
Tackling proof points
- Information: The first example of an Advancing Action, the act of developing new, not previously available information, is one of the most basic means of eliminating unknowns.
- Activity: The second approach, doing additional development, could be any of several different types of development activity. It could be product development, market development, technology development, sales channel development, etc. The key is that it is development that is specifically targeted at the biggest unknowns.
The steps
In its simplest form, an Advancing Action will lead to the next Proof Point, which will lead to the next Advancing Action, which will lead to the next Proof Point. Occasionally, the Advancing Action does not provide a conclusive indication or a clear proof point. That may mean that (1) the Advancing Action was not well designed, (2) the Advancing Action was not properly implemented, or (3) the Proof Point is not a good Proof Point. For any of these reasons, this becomes a Redo Point, and the process needs to be backed up, improved, and redone. Also include one final proof point, which is the stopping point. This occurs when the management team has gotten strong indications that the project is not viable.
Capital
Capital is allocated to these projects in stages as they reach certain Proof Points. Using active risk management principles, the portfolio will look more like a funnel. If one project starts to look much more attractive, more resources are diverted to that project and away from other projects. If projects begin to look less attractive or marginal, resources are diverted away. If major hurdles emerge and alternate pathways to success cannot be found, the project is shut down.
Tips
- Move beyond “more of the same, harder, better”.
- Control systems are always preserving the status quo.
- Manage value creation along with value capture.
- Exploration instead of exploitation.
- Innovation instead of efficiency.
- Long-term growth maximisation instead of short-term profit maximisation
- Divergent thinking instead of convergent thinking.
- Empowerment and alignment instead of command and control.
- Sagacity instead of serendipity.
- Go very broad in scope.
- Value creation is about venturing into new territory and planting new seeds.
Managers must use that zoom lens to look at multiple reference points in the future—the near future, the distant future, and everything in between. In this way, the long and short term are always interconnected. When they do, that vision, that view of the future, is built on several assumptions. While the organisation needs to stay true to its longer-term vision, it must be aware that the vision is made up of a number of assumptions about the future. Organisations that are more intentional about probing and experimenting are, by nature, more outwardly focused. It causes an organisation to “lift its head up” and move away from a sole focus on efficiency, quality, and near-term results.
Innovation from everyone, everywhere, all the time
Innovation involves a constant ebb and flow of ideas, experiments and drives for change.
- Have to know that they have the ability to be creative.
- Have to know that their ideas are encouraged.
- Have to know that they can and should try to act on those ideas.
- Successful innovation, particularly strategic innovation, usually goes beyond what an individual can accomplish within their own area of responsibility.
The book hits all the spots. The importance of creating an innovation culture, collective leadership, idea fluency, experimentation, organisational structure, attacking the bureaucracy, metrics, incentive systems, learning, and understanding is that only a certain percentage of the ideas will be successfully adopted. Gets close to “Pirates in the navy“.
Not a core competency, the core competency
Strategic innovation must become part of everyone’s job. Strategic innovation processes become the norm, not the exception. In a sense, it is analogous to the stem cells in the body. Stem cells are undifferentiated biological cells that can differentiate into specialised cells that produce all the other cells needed by the body. A competency in innovation anticipates and helps stimulate and develop those newer competencies required for future success. Unlike typical competitive advantages, the commitment to innovation, if done properly, is an ongoing and never-ending source of competitive advantage. It is, in essence, the gift that keeps on giving.
Paradigm hopping
Innovation cannot be a program du jour. The need for continuous innovation, both incremental and strategic innovation, is becoming ever more intense. It is the growing awareness that not pursuing strategic innovation opportunities presents its own risk. It involves the need for an organisation to identify and prepare to ultimately move to a new paradigm at the very point in time that they are experiencing the most success with the current paradigm.
Paradox
Just when your organisation has reached its pinnacle in knowledge and expertise in its given industry, it is most likely approaching the time when this expertise will be needed less because it will be supplanted by the knowledge and expertise needed in the next paradigm. The ultimate paradox is that you often must fail in order to succeed.
It is a desensitisation phenomenon
There will be a tipping point for the organisation when it reaches this level of adaptation, when it truly becomes change-ready. It is all about transforming both hearts and minds. It creates a sense of excitement and vibrancy within the organisation because there is always something new being tried. There is also less anxiety about what is happening in the external environment or with the competition because innovation breeds a confidence that your own organisation will be the first to come up with the next winning idea.
Core
Eventually, the organisation reaches the point where it does not need to be concerned about its core competencies being made obsolete by the next major paradigm because the key core competency is its ability to learn and innovate continually. Creating an organisation of innovation citizens.
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