A recent McKinsey report found that while 84% of corporate executives think innovation is key to achieving growth objectives, only 6% are satisfied with the innovation performance of their firm. To close the gap, we need to treat innovation differently than we do normal operations. There are four things leaders need to do. First, don’t get trapped by your P&L; innovation efforts may take a long time to become profitable. Second, instead of focusing on generating new ideas, make those ideas practical by zeroing in on problems to solve. Third, classify the problem before you identify a solution — what kind of innovation (disruptive or sustaining?) do you need? Finally, build for the few rather than the many. Often, one customer with a “hair on fire” use case can be better than thousands with a mild interest.
A recent McKinsey report found that while 84% of corporate executives think innovation is key to achieving growth objectives, only 6% are satisfied with the innovation performance of their firm. That’s quite a mismatch. It’s hard to imagine that a success rate that low would be tolerated in any other business function.
One reason for the paltry performance is that while other business areas, like sales or finance, are considered to be core functions, innovation is often considered to be something that’s “nice to have” rather than essential. Even if executives try to prioritize it, innovation often gets crowded out by more “urgent” short-term pressures.
Another pervasive reason is that senior executives are trained as operators, not innovators. And there’s a fundamental conflict between innovation and optimizing an existing operation. While the execution of a conventional strategy lends itself to linear progress and clear benchmarks, innovation often proceeds by S-curves, moving at a slow crawl until it explodes at an exponential rate. To close the gap, we need to treat innovation differently than we do normal operations. Here are four things leaders can do.
1. Don’t Get Trapped in Your P&L
For any business to succeed over the long term, it must earn a return that exceeds its cost of capital. That’s why good managers put so much focus on measuring and managing return on investment (ROI) as a basic operational practice. It is through continuously making incremental progress in lowering costs and increasing revenues that firms achieve competitive advantage in their industry.
Yet every enterprise is essentially a square-peg business waiting for a round-hole world. Unexpected changes in technology, customer preferences, and regulation can disrupt even the best-run operation. When that happens, traditional practices will only lead to getting better and better at things people care about less and less.
That’s why successful innovators prepare for irrelevance long in advance. IBM research, for example, has consistently made breakthroughs in a number of fields long before their commercial value became clear. Google’s X division was set up as a “moonshot factory” to pursue opportunities unrelated to its current business. The data giant Experian set up its DataLabs unit to work separately from its operational divisions.
None of these have defined revenue or profit goals, because their purpose is to explore new opportunities that can’t be quantified. Nevertheless, in researching my book, Mapping Innovation, I found that these exploratory efforts provide excellent ROI over the long term. In the public sector, return on basic research has been estimated to be between 30% and 100%.
2. Focus on Problems, Not Ideas
Another common misconception about innovation is that it is about ideas. It’s not. The truth is nobody cares about what ideas you have. They care about what problems you can solve.
While brainstorming about ideas can be helpful in an operational context, because problems are front and center, for innovation identifying a meaningful problem is half the job.
That’s why the organizations that are able to innovate consistently — over a period of years or even decades — develop a systematic and disciplined process for identifying new problems outside the normal operational content. Among the organizations I studied this took varied forms, but the underlying principle remained consistent.
For example, Experian DataLabs meets with customers to “find out what’s giving them agita” and then typically comes back with a prototyped solution within 90 days. IBM Research, on the other hand, focuses on “grand challenges” that take years or even decades to solve. Google’s “20% time” acts as a human-powered search engine for new problems.
Whatever way you choose to go about it, what’s essential is that the process involves true exploration. If you pursue problems that you know about already, you are unlikely to travel far from your current operational model.
3. Classify the Problem Before You Decide on a Solution
A third common issue that organizations run into is that they treat innovation as a monolith and limit the strategies available to them. They say “This is how we innovate, this is our DNA,” failing to recognize that different types problems require different solutions.
In my book I offer an Innovation Matrix, which I’ve described previously. It helps to classify problems according to how well the problem itself and how well the domain of capabilities to solve it are defined:
For example, when Steve Jobs set out to create the iPod, he defined the problem as “1,000 songs in my pocket,” which specified a hard drive of a certain size and capacity. It was also clear what capabilities were needed to solve the problem — that of a hard drive manufacturer. Once Apple found the right supplier, the iPod was a fairly standard problem to solve.
Other times, however, one of those elements is missing. For example, today energy storage is a big, well-defined problem, but it’s devilishly hard to solve and requires an open approach like that of the Joint Center for Energy Storage Research. Procter & Gamble’s Connect + Develop program and the Innocentive platform apply similar approaches. In other cases, like that of Airbnb and Uber, great value can be unlocked by identifying a new problem for existing solutions.
With some problems, such as curing cancer or overcoming climate change, neither the problem nor the domain is well-defined, and a more exploratory approach is required. Often, this is thought to be only for large enterprises with billion-dollar budgets, but there are a number of strategies even small firms can employ to access world-class research.
4. Build for the Few, Not the Many
Typically when firms are evaluating investments they look for large addressable markets. That’s good operational practice, but with a truly new innovation it often leads to failure. New ideas, almost by definition, are not well-understood and tend not to perform very well. So instead of seeking out a broad class of customers, you need to build for the few, not the many.
Consider the case of Google Glass. When it launched as a consumer product, it was a disaster, inspiring a huge backlash against the “glassholes” who bought them. Today, however, the device is gaining traction as an industrial tool and is proving effective at improving productivity, safety, documenting procedures, and training for new tasks.
That’s what Experian DataLabs means by finding out what’s giving its customers agita. When there is a pressing problem, people are willing to adopt even an imperfect solution. So instead of nitpicking with the prototype, its customers are happy to collaborate and improve them. Often, one customer with a “hair on fire” use case can be better than thousands with a mild interest.
An old marketing adage is that you need to find the right customer at the right time with the right offer. In a similar way, to close the innovation gap you need to find the right problem and apply the right combination of capabilities to solve it. Innovation is not operational excellence. It’s messy and nonlinear. Nevertheless, it’s what leads to business growth.
More Info: hbr.org
Categories: Money Matters