Q: How to evaluate innovation impact at the ideation stage?
This is a critical part of getting the innovation process right, and we always devote time to discussing it in my Innovation Excellence Masterclasses. The reason it's critical is that every organisation has limited resources, so we need to make sure we're investing our time, money, and energy in ideas that truly matter. And what really matters in today's innovation economy is not just keeping the show on the road by incrementally improving our core products or services. It's how to drive sustainable revenue growth and business model transformation by creating value for our customers in radically new ways.
So how do we identify the kinds of ideas that might have the potential to do that? How do we know if an idea is radical? How do we evaluate its chances of impacting our customers, and the markets we serve, or the new markets we'd like to enter or even create? What might indicate whether an idea – if you successfully developed and commercialised it – could really drive significant new revenues and profits, and increase the market value of the company? Here are some essential questions to build into your evaluation process:
Ask yourself: Is this idea truly new and different in the context of our business? If we succeeded at making it happen, how many customers would actually care? How much would they care? Does this idea have the potential to dramatically reset their expectations and behaviours? How much would their lives be changed or improved by it? What difference would it make to them?
Also, consider the possible impact an idea might have on your industry and your competitive position within it. Ask yourself: If we succeeded at this idea, to what extent could it change the basis for competitive advantage? How much productive change, disruption or even revolution could it bring to the industry as we know it today? Does it have the potential to alter the underlying industry economics?
After you have evaluated an idea against the above criteria, you can start asking the typical feasibility questions. My recommendation is always to plot a graph with two axes. One that measures potential impact on a scale of 1 to 10. The other that measures feasibility on the same scale. Now ask yourself how each particular idea scores on that impact vs feasibility graph.
What we don't really want is lots of ideas with high feasibility but low impact. On the other hand, potentially high impact ideas with extremely low feasibility are also not the most desirable.
Ideally, what we all want is high impact/high feasibility ideas, and they do sometimes come along, but the reality is that if an idea is going to take you beyond your core business into an adjacency or a completely new arena, it's by definition usually going to be harder for the company to do because it's outside the scope of your everyday operations and your legacy experience. So, we need to start looking for ways to increase the feasibility of certain ideas (for example, by partnering with players in the external ecosystem). But at the end of the day, the way we prioritise our resource allocation is by ranking ideas in terms of their impact multiplied by their feasibility. The highest-scoring ideas would be the ones to start pursuing first. Think of them as sprints. The high impact/lower feasibility ideas should not be dismissed but rather viewed more like marathons, with resource allocation paced over time, perhaps many years.
Q: How do you maintain a balanced portfolio between research projects (long term) and new product development projects (medium term)?
Again, we're back to resource allocation. What's more important? The short-term, the medium-term, or the long-term? The answer is that they are all important, but levels of investment usually differ greatly – in descending order – across these three distinct time horizons.
The same is true when we look at how our innovation investments are generally split between improvements to the core business, expansion into adjacent opportunities, and the pursuit of genuinely transformational ideas. In most companies, the ratios are similar. At least eighty percent of their innovation resources (sometimes ninety or even one hundred percent) is being devoted to optimising existing products or services for existing customers (short-term or mid-term improvements). Fifteen to seventeen percent, on average, and that's a generous calculation, might be going into efforts to expand into adjacent businesses that are new to the company. And only two to five percent of the resources, if any, are allocated to developing potentially breakthrough ideas that target new customer needs in markets that might not even yet exist.
Interestingly, a study published in the Harvard Business Review back in 2012 revealed that the return on innovation investments can actually be the exact inverse of these ratios. In other words, over time, up to eighty percent of new revenues generated from innovation is likely to come from the more transformational ideas, while only two to five percent of innovation-based revenues may be generated by incremental improvements.
Think about the Swiss giant Nestlé – the world's biggest food company. The company's core coffee business is Nescafé instant coffee. In fact, it's their largest brand altogether, worth almost $10 billion in annual revenues. Nescafé started out as a radical innovation back in the 1930s and really took off when the U.S. military embraced the product during World War Two. But today, most innovation efforts within the Nescafé division are focused on incremental tweaks to the existing product, like 'Gold Blend Barista Style' which targets customers who want more of a coffee-shop taste at home or at the office. Yet, Nestlé as a corporation continues to balance their innovation portfolio with longer-term, more transformational opportunities. Nespresso – the company's capsule-based espresso system – was one of them. The original patent dates back to the 1970s.
It took Nestlé over a decade to perfect various technical challenges, and then another fifteen years before the market penetration curve finally went from horizontal to vertical. During much of this period, Nespresso was not much more than a loss-making embarrassment to the company. But they stuck with it, believing it had the potential to eventually transform their coffee business. And it did. Today, Nespresso's coffee machines and little capsules are a fixture in homes and offices all over the world. Annual revenue, which has been growing at rates of 25 percent to 30 percent each year, now exceeds $4 billion (with gross margins of 85% or more). And the company has since leveraged the same basic system to create new opportunities such as SPECIAL.T, the capsule-based teamaker, and BabyNes which makes infant baby milk formula from single-use capsules.
This story illustrates the value of balancing short-term, incremental innovation activities with mid- to longer-term research on bigger, breakthrough projects and radical new inventions.
(By the way: as an exercise, you might want to take the evaluation questions I listed in my previous answer and apply them to Nespresso. Using these questions, do you think you could have possibly predicted back in the 1970s and 80s that Nespresso had the potential to be a high impact idea? And knowing that its technical and market feasibility were low at the time, would you have been willing to pace your investments over time, viewing it as a marathon that would one day pay off?)
Maintaining a balanced innovation portfolio is only possible if your company's leadership is willing to look far beyond the next few quarters. They need to believe in the strategic value of creating the company's longer-term future while keeping their eye on the continuity and the optimisation of the current business. And they need to commit the appropriate level of resources to these different time and opportunity horizons at the appropriate pace (Sprint or Marathon).
Google's leaders have long been a good example of how to maintain a balanced innovation portfolio. The company's 70-20-10 rule means that seventy percent of their resource allocation goes to core initiatives (today's business – 'Now'), twenty percent is devoted to adjacent opportunities related to the core (tomorrow's business – 'Next'), and ten percent is reserved for non-core, transformational opportunities (beyond tomorrow's business – 'Horizon'). This split is not optional. It's mandatory and deeply embedded in the company's culture. Looking at Google's success story, leaders in our own companies can take a big lesson from this example.
Q: How do you structure and manage the R&D/innovation processes and organisational structure?
There are two issues here. One is the innovation process itself. The other is the organisational infrastructure that is required for governing innovation effectively across the company. Let me deal with them individually.
First, the innovation process. I have to say at the outset that I wholeheartedly agree with the Greek poet and philosopher, Hesiod, who stated (back in 700 BC!) that "it is best to do things systematically". Doesn't this apply to absolutely everything we do as an organisation? Why should it not be equally true of innovation? Peter Drucker, the undisputed godfather of modern management, certainly believed it was. In a seminal article for the Harvard Business Review in 1985, he wrote that "innovation can be systematically managed". And, as always, he was right.
There is a certain fundamental order to things, whether we look at the agricultural process, or the manufacturing process, or the innovation process. There is a particular sequence of actions or throughputs that allow us to effectively turn inputs into outputs.
At its very essence, the innovation process looks like this:
INSIGHTS > IDEAS > EVALUATION > RESOURCE ALLOCATION > DEVELOPMENT
Thus, the question becomes: How do we structure and manage – and integrate – each part of this process so that the whole thing works systematically from end to end?
One thing we notice is that the very front end of innovation is not about ideas. It's about insights. These are the starting point, the raw material, the building blocks out of which big ideas are built. Insights represent the primary inputs in the process. I like to think of them as 'the front end of the front end' of innovation. Does your company employ a systematic process for generating, managing and sharing insights across the organisation? And how do you go about systematically using these insights in your innovation teams to inspire and build big ideas?
In my work with organisations, I introduce them to a market-proven methodology called 'The 4 Lenses of Innovation'. Over the last two decades, it has been deployed in well over a thousand corporate engagements around the world by more than 300 organisations, many of them Fortune 500 companies.
Briefly described, the methodology functions as follows. First, we systematically generate new insights by viewing a situation, a problem, a product, a service, a process, a business model – whatever – through the four innovation lenses. These lenses are:
- Challenging Orthodoxies: Questioning deeply-held beliefs and conventional assumptions inside the company and the industry
- Harnessing Trends: Identifying discontinuous trends and figuring out how they might be used to change the game and drive industry disruption
- Leveraging Resources: Looking for ways to recombine core competencies and strategic assets (both internally and externally) in order to enable new innovation opportunities
- Understanding Needs: Learning to identify deep, unmet customer needs and pain points, and then designing solutions from the customer backwards
Usually, we take an innovation group, create four distinct teams out of it, and give each one of those teams a specific lens to work with for a period of time (it could be a few hours, a day, a week, a month). After they come back and present their new insights, we recompose the teams by mixing them up, ensuring that we now have representatives of all four lenses in the new ideation teams. Then, we systematically 'crash' or combine insights from the four lenses to build new innovation opportunities, emerging with an extensive portfolio of high-quality ideas that can be clustered into a small set of focus areas (for example, short-term improvements, mid-term innovations, long-term revolutions, radical new business models).
From here, we move into systematic evaluation and resource allocation (issues I touched on in earlier answers above) and finally to systematic development, which includes the need for rapid prototyping and experimentation, multiple cycles of iteration, project management, execution, launch, scaling, and so on.
What's important to remember here is that the different stages of the innovation process will usually require the involvement of different types of people with different skill sets and experience. For example, the front-end part (insights and ideas) might be dominated by creative types – visionaries, contrarians, empathisers, designers, technical geniuses, front-line people – and perhaps external constituencies such as customers, partners, dealers, franchisees etc., while the back-end of the innovation process (evaluation, resource allocation, development) will demand increasing attention from senior leaders, project managers, marketing people and so on (along, of course, with some of those original creative people – especially when it comes to prototyping, experimentation, technical development etc.).
There's a whole lot more to consider of course, especially when it comes to the development part of the innovation process, but, within the confines of this article, I hope I've been able to cover at least the basics.
Now let's turn our attention to the second part of the question we're addressing, which is the issue of organisational infrastructure for innovation.
The first thing to say here is that the question I am answering made reference to R&D, which I know is how many companies still primarily structure their innovation efforts. But I prefer to think in terms of I&D – meaning Innovation and Development – because it's important today that we see innovation in much broader terms than as something that only happens in a technical lab. We want to be able to pursue and embrace innovation opportunities across the whole business spectrum – from products and services to processes, marketing strategies, customer experiences, cost structures, business models, and so forth. That, of course, means that we have to broaden the responsibility for innovation far beyond R&D. We have to make it part of everyone's job, just as we did with quality, or safety, or many other enterprise capabilities. Innovation should become a way of life for everyone at the company; everywhere they are, every day.
How can we achieve this? Well, one crucial component is the governance structure. It has to drive and support innovation from the top down and enable and embrace it from the bottom up.
In my experience of embedding innovation as a core competence inside many companies around the world, it's impossible to make innovation an 'all-the-time, everywhere' capability without setting up and sustaining the necessary management infrastructure for that.
It all starts with the CEO. At companies that truly achieve innovation excellence as a broad-based core competence, the imperative for innovation is always driven from the very top of the organisation. The only other way this works – if the CEO is not fully on board – is within a particular division or geography or business unit of the company, where the top leader has the necessary autonomy to drive innovation within his or her own domain of responsibility.
Ideally, I like to see a senior leader on the executive committee who is appointed as Chief Innovation Officer, or VP of Innovation (again, not just R&D, but innovation in all its forms). This means that innovation is solidly represented at the top leadership level of the company, reporting directly to the CEO.
The next level is usually something like a Corporate Innovation Manager who, frankly, has to do most of the heavy lifting involved with embedding a new enterprise capability across the organisation. He or she will generally have some people in support functions, like an Innovation Communications Manager, an Innovation Systems and Processes Manager and perhaps an Innovation Ecosystem Manager or Open Innovation Manager.
This centralised innovation governance structure will interact with Directors of Technical Services, Research and Technology, as well as Directors of Product Development and Marketing, for example, to ensure that the company's innovation efforts are constantly matching new technological possibilities with emerging customer needs. Some of these executives, such as managers of Intellectual Property, Licensing, Ventures, and Business Incubators, may report directly to the Chief Innovation Officer.
In larger organisations, the way we spread responsibility for innovation across geographies and business units is by appointing Regional Innovation Managers and Business Unit Innovation Managers, as well as regional and business unit Innovation Boards, to oversee and coordinate innovation activities within their own specific area of the business.
Then we appoint and train a widely dispersed group of Innovation Champions and Innovation Mentors, ensuring that they can spread the values, tools, processes, and skills of innovation into every nook and cranny of the company. They run ideation sessions in various parts of the organisation, and they are there to support everyday innovators when they come up with new ideas – by, for example, giving them a fast-track to resources or helping them turn an idea into a business case for presentation.
Another indispensable role is that of the Innovation Project Manager. Some companies create a whole portfolio of small units to handle emerging business opportunities. Each of these units requires a dedicated team of A-players who can take full ownership of a new innovation idea and drive it from the mind to the market with their own financial and management resources. Also, each team requires a great leader with the creativity, courage, connections, and charisma to turn an idea into a success story. Someone who can think really big, start really small, and scale really fast.
That, in a nutshell, is what an effective organisational infrastructure for innovation looks like.
I do hope these insights have been useful, and I'd be delighted to answer your further questions in the future. One thing is clear: achieving innovation excellence is a much more complicated and multi-faceted challenge than many people imagine, and it cannot be approached superficially. So, let's continue this discussion! I'd also love to hear about your own perspectives, experiences, challenges, success stories, and even spectacular failures on your company's continuing innovation journey.
Of course, the best place to explore these points in more detail – both with me and with your peers from different organisations and industries – is at one of our Innovation Excellence Masterclasses. If you haven't participated already, we hope you will soon!