Innovation risks becoming viewed as a buzz word and thereby falsely relegated to the fates of earlier favorites like TQM and MBO. So why is innovation different? Quite simply, innovation is a primary activity for sustained success. Innovation is not a discrete part of the business, it cannot be automated, and it is not optional. 

Unfortunately, leaders often (and understandably) seek prescriptions to solve problems at hand. There is hope that the next big thing will come pre-packaged and ready to deploy – we need something, we need it to work and we need it now. However, rote solutions rarely, if ever, live up to their marketing.  Unfortunately, those few exceptions won’t provide us a sustained advantage anyhow as all businesses are forced eventually to adopt them or face decline.

Building innovation as a standard practice, however, can provide just such an advantage. There are 3 keys to understanding innovation, which also provide the foundation for building a truly innovative organization.

1) Innovation is Ubiquitous. Innovation is simply action that can result in an improved outcome. In Alchemy of Growth, Baghai et al. describe a three-horizon model that links innovation to strategy. Simply, Horizon 1 activities focus on continuous improvements to extend and defend core businesses while Horizon 2 enables moves into adjacencies such as taking an existing product to a new market or bringing a new product to an existing market.

Horizon 3 activities are all about exploring options that could lead to breakthroughs and new opportunities. Many people frame innovation solely as Horizon 3 and miss the fact all are needed to realize both near and long-term strategy. In combination, these 3 sets of activities focus on not only finding future ways an organization can provide (and extract) value.  They also help us stay relevant and continue to deliver value today.

Innovation is not so different from other functions and as such should have its place within and throughout the organization.

Think of it this way: while there are almost certainly formal Finance or HR groups in your company, every part of the business has specific responsibilities for the management of its people and its finances. Through this lens, this also means that Innovation should be required to meet the standards of any other part of the business as well. There should be explicit rules governing it. Processes should be well defined to shepherd it and measures should be in place to evaluate it.

Of course, there needs to be balance. In Apples are Square, Kuczmarski wrote, “The challenge of a leader is to create an organizational structure that galvanizes resources without constraining the creative freedom of employees.” The key is to channel the collective genius of the people within and supporting your organization into those actions producing improved outcomes.

2) Innovation is Anthropogenic. Successful Innovation requires the wise and focused application of insight. Only people can provide that. Even the most ambitious promises of artificial intelligence do not include expectations of artificial judgment. Great strides have been made in our ability to capture and manipulate data. Powerful tools and methodologies have been developed to translate customer journeys into Human Experience Design. Mindful Leadership has shown not only a better way to inspire and manage our employees but also to develop higher levels of empathy towards our customers as well. Each of these and many others have earned their rightful place in our “insight toolkits.”

To these, we should also add the capability of peripheral vision. In their book of the same name, Day and Schoemaker argue that most organizations are lacking in the ability to detect weak yet highly impactful signals. They present multiple scanning techniques, including the use of outside experts to infuse “fresh thinking about new technologies,” to meet growing threats and take advantage of opportunities.

Regardless of which tool from your “insight toolkit” is used, interpreting the often incomplete, vague or seemingly contradictory outputs without false attribution is the critical skill for gaining true and actionable insight. Unfortunately, there is a real risk that these types of exercises devolve into Rorschach tests that allow the image formed to be seen as proof of presuppositions and biases. This is where wisdom and focus come in.

As a practical matter, making wise business decisions cannot be taught but encouraged. Innovative cultures value the asking of challenging questions, celebrate fast and low-cost failures, reward willingness to change, and reinforce trust throughout. Wisdom needs opportunity to develop and should also be shared. 

Businesses should overtly communicate the boundaries or guideposts within which things will be judged. There should be a strong sense of the business’ identity brought to the question at hand. A set of 3 to 5 decision criteria for investing resources into any innovation, whether Horizon 1, 2 or 3 needs to be clearly articulated and consistently applied.  Importantly, they need to resonate with the critical capabilities that not only distinguish the organization today but also will help differentiate it tomorrow. As Zook notes in Beyond the Core, the most successful companies have the most restrictive criteria. 

In determining, applying and even periodically challenging your decision criteria, you create a vehicle for discussions that have the potential to positively impact people in significant ways, including building a sense of “Shared Wisdom.”

Obviously, strictly applying your decision criteria also effectively filters what might be a large number of good ideas into a manageable pool of ideas worth considering for your organization.  For those that make the cut, a business case will be needed.  Horizon 1, 2, and 3 require their own approach but each should seek to determine the distance the innovation must travel to meet an “approachable profit pool.”

Of course, Horizon 1 innovations might be seen as required.  However, a detailed proforma is often desirable to help guide decisions balancing any potential options with the time and investments required. For Horizon 2 and 3, we need to believe the innovation will yield an ROI at least equal to that of the current leader in that space.  For these, our analysis should be focused on determining and then challenging the assumptions built into our proforma that first promised that result.  In other words, we should actively seek to disprove those assumptions before any unnecessary time or investment is expended.

The stakes are simply too high to spend any more resources than absolutely necessary to determine to not pursue any given innovation. At the same time, not pursuing enough of the right innovations has proven to be even more destructive.

3) Innovation is Required. Markets evolve and economies cycle.  Innovation is broadly recognized as a primary contributor to growth and as a means of ensuring that we thrive when new opportunities arise.  Additionally, our businesses, regardless of industry, size and competitive position, must both anticipate and respond to growing risks to survive.  Innovation has a role to play here as well.

Time has proven that it is tough to continue to grow indefinitely and a pause often becomes a dramatic and sustained stall.  An analysis by the Corporate Executive Board covering Fortune 100 and Global 100 companies between 1955 and 2023 noted that 87% experienced such a stall.  Shockingly, more than half of those experienced slow or negative growth for the decade that followed.   Of the 170 large companies that faced these extended stall points, average annual growth rates had risen from 8 – 9% to 13.8% in their peak year – only to drop to an average approximately one-tenth of that over the subsequent 15 years.  When measured against the S&P 500 index, these companies lost an average 74% of their market capitalization in the decade following their stall.

A deeper, subsequent analysis of 50 of these companies found that external factors, those out of management’s control, only accounted for 13% of performance cliff noted above.  A full 50% of factors related in some way to innovation as we have now defined it.  These included ineffective innovation management, failures in adjacency moves, breakdowns in managing market-leading positions, and premature abandonment of the core.  The remaining factors included issues like failed acquisitions, loss of key customers and voluntary slowdowns.

The takeaway is as dramatic as it is urgent.  Large numbers of once admired companies, with histories of taking market share, have fallen spectacularly due to a failure to actualize innovation. 

An obvious interpretation is that a greater emphasis on innovation is more warranted as the risks of a stall point increase.

Said another way, when the temptation is greatest to pull back on exploration and investment, to “get back to your knitting” if you will, the actual need might be the opposite: dedicate greater resources and attention on innovation activities. Fiscal discipline is and should always be a reality.  Discipline during growth should prepare for continued innovation activity when confronted by stricter fiscal constraints during the inevitable slow-down.  The key is to recognize that innovation is not an option.

Ultimately, innovation must be seen as an integral part of any successful organization.  Regardless of whether your organization chooses to carve out a separate innovation function, include dedicated or matrixed resources within the Marketing, Technical or Financial functions, or any other number of hybrid operating model designs, innovation itself should be recognized as an integral part of the whole.  As the source for improved outcomes, innovation is a necessary part of nearly every role in the company.

Innovation also should be recognized as a people-powered activity that activates not only their creativity but their judgment.  This requires deliberate effort at creating a governance structure, processes and measures that reflect the capabilities levered by the strategic plan as well as the aspired-to culture of the organization. 

Because both people and culture are notoriously idiosyncratic, well-run innovation represents one of the few avenues for sustained advantage against competitors.

Finally, innovation needs to be seen as a necessary, continual investment.  The rewards are obvious and a reduction in risks is significant.  As tempting as it may become to cut corners during downturns, rolling blackouts on innovation have simply proven to leave organizations wandering in the dark. 

In all these ways, innovation stands apart from mere business fad.  Innovation should not be seen as a buzz word.  Innovation is an idea that demands reflection, requires the determined weighing of a multitude of options and then unique actions based upon each organization’s specific circumstance.  In that way, it is an example of innovation itself.

Embrace true innovation tailored to your organization’s unique needs. The Abaco Group can guide you in reflecting, evaluating, and acting on innovative ideas that drive real impact. Reach out today to start shaping your innovative future.