When it comes to corporate innovation, most companies believe that pouring money in the R&D department is the way to go. However, this is not the right approach. Tendayi Viki, Dan Toma and Esther Gons in their book “The Corporate Startup” discuss why innovation in established companies fail and the right approach to tackle innovation.
“Innovation labs created by companies fail because the innovators don’t get autonomy”
Tendayi et al. say that most managers believe that creating an innovation lab can separate the innovators from the toxic environment within the company. However, they fail to build management process around these labs to provide autonomy to the innovators.
“Creating great new products is not exactly innovation”
The moment management of an established company sees a startup launching a new product that is gaining traction. They immediately pour money in their R&D labs, incubators and accelerators to develop similar products. However, this is not exactly an innovation.
A unit within PricewaterhouseCoopers(PwC) called Strategy & Business has been publishing annual reports of top 1000 innovative companies in the world over the past 12 years. Their major finding was that the top 10 most innovative companies every year are often not the top 10 companies who spend the most on R&D.
Tendayi et al. define corporate innovate as-
“The creation of new products and services that deliver value to customers, in a manner that is supported by a sustainable and profitable business model”.
Therefore, corporate innovation is not just about creating new products, it is about giving the customers what they want and in due course of fetching value to customers, the new product makes the company profitable. A product devoid of elements of sustainability and profitability is just a new “cool” product not answering the needs of customers and it is not an innovation.
To proceed with corporate innovation, Tendayi et al. suggest the following five-step process-
1. Start with defining innovation thesis
The first step to corporate innovation is to outline an innovation thesis which aligns with the overall strategic goals of the company. An innovation thesis is like the investment thesis of venture capital firms. The VC firms, in their investment thesis, clearly sets out the type of investments they would pursue. For example, if a software company believe that the future is driverless vehicles then they would define their innovation thesis as investments in products for driverless vehicles.
2. Allocating innovation portfolio
According to Tendayi et al., this portfolio should contain products that cover the entire spectrum of innovation i.e. products in core, adjacent and transformational regions of the matrix. Simply put, a company should have products in early-stage, mature and established products. The balance of the product portfolio should be an expression of the company’s overall strategy and innovation thesis.
3. Setting up an innovation framework
Defining an innovation thesis and deciding a portfolio are great steps but a framework is required to search and execute. There are various innovation frameworks such as Ash Maurya’s Running Lean Framework, Steve Blank’s Investment Readiness mode, and Tendayi Viki’s Lean Product Lifecycle Framework.
All these frameworks can be broken down into three simple steps-creating ideas, testing ideas and scaling ideas. With an innovation framework in place, everyone in the company will know the exact stage a product is in and this can provide the basis for how a company can manage its investment decision and product development practices.
4. Select the right KPIs to measure success
After setting up an innovation framework, it is essential to not rely on traditional accounting methods as they are great to manage core products but not so apt to manage innovative products as they require new tools. Tendayi et al. propose an incremental investing-based approach to manage their innovation stage products. In addition, they also propose three KPIs (Key Performance Indicators)-
Reporting KPIs for the product teams which focuses on the number of product ideas generated, number of experiments and progress made from idea creation to scaling it up.
Governance KPIs focus on helping companies to make informed investment decisions i.e. how close are the teams to finding the product-market fit.
Global KPIs focus on helping the company examine the overall performance of their investments with regards to their innovation context of the larger business. For example, what percentage of the revenue is made up of the investments made in development and execution of innovative products?
5. Set up and maintain a network to facilitate innovation practice
The core principle of innovation in practice is simply that no product can be taken to scale until it has a validated business model. This process requires that teams validate both the attractiveness of the products to customers and the potential profitability of the business model.
A key ingredient of this process is having a network or community. Companies must create and support communities of practices that interact regularly and share lessons on best practice. Having this setup ensures that the innovation skills are shared and developed across the company.
Source: The Corporate Startup by Tendayi Viki, Dan Toma, and Esther Gons.