The innovation problem…

We have an innovation problem.

Innovation, as a buzzword, is everywhere. CEOs highlight innovation in corporate speeches. Marketing copy can’t stop using the word. Organisations perform grand-standing innovation activities. We have internal and external and open innovation. And, seemingly every job advert is looking for innovative people to fill innovative positions.

However, we are not making the difference we expect and need.

This article is about exploring the problem. This website is about finding and developing the solution.

Key take-aways

  • 94% of executives are unsatisfied with innovation performance…
    • …yet 84% see innovation as important to growth! (source: McKinsey)
  • Are economies are >80% service based…
    • …yet we limit ourselves with product-dominant thinking
  • We set innovation ambitions that we then prevent our organisations meeting
    • …looking for disruptive innovation…but measure on total quality improvement, for example?
  • We build in organisational hinders to successful innovation, often to solve the previous problem
    • …do you have an R&D team but are not really a product company? (watch out…you might be calling them your innovation team)
  • …yet we struggle to change our organisations to meet the (needed) ambitions and remove those hinders
  • Our governance around innovation needs improving
  • But, it is not all bad news – we can fix this!

What, then, is this innovation problem?

What is this innovation problem

Of the executives surveyed by McKinsey’s, 84% agreed that innovation is important to their growth strategy. However, only 6% of those executives surveyed are satisfied with innovation performance.

Think about that.  94% of executives are unsatisfied with innovation performance. Despite 84% believing innovation is important for their organisations’ growth!

The innovation problem: 94% of executives are unsatisfied with innovation performance! (source: McKinsey). Read more here… Tweet this
Figure 1: various insight to the innovation problem

And, innovation is not a new thing.  Back in 1954, Drucker was telling us in The Practice of Management that “a company only exists to get a customer”.  In other words, “a company has two, and only two, functions: marketing and innovation”.

60+ years later we still have a problem with innovation! What is worse, McKinsey’s survey uncovers that “very few [executives] know what the problem is, or how to fix it”. And the solution is not to just run an innovation competition using an idea tool (sorry, most innovation consultants).

The innovation problem:…very few executives know what the problem with innovation performance is, or how to fix it (source: McKinsey). Here's some insights… Tweet this

And it’s not just McKinsey surfacing these challenges. PWC’s 2017 Innovation Benchmark found that 54% of the companies they surveyed were struggling to bridge the gap between business and innovation. In fact, there are many reports and figures I could repeat and summarise here. But I think this blog post from Viima – 50+ statistics on innovation – does a great job summarising.

Can we really not identify the problem and find ways to fix it? I believe we can. But first, let’s dive into what impact this innovation problem has.

The impact of innovation not performing

What do we mean by innovation is not performing? In short, we often take a product-dominant view: innovation is not delivering an increase in unit sales.

By having poor innovation performance we can expect our revenue to drop over time. We will have gained market saturation with our existing product. Other firms may begin to out compete us through creating newer and/or enhanced products addressing the same, or the evolved, need. And there is always downward price pressure. Even without active innovation, we could reasonably expect costs to reduce over time. That happens through natural efficiencies gains.

Figure 2: The impact of a performing innovation function on a firm (from a product-dominant thinking perspective)

In a world where innovation is performing, we should see both increasing revenue and/or more rapid cost reductions. It is a world where new, or enhanced, products are replacing old products and meeting customers evolving needs. And we are beating competitors with products seen as more valuable. Or even making competitors irrelevant with innovations in blue oceans. Our costs are decreasing faster than the natural expectations.

This world is what we see in Figure 2. But this is not what executives are seeing. Contributing to 94% of them being unhappy with innovation performance.

For now, let’s just note the above is a product-dominant perspective. In the service world things are a little similar but also a little different (this becomes important in my solution a little later).

Why is innovation not performing?

Maybe you recognise one or more of the points I show in Figure 3. I often hear these when people informally talk about innovation not working, or not performing, or failing.

Figure 3: Several symptoms making 94% of executives unhappy with innovation performance

You probably have similar and even additional points based on your own experience (would be great to hear about them in the comments). If we take a step back from these individual points, I believe we can collate them into the pyramid we look at next.

Introducing the innovation performance pyramid

I often like to redraw the set of innovation performance challenges as the pyramid shown in Figure 4.

Figure 4: The Innovation Performance Pyramid

Now we can start to tease out some of the challenges.

First, when starting innovation in a firm we tend to focus our innovation initiatives on the bottom two rows. We call for ideas, we ideate, we run ideation competitions; we capture and filter many ideas. There are many tools to help us capture ideas. And most “help” us filter those wide list of ideas towards becomming innovations; a form of innovation governance.

The innovation problem: your ideas need to be i) implementable (or you can change the organisation), ii) able to generate value (and you know what value is and how it is generated), and iii) innovations that customers will use. … Tweet this

But, it is not enough to capture ideas and run through an ideation “funnel” process. If we can’t implement those innovations in our organisation. Or if we can’t really find the value they will generate (or worse, and I feel increasingly the case, misunderstand value generation). Even worse if the end customer is not interested in, or resists . the innovation. Then we have poor performing innovation.

And whilst ideation tools and processes could help address those three challenges, they are often wider than the ideation process. So, in my experience, they either are not addressed, or are deferred to a later point (which often does not arrive). But, they are very important to understand. Let’s look at them further.

Innovations the company will struggle to implement

It sounds obvious, but we need to come up with innovations that the organisation can implement. Alternatively, we should also think of how to change the organisation so it can implement identified ideas.

Within this challenge there are three areas I want to especially call out. First is the alignment of the organisation with the CEO’s innovation vision. Second is organisational blocks to innovation. Thirdly, governance.

Aligning innovation vision

How many times do we see CEOs calling to find the next big thing in their industry? Yet the organisation has a laser focus on cost efficiency and control.

The innovation problem: looking for radical innovation but still driving your company on cost efficiency? Read more on this and other parts of the innovation problem here… Tweet This

Or innovation events spawning exciting ideas that just “don’t align with strategy”, so will never get past the inertia of implemention?

There are many types of innovation, to name a few:

  • disruptive, radical, incremental
  • on product, service, or business model
  • from a tech push or demand driven perspective
Figure 5: Different types of innovation

The innovation vision has to be aligned throughout the organisation. And if that vision requires changing the organisation mindset or structure, then that also needs to be done.

Removing organisational speed humps

In my experience, we often copy product innovation thinking. This leads to believing in having an R&D team (which you may be calling an innovation team). A team tasked with being innovative and coming up with ideas/innovations the business can later use. But doing so creates a speed hump (or even barrier).

The innovation problem: 54% of innovating companies struggle to bridge the gap between business and innovation! (source: PWC, 2017). Read more here… Tweet this

It is hard to get “R&D” into production. Even for a true product organisation, such as drug companies, that knows how to funnel R&D as part of its DNA. How will we “amateurs” solve this. If your innovation team is always in push mode then you have a problem.

Even more so for services (and remember, we are in a >80% service economy) where i) it is traditionally seen that innovation does not come from R&D and ii) it is all about meeting customer needs.

Further, few organisations are ambidextrous by nature. Ambidextrous being a set-up that allows an organisation to run both i) business as normal with perhaps incremental innovation happening, and ii) new business with more radical/disruptive innovations. It is difficult to do both if you don’t think ambidextrously.

Governing

[coming soon]

Innovations that are not generating (co-)value

In a product dominant world, value generation is relatively simple. You have an idea of what value will be generated as you manufacture the product. And that value is translates into the margin you believe you can make. A customer simply buys that value when they buy the product, and then uses it up.

However, our economies are increasingly service based. And value is trickier in service economies.

Firstly, value generation and the roles of the firm and customer are different. For example, we move from value-in-exchange to value-in-use. Secondly, as a customer, we are often seen as a driver of value generation. We say the value is often co-produced. Think of Netflix – you get value through watching content, they get value through analysing the content you watch to give you and others recommendations). Thirdly, service innovations have additional aspects to address compared to product innovation.

However, there is a continuum between products and services. Even though we know we will sit somewhere on the product-service continuum – and in our increasingly service dominant economy we are unlikely to be a pure product – we still cling to applying product-dominant thinking. By misunderstanding, or not knowing, value generation in services we risk our innovation efforts.

Innovations that customers are not using

Even once we have created an innovation that should generate value, we are reliant on customers view of that value generation. And often the customer participates in that value generation. Services are particularly sensitive to customer perceptions…and remember, we live in a service economy. I have already mentioned value is no longer in exchange, but in use (and often in context) plus we have aspects such as customer resistance to overcome (in addition to the normal product-dominant view of customer adoption).

A lot of these aspects are difficult to address during ideation as they require deeper research during the product/service development.

With service innovation it can be the case that you only truly see customer resistance or lack of co produced value generation in the wild. In a product mentality you would be tempted to scrap the product. From a services perspective you need to appreciate your initial offering will need tweaking, changing, perhaps combining with other services, or even pivoting, before it starts firing up co production of value (and therefore a revenue stream for you).

Are we innovating for our organisation type?

Just as a final reflection. One topic I’m exploring is: are you innovating in the most appropriate way for your organisation type? This comes initially from the insight that firms still innovate in product ways even though they are probably services, or at least living in economies that are 80+% service based. Can this be extended beyond the product vs services divide?

I look at some of these firm types and the reasons they innovate in Figure 6 (and discuss in more detail here).

Figure 6: Some reasons why different types of organisations innovate

Call to action / fixing the innovation problem

So, there we have my view of the innovation problem. I find it amazing that back in 1954 Drucker was defining that a firm had only two functions and over of those was innovation, yet in 2019 we are still struggling to get innovation to perform.

The rest of this site will capture my ongoing journey to fix this innovation problem. Right now I believe the key is largely to be found in getting us to think in a more service-dominant way (given that our economies are shifting that way, if not over 80% of the way already). And ending the innovation push nature we tend to fall in (separate innovation team with weak links to the business).

We’ll see that Service innovation is built around co-value generation … so please read the articles but most of all, get involved with the discussion – this way I can improve the thinking and we all can access those improvements!

Link to References


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