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 try internal, 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. A survey shows only 6% of executives are happy with innovation performance.
Let’s explore this problem in this article. And it is this article that sets the question for this site: how do we fix this innovation problem.
- 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 same executives 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
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 that indicate there is a problem. But I think this blog post from Viima – 50+ statistics on innovation – does a great job summarising.
What is worse, is that McKinsey’s survey uncovers that “very few [executives] know what the problem is, or how to fix it”.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
I’ve been here too. As a Chief Innovation Officer trying to set up innovation in a global account. We did the “right” things. Put tools and governance in place. Got ideas and tried to get them to innovations. After a year and a half, we had plenty in our innovation pipeline. But sadly we struggled to get the business interested.
I believe we can fix the problem. It requires us to change how we think and what we do. But first, let’s understand what impact this innovation problem has.
The impact of innovation not performing
What do we mean by innovation is not performing? Well, there could be three views – the customer, the innovation team and the business.
Any innovation team is often focussed on idea generation. And so poor performance would be seen as not generating enough ideas. I’ll come back to why this is wrong shortly.
From a customer perspective, if we are not offering any new or enhanced value then they will not be excited by our offerings. They are likely to turn to competitors.
And whilst the business is interested in idea generation, they are more interested in positively changing revenue or costs. We can look at in two ways. Firstly from thinking in terms of goods. That is our usual view of economies, economics and marketing. Secondly, and rather newer, we can think of it in terms of the economy being dominated by services.
The Goods View of why we innovate
Everything, in the goods dominated view of economies, is focused on a value exchange. The firm embedds value during the manufacturing process. And that is exchanged to the customer usually at the point of sale. Success is measured by number of units sold and the profit made.
We can draw a simplistic sketch of revenue and costs, such as the red lines in Figure 1. If we perform no innovation then two things typically happen. First we would expect number of sales to drop off (revenue decrease). Due to the goods offering nothing new, we reach market saturation, and/or our competitors are out innovating us. Also we would expect cost to decrease due to efficiencies being made in production. These are the red lines you can see in Figure 2.
Ideally we want to be nearer the red lines in Figure 2 than the blue lines. In this situation regular innovation is driving additional sales and therefore revenue. Additionally we are using innovation across the manufacture and supply chain to drive down costs faster than natural reductions.
Poor innovation performance, then, keeps us on the blue tracks. As Peter Drucker coined: “innovate or die”. R.I.P. Blockbuster, Toys’R’Us, AOL, MySpace, and so on.
The Services view
In the service view of the economy we see everything as a service. We don’t have a moment where value is exchanged. Rather we have value in use, and often the value is co-created between the provider and the user. This approach reframes our thinking. We see a service as a potential solution to a customer problem (jobs to be done). Relationships and relationship building becomes important. You need to have market orientation. Blue ocean thinking becomes a natural way of strategy thinking.
Innovation gains a wider focus beyond new or enhanced goods. Goods can be servitised. New business models come into play. Digitisation has a home. The circular economies make sense. Collection of data becomes valuable, easier, and beneficial to all parties.
In fact, I believe the world is based on services. And goods are used as a transportation method for services. This can be a little strange at first, especially as our teaching is completely based on a product world. And until recently our experience of the world was one of value exchange (ie we buy goods and then own that value). I have a lot to say on this, but let’s park that for the moment.
So, why is Innovation not performing?
I believe there are many reasons innovation performance is not what we need it to be. Maybe you recognise one or more of the points I show in Figure 3. These are the points I often hear these when people informally talk about innovation not working, or not performing, or failing.
You probably have similar and even additional points based on your own experience (would be great to hear about them in the comments).
But I believe it starts early and is wider. Let’s take a look at the reasons I believe contribute to the problem. [At a later point i want to group them together under some form of categorisation…]
We’ve “forgotten” why we innovate
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, he continued, “a company has two, and only two, functions: marketing and innovation”.
This leads back to “innovate or die” (innovation), but also that you need to innovate the right things for the right people, and get them to know about the innovation and adopt it (marketing).Innovation needs to be part of your organisational DNA, not a bolt-on extra. Click To Tweet
The point here is innovation needs to be part of the organisations DNA. It can’t be a bolt on aspect. For sure the function could be in a team. But that has to be in the same way marketing, finance and hr are teams. Make the innovation function too separate and it becomes too disjoint. The responsibility is someone else’s. Their ideas are unimplementable, or too crazy, or…
Make the team to separate and Then you have to start trying to implement an ambidextrous organisation. You might want this if you are pursuing innovation that will canabilise your existing business. But odds on you are not and so are introducing unnecessary barriers.
This nearly leads us to innovation ambitions.
Sources of innovation
[Move to new,article on why we innovate]Drucker, in “Innovation and Entreprenuership” highlighted seven sources of innovation that every manager should be monitoring all the time:
- The unexpected – what of your and competitors unexpected successes and failures can you capitalise upon?
- Incongruity – what are the unmet needs and wants of your customers?
- Process needs –
- Changes in market/industry structure
- Demographic changes
- Changes in meaning and perception
- New knowledge
We have mismatched ambitions
How many times do we see CEOs calling to find the next big thing in their industry? Yet they drive a laser focus across the organisation 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
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.
We have the wrong view of economy
For a long time we’ve lived in what appears to be a product dominated economy. And subsequently we have built theories and practices around innovation based on products and manufacturing.
The world we really live in though is one where services dominate.
We don’t communicate innovations effectively
No doubt about it, innovation means change. Both to our customers. But also to our organisation. And this is good news. Since we know how to handle change in general.
Introducing the innovation performance pyramid
I often like to redraw the set of innovation performance challenges as the pyramid shown in Figure 4.
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.
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.
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.
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).
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!