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The Enterprise Innovation Revolution: Part I
by Borys Stokalski, Senior Consultant, Cutter Consortium
ENTERPRISE INNOVATION LANDSCAPE
The 21st-century shift from an industrial to a knowledge-based economy envisioned by such thought leaders as Alvin and Heidi Toffler, Peter Drucker, and others is quickly materializing. The shift is clearly marked by the rising importance of the terms "innovation" and "innovation management" in many modern enterprises as well as the extension of the notion of innovation beyond the traditional area of invention. This is not to say that invention -- the result of traditional R&D processes -- is losing importance. On the contrary, in an economy of intangibles, there are not many things more valuable than the ownership of an intellectual asset such as a successful technical standard, a breakthrough technology, or a new drug formula. But the invention advantage is complemented by three other forms of innovative activities: value innovation, management innovation, and business model (strategic) innovation. These three categories form the pillars of business by using the capability to change as the competitive weapon -- a business innovation chain.
Value innovation is primarily related to the relationship between business and its market. As the nature of market offerings changes from products to services, and even further, to experiences, any business is vulnerable to a growing pressure of value erosion. Any successful unique market offering gets quickly replicated by market players, leaving a relatively short time window for value innovators to thrive on their uniqueness. In order not to surrender to the forces of commoditization, one needs to be able to provide a constant stream of new capabilities of services as well as attractive new aspects to the customer experience.
Although value innovation may exploit inventions as the source of new value, most of the time it relies on established technologies and standards. The essence of a value proposition can be seen as a combination of attributes that define product/service characteristics (quality) from the customer perspective. Thus, value innovation relies on finding an appealing recombination of these attributes or changing the entire set of dimensions that define the competitive landscape.
An important signum tempori is the importance of management innovation within the entire spectrum of enterprise innovation initiatives. In a 2006 Harvard Business Review article devoted entirely to the subject of management innovation, Gary Hamel argues that management innovations have been historically the single most important source of sustained advantage in business [1]. Table 1 presents Hamel's Top 12 breakthrough ideas that have challenged the status quo in business and delivered potent advantages to the companies that pioneered them in the last century.
Table 1 -- Gary Hamel's Top 12 Management Innovations [1]
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A major part of Hamel's Top 12 list (items 1-8, 11) is related to improving Taylorism (i.e., a command-and-control, top-down, scientific management philosophy rooted in industrial epoch). Industry consortia and radical decentralization, however, signal the search for practices that depart from Taylorism and instead support the knowledge economy. Hamel asserts:
Modern management practice is based on a set of principles whose origins date back a century or more.... Generations of managers have mined these principles for competitive advantage, and they have much to show for their efforts. But after decades of digging the chance of discovering a gleaming nugget of new management wisdom in these well explored caverns is remote. Your challenge is to uncover unconventional principles that open up the new seams of management innovation. [1]
To explore the ideas of new management practices further, see my Executive Report "Adaptive Enterprise Toolbox" [2].
To a large extent, the area of management innovation departs from the implementation of "best practice" to the discovery of "next practice." Arguably, the most important area of management innovation -- or rather, a trigger that makes management innovation so important -- is the final innovative activity: the birth of new business models that explore social capital, collaborative business networks, and intellectual capital as a shared asset.
SURVEY GOALS AND METHODOLOGY
To explore the concept of the enterprise innovation landscape, Cutter Consortium conducted a recent survey among decision makers from 119 organizations of varied size, industry, and country of origin. The basic questions we sought to answer were as follows:
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To what extent are enterprises engaging in the four areas of innovation (invention, value innovation, management innovation, and business model innovation), and what kind of impact do they expect from these activities?
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How do the enterprises assess their ability to achieve the expected business impact of innovation?
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What are the suspected sources of success or failure in achieving the impact expected from innovation?
It is important to stress that the survey is based on self-assessment. As such, it presents a state of mind of the managers involved in the enterprise innovation revolution rather than a state of the revolution itself. Nevertheless, assuming that management judgment is an important indicator of how things are going -- as well as an important factor influencing the future course of action -- we will attempt to draw some general conclusions in this two-part Executive Update series.
Definitions
For the purpose of this series, we use the following definitions in the analysis of the survey:
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The results of innovation processes have been categorized according to the following three impacts on business:
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Minor tweaks. These include changes that are necessary to survive in the competitive markets.
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Material change. This includes significant new sources of revenue, productivity, and quality improvements.
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Breakthrough. This includes new market-leading products and/or organizational changes that redefine industry productivity standards.
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Based on planned and achieved results, the outcome of innovation processes has been calculated in four ways:
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Well-below target. Breakthrough was planned, but only minor tweaks were achieved.
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Below target. Achieved impact is one level below planned (e.g., expecting breakthrough but achieving material change).
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On target. Achieved results are the same as expected.
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Above target. Achieved results are better than expected.
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The successful innovator is an organization where the outcome is on target or above target.
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To better understand the relationship between innovation outcome and the manageability of the innovation process, participants were asked about the efficiency of their innovation process. Survey responses ranked innovation process manageability in the following five ways:
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Whatever the actual efficiency of the innovation process, it is clearly a major competitive disadvantage.
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Our organization does not measure efficiency.
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Our organization measures the efficiency, but since there are no benchmarks related to the measures used, it is difficult to say anything sound about the efficiency of innovation.
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Our organization measures the efficiency and sees areas where efficiency should be improved in order to become a major competitive advantage.
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Our organization measures the efficiency of innovation, and it is a major competitive advantage.
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Thus, the true innovation champions would be those who obtain positive outcome, achieve meaningful results (breakthrough or material change), and obtain an efficient innovation process.
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On the other hand, the innovation losers are those who achieve only minor results, while planning for more, and those who have an inefficient innovation process.
Patterns
Through survey analysis, we have identified the following patterns:
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Innovation practice model. What mix of management practices is used to govern the process of innovation? We have identified the following five patterns:
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Ad hoc. This set of practices includes only ad hoc initiatives, some driven by doers, some proclaimed by management; no governance scheme exists.
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Grassroots support. This set of practices includes innovation initiatives driven by doers and endorsed by management, which provides adequate resources; no explicit innovation scorecard exists.
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Innovation pull. This set of practices excludes any grassroots initiatives and relies solely on management initiatives and innovation objective schemes.
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Scorecard. There are no initiatives associated with innovation; the scorecard (implicit or explicit) is the only management practice used to foster positive change and ensure that expected results of innovations are achieved.
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Innovation governance. This set of practices includes innovation initiatives driven by doers and endorsed by management, which provides adequate resources; the innovation governance scheme includes explicit or implicit goals for innovation processes.
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Innovation approach model. What are the patterns of engagement in the four areas of innovation? We have identified the following six patterns:
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Total innovation. Organization applies activity in all four areas of enterprise innovation.
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R&D plus. Organization complements classic R&D (invention) with activities in other areas of enterprise innovation.
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R&D. Organization focuses solely on classic R&D.
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Value innovation plus. There are no traditional R&D activities; organization complements value innovation with other aspects of enterprise innovation.
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Value innovation. Organization is totally focused on value innovation.
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Management innovation. Organization is focused solely on management innovation, including business model innovation; no R&D or value innovation activities occur.
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Let us now begin our examination of the survey results.
KEY FINDINGS
Innovation Is Risky
The first key finding of the survey is that innovation is a risky proposition. Figure 1 presents the spectrum of outcomes among survey participants. While the number of organizations that are successful innovators (i.e., on or above target) seems high, if we examine only those respondents who see innovation as an important factor to their business (i.e., expect it to deliver material change or even breakthrough), then we can conclude that innovation is a risky proposition. Why? Because more than 37% of such organizations (those that view innovation as important) experience outcomes below target; and among those planning for breakthroughs, the percentage of organizations that are below target exceeds 50%.
Figure 1 -- Expected vs. achieved results (number of respondents).
Value Innovation
The second key finding is that the focus is on value innovation. Almost 70% of responding organizations are active in the value innovation area (see Figure 2). The area least popular among survey participants is invention -- the traditional realm of industrial innovation (R&D). Only about one-third of all survey participants (and less than 30% of organizations planning for material change or a breakthrough) are active in the invention area. The question remains whether this marks a decreasing interest in genuine R&D. In my opinion, this is not the case. The development of truly unique, patentable, proprietary technologies may incur relatively high cost, high risk, and long cycle time if compared with value innovation, which combines existing technologies into new value propositions. However, one must note that advances in CAD, engineering, and manufacturing actually lower R&D costs, making it more feasible than ever. Thus, I attribute the relatively low popularity of invention to a much faster growth in other areas of enterprise innovation.
Figure 2 -- Areas of enterprise innovation: all respondents and innovation champions.
Mature Innovation Leads to Success
The third key finding is that more mature innovation process management corresponds with successful innovation. The analysis of innovation champions (i.e., efficient innovation process; positive outcome) and innovation losers (i.e., poorly managed innovation process; negative outcome) reveals an important difference in the spectrum of innovation management practices.
The key differentiating factor seems to be the use of innovation governance practices as well as innovation scorecards by the successful innovators, approaches completely missing in the case of innovation losers (see Figure 3). Champions tend to avoid any form of ad hoc innovation initiatives, while losers use ad hoc approaches in almost 50% of cases. Both groups contain a significant proportion of organizations that tend to rely on supporting grassroots initiatives. Apparently, without support of a proper governance scheme, the outcome of this approach is purely random.
Figure 3 -- Spectrum of innovation practices: innovation champions vs. innovation losers.
Innovation as Competitive Weapon
The fourth key finding is as follows: organizations active in the area of invention are more successful in using innovation as a competitive weapon than those that do not have this kind of management experience. The survey results suggest that, while the focus is on value innovation, there's an important advantage to organizations experienced with the more traditional R&D practices and discipline of invention. This is not a decisive factor, but the differences between outcomes as well as efficiency of innovation are clear. Figure 4 shows that organizations that manage some form of invention tend to have more than twice as many above-target outcomes than those that do not. Also, the disappointing well-below-target category of outcomes can only be seen among the "noninventors." Similarly, with organizations that claim efficiency of innovation as their major competitive advantage, those with R&D experience occur twice as more than those without R&D experience.
Figure 4 -- Spectrum of innovation approaches: R&D vs. no R&D.
Innovation Benchmarks Wanted
The lack of benchmarks related to enterprise innovation processes is clearly another key issue. More than 24% of respondents measure some aspects of innovation process efficiency, but due to lack of benchmarks, they are not able to draw improvement conclusions from their data. They can only benchmark internally, which may prove useful for best practice identification in large organizations. In small and medium-sized organizations, internal benchmark does not serve this purpose particularly well. Therefore, this is an important area in which independent research organizations and academia may contribute to the general improvement of innovation process manageability.
In Part II, we will continue our examination of Cutter's innovation survey, focusing on the patterns of success and failure.
REFERENCES
1. Hamel, Gary. "The Why, What, and How of Management Innovation." Harvard Business Review, 1 February 2006.
2. Stokalski, Borys. "Adaptive Enterprise Toolbox: Next Practices for the Knowledge-Based Economy." Cutter Consortium Business-IT Strategies Executive Report, Vol. 8, No. 10, 2005.