Successful innovation necessitates interactions among multiple actors from multiple parts of a company. In the journey from ideation, product creation, first customer sales, growth and scale, multiple parts of the organisation are inevitably involved in innovation. This is why organisational alignment around innovation is critical. Companies need to create an internal process that:
- Facilitates the serendipity that creates sparks of creative ideation.
- Captures and tests the outputs of this creative ideation.
- Transforms ideas into successful products with profitable business models.
This means that organisations need to be designed to create and benefit from serendipity. The goal of this book is to articulate the principles that inform how organisations manage these innovation complexities. We strongly believe that principles trump tactics. It is, ultimately, up to each organisation to adapt these principles and apply them to its business, strategic goals and context. The five principles for building corporate innovation ecosystems are as follows:
We believe that innovation must be part of, and aligned with, the overall strategic goals of the company. This is important when it comes to later transitioning innovation projects into the core product portfolio. Just like venture capital investors have investment theses that specify the types of startups and markets they invest in, every large company must have an innovation thesis. An innovation thesis clearly sets out a company’s view of the future and the strategic objectives of innovation. For example, an established software company can take the view that driverless cars are the future and they want to get in that market early. Their innovation thesis will be that they invest mostly in new ideas that bet on that future (i.e. software products for driverless vehicles). In this regard, an innovation thesis sets the boundaries or guard rails concerning the innovation projects the company will or will not consider. In addition to this deliberate strategy, the company must also use its innovation process as a source of emergent strategy that is responsive to changes in the market.
To achieve its innovation thesis and strategic goals, an established company should then set itself up as a portfolio of products and services. This portfolio should contain products that cover the whole spectrum of innovation; i.e. those that can be classed as core, adjacent and transformational. The portfolio should have early stage products, as well as mature and established products. A company may also consider having in its portfolio disruptive products that are aimed at lower-end or emerging markets. The goal is to have a balanced portfolio in which the company is managing various business models that are at different stages of their lives. The balance of the product portfolio should be an expression of the company’s overall strategy and innovation thesis.
In order to execute on its thesis and manage its portfolio of products and services, the company needs a framework for managing the journey from searching to executing. There are several examples of innovation frameworks; for example Ash Maurya’s Running Lean framework and Steve Blank’s Investment Readiness model. At Pearson, Tendayi has been part of a team that has developed the Lean Product Lifecycle, which is an award winning innovation management framework. All these frameworks can be synthesized into the three simple steps for innovation; creating ideas, testing ideas and scaling ideas. Every now and again, a company may decide to refresh the business models of its existing products through renewing ideas. Having an innovation framework provides a unifying language for the business. Everybody knows what phase each product or business model is in. This then provides the basis for how a company can manage its investment decisions and product development practices.
With an innovation framework in place, the company now needs to make sure they are using the right investment practices and metrics to measure success. Traditional accounting methods are great for managing core products. However, when managing innovation, different sets of tools are needed. We propose that companies should use incremental investing based on the innovation stage of their products. This approach is based on Dave McClure’s Moneyball for Startups. We also propose three sets of innovation KPIs that companies should be tracking:
- Reporting KPIs focus on product teams, the ideas they are generating, the experiments they are running and the progress they are making from ideation to scale (e.g. assumptions tested and validated).
- Governance KPIs focus on helping the company make informed investment decisions based on evidence and innovation stage (e.g. how close are the teams to finding product-market fit).
- Global KPIs focus on helping the company examine the overall performance of their investments in innovation in the context of the larger business (e.g. percent of revenue in the last 3 years).
In addition to correctly managing investments in innovation, the way in which product teams develop their products has to be aligned to the innovation framework. Pearson’s Lean Product Lifecycle is accompanied by a great playbook that provides guidance to product teams as they search or execute on their business models. Adobe’s Kickbox provides similar guidance, tools and resources. The core principle for innovation practice is simply that no product can be taken to scale until it has a validated business model. As such, during the search phase the job of innovators is to validate their value hypotheses (i.e. does our product meet customer needs?) and their growth hypotheses (i.e. how will we grow revenues and customer numbers?). This process requires that teams validate both the attractiveness of the product to customers and the potential profitability of the business model. A key part of this innovation practice is the idea of a network or community. Companies have to create and support communities of practices that interact regularly and share lessons on best practice. This ensures that innovation skills are shared and developed as a human capability across the company.
These five principles combine to help create an innovation ecosystem. The first two principles (thesis and portfolio) focus on innovation strategy, the next two principles (framework and accounting) focus on innovation management and the last principle is where rubber meets the road and the company begins interacting with customers and validating business models. Most innovation labs have tended to just focus on this last part (innovation practice). But the truth is that without a supportive ecosystem in place, products coming out of innovation labs will have high mortality rates. This is why applying all five principles is important.
As you can see above, these elements are interconnected; each representing a create-test-learn loop of its own. To the extent that strategy informs investment decisions, the success of these decisions in turn informs strategy. To the extent that investment decisions impact innovation practice, innovation practice produces learnings that inform investment decisions and, in-turn, inform strategy. This is an innovation ecosystem at work. Each interconnected piece is responding to data from the other pieces. Such a holistic approach allows companies to innovate like startups, without having to act like startups. We will now describe each principle in detail in the following chapters.