In the previous article in this series (Issue
How to get paid twice for everything you do, part 3: Innovation management Individuals with good ideas tend to be creative, but not innovative. Innovation is a group process that needs to be managed like any other business process. To become a high-achieving performer in the field, you need a best-practice innovation management system in place. ▶ In the previous article in this series (Issue no. , ), we looked at innovation activities that drive value creation and value appropriation. Here, in this follow-up article, we address issues that surround the management of these types of integrated innovation activities. Successful innovation management is primarily about recognizing and understanding effective routines and facilitating their emergence across the organization. Unfortunately, such routines are not easy to establish since they represent lessons learned over time, through a process of trial and error, and hence tend to be very company-specific. Each company has to develop its own particular routines. The good news, though, is that we can identify some general rules about how to manage innovations well DON’T CONFUSE CREATIVITY WITH INNOVATION Creativity is a process undertaken by the individual, and nearly everyone is capable of coming up with good ideas. But individuals do not innovate. Innovation is a group process for a simple reason: individuals may have part of the solution to a problem, but they rarely have the whole answer. To be creative, they require domain knowledge expertise, which takes an average of years to develop, whatever the domain. If this knowledge is lacking, most ideas will either be reinventions of others that already exist, or impossible to implement. In addition, many of today’s product-service systems, for example, are so complex that no single individual can have knowledge of all their critical components. Innovation is therefore a group process. Creativity also requires imagination, and the ability to fantasize – to allow the mind to wander, free from the constraints of logical patterns. Other characteristics of creativity include the ability to see the things that others miss, or to ask the questions that others do not. It is also the ability to complete- ly redefine an existing problem. Creativity requires interaction with people who have knowledge expertise in domains other than one’s own. This generates cross-fertilization and the ability to combine ideas from different fields. Creativity also involves rational analysis based on having a good feel for the target audience. And all of this takes time. INNOVATION IS ABOUT GENERATING VALUE Innovation is ultimately about the conversion of knowledge into money. High-performing organisations in value-creating innovation have several things in common. They have clear value-creating innovation strategies, and their employees know what these innovation strategies mean for them in their jobs. They incorporate demanding customers and/ or true consumer insights into the valuecreating innovation process already at the idea stage. They know what they are good at and they identify, maintain and leverage core competencies. They also know what they are not good at, and ensure that activities requiring skills outside the organisation’s core competence are avoided or outsourced. Other characteristics shared by high performers in value-creating innovation are that they put best-practice innovation management systems in place, and they ensure that value-creating innovation activities and outcomes are constantly evaluated and measured. Research shows that there is a strong causality link between innovation management and performance in value-creating innovation. An example of findings in this domain is shown (in simplified form) in Figure . BESTPRACTICE INNOVATION MANAGEMENT SYSTEMS Best-practice value-creating innovation management systems are used to keep track of all projects for the current budget year, both planned and ongoing, including evaluations and suggestions for corrective actions. Projects are also evaluated annually, EBR #1 2012 • 45 Management Understanding innovation Value-creating innovation is a business process like any other and needs to be managed accordingly. and their financial outcomes are documented. Best-practice value-creating innovation management systems have the following organizational features: 3 a top-down element that determines and approves the value-creating innovation strategy for the next product-service system life cycles, as drafted by the value-creating innovation management group. The top-down element also decides on and approves the strategy document, outlining the different projects as provided by the value-creating innovation prioritization meeting and documented by the valuecreating innovation management group. The top-down element is responsible for decisions on strategic investments, as well as for initiating and responding to stakeholder relationships that follow as a consequence of the value-creating innovation strategy that is chosen. This occurs in alignment with the corporate strategy and includes initiating cooperation agreements, negotiating joint efforts with stake- holders that require peer-to-peer interaction, and articulating corporate interests when involving key stakeholders in projects. The top-down element further initiates key projects to ensure that the strategy decided is delivered upon. 3 a value-creating innovation management group, which is the permanent staff function that oversees and runs the value-creating innovation management system. This group is responsible for organizing and leading the work and preparing the strategy and the plans, as well as preparing and documenting the value-creating innovation prioritization meeting. It comprises senior people with relevant backgrounds. It is important to note that the management group’s responsibility is to oversee and coordinate, though it does not have the authority to make any project- or strategy-related decisions. 3 a series of value-creating innovation prioritization meetings. Together with the value-creating innovation strategy, these meetings are the key component of the val- Figure 1: Impact of innovation management on value-creating innovation performance Collaborative capabilities Innovation leadership Explains 36% of the variance Stimulus factors of innovation management Explains 70% of the variance Technological capacity for innovation management Explains 17% of the variance Innovation capabilities Explains 23% of the variance Explains 69% of the variance Innovation performance Explains 37% of the variance Explains 26% of the variance Market performance Sales increase Explains 18% of the variance Explains 18% of the variance Financial performance (Extracted, adapted and simplified, based on Prajogo et al.1, and on Moser2, respectively) 46 • EBR #1 2012 Understanding innovation Management ue-creating innovation management system, ensuring transparency and adherence to the innovation strategy. The frequency of prioritization meetings depends on the industry in which the company operates and the strategy that it pursues. One of the meetings is dedicated to developing the upcoming year’s budget and plans, while the others address re-prioritization as a consequence of emerging issues. At the former meeting, both the bottom-up element (defined below) and the top-down element are represented, together with the management group. The prioritizationmeeting attendees discuss priorities against the background of the innovation strategy. Based on this discussion, the chairman of the prioritization meeting decides which projects and programs should be launched within the existing budget. The prioritization meeting delivers its output to the management group for processing into the plans. The management group then forwards this to the top-down element for a formal decision and sign-off. 3 a bottom-up element, which is responsible for generating ideas, evaluating these against the innovation strategy, and executing the projects and evaluating the results. The bottom-up element includes representatives of both the providers of the value-creating innovation and its users, and is frequently linked into a semiopen value-creating innovation network. Best-practice value-creating innovation management systems should also have processes that outline how these elements work and interact, as outlined in Figure . The rise of open innovation changes nothing in the above system, which is inherently an open-innovation system, though it does place even higher demands on the value-creating innovation strategy. Value-creating innovation is a business process like any other and needs to be managed accordingly. This entails the articulation of a clear value-creating innovation strategy against the backdrop of which the management system operates. This manage- Figure 2: The value-creating innovation management system operating against the backdrop of the innovation strategy Strategy CEO Decision Corporate head of innovation Innovation meeting Innovation office External proposals Innovation groups Suggestions from all parts of the organization and membership from all parts of the organization External proposals (Roos3) EBR #1 2012 • 47 Management Understanding innovation Business-model innovation timing differs according to whether the company is in proactive or reactive mode. ment system ensures that all major value-creating innovation activities are executed using the integrated approach of value-creating innovation – utilizing valuecreating innovation that is based on technology, design, art, hermeneutics and efficiency improvement. PRACTICAL TOOLS FOR ASSISTING IN THE VALUECREATING INNOVATION PROCESS One of theese tools, the living lab, is an embodied research methodology for sensing, prototyping, validating and refining complex solutions in multiple and evolving real-life contexts. In essence it applies a methodological approach to design within a semi-open innovation framework. Such frameworks build on the principal of crowd sourcing, meaning that tasks traditionally performed by individuals are outsourced to a group or community through an open call. In this case, the crowd is defined and delimited by the originator of the problem, to enhance fast prototyping co-creation thinking when it comes to products, services and solutions that are either systemic in nature or part of a greater systemic/holistic setting. The aim is to achieve behavioral change in the user which is: desirable from the user’s point of view (in other words, they are better off in their own opinion after the change); beneficial to the supplier and has a positive impact on other stakeholders. One of the best known living labs is the Aalto Design Factory. The stage is a delimited and controlled domain in which the customer or consumer interacts with the product-service-system offering and experiences the value (for example, authenticity, beauty, delight) that the artists have added through using their individual understanding to question reality and express insights in the form of a holistic but abstract attribute of the offering. One such stage could be “fashionable-people’s” expressions of opinions on the esthetics of mobile phones in online fashion media, such as blogs and magazines (for more on this, see Juhlin et al.) Getting inside the consumer’s mind is about being able to, through the use of the senses or information, create a predictable feeling in the consumer. For example they can feel hunger if the smell of newly baked bread is released into a shop, fear or excitement can be generated through the use of music and visual techniques in movies, and relaxation can be encouraged through the tactile experience of bedding materials. Classical productivity tools include all the well known efficiency improving tech- Figure 3: Strategies for managing dual business models A Serious Nature of conflicts between the established business and the innovation Minor B Separation strategy D Phased integration strategy C Phased separation strategy Integration strategy Low strategic relatedness High strategic relatedness (different markets) (similar markets) Similarity between the established business and the innovation (Markides et al)6 48 • EBR #1 2012 Understanding innovation Management niques like lean manufacturing, Six Sigma, and so on. The company needs to master the tools that are appropriate for the various knowledge domains that are to be deployed for value-creating innovation purposes. INNOVATION IS ABOUT APPROPRIATING VALUE Successful innovation involves the appropriation of the highest possible share of the value created. High performers in innovation have several things in common. They have a clear strategy for when and how to increase the relevance of the product-service system offering and when and how to innovate aspects of the existing business model. At the idea stage, they have already incorporated insights into the structure and dynamics of the business ecosystem, as well as the developments in the knowledge domains that underpin their value-appropriation innovation process. High performers also constantly evaluate and measure the value appropriation achieved. BUSINESSMODEL INNOVATION MANAGEMENT Business-model innovation timing differs according to whether the company is in proactive or reactive mode. In proactive mode, there appear to be three main situations in which business-model innovation is potentially required: 3 when scaling up new product-service systems 3 when entering a market that includes entrenched competitors and requires a “breaking the rules” approach 3 when facing a near-death experience in which the continued use of the existing business model would likely lead to the company’s demise. In reactive mode, a company must respond to an entrant that is using a new business model. The appropriate response could be to: 3 abandon the existing business model and develop a new one through innovation or imitation of the entrant’s business model. Both of these approaches are highly risky and very difficult to achieve, so they are rarely used. The longer the incumbent has been in the industry and the longer the life cycle of the product-service system in the industry, the less likely it is that these strategies will succeed. 3 maintain the existing business model while developing a new one through innovation or imitation of the entrant’s business model. This has been seen in several industries (for example, the establishment of lowcost carriers by incumbent airlines), with varying success. Charitou et al.)5 identify four strategies for managing dual business models. These are outlined in Figure 3. Using a separation strategy entails keeping the two business models separate and minimizing any interaction between them. As the opportunity for achieving synergies between the two business models decreases and the conflict between them increases, the appropriateness of the separation strategy increases. Markides et al. found that companies which adopt the separation strategy will do better if they: 3 give operational and financial autonomy to their units, but still maintain a close watch over each unit’s strategy and encourage cooperation between the unit and the parent through common incentive and reward systems 3 allow the units to develop their own cultures and budgetary systems 3 allow each unit to have its own ceo, who is transferred from inside the organization (rather than being hired from outside the company). The use of a phased integration strategy entails initial separation between the two business models for a period of time, followed by a slow merger between them with a focus on minimizing any disruptions from the conflicts that initially exist between the two. As both the opportunity for achieving synergies between the two business models and the conflict between them increases, so does the appropriateness of the phased integration strategy. When a phased separation strategy is used, the first step is to establish the new business model inside the company’s existing organizational infrastructure, to leverage the firm’s existing resources and resourcedeployment system. This results in a faster learning curve. When the learning is deemed sufficient, the new business model is separated into an independent organizational unit. As both the opportunity for achieving synergies between the two business models and the conflict between them decreases, the EBR #1 2012 • 49 Management Understanding innovation References Daniel I. Prajogo and Pervaiz K. Ahmed. . “Relationships between innovation stimulus, innovation capacity, and innovation performance.” R&D Management (): -. Roger Moser. . Strategic Purchasing and Supply Management: A Strategy-Based Selection of Suppliers. Dissertation. European Business School Oestrich-Winkel. Deutscher Universitäts-Verlag. Roos, G., Innovation Management – A Success Factor for Competitiveness, VTT Intelligence Forum ; Tuottavuus ja T&K-strategia murroksessa; Miten vastata haasteeseen?, VTT SYMPOSIUM , VTT , pp - Juhlin, O. and Zhang, Y., , Unpacking social interaction that make us adore: on the aesthetics of mobile phones as fashion items, in Proceedings of the th International Conference on Human Computer Interaction with Mobile Devices and Services (MobileHCI ‘), ACM, New York, NY, USA, pp. - Charitou, C. D. and Markides, C. C., , Responses to Disruptive Strategic Innovation, MIT Sloan Management Review, Vol. , Nº , pp. Constantinos Markides and Constantinos D. Charitou. . “Competing with dual business models: A contingency approach.” Academy of appropriateness of the phased separation strategy increases. The integration strategy entails embracing the new business model through the company’s existing organizational infrastructure. As the opportunity for achieving synergies between the two business models increases and the conflict between them decreases, the appropriateness of the integration strategy increases. Markides et al. found that companies which adopt the integration strategy will do better if they: 3 treat the new business model as an opportunity to grow the business (rather than see it as a threat) 3 leverage the strengths of the traditional business to find ways to differentiate themselves (rather than imitating the strategies of their attackers) 3 approach the task in a proactive, strategic manner rather than as a hasty knee-jerk reaction to a problem 3 take extreme care not to suffocate the new business through the firm’s existing policies. Incremental business-model improvements should be a continuous process (Mitchell et al.), whereas discontinuous business-model innovation should not be a continuous process due to its disruptive effect and high associated risk (Markides). Succeeding through business model innovation is normally better than competing on the same business model as competition since successful new business models offer more value to customers, and as a consequence, sets the standards for the next generation of entrepreneurs. Furthermore, they normally create new, incremental demand, they fail neither the narrative nor the numbers test, and they are difficult to replicate (Magretta). Management Executive (): -. Markides et al. . CONCLUDING REMARKS Markides et al. . Donald Mitchell and Carol Coles. . “The ultimate competitive ad- Achieving the objective of being paid twice for everything you do – or, in more practical terms, having the profit of your activities exceed the gross revenues from your primary revenue stream – requires the ability to simultaneously manage value-creating innovation and value-appropriating innovation. To succeed in this, the following sequence of steps is suggested: confirm that the company has access to the right resources ensure that these resources are deployed in vantage of continuing business model innovation.” Journal of Business Strategy (): -. Constantinos Markides. . “Disruptive innovation: in need of better theory.” Journal of Product Innovation Management : -. Joan Magretta. . “Why business models matter.” Harvard Business Review (May): -. Magretta. . A complete list of references can be found in the PDF-version of this article at ericsson.com/thecompany/our_publications 50 • EBR #1 2012 an effective resource-deployment system make sure that knowledge relating to as many of the science, technology, engineering, design, art, hermeneutics and efficiency domains as are relevant exists within the company, and deploy this combined domain knowledge in an integrated way with the aim of maximizing the value that can be created and embodied in a product-service system see to it that domain knowledge relating to effectiveness and business models exists within the company, and deploy this combined domain knowledge in an integrated way with the aim of maximizing the value that can be appropriated from the newly innovated product-service system design the innovation process to enable the necessary dynamic interaction and feedback loops between steps 3 and 4 develop an appropriate set of systems, structures and processes to manage the complete integrated-innovation approach in a scalable, efficient and effective way make sure that all this fits in with the company culture and strategy typology continuously measure and evaluate progress made toward the objective. ● AUTHOR ▶ GÖRAN ROOS is Chairman of VTT Technical Research Centre of Finland, Honorary Professor at Warwick Business School in Coventry, UK, Visiting Professor of Intangible Asset Management and Performance Measurement at the Centre for Business Performance at Cranfield University, UK, part-time Professor in Strategic Design in the Faculty of Design at Swinburne University of Technology in Melbourne, Australia, and Senior Advisor, Asia Pacific, at Aalto Executive Education Academy. Presently the Managing Director for Intellectual Capital Services Ltd in London, he has founded or co-founded several companies, worked as a consultant in 50 countries and held management positions in several corporations. He presently sits on several corporate advisory boards. (goran@roos.org.uk)
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