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Corporate Dual Innovation Management

 

Almost every company shifts into overdrive to create ‘smart’ products, to turn a product business into a service business, to create new business models or to reach out beyond their traditional industry boundary.

This race is fueled There is a huge noise around what companies should do to find the big ideas. Compared to it, the discussion about the best way of turning those ideas into substantial businesses is not much addressed.

 

The original Innovation diffusion theory sought to explain how, why, and how fast new ideas and technologies spread through cultures. The origins of the idea go back to the 19th century but Everett Rogers popularized it in his 1962 book, Diffusion of Innovations. Subsequently strategists and corporate marketers picked up the theory to explain how new products moved through the marketplace. The model proposes that the flow of new, innovative products through the marketplace runs through five buyer or adopter types: innovators, early adopters, early majority, late majority, and laggards. The size of the groups follows a normal distribution curve.

In 1991, Geoffrey Moore expanded on the innovation diffusion mode in Crossing The Chasm by demonstrating that companies typically see fast growth in the two first market segments, innovators and early adopters, only to significantly slow and often completely stall when trying to move into the larger early majority market. Moore called the space between these groups the chasm.

According to their perspective, the chasm is what defines success or failures to new ventures. If a company will succeed in crossing the chasm, it will be adopted by the market. That means that once an innovation will be adopted by  more than ~16% of the market its probability to succeed will grow dramatically.

Due to the importance of the chasm for success, many company aim to cross it in the best possible way. Therefore, a wide range of companies will invest heavily in the Early adopters group in order to position themselves better towards the next phase. Others will try to attract the Early majority with various strategies so they would adopt their innovations and assist them in crossing the chasm successfully.

 

Vehicles used for the corporate innovation race

Huge sums of money are spent to build dedicated, vehicles to win the innovation race:

  • Leading companies have invested heavily into more than 300 corporate innovation centers around the globe. Depending on the companies’ objectives, these innovation centers are mostly autonomous, designed as corporate accelerators, incubators, Digital Labs or in a blended form.
  • ‘Hackathons’ or comparable formats are used to bring together external ideators with internal experts for drumming out disruptive ideas.
  • There is a significant rise in investments into open approaches to innovation such as scouting, listening posts, corporate-university partnerships, technology spin-ins etc.
  • And finally, as has been shown last year, Corporate Venture Capital is re-positioned from a primarily financial instrument towards a major innovation driver.

However, there are only few reports that ideas coming out from these approaches really moved the needle. Quite contrary, there is an increasing number of stories showing that prestigious companies, some of them world market leaders, have been shutting down their innovation centers.

 

Facing the organization-internal chasm

Geoffrey Moore has pointed out 25 years ago that ‘out there’ is a chasm to be overcome in the market diffusion of non-incremental or disruptive innovations.

Increasingly, companies notice that there is also a organization-internal chasm when it comes to those innovations. They observe that the transfer rate from the promising ideas generated in the vehicles mentioned above into substantial business is too low. Depending on the specific company’s situation, one also hears

  • ‘Our promising innovation concepts stumble or die along the way’
  • ‘We have too many stakeholders with diverse and frequently changing intentions’
  • ‘Our corporate start-ups can‘t find a sponsor or an organizational home to grow’
  • ‘The time-to-impact is too long’
  • ‘The desired business impact can‘t be reached’

The two-front war of corporate start-ups

To understand the chasm – and hence to increase the business impact from explorative ideas – it is key to recognize that corporate start-ups are fighting a two-front war.

Conventional start-ups are fighting on one front ‘only’: They want to win the market and scale their business. However, ‘corporate start-ups’ (in this context defined to be an explorative idea with validated product/market-fit which should be turned into significant business This second front is the inherent tension between the core organization and the corporate start-up. The tension comes from the largely incompatible designs and operating models of these two organizations, which are based on two completely different rationales. It cannot be avoided – but it can be managed.

The business units of the core organization are operators and incremental innovators. They are designed to exploit the opportunities in defined markets, technologies and business models. They are based on lean / efficient and 0-mistakes principles. They are driven The core business, however, is not designed to create risky leap-frog, explorative innovation that is incompatible with the existing business system at the outset.

Quite contrary, corporate start-ups has an explorative DNA. By definition, they’re designed to look further ahead and explore terrain that is not yet on the corporate map. They are based on agile / lean start-up / test-and-learn principles. They are geared towards long-term (financial) goals. They excel at finding new ecosystem / co-innovation partners and push the innovation agenda into new business models and sometimes even beyond the defined industry boundary.

Why we need Scaling-Up: The process view

For many companies, transitioning a particular corporate start-up over the chasm, i.e. scaling-up the big idea, is still an art, not a practice. The rare success cases can mostly be ascribed to ideal ad-hoc conditions or to corporate mavericks burning for their ideas so much that they were willing to fight all the conflicts and risk their own career in doing so.

It helpful to divide the process from ‘insights’ to ‘significant business impact’ into three different stages:

  • Start-up: Discovery / Ideation / Incubation
  • Scale-up
  • Growth

 

After making this distinction it becomes apparent that from a process view the transition between ‘having a validated idea’ and ‘driving business growth from inside the core organization’ is underexposed today  .

In the Start-Up phase, we find a solid body of knowledge on how to work effectively:

  • Design Thinking helps to understand the unmet / under-served but valuable customer needs and to come up with meaningful ideas, including how these ideas should be validated
  • Lean Start-Up and customer development helps to understand how to turn these ideas into a business context, including how to build minimum viable offerings, create and develop initial customers and leverage agile iterations.
  • Open Innovation helps to understand how to look for external, missing pieces of technology, capability and knowledge, including how these should be integrated
  • Business Model Canvas helps to set a joint language for discussing “mechanics” of novel businesses and key aspects in defining the business model to generate profits from the ideas

At the other end of the spectrum we find many – too many to mention – methods helping companies to grow an existing revenue base once a solid initial customer base has been established.

However, compared to these two phases, there is no comparable body of knowledge for the Scaling-Up phase. This essential transition looks a bit like innovation’s ‘no-man’s land’.

Why we need Scaling-Up: The portfolio view

There is a second lens that underlines the need for developing a solid Scaling-up-methodology. If one plots the vehicles companies use to win the innovation race   in a portfolio showing the phases and the set-up, one finds that there is a big, open space.

 

 

Most of the vehicles used to win the innovation race are focused on the stages Discovery, Ideation and Incubation. Depending on the specific company goals, they are set up in a start-up-setting, in a corporate setting or in a blended form. Our research did not find formally set-up vehicles for Scaling-Up.

For  many companies it becomes apparent that there is a missing piece in corporate innovation and digitization. The pivotal area, which features a unique focus on combining scaling-up (vs. ideation/discovery or incubation) of corporate start-ups with corporate (vs. start-up) setting has not been addressed. We expect that there will be a growing focus on a ‘Dual Innovation Management’ that integrates sustaining or incremental with explorative innovation and provides a solid basis for corporate start-ups to scale and become a meaningful business.

 Dual Innovation Management will:

  • integrate core innovation and explorative innovation strategy as dual and highly incompatible directions of impact
  • properly govern the critical resource allocation process among both directions
  • adequately manage the vital “interface” between the two camps, particularly involving a defined Scaling-Up approach
  • be operatively covered via a portfolio management process, comprising distinct types of innovation activities across three playing fields (Optimize the Core, Reshape the Core, Create the New)
  • involve senior leadership to play a critical role in leading and managing all playing fields
  • have access to mitigation mechanisms to balance the inherent conflicts between corporate start-up and the core organization
  • will work with corporate organizations that are prepared to absorb explorative innovation

Several companies   aim to be leading in ‘turning Scaling-Up from an art to a practice’.

Let’s  have a look at recent research findings on Dual Innovation:

  • 70% of the most innovative companies deploy a dual innovation approach. (BCG)
  • 100% of the experts surveyed in a German study agreed that defining a dual (ambidextrous) innovation strategy is vital to corporate innovation capability. (Detecon)
  • “A two-engine operating model holds particular promise for companies looking to achieve flexibility, as well as higher returns from their innovation investments.” (Accenture)
  • […] we are truly delighted to find that 75% of the companies that report an above 10% growth expectation for the coming 24 months also own a Division-X (or the equivalent hereof).” (Deloitte)
  • The survey found that the need to innovate is driving penetration of the bimodal construct – having two modes of IT, and ultimately of the entire business. Bimodal captures the platform characteristic of continuously building and refactoring capabilities for the future, and seems to have captured the global business mood, with leading companies increasingly separating the more exploratory parts of their businesses from those that exploit the well-established business (e.g. Google’s Alphabet).” (Gartner)

 

From these findings it becomes clear: While there may be no “One-size-fits-all” approach to innovation, it becomes obvious that the increasing relevance of Dual Innovation has been widely recognised.

Process Model Innovation is deemed a critical ingredient to building up platform innovations that capitalise on horizontal technologies, rather than being confined within a specific industry vertical.

When it comes to Dual Innovation and Process Model Innovation it’s not an Either/Or decision. Modern Dual Innovation approaches encompass two complementary directions of impact:

  • Transforming the Core (by largely changing or disrupting the existing operating model)
  • Creating the New (by largely changing or disrupting the existing business model)

Both directions involve Process Model Innovation as a vital part – in different contexts though: either to change an existing operating model or to build a new business model. The former seems underrated to me in recent discussions on innovation, mostly zeroing in on the latter – though by no means being less critical in regard to innovation capabilities of incumbents.

diagram

To sum it up, innovating process models and agilisation of operating models towards platforms is to be put higher on the agenda. Those innovations tap into the potential of digitalisation and overarching internal collaboration, as also leveraging external ecosystems.

While not being the only lever for companies to stay ahead, they make up a vital part of modern Dual Innovation approaches: Alongside “creation of outstanding value” it’s “outstanding delivery of this proposed value” that fuels outperforming customer experience and thus makes a difference.

 

 

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