#4 The Innovation Operating Model
In my last article (#3 Profit and the Innovation Culture) I was discussing the problems with trying to build an innovation culture.
Instead — to achieve the holy grail of innovation — I put forward the idea of establishing an operating model for innovation — called “The innovation operating model”.
So let us elaborate on this to bring more clarity to what this means.
In wikipedia you can read that “an operating model is both an abstract or visual representation (model) of how an organization delivers value to its customers or beneficiaries as well as how an organization actually runs itself”.
So when discussing an operating model for innovation we are looking and thinking of innovation as a system (a discipline that can be taught and managed) — i e how innovation delivers value to it’s customers as well as how the innovation discipline is to be run.
Because, innovation truly needs discipline and clear objectives to function at scale. With measurable objectives and deadlines you can have a sense of urgency to drive progress.
To be able to apply “The innovation operating model” you need to start with an innovation capability of some sort. Traditionally the innovation capability was the same as the research and development (R&D) department.
This department normally lean towards product innovation, has a technical focus and uses significant budgets, resources and time.
In recent years the scope of the innovation capability has been broadened. The traditional product focus is making space for innovation from other parts of the business. Not only the scope but also the skill set of the innovation capability is changed/increased. New skills such as agile, design thinking and lean start-up are being added to the repertoire. This broadening of skills sets is driven by the need to manage uncertainty.
As such, the scope of the traditional innovation capability is extended from product to the entire business model, supported by this — the agile, design thinking and lean start-up. In effect, the new innovation capability is a business model innovation capability or something driven by an “innovation operating model”.
This model is there to drive cross-functional decision making, to define and manage innovation investments.
There are a few approaches to handle the “The innovation operating model” which have different impacts.
First, let us make a distinction between a bottom-up and a top-down approach to business model innovation. With bottom-up approach, we mean innovation directed and funded by local business units. With top-down approach, we mean innovation that is directed and funded from the corporate department. The distinction between the two approaches is important because each has a different scope and skills set.
Let me try to explain the difference.
The scope of the bottom-up approach could be — for example — to innovate the various elements of the current business model or models — the scope described in the previous paragraph. This is achieved through the aforementioned agile, design thinking and lean start-up skill sets.
An example could be an innovation project run by the local sales department of a business unit within a large multinational company. The business unit initiated its own innovation program in which they explored new revenue models for offering current services. The sales department used design thinking and lean start-up to design and test their assumptions with their customers, and as a result, local management is investing in a pilot in which freemium services are offered.
The scope of the top-down approach on the other hand could be to innovate beyond the current business models. This is best done in a “sandbox” — a entity separate from the business. In this environment, the same skills apply as the Bottom-up skills, but are complemented by strong strategic skills to define and re-iterate based on trends, vision and learnings.
Taking further the earlier example, the multinational has set-up a new business unit within a sandbox, in which they are experimenting with various business models such as a financial platform services that could later complement or replace the current services.
Another part of the scope of the top-down approach is the business models’ portfolio. This portfolio is an overview of all organisational business models and this is best done by the corporate department. With this overview, the corporate team can work on the industry dominant business model and business models coherency or business models adding mutual value to each other.
Are These Models Mutually Exclusive?
Leaders and leadership are traditionally in favor of one of the models: either top-down, with vision and innovation driven down more through chains of command, or bottom-up where top-level leaders are more facilitators. Each approach has passionate advocates and critics.
Linear strategies, often adopted by incumbent companies, are focused on efficiency and optimization and use a “deliberate” path to innovation. These strategies are usually top-down and unambiguous.
Startup culture favors nonlinear strategies, which identify and exploit “emergent” innovations, and are often bottom-up and more flexible.
The challenge is that deliberate and emergent innovation fight for the same, limited, resources of cash, talent, technology and facilities, but the opportunity is to create a culture that can optimize deliberate innovation and concurrently identify, test and develop emergent innovation.
This bifurcation is a structural and cultural challenge.
Startups, to paraphrase Reid Hoffman, “throw themselves over the cliff and build the plane on the way down.” For incumbents, “the bigger you are the harder you fall” phrase is what often guides them.
It’s often said that incumbents fail to identify disruptive nonlinear innovations due to ignorance or ego. This I believe is incorrect.
The problem is that nonlinear innovation does not work for current customers, it disrupts legacy processes, devours resources and is usually highly inefficient. It is the exact opposite of what successful market leaders want for their companies — according to how they measure success. Where it is completely counter to deeply-ingrained incumbent culture which normally rewards efficiency and stability.
Some companies find a way to create an equilibrium between linear and nonlinear innovation. Companies such as Amazon, and Alphabet (Google) excel in creating a corporate culture that effectively leverages and synchronizes both models.
But leveraging the innovation operating model (which ever approach / model) that is used — still entails a risk.
This risk is that if the focus turns to much to the explorative processes / operation (implicitly the innovation work) then there is a huge risk that they are not putting enough effort in the exploitational parts (efficiency, implementation and possibly transformation). This can hurt the current/on-going business.
Therefore the innovation operating model very often need to co-exist with current operating models and the company needs to hold a high level of organizational ambidexterity (read: https://en.wikipedia.org/wiki/Ambidextrous_organization).
Discussions around ambidexterity and organizational structure will be continued in the next article — “#5 Innovation and Organizational Setup”
