Most Innovation Strategies aren’t strategies. Or innovative.
When terminology makes a monetary impact
Thumbing through the investor relations pages of most major companies, you’ll be hard-pressed to not find someone for whom the ‘4th pillar’ of their strategy isn’t ‘Innovation’; a nod to the zeitgeist of an ‘ever-quickening pace of change’ and ‘disruptopia’. Push behind the headlines of the annual report and you’ll find that innovation fever permeates through the organisation and those who service it: ‘innovative solution x’, ‘innovative idea y’, ‘I hear what you’re saying but can we make it innovative?’
Innovation has become meaningless. A magic adjective that shows that you’re ‘woke’ to the impending technical doom that Google or Amazon are going to level on your organisation unless you design-think your way onto a lean platform within an agile ecosystem — what a job-to-be-done…
But it shouldn’t be meaningless. At its core, pursuing innovation as a strategy is a perspective on the future of your company. At best, a bet on where growth is going to come from, and at worst, whether it’s going to be viable at all. Underestimating this risks them both.
To explore this further, it’s worth reminding ourselves what a strategy is. It’s a reaction to scarcity — a need to deploy a set of finite resources to achieve an aim. Inherently it’s about making tradeoffs amongst a set of alternative methods to achieve that aim. Or, as a McKinsey Partner once told me:
If the inverse is not also a viable option, then it’s not a strategy
The inverse of innovation isn’t ‘to not be innovative’; it’s optimisation.
Choosing a strategy of innovation means that you don’t believe that optimising what you do today is going to be sufficient to secure sustainable growth tomorrow. It’s a belief that we can continue to squeeze out every ounce of cost or get tighter and tighter with our ‘personalisation’ and we still won’t be able to compete. Because the customer and market will be totally different. Because we just won’t have what it means to be competitive.
This is by no means an exclusive strategy. The optimising power of the ‘Massive-Artificially-Generated-Intelligence-Computer’ (MAGIC) has a place. The left-hand feeds the right in a cycle of investment from old to new. You may have heard of the 70:20:10 allocation popularised by Google — deploying 70% of your portfolio to optimising the current business, 20% looking for adjacent opportunities, and 10% allocated towards new breakthroughs.
By no means is it that straightforward. At any time, that investment of time, talent and assets should be proportionate to your conviction that the pursuit of the new is a more sustainable strategy now than the optimisation of the old. Bansi Nagji and Geoff Tuff of Monitor Deloitte pick apart the dynamics influencing that allocation in this great read:
A bolder alternative is to utilise Facebook’s approach of market-cap-at-risk (‘I think that there’s a 1% chance that it’ll destroy our company, so it’s worth 1% of our market capitalisation’) — the method they reportedly used to value the Whatsapp acquisition.
Sure, this may feel like an academic question of terminology, but it is important.
Because every time you flagrantly stick the word innovation into a pitch or communique, a baby unicorn dies.
I’m very serious. Why? Because doing so has very real implications for the CFO and the group investment process of your company. True innovation is very difficult to measure because it so often looks commercially bonkers, at least initially. That’s why a pre-seed venture investor values a company entirely differently to how a private equity house or fund manager does. The level and nature of risk in each of those scenarios are entirely different, as is the available evidence used to model those risks. Muddying the waters between these different scenarios risks muddying the expectations and methods used to evaluate them — and an inability to measure and evaluate appropriately will make it almost impossible to manage the portfolio effectively.
Plainly, the really new big-dollar breakthroughs rarely look good initially when evaluated through the lens of regular project finance. Viewing them through that lens risks killing a unicorn before it even leaves the magic paddock.
So what to do? A few closing thoughts.
Be deliberate — lose the abstract ‘disruption/pace of change’ narrative. Pursuing a strategy of innovation is a perspective on growth, where it’s going to come from and what it’s likely to look like. Define your strategy narrowly behind a stated objective — something to rally around and evaluate against — your answer to ‘why are we spending so much time and money on this?’
Be clear — make sure a clear benchmark of what should and shouldn’t be evaluated as ‘innovation’, and the risk profile that entails. Personally, I like it to be linked to whether it’s challenging a core orthodoxy or taboo at the heart of an industry — something that should it be dis/proven would drastically change the state and dynamics of competition.
Be calculating — measure accordingly. Optimisations should be subject to the rigorous evaluation of traditional project finance. For things that are truly breakthrough in nature, then the single most useful thing that the lean start-up gave us was Innovation Accounting. It’s a good start but by no means perfect and should be customised based on the industry and growth cycle you’re in.
All views expressed in this piece are my own and are not necessarily representative of those of my employer.
This is, however, what we at Market Gravity absolutely do.
Reach out if any of the above has sparked any questions or thoughts and I’d be happy to discuss over a coffee.
