Innovation Governance

Published 16 March 2022

Abstract

The COVID-19 pandemic has upended nearly every aspect of life, from personal (how people live and work) to professional (how companies interact with customers, how customers select/purchase products, how supply chains deliver them). Customers are redefining the relationships they have with their brands. Channels may have radically shifted to new needs or work around new constraints. These shifts are creating disruptive opportunities and new risks. Long standing assumptions that supported years of predictable growth may no longer be valid. Innovation, customer experience, and pervasive digital engagement are key elements of this next normal.

Delivering the next normal will require a significant shift in innovation capabilities and their governance for most companies, many of which are used to a less orderly approach. By figuring out how to govern innovation as an integrated system within overall portfolio goals, the enterprise can harness its energy and make it a reliable driver of growth.

Innovation governance is a holistic approach to guiding and sustaining innovation and is a vital part of business management. Innovation governance is about achieving this consistent approach supporting continuous learning, discovery, and improvement.

This report provides a framework for addressing the overarching aspects of innovation governance including:

Building an innovation vision and strategy,
Sourcing / developing core innovation capabilities
Driving appropriate execution
Promoting innovation broadly

We provide examples and recommendations in each of the areas.

Author:

Gary Zimmerman

CMO / Principal Consulting Analyst

[email protected]

Executive Summary

Innovation governance refers to a holistic approach to guiding and sustaining innovation and is a vital part of business management. It’s effectively a set of mechanisms that align a company’s resources, goals, and objectives with each internal department, and with external parties. Regardless of what industry an organization is in, or how big it is, innovation pushes growth by bringing ideas to life.

With technology (and customer demands) continuously evolving, businesses are forced to act and innovate simply to stay competitive. The result of this is that those with the most comprehensive strategies for managing innovation are likely to do well over those that don’t.

There are four key elements of innovation governance which are worth noting. They are:

Building a vision and strategy – At the heart of innovation governance is a clear message that innovation is critical to the company’s continued success. The vision should include specifics about what types of innovative projects will be prioritized and what the objectives of them are. This is what we have previously defined in our reference architecture as the Innovation Spectrum.

Sourcing / Developing capabilities – Sustainable business success requires leaders to understand and nurture the right combination of innovation elements for their organization. The challenge is identifying those elements, understanding the current state, and planning appropriate improvements. This is a core value of innovation governance.

Steering execution – Steering execution is the most tangible part of innovation governance because this is where the innovation system produces results. Governance ensures the resources, structures, and guardrails are in place to deliver value to the enterprise.

Promoting innovation broadly – Finally, the real value of innovation will only be unleashed if it is communicated well to everyone involved. High-level innovation strategies need to be conveyed to all staff and stakeholders in the organization so they can readily understand what the company is trying to achieve through its innovative endeavors. And all along way journey, successes both great and small must be celebrated to reinforce the commitment to innovation.

Effective communication will also build trust and transparency, which is crucial to company cohesion. In a simpler form, innovation governance looks like this chart.

Figure 1

Innovation governance as a term, refers to a systematic learning process aspiring to create, identify, refine, and implement new value creating ideas – to address perceived challenges and exploit opportunities that have risen or are about to rise in the future. Innovation governance simply means having a consistent approach for making the organization constantly better in the long run. Constant improvement is, after all, just a continuous learning process aiming to drive the business forward, and innovation governance is part of that constant improvement.

When it comes to innovation governance, there’s a point to be made about there being no such thing as best practices. While there are certain practices that might be superior to others in some contexts, implementing best practices for all innovation governance cases represents the standardization of thinking. It’s not smart to slavishly follow other’s success stories because what may have worked well for someone in the past, might not work for you, and most certainly isn’t guaranteed to work in the future.

This, however, doesn’t mean that there wouldn’t be practices that are more likely to work than others when striving towards greatness in innovation management.

As part of the recommendations in this report, we’ve listed six key factors for successful innovation that we think are worth considering for most businesses.

Constant improvement
Value creation
Build- Measure-Learn Model
Resource allocation
Develop / procure capabilities
Focus

Successful innovation rarely happens overnight. It requires patience, a clear vision and lots of testing to see what works and what needs to be improved, constantly aiming for becoming better both as a company and on a personal level.

Succeeding in innovation governance doesn’t necessarily rely on the most brilliant, revolutionary idea. Unfortunately, many leaders believe innovation is made up of quick wins – one-off, disconnected ideas driven by today’s pressures. In doing so, they fail to understand that successful innovation is, indeed, a continuous practice that should be at the very core of what they do. To master any skill, you need to commit to your goal and work extremely hard towards it. Being good at innovation governance is no different.

Introduction

The COVID-19 pandemic has upended nearly every aspect of life, from the personal (how people live and work) to the professional (how companies interact with their customers, how customers choose and purchase products and services, how supply chains deliver them). While it is too early to say the pandemic is in the rear-view mirror, it is now that enterprises need to think about the “Next Normal”, and how they’ll build upon what was learned and respond to what has changed. In a recent survey by McKinsey, more than 90 percent of executives said they expect the fallout from COVID-19 to fundamentally change the way they do business over the next five years, with almost as many asserting that the crisis will have a lasting impact on their customers’ needs.

Figure 2

However, as this chart from the McKinsey study shows, most companies deprioritized innovation to concentrate on four things: shoring up their core business, pursuing known opportunity spaces, conserving cash, and minimizing risk, all the while – waiting until “there is more clarity.”

The pandemic forced rapid changes in customer behavior.

For years, videoconferencing providers enjoyed steady growth by focusing on corporate customers. This market typically required expensive deployments, often involving the physical installation of specialized equipment and training to ensure high quality connections. Now Zoom, with its simple setup and almost viral connectivity, has become the “Kleenex” of the videoconference world. Practically overnight, the world has grown accustomed to “zooming” for myriad purposes, including the arts, religion, fitness, and social connections with colleagues, friends, and family. And while many enterprises rely on Microsoft Teams as their go-to business collaboration tool, you’d be hard-pressed not to find Zoom accounts and clients in their infrastructure.

Crises tend to reshape spending patterns

Many consumer-facing companies are contending with the likelihood that brick-and-mortar retail may never return to its glory days, as many stores have become mini-distribution hubs for e-commerce. A positive example of this has been Chick-fil-A, the fast-food company that well known for chicken sandwiches. On March 16, 2020, the first day of the national lockdown, the company closed all its dining rooms and transitioned to drive-thru service only. The company erected drive-thru tents to increase capacity and within weeks of the lockdown they were moving 100 cars per hour through drive-thru at many locations.

The company leveraged technology to facilitate an interaction between people, to take tasks off their team members which allowed them to make the customer experience efficient and pleasant. They leaned into the Chick-fil-A One app, iPads in the drive-thru, and other technologies that allowed for team members to serve guests with a high level of excellence.

B2B enterprises are not immune

But the changes aren’t just affecting the B2C market. Before the shutdown, B2B sales coverage models at large organizations tilted heavily toward field sales, representing 70% of reps. The remaining 30% were inside sales reps and digital channels focused mostly on building pipeline. However, with lockdowns, flight restrictions, and remote working this model was shifted dramatically. Even if the sales rep could get to the client location, there was no guarantee that the client would even be there. So, sales, by necessity, became a virtual activity. While face-to-face interactions will come back to some extent, enterprises have begun to understand that it’s more efficient and even more effective to be virtual in many cases. This chart from a recent Ernst and Young study shows how the sales approach has shifted; and will likely continue to shift in the next normal.

Figure 3

These examples show that many businesses simply cannot operate as they have in the past. What made a company successful historically may no longer be possible during or after the crisis. Customers are redefining the relationships they have with their brands. Channels may have radically shifted to accommodate new needs or work around new constraints. Opportunities that never existed before have suddenly become priorities. The assumptions that supported years of stable, predictable growth may no longer be valid. Innovation, customer experience, and an increased reliance on digital technology are the hallmarks of this next normal.

Reviewing the innovation reference architecture

The TechVision Research Reference Architecture for Innovation is a master template that identifies the innovation capabilities (rather than technologies) that can be improved or enabled, allowing business stakeholders and intrapreneurs to achieve a common language for innovation functions, which can then be refined over time. It provides the following benefits:

Focus on efforts that provide strategic benefit. Even a successful innovation effort that is counter to the corporate strategy can be distracting at best, destructive at worst.
A disciplined approach produces less waste. From problem identification and brainstorming to development and testing, following a set roadmap makes the most of innovation efforts. When the process is clear and repeatable, it makes it possible for an organization to measure their progress and efforts.
Establishing a measurement system results in process improvements, better formed concepts, and ultimately a competitive advantage and a significant return on investment.

We have defined our innovation reference architecture to help our clients better organize and manage their continuous innovation process; and the details of the architecture are documented more fully in our report “Innovation Reference Architecture”. However, this reference architecture is not meant to be prescriptive. Each organization must develop their innovation capabilities according to their own strategy. What follows the diagram is a brief description of the components of the reference architecture.

Figure 4

Innovation Spectrum – The innovation spectrum defines the entire scope of innovation within the enterprise. It covers everything from incremental improvement of existing products and processes to those disruptive, breakthrough innovations that change the world. All innovation projects, regardless of where they are in the spectrum, are part of the innovation portfolio that is guided by an innovation thesis.

The innovation portfolio component describes the entire “book of business” of innovation investments. Innovation activities take place on a broad spectrum based on how much is unknown about the markets being addressed and technologies being adopted. This spectrum ranges from Horizon 1 efforts, where we are focused on optimizing and scaling the core business, to Horizon 2 efforts where you are focused on the next wave of growth, and finally Horizon 3 efforts focused on the future of new markets, technologies, and growth engines.

Strategy and Capabilities – When entrepreneurs set out to build a new venture, they start with a very limited means, often just who I am, what I know, and whom I know. Then, the entrepreneurs imagine the possibilities that originate from their means. As figure 4 shows, an established enterprise has a treasure of assets already at your disposal. You have a direction outlined by the corporate strategy. You have a proven business model. You have established and resourced business processes. A platform on which to execute. And finally, the knowledge built up over the years as to how you deliver customer value. To use a baseball analogy, the entrepreneur is at the plate trying to get that first hit while your business is already rounding third base headed towards home. Taking stock of your riches and taking advantage of them is key.

Methods and processes – For innovation to be effective, it needs to become a core competency, it must be supported as any other business activity within the company. It needs to have a defined business process, specific tools and methods, resources, incentives, and training.

This section of the reference architecture addresses the innovation methods and processes that are needed to create and execute innovation projects. These are the focus of this report.

People and Networks – Innovation is not done by organizations – it’s done by people. For the foreseeable future, innovation will require people and their connections with other people to succeed. To succeed in internal innovation, the enterprise must be conscious of the soft factors, culture, employee skills, and motivation that drive behavior. You must adjust these soft factors to match what’s needed to foster and nourish intrapreneurs.

And in an increasingly digital world, the ability to innovate is no longer just an internal exercise. While the enterprise needs to make sure innovations supporting core value remain in-house, external entities create a wider talent pool for innovation on any number of challenges.

Innovating with external parties tends to be approached in one of three ways, Open Innovation, Crowdsourcing and Co-Creation. These collaborative approaches to innovation are covered in depth in this report. But many software developers are familiar with the products of such efforts. If you are involved in delivering software, you are most likely already using open innovation. Open-sourced software is running in 78% of enterprises today and that’s a prime example of open innovation where everyone contributes their ideas and efforts for common good.

Execution – Most people think innovation is all about ideas, when in fact it is more about delivery, people, and process. Ideas, big and small, are loaded with assumptions. Assumptions like “customers will buy,” “we can make it at scale,” “our organization can support it,” and many others. Innovation is what you do to commercialize ideas. Every organization has several techniques they use to commercialize their inventions. Our accompanying report “Innovation Execution” is dedicated to the tools and techniques supporting this layer of the architecture.

Digital Platform – While TechVision has authored several research reports focused many aspects of the technology stack, this innovation reference architecture highlights social, mobile, analytics and cloud, SMAC for short, as the four technologies are currently influencing business innovation.

The idea of SMAC was first published as part of a Search CIO Essential Guide and defines an ecosystem that allows a business to improve its operations and get closer to the customer. We believe that these technologies extend beyond commercial products and go deep into the innovation process itself because they are key to rapid experimentation and confirmation.

At our latest Chrysalis conference, we discussed a set of emerging technologies that we believe will start making their way into the digital platform as they become more mainstreamed. These include:

Blockchain – Blockchain technology continues down the path toward broad adoption as organizations gain deeper understanding of its transformational value, within and across their industries. Blockchain is to trust what the web was to communication.
Cognitive technologies – Cognitive is shorthand for technologies such as machine learning (ML), neural networks, robotic process automation (RPA), bots, natural language processing (NLP), and the broader domain of artificial intelligence (AI). Cognitive toolsets both augment human response and potentially automate the appropriate response.
Digital reality – an umbrella term for augmented reality (AR), virtual reality (VR), mixed reality (MR), the internet of things (IoT), and immersive / spatial technologies that are redefining how humans interact with data, technology, and each other.
Faster horses – Cloud storage, 5G hyperconnectivity, and Quantum computing are disrupting the classic “transmit, compute, store” constraint cycle. As they mature, they will accelerate the previous emerging technologies as well as allow many others in autonomous / edge computing areas to become reality.

While the enterprise digital platform will continue to evolve over time, the need for technologies that facilitate the rapid experimentation and confirmation so critical to innovation needs to be nurtured and grown.

Coordination and governance – Much like a manufacturing plant focuses on producing product, an innovation system focuses on producing commercialized inventions. And in a similar way, the innovation system needs to be observed, measured, and improved. That’s the role of the coordination and governance function. Innovation governance starts with building a vision and strategy for innovation. The “why innovate”. But it does not stop there! Innovation governance is also concerned with the development of innovation-enhancing capabilities, not just hard skills but softer ones as well. In addition, it deals with the organization and improvement of the classic tasks linked with execution. These areas are covered in this report.

Governance Defined

As we discussed in our report “Integrated IT Governance Programs for the Digital Enterprise”, governance is a watchword that has been a staple of successful businesses worldwide – for centuries. The Business Dictionary defines governance as “Establishment of policies, and continuous monitoring of their proper implementation, by the members of the governing body of an organization. It includes the mechanisms required to balance the powers of the members (with the associated accountability), and their primary duty of enhancing the prosperity and viability of the organization.”

In business, governance is the way rules, norms and actions are structured, sustained, regulated, and held accountable. The degree of formality depends on the internal rules of a given organization and, externally, with its business partners. As such, governance may take many forms, driven by many different motivations and with many different results. For instance, a government may operate as a democracy where citizens vote on who should govern and the public good is the goal, while a non-profit organization or a corporation may be governed by a small board of directors and pursue more specific aims.”

What is innovation governance?

For smaller companies, managing innovation can perhaps be straightforward, but for very large conglomerates it’s going to be more complex. Rigid sets of rules are much less likely to be transferable across all the different sections, leading to a more chaotic innovation style. With so many employees, it may also be difficult to engage with them successfully and instill a culture that welcomes innovation as second nature.

In terms of innovation governance itself, it’s also crucial to contextualize governance tactics. However, this can only be achieved after the underlying principles are agreed upon.

This universality of innovation principles makes them the ideal base from which companies can tailor their approach to suit. Additionally, when considering innovation governance, management need to be clear in their mission to achieve company innovation across all areas, not just in products and technologies.

Furthermore, managers should remind their different teams that combined, mutually reinforced innovation is far preferable, and more advantageous, than a siloed approach. Teams need to be actively involved in an integrative innovation process right from the design stage through to testing and marketing.

There are four key elements of innovation governance which are worth noting. They are:

Building a vision and strategy

At the heart of innovation governance is the clear message that innovation is critical to the company’s continued success. The vision should include specifics about what types of innovative projects will be prioritized and what the objectives of them are. This is what we have previously defined in our reference architecture as the Innovation Spectrum.

Sourcing / Developing capabilities

Sustainable business success requires leaders to understand and nurture the right combination of innovation elements for their organization. The challenge is identifying those elements, understanding the current state, and planning appropriate improvements. This is a core value of innovation governance.

Steering execution

Steering execution is the most tangible part of innovation governance because this is where the innovation system produces results. Governance ensures the resources, structures, and guardrails are in place to deliver value to the enterprise.

Establishing and improving structures – Innovation structures need to include specific elements like processes and platforms. However, they can also be about small-scale team dynamics across the organization and beyond, and at individual job level.

We cover this topic extensively in our reports covering “Innovation Execution” and “Supporting Methods and Procedures for Innovation.” However, metrics are covered in this report.

Allocating resources – To innovate effectively, you need the right people, the right resources, and the right financing. Portfolio management is a key innovation capability, allowing for the effective management of different project scopes, objectives, and timeframes.
Managing risk – As innovation usually involves some form of risk, it’s important to ascertain how these risks balance against the potential rewards. Risks must be set against the company’s ambitions, and how well it could tolerate any failures by way of finances, culture, and reputation.

Promoting innovation broadly

Finally, the real value of innovation will only be unleashed if it is communicated well to everyone involved. High-level innovation strategies need to be conveyed to all staff and stakeholders in the organization so they can readily understand what the company is trying to achieve through its innovative endeavors. And all along the journey, successes both great and small must be celebrated to reinforce the commitment to innovation.

Effective communication will also build trust and transparency, which is crucial to company cohesion. In a simpler form, innovation governance looks like this chart.

Figure 5

But how do you begin? For most, it begins with an assessment of the current state of innovation within the enterprise.

Innovation assessment

Innovation assessments help executives make informed decisions about investing in innovation. Every year businesses are allocating more resources to innovation capabilities in pursuit of growth as studies demonstrate the direct link between innovation and financial performance. Some of this confidence seems misplaced as many executives are disappointed with the return on their innovation investments. It is clear to most that just spending more doesn’t automatically lead to success. Top performers in innovation make their investment choices wisely and base it on understanding the gap between their current capabilities and what is needed to deliver outstanding, world-class performance.

An innovation assessment is a tool and a framework that can help a company identify where they currently are in terms of their innovation capabilities. It can also be used to create a roadmap for future improvement. There are three types of assessments that are generally available, a maturity model, a checklist, and a benchmark.

A maturity model can be viewed as a set of structured levels that describe how well the behaviors, practices and processes of an organization can reliably and sustainably produce required outcomes.

A maturity model can be used as a benchmark for comparison and as an aid to understanding – for example, for comparative assessment of different organizations where there is something in common that can be used as a basis for comparison. In the case of the innovation maturity model, for example, the basis for comparison would be the organizations’ innovation strategy, systems, talent, support, and measures.

Figure 6

An innovation maturity model is best used to get an idea of where the overall innovation capability is performing in terms of a formal business process. The data underlying the model can point to general gap areas to focus on for improvement.

A checklist assessment examines the presence or absence of specific elements in the innovation system performance. All elements are generally weighted the same and the gradations in quality are typically not recognized.

Figure 7

The innovation capabilities are measured against a generic model of performance (in the example in the figure, minimum performance level is 2 and best is 4.5 out of 5) and areas that are “out of phase” are the areas where improvement is indicated.

Benchmarking is the practice of comparing innovation capabilities and performance metrics to industry bests and performance by similar companies. Benchmarking is used to measure performance using specific indicators (in this example, 16 key aspects of innovation) resulting in a metric of performance that is then compared to others.

Figure 8

Benchmarks give you the clearest view of where you stand and depending on the tool used can give you other insights into your capabilities beyond gaps. For example, an enterprise can see where their capability strengths lie and determine if they match their innovation strategy.

In figure 8, the vertical axis defines the focus on profit (bottom half of the hemisphere) vs. growth (the top half). The horizontal axis defines the focus on internal innovation (left half) or external innovation (right half). The enterprise represented in the figure more often prioritizes growth and uses internal capabilities to accomplish that growth.

By identifying gaps and focus, an enterprise can begin to understand how their innovation capabilities support (or hinder) their corporate strategy.

Keep the innovation life cycle in mind and build a blueprint of preferred approaches for each element of it. You’ll be able to present a clear rationale and show how innovation capability building is about creating a coherent end-to-end capability, rather than a disconnected set of tools. Build, manage against, and update a development roadmap. An end-to-end process capability won’t quickly emerge, — but a stepwise migration plan, used as an adaptive tool, will make the path clear (reducing employee resistance).

Building a Vision and Strategy

Don’t waste time arguing about what ‘real’ innovation is and whether incremental improvement counts. Innovation is the discipline of tackling existential threats and opportunities early enough for you to have a chance of winning. Who cares if the solution is incremental or disruptive, what matters is that the right problems get solved.

Get specific about the biggest risks to the business over the medium and long term
Be candid about the challenges that the business has never solved before
Re-frame Innovation as the method for finding new solutions to those challenges

As organizations grow, they tend to talk about the things customers buy, instead of the problems customers are paying to solve. The risk is you get stuck tinkering with what you do today, rather than imagining what you could build with customers tomorrow.

Purpose (WHY)

The simple question “Why innovate?” leads us to examine the strategic nature of innovation. We know innovation is a strategic necessity because the purpose of innovation is to ensure that your organization survives, and the evidence overwhelmingly shows that any organization that doesn’t innovate probably won’t stay in business for long. Hence, the innovation process should be aligned with the organization’s strategy, and innovation should be a key factor that defines how the strategy will be realized. The purpose covers whether the organization aims for profit or growth. The purpose also addresses the degree to which the organization focuses on small, incremental improvements or radical innovation, and whether the organization is pursuing both at the same time.

The purpose is the core belief of the business. It’s what drives the organization to seek a leading position in the future. We believe that the company’s purpose shapes the guard rails around innovation. Your why shapes your innovation thesis and these two components form the bedrock upon which to build your innovation strategy and ecosystem.

Innovation Thesis (WHAT)

To lead innovation successfully, every company needs a clear innovation thesis. Leaders need to take a point of view about where the world is going and how they plan to use innovation to respond. This innovation thesis must be aligned with the overall corporate strategy. To develop an innovation thesis, you first need to do the following two things:

Portfolio Analysis — If innovation is a journey, then you need to know where you are as a company before you decide a direction to take. As such, companies must review their current portfolio of products and services. What is the balance in our portfolio in terms of core, adjacent and transformational innovation? Do we have products and services that are in decline and need to be retired? What are the gaps in our portfolio in terms of our core business versus future facing products?
Business Environment — After looking internally at your company, you then need to look at the world around it. What key trends are emerging that are likely to impact your company in the future (i.e. economic, technological or social)? What is the landscape of startups challenging your business? What key changes in customer preferences are you noticing?

When this analysis is complete, you can then develop the innovation thesis. This is a broad statement about where you are as a business, where you think the world is going, what sorts of ideas you think will succeed in that world and how you are going to use innovation to respond (i.e. what you will invest in versus what you will not invest in?

The innovation thesis describes how you are going to get to your future state and is composed of three parts: the statement, the antithesis, and the thesis. This exercise should fit on one page – not more. While there are many forms of the thesis offered by different innovation consultancies, they all boil down to a document that contains the following.

Statement

The statement should be a small paragraph explaining how you see the world and what your innovation ambitions are for the future.

Antithesis

Define what is outside your innovation scope:
We are not going to invest in problem spaces such as:
We are not going to invest in business models:
We are not going to invest in technologies:

Thesis

Define what is inside your innovation scope:
We are going to invest in problem spaces such as:
We are going to invest in business models:
We are going to invest in technologies:

What follows is an Innovation Thesis example for a generic logistics company

Figure 9

An Innovation Thesis Is a Hypothesis

Because we cannot predict the future, your innovation thesis must be developed and viewed as a hypothesis that will evolve over time. Your investments in various ideas will be the experiments you run to test the thesis. On a quarterly or biannual basis, you can then get together as leaders, review progress and refine your thesis. The innovation thesis helps you understand which bets to take, which bets might be out of scope.

Innovation Strategy (HOW)

Once you have established your innovation thesis the next question becomes HOW are you going to take a leading position in the future? To define that is to define your innovation strategy. Strategies should be able to answer the following three simple questions:

Where are you now?
Where do you want to go?
How will you get there?

The digital revolution and globalization are the two main factors that have increased the pace of change and shortened the durability of most business concepts. Companies can innovate or imitate faster now than ever before. With faster information flow and quicker research – nothing remains a secret for long and no product remains unique for long. Capital intensive entry barriers have become meaningless in many industries due to outsourcing. This means that the holy grail of business, a sustainable competitive advantage, is being replaced by the ideas of a transient competitive advantage, where enterprises recognize inflection points and move quickly to take advantage of opportunities.

One result of this shift to transient advantage is that innovation becomes more imperative, which means that organizations really do need to make it a routine capability, rather than pursue it in fits and starts. So, you need a governance structure. You need a well-thought-out process for getting new ideas into the market quickly. You need a way of making sure that the funds are there in the right way. You need to create the right the incentives.

This notion of transient advantage is part of serial innovator, Elon Musk’s approach to the market. In a 2018 earnings call, he tried to downplay the value of “economic moats”, another name for competitive advantages, by saying “I think moats are lame…If your only defense against invading armies is a moat, you will not last long. What matters is the pace of innovation, that is the fundamental determinant of competitiveness.”

We first raised the idea of inflection points in our report “Applying Start-up Concepts to Enterprise Innovation” where we explained leaders must be vigilant in looking for “fault lines”—the weakening foundations in your business model, or the shifting needs of your customer base. The fault lines focus on the fundamentals: whether the business serves the right customers, uses the right performance metrics, is positioned properly in its industry, deploys the right business model, and has employees and partners who possess the required capabilities^[1]. In trying to discover and validate the existence of these faults, you’ll likely discover execution gaps and inflection points. These execution gaps and inflection points form the basis of an innovation strategy that focuses efforts on:

Improving existing products: Taking existing products and increasing their performance along dimensions of value that matter to target consumers.
Developing new products: Creating new products and services to serve existing consumers or to target entirely new markets.
Optimizing revenues: Increasing revenues and profits by implementing new pricing options or business models.
Optimizing costs: Reducing costs and overhead by implementing cost saving initiatives and streamlining operations.

Your innovation strategy forms the bridge between your high-level corporate mission, vision, and intent, and translates all the way down to the day-to-day team activities that will deliver the desired impact results. While no two innovation strategies are the same, all successful strategies outline the following:

Where are you now?
Where do you want to go?
How are you going to get there?

The following diagram visualizes this bridge.

Figure 10

The Strategy Layer

The first part of the bridge, the strategy layer, defines the approach innovation efforts will take over the planning horizon. As mentioned earlier, the Innovation Strategy reflects the destination the business has outlined for itself and how innovation helps it to get there.

The innovation goals around products, revenues, and costs are clear statements that explain what you will do to deliver the value defined by the innovation strategy, each goal is accompanied by several clear business measures that indicate progress towards the destination.

At the next level are the ideas (bets) that you believe will deliver the results. The goal is to have each bet define the assumptions about the solution (product) and the use (market). These concepts and guidance for moving from idea to realized value are further defined in our report “Innovation Execution.” Ideas will come and go as the environment shifts or assumptions about the ideas are proven wrong. This is where the innovation thesis comes into play. Bet selection is guided by anti-thesis and thesis statements within the document.

The Tactical Layer

The tactical layer is where people see what you are going to do. In the tactical layer we have the following items

Promises of value – represent the definition of the problem and the value the solution will bring. As we have said throughout our library of innovation reports, innovation is about taking ideas and turning them into recognized value. In Customer Development terms, this is about confirming who the customers for your product are and whether the problem you believe you are solving is important to them. Only once the value has been established do you then look at what you need to do to deliver it.

Promises of delivery – are the things you will do/build to deliver the value. The notion here is that you take the bets and allocate them to teams or collections of teams or even cross functional groups and ask them to understand how to deliver the bet.

The ideal outcome is a well understood problem with a range of solutions validated with customers through prototyping and research. The expectation is that many of these validation efforts will fail, but this is good because it minimizes expense and risk.

Like sales, innovation is a numbers game. You can think of the innovation as a funnel: ideas > experiments > successes. When we remind ourselves of this, two things happen, you can ‘see’ where things are getting stuck, and you avoid under-investing in experiments.

Organizations with mature innovation programs, can expect 1 in 4 experiments to be a success. At the tactical level, play the numbers game by investing in a portfolio of small experiments.

Get innovation sponsor/team to estimate the potential cost of not solving the problem
Ask the team what a reasonable investment would be to mitigate that risk
Set an experiment budget that gives you space to try at least 4 solutions

Once set, the innovation strategy becomes that narrow set of options that the company has chosen to put considerable weight behind and actively pursue, while knowingly ignoring other potentially attractive options, simply because they are out of bounds with its innovation thesis.

In short, the innovation strategy contains the guiding principles and priorities that you must focus on to ensure that you stand as a winner in the changing landscape of tomorrow.

The need for ambidexterity or balance

So how does the innovation strategy differ from the business strategy or core strategy? Well, to have a chance of standing the test of time and creating a legacy, companies must balance the short-term with the long-term view.

While the core strategy is focused on optimizing the current business model – which includes incremental innovation – your innovation strategy should be focused on creating the company that you strive to become so that you can also thrive in the future.

The innovation strategy is about searching, experimentation, transformation, and new competencies, rather than execution, optimization, defending the status quo, and core competencies.

So, for example, a corporation may choose to focus on building their internal innovation capabilities by revamping their way of searching for and recruiting new talents. Or they may choose to reserve a percentage of their budget for investing in fast-growing startups that are focused on “AI and blockchain technologies”.

For each heading such as “Intrapreneurship”, “Startup Accelerator”, “Innovation Lab”, “Corporate Venture Capital”, etc. there are many subsets of key activities that a corporation may or may not focus on. The sum of all those activities would be the company’s way to execute on their innovation strategy, also known as “Sourcing / Developing Capabilities”.

Sourcing / Developing Capabilities

The innovation capability of your organization is not simply the ability to generate new ideas or create new products. It is the holistic, comprehensive, and all-encompassing ability of your entire organization to respond to changes in the business environment with actions that deliver real value to the organization.

What enables or inhibits an organization’s ability to innovate are the subtle complexities of the interactions and relationships between all the functions of the firm. Each organization contains its own individual seeds of success or failure. A responsibility of innovation governance is to routinely assess, and source / develop the enterprise’s innovation capabilities.

The more mature a corporation becomes in terms of how to drive innovation, the more they tend to build a balanced portfolio approach to innovation, consisting of numerous bets across different areas.

Some of these areas may be better served by the corporation itself, others entirely by outsourcing to external parties, and some in close collaboration with others. The ecosystem consists of all the players and stakeholders that the corporation is interdependent on to execute on its innovation strategy.

The main reasons why ecosystems are imperative for innovation and growth is that you simply can’t be the best at everything. Nevertheless, the business model that you have chosen to focus on may still require you to deliver to your customer’s things that you are not great at creating. So, ecosystems become the way to do that. This is nothing new. Specialization has been at the core of trade for thousands of years.

Another viewpoint is that innovation tends to happen at the intersection of diverse disciplines and the realization that it must be a statistical probability (even if you are a very large company) that the best talent almost certainly resides outside of your company. And to get access to that talent the organization must be willing to form a web of strong interconnecting nodes, i.e., an ecosystem.

The ecosystem consists of all the capabilities that your company chooses to engage with to help you to execute on your strategy and that will move you towards a winning position in the landscape as laid out by your innovation thesis. Those capabilities are outlined the figure below.

Figure 11

The figure represents a spectrum of innovation channels that large organizations can develop / procure to reach growth through innovation. The channels are further described in Attachment A.

This matrix distinguishes between low-cost and high-cost options as well as internal channels and external ones. The low-cost channels represent the starting points from which an enterprise can develop capabilities. The costs increase as the enterprise builds out and institutionalizes their use.

The internal channels are developed and optimized to deliver on internal projects that are what is traditionally known as closed innovation. The external channels are procured to deliver on open innovation.

Figure 12

Open vs Closed Innovation

You may have not heard of “closed innovation”, but I’m sure you’re familiar with it. It’s what just about all known companies in more traditional industries do to birth new products or services.

Closed innovation relies on the notion that internal expertise (ideas), along with an iterative process for managing that expertise, can sustainably produce new businesses. Information is kept within the confines of the company and is not shared with any external parties. Thus, it looks like the funnel on the left, with solid walls representing the limiting yet secure internal development process.

Open innovation

Open innovation, on the other hand, is based on the belief that knowledgeable and creative individuals outside the company can also contribute to achieving strategic goals and that sharing intellectual property both ways is useful for different parties in different ways. The more information is gained, the more educated the decisions ultimately are. The open innovation funnel on the right is more like a hybrid between a sieve and a funnel, as the development process is not limited to individuals within the facilitating company. In addition, the number of ideas is also higher.

Open innovation is a process in which multiple players (within and outside an organization) contribute towards creating and developing new products, services, policies, processes, or business solutions. It might include the involvement of customers, suppliers, and multiple stakeholders such as agencies and consultants.

Usually, firms that promote open forms of collaboration benefit from having access to different capabilities and knowledge, enhancing their competitiveness, and accelerating their innovation process. On one hand, it enables small companies such as start-ups to partner with other players, complementing each other and taking advantage of different perspectives and resources. On the other hand, it helps large companies to speed-up their innovation process and time-to-market, overcoming bureaucracy and inflexible procedures.

While the innovation strategy outlines goals around the enterprise’s own revenues and profits, open innovation expands on those concepts to include value that is added though the ecosystem. Collaboration can occur in all aspects of the business cycle, depending on the context:

At the “Configuration” level which are focused on business delivery, structures, profit model network and internal processes
At the “Offering” level, focused primarily on its product system and product performance
At the “Experience” level, focused on customer engagements, channels, brand and personalization.

The shift from closed innovation to open innovation.

Many consider closed innovation as an antiquated way of doing business. In effect, it is a system that is insistent upon one way of achieving objectives. The consensus was that a business should hoard the best staff and resources. Backed by their own research and development efforts, they would have the key to success. The traditional mindset fostered by closed innovation practices is intended on protecting crucial information and intellectual property solely for securing an advantage over competitors.

On the contrary, open innovation invites outside sources to join in research and development initiatives. In this model, there is a trade of expertise and collaboration for mutual benefit. But are these two models, or principles, mutually exclusive? Of course not. Open innovation should be the preferred vehicle to competitive advantage but not in isolation. Closed innovation has its place, especially when technologies are closely linked and integrated at the product level (Apple) or when closed innovation produces a clear and fundamental advantage over competitors.

Indeed, the approach chosen by companies should depend on its coherence with the strategic, organizational, and managerial contexts and on an acceptable balance between the benefits and costs.

Open innovation is not a replacement for closed innovation but should rather be regarded as complementary. Businesses that combine these two practices and have the internal structures to manage such moves, are better positioned to deliver outcomes in a rapidly changing environment.

Indeed, many companies have been defining new strategies for exploiting the principles of open innovation, exploring ways in which external technologies can fill gaps in their current businesses and looking at how their internal technologies can become the seeds of new businesses outside the current organization.

How an enterprise approaches balancing closed and open innovation investments is an individual decision and should be based how it views a combination its ability to capture the value of proprietary solutions, the viability of open-source solutions, and the complexity of technology being developed.

Regardless of which channels are used, innovation governance shapes the external channels as part of a complete innovation sourcing strategy. Just as experienced marketers reach their end customers through specific distribution channels — not via an ad hoc collection of resellers and outlets — leading companies match innovation-sourcing channels to particular business needs. They match specific sets of sources with their innovation needs and manage them as a group, through established processes, rather than as separate and independent relationships. In that way, the channel relationships are optimized, strengthened, and de-risked in a consistent way.

Intellectual Property Management in open innovation

As mentioned earlier, open innovation is the process of tapping ideas and resources outside your business or organization, not just to advance your own innovation, but to benefit the partner business or organization in some way. Because of this changing dynamic, IP should not be just protected as an asset. It must be used as a tool for innovation. You can trade, share, and distribute it.

The current Intellectual Property laws only lay down rules for protecting, safeguarding, and using IP. Surprisingly, not much has been written or published to answer strategic questions surrounding innovation and how to distribute IP within the innovation partners.

Organizations need to be flexible about IP negotiation and its distribution within the innovation setting. A one-size-fits-all approach to handling IP hampers the establishment of a nurturing environment for innovation and damages the relationship with your innovation partners.

An innovation and IP strategy consists of an internal and external analysis, innovation and IP options, and strategy implementation.

Defensive IP Strategy

In a closed setting, organizations create ideas and innovate on their own. They often protect their knowledge and rights by keeping them secret, protecting them and / or vesting IP rights on them such as patents, copyrights, model / design rights or even trade secrets. In such a closed setup, excluding others is key, and as such the approach is primarily defensive.

Proactive IP Strategy

A more open innovation model assumes a great pool of useful ideas exist outside the walls of the company. In this case, IP is not only used to protect ideas but also to generate revenue: the company collaborates to develop ideas, innovating together. When an organization applies this more open model – protecting IP as well as selling, sharing, or buying it – the IP portfolio will not only be used as an asset, but also as a strategic tool. As a result, the company profits when other parties use their IP and the other way around. This way, the IP can be used proactively rather than just defensively.

While every circumstance is different, engaging your IP experts in determining the best way to leverage IP in an open innovation world could generate benefits beyond a traditional defensive approach.

Steering Execution

Allocating Resources

Every organization innovates and there’s usually a lot of enthusiasm for it. There are individuals who really believe that innovation is important to do their work. And so, they start well-intended but very much ad hoc innovation initiatives.

If you are in an organization and you’re tasked with advancing innovation, you’re never in a green field situation. How do you introduce an innovation strategy without stifling that enthusiasm of the people that already believe that they’re doing the right thing? That they are advancing innovation for the good of the company and for the good of themselves. And they’re really motivated. That’s a real challenge for people who are giving that task or responsibility to advance innovation inside an organization. 75% of the larger organizations do not have a well-structured innovation process. Innovation remains mostly ad hoc.

In addition, most organizations spend their time putting out fires and pursuing projects aimed at catching up to their competitors. They have far too many projects going at once and all too often seriously overcommit their innovation resources. They spend too much time dealing with short-term pressures and not enough time on the strategic mission of innovation. Indeed, in most organizations, management directs all its attention to individual projects—it micromanages project development. But no single project defines a company’s future or its market growth over time; the “set” of projects does.

To successfully execute an innovation strategy requires attention to managing the set and mix of projects, including how resources are allocated between projects. Innovation management must plan how the project set evolves over time, which new projects get added when, and what role each project should play in the overall strategy. The innovation portfolio addresses these issues.

To create the initial portfolio, projects (both active and in the pipeline) are categorized based on the number of resources they consume, how they contribute to the company’s innovation strategy, and the timeframe in which they are expected to be realized (Horizon 1,2,3). Next categorizing projects by type provides useful information about how resources should be allocated. The two dimensions we have found most useful for classifying are the degree of change in the technology needed and the degree of change in the market. The greater the change along either dimension, the more resources are needed, and the more risk is involved. Understanding how the categories differ helps managers predict the distribution of resources accurately and allows for better planning and sequencing of projects over time. Finally, active projects should be pegged to innovation stage (problem/solution fit, solution/market fit, market maturity) so that the scale of investment can be tied to the validation efforts required.

By doing so, you can see where gaps exist in supporting the innovation strategy and make more informed decisions about what types of projects to add/retire and when to add/retire them. Sequencing projects carefully, in turn, gives management greater control of resource allocation and utilization. The portfolio also reveals where innovation capabilities need to be strong. Over time, companies can focus on procuring or developing the innovation capabilities needed across the entire portfolio.

Finally, the portfolio will enable an enterprise to improve the way it manages the innovation system. Simply adding projects to the active list—a common practice at many companies—endangers the long-term health of the development process. Management needs to create a set of projects that is consistent with the company’s innovation strategies rather than selecting individual projects from a long list of ad hoc proposals. Once the portfolio is built it becomes the basis for ongoing management.

Portfolio Management

Any well-managed innovation process includes mechanisms to track ongoing initiatives and ensure that they are progressing according to plan. Companies traditionally rely on stage-gate processes to assess projects periodically, recalculate their projected ROI according to any changed conditions, and decide whether they should get a green light. But such projections are only as reliable as the market insight the company can glean. In the case of a core product extension, that insight is usually sufficient: Customers can say whether they would like a proposed product variant and, if so, how much they’d be willing to pay for it. However, if the innovation initiative involves an entirely new solution—one that customers may not even know they need—traditional stage-gate processes are dangerous. It’s impossible to predict fifth-year sales for something the world has never seen before.

Moreover, whereas portfolio management for core or near-adjacent innovation involves gradually finding a small set of winners from among a vast number of ideas, the process is very different for transformational innovation. Here the challenge is to take a small number of possibly game-changing ideas and ensure that they emerge from the pipeline stronger. A company must spend sufficient time up front exploring what’s possible, constantly expanding the options available in pursuit of the right big idea. In other words, transformational efforts are not generally managed with a funnel approach; they require a nonlinear process in which potential alternatives remain undefined for a long period of time. This is another reason why a stage-gate process is so lethal to transformational innovation: It results in the rejection of promising options before they are properly explored.

Investment Allocation

As we discussed in our “Innovation Reference Architecture” report, Companies need to think about innovation in terms of investment and effort horizons. Most efforts related to core and growth innovation (Horizon 1 and some Horizon 2) are smaller-scale projects that don’t need major infusions of cash. They can and should be funded by the relevant business unit’s P&L through annual budget cycles.

Bold transformational efforts (Some Horizon 2 and Horizon 3) typically require sustained—and sometimes significant—investment. Their funding should come from an entity that can rise above the fray of annual budget allocation.

However, companies should avoid the “innovation tax” approach, whereby the C-suite asks the business units to contribute a percentage of their budgets to transformational initiatives (under the theory that innovation benefits the whole company, so everyone should support it). Business units rarely see their “contribution” as going to a good cause; they simply perceive that the corporate office is siphoning off a percentage of their budgets and come to regard the innovation team as the bad guys. Companies might instead create a completely different funding structure for transformational innovation, one that’s separate from the regular P&Ls of the business.

Finally, an established enterprise that is retiring legacy solutions with substantial technical obsolescence might allocate some budget to Horizon 0 efforts (retiring products, sunsetting support, etc.)

We believe that the value return ratio on projects is roughly the inverse of that ideal funding allocation described in the traditional 3 horizon model: Core innovation efforts (70% of funding) typically contribute 10% of the long-term, cumulative return on innovation investment; growth initiatives (20% funding) contribute 20%; and future / transformational efforts (10% funding) contribute 70%.

In summary, a management team should arrive at a ratio that it believes will deliver better ROI in the form of revenue growth and market capitalization, discover how far its current allocation is from that ideal, and come up with a plan to close the gap. Also, managers need to think about aligning innovation initiative funding with risk by adopting the notion of innovation accounting.

Innovation Accounting

Innovation Accounting is the process of investing and measuring the innovation within an organization. Especially when you are still creating and testing ideas, there needs to be non-financial indicators for success. That is why every modern organization needs innovation accounting next to traditional financial accounting.

Innovation Accounting focuses on managing the following three innovation activities:

Making investment decisions on different products at different points in their innovation journey.
Tracking and measuring the success of specific innovation projects.
Assessing the impact that innovation is having on the business.

Innovation accounting allows management to make small incremental investments, while giving innovators the space they need to test their ideas in the marketplace. This is how startups make progress and is a model that enterprises should consider in driving sustainable innovation programs. Risk is mitigated and flexibility is achieved by using available funding to successfully reach a milestone, assessing results, and then asking for the next increment to reach a subsequent milestone.

Successful innovation is about combining new ideas with sustainably profitable business models. This definition tells us what innovators should be doing. Creativity is a first step.

The next step is to test whether there is a good business model. That’s where using tools like the business model canvas and traction metrics make sense. As each traction threshold is reached, key aspects of the business model are validated, risk is removed, and more investment is warranted.

This evidence-based structure can be used by managers to make investment decisions. Through innovation accounting, the manager and the innovator can work together to transform ideas into realized value.

Managers can make small incremental investments in ideas based on the evidence provided. This stops teams from getting a huge sum in the beginning. It is the request for huge sums that cause managers to pause and ask for all the information before they pull the trigger. It also prevents many ideas from seeing the light of day because the innovator does not want to spend all his/her personal capital (reputation, relationships) on something that may not pan out.

But if teams only requested small amounts to first test their ideas, it would change the conversational dynamics. Throughout the innovation cycle, progress should be measured based on how well teams are doing in their journey towards market/product fit. This allows managers to stop projects that are not working and double-down on those that are having some success and becoming more attractive to the market.

With incremental investing, companies can now make many small bets, rather than a few huge bets. This is transformational because the more bets a company makes, the more likely it is to find something that works to advance the strategy.

Innovation Accounting asks us to consider two questions for every project:

Are we making progress towards our outcome hypothesis (our promise of value)?
How do we know?

In the world of Lean Startup this is known as a “leap of faith assumption”; one that requires that we understand and validate our value and growth hypotheses before we move further forward with execution. This becomes a basic part of the economic framework that drives effective solution development.

To answer these questions, and make better economic decisions, we support innovation accounting by using leading indicators, actionable metrics focused on measuring specific early outcomes using objective data. Leading indicators are designed to harvest the results of development and deployment of a Minimum Viable Product (MVP). These indicators may include non-standard financial metrics such as active users, hours on a website, revenue per user, net promoter score, and more.

It’s important to be aware of vanity metrics, which are indicators that do not truly measure the potential success or failure of the real value of an initiative. While they may be easy to collect and manipulate, they do not necessarily provide insights on how the customer will use the product or service. Measures such as the number of registered users, number of raw page views, number of downloads may provide some useful information or make us feel good about our development efforts, but they may be insufficient to provide the evidence necessary to decide if we should pivot or persevere with the initiative’s MVP.

Finally, there is the question of what measurements should inform management. For core or adjacent initiatives, traditional financial metrics are entirely appropriate. But using such metrics too early in transformational efforts can kill potentially great ideas. For instance, net present value and ROI calculations, commonly used to assess core and near-adjacent initiatives, require assumptions about adoption rates, price points, and other key variables—which in turn require customer input. Such input is impossible to obtain for something the world does not yet know it needs.

Managers should discuss thoughtfully where economic and noneconomic metrics, along with external and internal metrics, are most appropriate. Traditional stage-gate systems operate at the intersection of economic and external metrics—they estimate how much money the company will make when its innovation is launched in the outside world. And, again, this combination is appropriate for evaluating core or near-adjacent initiatives because the information is obtainable and largely accurate.

However, companies should use the opposite—a combination of noneconomic and internal metrics—to assess transformational efforts in their early stages; this can enhance the team’s ability to learn and explore. For example, what if the only hurdle an initiative must clear to receive continued investment is that the company is likely to learn (not yet earn) from it?

Eventually a company must focus on the hard economics of a transformational project. But that can wait until there’s something ready to pilot and launch.

Innovation accounting is also transformational because it now provides a methodology to manage innovation, whereas before innovation was mostly thought of as a creative process. Understanding the last piece of the innovation accounting scope requires moving into our next section, managing risk.

Managing Risk

Managing a portfolio of innovation initiatives should obey one central principle: evolutionary selection. The decision on whether to scale up an initiative, e.g., a new technology or business model, is made when further information has been gained from the previous project stage. Much of this needed familiarity can come only through experimentation and testing, rather than from vision or analysis. This suggests staging investments across the innovation portfolio depends on the associated risk and uncertainty. Therefore, big investments (in total spend) are usually made in Horizon 1, medium investments in Horizon 2, whereas the high-risk profile of activities in Horizon 3 suggests making smaller investments. This highlights the importance of pilot projects, prototypes, and iterative market-testing and learning before initiatives and investment scale up.

The solution to managing risk across the portfolio is to pursue a disciplined, systematic process that will distribute your innovations more evenly across the spectrum of risk. Two tools, used in tandem, can help companies do this.

The first, the risk matrix, will graphically reveal risk exposure across an entire innovation portfolio.

The second, the R-W-W (“real, win, worth it”) screen, sometimes known as the Schrello screen, can be used to evaluate individual projects. Versions of the screen have been circulating since the 1980s, and since then a growing roster of companies, including General Electric, Honeywell, Novartis, Millipore, and 3M, have used them to assess business potential and risk exposure in their innovation portfolios.

Although both tools, and the steps within them, are presented sequentially here, their actual use is not always linear. The information derived from each one can often be reapplied in later stages of development, and the two tools may inform each other. Usually, innovation teams quickly discover when and how to improvise on the tools’ structured approach to maximize learning and value.

The Risk Matrix

To balance its innovation portfolio, a company needs a clear picture of how its projects fall on the spectrum of risk. The risk matrix employs a unique scoring system and calibration of risk to help estimate the probability of success or failure for each project based on how big a stretch it is for the firm: The less familiar the intended market (x axis) and the product or technology (y axis), the higher the risk. A project’s position on the matrix is determined by its score on a range of factors, such as how closely the behavior of targeted customers will match that of the company’s current customers, how relevant the company’s brand is to the intended market, and how applicable its technology capabilities are to the new product.

A portfolio review team – typically consisting of senior managers with strategic oversight and authority over development budgets and allocations – conducts the evaluation, with the support of each project’s development team. Team members rate each project independently and then explain their rationale. They discuss reasons for any differences of opinion and seek consensus. The resulting scores serve as a project’s coordinates on the risk matrix. The determination of each score requires deep insights.

Once the risk matrix has been completed, it typically reveals two things: that a company has more projects than it can manage well, and that the distribution of Horizon 1, 2, and 3 innovations is skewed towards Horizon 1. Most companies will find that most of their projects cluster in the bottom left quadrant of the matrix, and a minority skew toward the upper right. This imbalance is unhealthy if unsurprising. Discounted cash flow analysis and other financial yardsticks for evaluating development projects are usually biased against the delayed payoffs and uncertainty inherent in Horizon 3 innovations. What’s more, Horizon 1 projects tend to drain R&D budgets as companies struggle to keep up with customers’ and salespeople’s demands for a continuous flow of incrementally improved products. The risk matrix creates a visual starting point for an ongoing dialogue about the company’s mix of projects and their fit with strategy and risk tolerance. The next step is to look closely at each project’s prospects in the marketplace.

Figure 13

Each dot in figure 13 stands for one innovation project in an imaginary company’s portfolio. The size of each dot is proportional to the project’s estimated value. (Companies may choose to illustrate estimated development investment or some other financial measure instead.) This portfolio, dominated by relatively low-risk, low-reward projects, is typical in its distribution. How projects get positioned on the matrix based on evaluating some statements about the project is shown in Attachment B.

Screening with R-W-W

The R-W-W screen is a simple but powerful tool built on a series of questions about the innovation concept or product, its potential market, and the company’s capabilities and competition as represented in figure 14.

Figure 14

The R-W-W screen is not an algorithm for making go/no-go decisions but, rather, a disciplined process that can be employed as part of portfolio management at multiple stages of the innovation cycle to expose faulty assumptions, gaps in knowledge, and potential sources of risk, and to ensure that every avenue for improvement has been explored. The R-W-W screen can be used to identify and help fix problems that are miring a project, to contain risk, and to expose problems that can’t be fixed and therefore should lead to termination.

Innovation is inherently messy, nonlinear, and iterative. For simplicity, this section focuses on using the R-W-W screen in the early stages to test the viability of product concepts. However, a given product would be screened repeatedly during development – at the concept stage, during prototyping, and early in the launch planning. Repeated assessment allows screeners to incorporate increasingly detailed product, market, and financial analyses into the evaluation, yielding ever more accurate answers to the screening questions.

R-W-W guides an innovation team to dig deeply for the answers to six fundamental questions:

It is Real?
- Is the market real?
- Is the product real?
Can We Win?
- Can the product be competitive?
- Can our company be competitive?
Is It Worth Doing?
- Will the product be profitable at an acceptable risk?
- Does launching the product make strategic sense?

The innovation team answers these queries by exploring an even deeper set of supporting questions. The team determines where the answer to each question falls on a continuum ranging from definitely yes to definitely no. A definite no to any of the first five fundamental questions typically leads to termination of the project, for obvious reasons. For example, if the consensus answer to Can the product be competitive? is a definite no, and the team can imagine no way to change it to a yes (or even a maybe), continuing with development is irrational.

There are times when the product and market are real but it’s not a good fit for the capabilities and desires of the business itself. Just because a product doesn’t fit those aspects doesn’t mean it doesn’t have value. An enterprise can extract value from product that is proven viable and valuable from outside of the business. In other words, through one of the ways mentioned in the IP section in terms of capturing value from the IP generated in the innovation effort. Now let’s step through the aspects of the model.

Is It Real?

Figuring out whether a market exists and whether a product can be made to satisfy that market are the first steps in screening a product concept. Those steps will indicate the degree of opportunity for any firm considering the potential market, so the inquiring company can assess how competitive the environment might be right from the start.

One might think that asking if the envisioned product is even a possibility should come before investigating the potential market. But establishing that the market is real takes precedence for two reasons: First, the robustness of a market is almost always less certain than the technological ability to make something. This is one of the messages of the risk matrix, which shows that the probability of a product failure becomes greater when the market is unfamiliar to the company than when the product or technology is unfamiliar. A company’s ability to crystallize the market concept – the target segment and how the product can do a better job of meeting its needs – is far more important than how well the company fields a fundamentally new product or technology.

Second, establishing the nature of the market can head off a costly “technology push.” This syndrome often afflicts companies that emphasize how to solve a problem rather than what problem should be solved or what customer desires need to be satisfied.

Whether the market and the product are real should dominate the screening dialogue early in the development process, especially for Horizon 2, 3 innovations. In the case of Horizon 1 innovations, a close alternative will already be on the market, which has been proved to be real.

Is the market real? A market opportunity is real only when four conditions are satisfied:

The proposed product will clearly meet a need or solve a problem better than available alternatives.
Customers can buy it; Will budgetary constraints prevent customers from buying? Are there regulatory requirements that the new product may not meet? Are customers bound by contracts that would prevent them from switching to a new product? Could manufacturing or distribution problems prevent them from obtaining it?
The potential market is big enough to be worth pursuing; A market opportunity isn’t real unless there are enough potential buyers to warrant developing the product
And customers are willing to buy the product. Are there subjective barriers to purchasing it? If alternatives to the product exist, customers will evaluate them and consider, among other things, whether the new product delivers greater value in terms of features, capabilities, or cost.

Even when customers have a clear need or desire, old habits, the perception that a switch is too much trouble, or a belief that the purchase is risky can inhibit them. Customers may also be inhibited by a belief that the product will fail to deliver on its promise or that a better alternative might soon become available. Addressing this reluctance requires foresight into the possibilities of improvement among competitors.

Is the Product Real?

Is there a clear concept? Before development begins, the technology and performance requirements of the concept are usually poorly defined, and team members often have diverging ideas about the product’s precise characteristics. This is the time to expose those ideas and identify exactly what is to be developed. As the project progresses and the team becomes immersed in market realities, the requirements should be clarified. This is what is known in Lean Startup as experimenting your way to an MVP.
Can the product be made? If the concept is solid, the team must next explore whether a viable product is feasible. Could it be created with available technology and materials, or would it require a breakthrough of some sort? If the product can be made, can it be produced and delivered cost-effectively, or would it be so expensive that potential customers would shun it? Feasibility also requires either that a value chain for the proposed product exists or that it can be easily and affordably developed, and that de facto technology standards (such as those ensuring compatibility among products) can be met. This is what is called a Minimum Marketable Product.
Will the final product satisfy the market? During development, trade-offs are made in performance attributes; unforeseen technical, manufacturing, or systems problems arise; and features are modified. At each such turn in the road, a product designed to meet customer expectations may lose some of its potential appeal. Failure to monitor these shifts can result in the launch of an offering that looked great on the drawing board but falls flat in the marketplace. In Lean Startup, this is where you start demonstrating traction.

At this point, using Lean Startup language, the experiments have proven the hypotheses around problem/solution fit and product/market fit.

Can we win?

After determining that the market and the product are both real, the project team must assess the company’s ability to gain and hold an adequate share of the market. Simply finding a real opportunity doesn’t guarantee success: The more real the opportunity, the more likely it is that hungry competitors are eyeing it. And if the market is already established, incumbents will defend their positions by copying or leapfrogging any innovations.

The questions at this stage of the R-W-W screening carefully distinguish between the offering’s ability to succeed in the marketplace and the company’s capacity – through resources and management talent – to help it do so.

Can the product be competitive?

Customers will choose one product over alternatives if it’s perceived as delivering superior value with some combination of benefits such as better features, lower life-cycle cost, and reduced risk. The team must assess all sources of perceived value for a given product and consider the question

Does it have a competitive advantage? Can someone else’s offering provide customers with the same results or benefits? The team should also consider whether the product offers additional tangible advantages – such as lifetime cost savings, greater safety, higher quality, and lower maintenance or support needs – or intangible benefits, such as greater social acceptability (think of EV cars and vegan leather products) and the promise of reduced risk that is implicit in a trusted brand name.
Can the advantage be sustained? Competitive advantage is only as good as the company’s ability to keep imitators at bay. The first line of defense is patents. The project team should evaluate the relevance of its existing patents to the product in development and decide what additional patents may be needed to protect related intellectual property. It should ask whether a competitor could reverse engineer the product or otherwise circumvent patents that are essential to the product’s success. If maintaining advantage lies in tacit organizational knowledge, can that knowledge be protected? For example, how can the company ensure that the people who have it will stay? What other barriers to imitation are possible?
How will competitors respond? Assuming that patent protection is (or will be) in place, the project team needs to investigate competitive threats that patents can’t deflect. A common error companies make is to assume that competitors will stand still while the new entrant fine-tunes its product. Thus, the team must consider what competing products will look like when the offering is introduced, how competitors may react after the launch, and how the company could respond. Finally, the team should examine the possible effects of this competitive interplay on prices. Is the product price competitive and would the product survive a sustained price war?

Can our company be competitive?

After establishing that the offering can win, the team must determine whether the company’s resources, management, and market insight are better than those of the competition. If not, it may be impossible to sustain advantage, no matter how good the product.

Do we have the right resources? The odds of success increase markedly when a company has or can get resources that both enhance customers’ perception of the new product’s value and surpass those of competitors. Superior engineering, service delivery, logistics, or brand equity can give a new product an edge by better meeting customers’ expectations.
Do we have appropriate management? Here the team must examine whether the organization has direct or related experience with the market, whether its development-process skills are appropriate for the scale and complexity of the project, and whether the project both fits company culture and has a suitable champion.
Can we understand and respond to the market? Successful product development requires access to market research tools, an openness to customer insights, and the ability to share them with development-team members. Repeatedly seeking the feedback of potential customers to refine concepts, prototypes, and pricing ensures that products won’t have to be recycled through the development process to fix deficiencies.

Is it worth it?

Will the product be profitable at an acceptable risk?

Are forecasted returns greater than costs? Few products launch unless top management is persuaded that the answer to this question is definitely yes. This requires projecting the timing and amount of capital outlays, marketing expenses, costs, and margins; applying time to breakeven, cash flow, net present value, and other standard financial performance measures; and estimating the profitability and cash flow from both aggressive and cautious launch plans. Financial projections should also include the cost of product extensions and enhancements needed to keep ahead of the competition.
Are the risks acceptable? A forecast’s riskiness can be initially assessed with a standard sensitivity test: How will small changes in price, market share, and launch timing affect cash flows and breakeven points? A big change in financial results stemming from a small one in input assumptions indicates a high degree of risk. The financial analysis should consider opportunity costs: Committing resources to one project may hamper the development of others.

Does launching the product make strategic sense?

Even when a market and a concept are real, the product and the company could win, and the project would be profitable, it may not make strategic sense to launch. To evaluate the strategic rationale for development, the project team should ask two more questions.

Does the product fit our overall growth strategy? In other words, will it enhance the company’s capabilities by, for example, improving or expanding sourcing, delivery, or support capabilities? Will it have a positive or a negative impact on brand equity? Will it cannibalize or improve sales of the company’s existing products? Will it enhance or harm relationships with stakeholders – dealers, distributors, regulators, and so forth? Does the project create opportunities for follow on business or new markets that would not be possible otherwise? These questions can serve as a starting point for what a thorough evaluation of the product’s strategic fit must be.
Will top management support it? It’s certainly encouraging for a development team when management commits to the initial concept. But the ultimate success of a project is better assured if management signs on because the project’s assumptions can withstand the rigorous challenges of the R-W-W screen.

Each section and its respective questions provide an array of assumptions to be turned into hypotheses and validated. So, when we say the answer in the R-W_W framework is a Definite Yes or Definite No, the next question to ask is How do we know? Finally, the sections are not sequential; questions about company capabilities and strategic alignment are evaluated along with ones quantifying product and market during portfolio reviews.

Ultimately, that is what an evidence-based approach to innovation is all about. An evidence-based approach is about measuring and eliminating risk, about consciously managing a portfolio of potential and existing customer value, and of having ways to test, validate and learn continuously.

In the world of start-ups, entrepreneurs think in terms of runway and burn. How much will it cost me to get to problem/solution fit? How much will it cost me to get to product/market fit? Investors determine whether they are willing to continue funding or cut bait. Portfolio Management plays a similar role in determining when to continue or cut bait on an innovation project. If the experiments are making progress towards demonstrating fit, then as long as the innovation is aligned with the strategy, the program can continue. If the project is not proving to be a fit, then a pivot or retirement decision can be facilitated as part of the portfolio review.

Establishing and Improving Structures

While we cover the operational aspects of execution and support in our reports covering “Innovation Execution” and “Supporting Methods and Procedures for Innovation,” this section focuses on measuring the health of the innovation system itself.

There is a myriad of potential metrics that could be deployed to track your innovation output, some more complex than others. There is no right or wrong answer. It is about choosing the most appropriate measures for your own business objectives and goals.

Many companies (including TechVision) that specialize in innovation support recommend three types of key performance indicators (or KPIs) that should be tracking the throughput of an innovation system:

Reporting KPIs are connected to Innovation Practice. These focus on product teams, the ideas they are generating, the experiments they are running and the progress they are making from ideation to scale.

Governance KPIs are connected to Innovation Governance. The focus here is on helping the company make informed investment decisions based on evidence and innovation stage.

Global KPIs are connected to Innovation Strategy. The focus here is on helping the company examine the overall performance of their investments in innovation in the context of the larger business.

This table contains a sampling of the metrics that can be captured as ideas move towards recognized value.

Innovation Stage	Reporting KPIs	Governance KPIs	Global KPIs
Creating Ideas	· number of ideas generated · number of ideas chosen · assumptions identified · hypotheses developed · minimum fail criteria set	· number of ideas submitted · number of decisions made · products moved to next stage · average amount invested · alignment with thesis · alignment with portfolio · assumption-to-knowledge ratio	· number of products by innovation type (core, adjacent, transformational) · number of products per substage (generate, select, review)
Testing Ideas	· number of experiments run · number of customer conversations · number of customer interviews · number of customer observations · number of prototypes/MVPs built · number of hackathons/design sprints · experiment results · decisions made (pivot or persevere) · cost-per-learning · time-cost-per-learning · learning velocity · validation velocity	· number of products in pipeline · number of applications · submitted number of decisions made · number of products moving stages · average amount spent per stage · stage-gate criteria · assumption-to-knowledge ratio · % of products at problem-solution fit · % of products at product-market fit · % of products ready for scale	· number of products by innovation type (core, adjacent, transformational) · number of products per substage (problem, solution, business) · % of products aligned to thesis · number of patent filings · partnerships and collaborations · process improvement metrics · number of patents granted · new business models ready to scale · cost savings · innovation conversion · new market segments entered
Scaling Ideas	· number of growth tactics tested · number of experiments run · number of customers engaged · number of channels tested · number of usability tests run · validation velocity · cohort analysis · pirate metrics (acquisition, activation, retention, revenue, referral) · Growth Engines (lifetime value, retention rates, viral coefficients) · revenues and profits	· number of products in pipeline · number of reviews submitted · number of decisions made · number of products moving · sub-stages average amount · spent per sub-stage · stage-gate criteria · average growth rates · growth hypotheses validated return on investment (ARR, IRR, NPV) process · improvement metrics	· new products by type of innovation (core, adjacent, transformational) · % of products aligned to thesis · number of patent filings · number of products built using lean · partnerships and collaborations · innovation contribution · cost savings · innovation conversion · market share (new segments, shelf space, share of wallet, distribution footprint) · patents granted · customer satisfaction

Table 1

Key Innovation Maturity Metrics

The following are the summary-level input and output metrics that reflect innovation maturity. These measures quantify the value of the innovation system, the organization’s ability to execute, and leadership support and engagement.

Category	Input Metrics	Output Metrics
Return on Investment	§ % of capital invested in innovation activities such as submitting and reviewing ideas for new products and services and developing ideas through an innovation pipeline § Percentage of “outside” vs. “inside” inputs to the innovation process (open innovation) § Number of new products, services, and businesses launched in new markets in the past year	§ Actual vs. targeted breakeven time (BET) § % of revenue/profit from products or services introduced in the past X years § Royalty and licensing income from patents/intellectual property
Organizational Capability Metrics	§ % of employees who have received training and tools for innovation – e.g., instruction in estimating market potential of an idea § Existence of formal structures & processes that support innovation § Number of new competencies (distinctive skills and knowledge domains that spawn innovation)	§ Number of innovations that significantly advance existing businesses § Number of new-to-company opportunities in new markets
Leadership Metrics	§ % of executives’ time spent on strategic innovation versus day-to-day operations § % of managers with training in the concepts and tools of innovation § % of product/service or strategic innovation projects with assigned executive sponsors	§ Number of managers that become leaders of new category businesses

Table 2

These tables are not meant to be prescriptive but rather provide a list of options for those looking to instill metrics within their own organizations.

Getting started with innovation metrics

The metrics we recommend above are for companies that have been innovating for a while and have institutionalized the collection and reporting. If you are just starting the journey, here are a few guidelines that can be useful in developing your own innovation metrics.

You can’t measure what hasn’t happened – Focus on input. For companies starting the innovation journey, you’ll need to discover/build the system and processes before you can measure the output. Focus on metrics that encourage training and innovation skill development and on recruiting individuals with the right attitude and mindset for innovation.
One size does not fit all. The most critical variable is the level of “innovation maturity.” You should track metrics that encourage the development of your innovation system – no matter what the starting point. Also, metrics will vary across industries because some of the competencies and skills required for innovation will be different.
Keep it simple. Avoid the tendency to collect every possible piece of data. Create metrics that are simple, meaningful, and intuitive. Metrics will have the most impact if they can become commonly used and understood throughout the company.
Leverage existing metrics and methodologies. There may be innovation metrics in place somewhere in your company – seek them out and assess them for broader use. Also, if your company currently uses a method such as Balanced Scorecard or Value-Based Management, reconcile your metrics with that methodology. If your company uses a management dashboard, make sure to include the innovation metrics. In our experience, “modified” metrics are more readily accepted than additional brand-new metrics.
Don’t be afraid to modify or adapt the metrics. Consider metrics a living thing. As your company evolves towards greater innovation maturity, your metrics should reflect that maturity. If a particular metric isn’t providing the insight or guidance that you had hoped, adjust it, or replace it.
Align your metrics with the goals of your innovation program. Are you seeking game-changing, radical innovation or incremental innovation or both? Is the goal to innovate in the core business as well as building future businesses? Are you attempting to develop a company-wide innovation that invites everyone to participate, or will innovation be the job of a select group of innovators? Will you rely only on internal ideas or seek innovations from customers, partners, and other outside sources? Are there specific targets or markets for your innovation program? Specific problems you want to solve? First, be very clear about the goals of your innovation program and select metrics that measure your progress towards these goals.
Include at least one or two customer-driven metrics. Measure customer-driven metrics such as sales from new products or service adoption to complement the internally focused metrics, because if your innovation doesn’t matter to customers, it probably needs to be re-focused.
Communicate your innovation progress. A simple dashboard of your 2 or 3 most important innovation metrics goes a long way in building an innovative culture. Review your innovation dashboard in leadership meetings to keep executive attention focused on your innovation progress. Let everyone know you are on the right track, and when innovations come to fruition, make sure you communicate the impact.

Always keep in mind the purpose of your innovation metrics: to track your progress towards a robust and productive innovation system and capability, and to communicate that progress to employees. With these starting guidelines in mind, it should be less of a daunting task to measure your innovation progress. Ultimately, a company must go beyond a corporate slogan to produce results. Having business units and individual performance synced up with goals is the only way to generate a sustained change in behavior.

Don’t assume that a sophisticated or comprehensive measurement system replaces the need for management deliberation and decision making. Successful innovation pioneers develop their innovation system in tandem with business decision processes that take advantage of the rich information that metrics can produce. In the end, it’s not just about better knowledge – it’s about better decisions enabled by better understanding. Start small but keep your eye on the real goal: a productive, profitable, and engaging innovation engine.

Promoting Innovation Broadly

As mentioned earlier, the real value of innovation will only be achieved if it is communicated well to everyone involved. High-level innovation strategies need to be conveyed to all staff and stakeholders in the organization so they can readily understand what the company is trying to achieve through its innovative endeavors. And all along the journey, successes both great and small must be celebrated to reinforce the commitment to innovation. Employee engagement is key to any innovation system and this section outlines some steps that can be taken to build and maintain that engagement.

Tell people about it

You’re less inclined to buy a product when its creators don’t promote it; don’t extol its benefits; don’t include you at the center of its advertising. Why would employees want to engage with an innovation program that is similarly not promoted and doesn’t center them in the process?

Prepare Consistent Messaging for Internal Materials – Before you start sending promotional materials out, you’ll need to craft messaging that aligns your overall organizational mission with the goals of your innovation efforts. Your innovation thesis and strategy go a long way in providing consistency. And you’ll need make those materials extraordinary; more on that later.
Get Creative with Branding – Coming up with a name for your program seems like a fluffy step, but it can help set a precedent for future innovation efforts. Companies like Adobe (KickBox), and LinkedIn ([in]cubator) are promoting their innovation programs. For instance, Kickbox (which is now an independent foundation) has printable materials, training, instructional videos, and events promoting the program. If it’s obvious that a lot of work went into promoting the program, employees are likely to think the company is serious about innovation and give work back.
Make the Message Extraordinary – The art of the extraordinary demands that promoters (marketers) move beyond what is typically defined as their comfort zone – the usual, regular, or customary – and to embrace the unconventional, the bold, and the provocative. Extraordinary makes innovation memorable and drives folks to share or engage with the content rather than ignore it.

The Magic Number Seven – In marketing, the “rule of seven” states that the more people see or hear something, the more they remember it. In fact, studies have shown that people need to see a message at least seven times before it sinks in. It supports the notion that people learn, and therefore remember, by repetition.

This same principal can be applied to promoting innovation – the more messages (online and offline) that are out there, the more people are likely to recognize the presence and importance of the innovation program, leading to trust and participation.

Give employees a reason to care

The fact is, if people aren’t feeling connected to your company, there’s little incentive for them to be innovative. Make sure you keep your team in the loop on your firm’s strategies and challenges and invite their input.

Employees who are involved early on in processes and plans will be motivated to see them through to completion. Their active participation will fuel more ideas than if they learn of initiatives second-hand.

Ensure all your employees know that you want to hear their ideas. Unless they understand how innovating your business processes can keep your firm competitive, your efforts at encouraging creative thinking risk falling flat.

Calm the naysayers

A key reason people often hesitate to offer fresh proposals is that they worry what others might say. No one wants to have their ideas shot down immediately or become fodder for jokes. Make sure you’re doing all you can to make it safe to brainstorm.

Even if someone makes an unrealistic suggestion, thank the person for thinking creatively. Also make sure that people can offer their recommendations in writing if they’re not comfortable speaking up. Stress to the entire team that you welcome input any way they prefer to share it with you.

Don’t just acknowledge ideas; act on them

The quickest way to dishearten innovative spirits is to encourage them to be innovative, then do nothing with their ideas. Of course, it’s never guaranteed that an idea will fly, but nurturing ideas and trying to build on them is extremely important for fostering an innovation culture. Simple ways to do this include:

Planning further discussions or workshops
Sharing ideas with new people or different teams
Reaching out to customers to get feedback on ideas
Giving people a chance to test their ideas (think Kickbox)
Asking people to present their ideas to a bigger group – even if it’s just for inspiration

In our report “Innovation Execution” we describe many approaches for rapidly creating, testing, and validating prototypes, building a minimum viable product, and if everything goes to plan, developing it into a fully-fledged, product, business, or solution. Part of promoting innovation is making sure, innovators are provided with all the resources they need to successfully launch a new venture, including time to develop their ideas, dedicated advisors, and training.

Give everyone the opportunity to innovate

Innovation should never come from the top down or be restricted to specific teams. It’s been proven that diversity is key to successful innovation, and everyone in your company can bring a fresh perspective to the table.

Google is renowned for encouraging all their employees to set aside time purely to work on personal projects and explore new ideas, which is a smart and simple way to encourage innovation and boost employee engagement.

Provide people with dedicated resources so they can pursue their ideas. This includes coaching, funding, and access to subject matter experts – and when they’re ready, connect them with customers to trial product prototypes. Anyone can submit an idea, at any time, through idea management tools as described in our report “Supporting Methods and Procedures for Innovation.” These ideas are reviewed by a dedicated team and the ones with the most potential are given the opportunity to start building a new business and invited to pitch for investment.

Empower employees & reward creativity

Employees who are trusted to think outside-of-the-box and try new things just may stumble across that next great business innovation. Monetary incentives are not necessary; you can provide employees with a sense of ownership as incentive for their ideas and continue to involve them in the implementation of their process or product innovations. And never forget that regardless of the outcome of an idea, make sure to recognize employees for their time and commitment to the process and thank them for their commitment to innovation. A personalized ‘thank you’ letter is always a nice touch.

Don’t make it too hard to innovate

You may think that it’s easy for employees to offer their ideas, but is it really?

Do what you can to remove the red tape – Consider which internal processes might be stifling innovation. For instance, it can be demoralizing if recommendations must go through multiple layers of approvals in the organization and take a significant time before they’re implemented, if at all.

A perfect example of removing red tape is Kickbox. Its core premise is that the innovator needs to be given the resources and freedom to prove their idea is workable. Each box contains:

Letter from executive: the company wants you to innovate.
Permission from manager: you will have time to pursue your project.
$1000 credit card: you have the money to pursue your innovation project.
- Removes friction from fast moving validation work
- Shows trust: trust people and it fundamentally changes the relationship. “The company really means it because they put their money where their mouth is.”
- Most controversial element. But eliminating risk also eliminates upside and without innovation we will eventually be irrelevant.
Time: permission from manager for 30-40 hours over next 6-8 weeks
Finally, sugar (chocolate bar) and caffeine (coffee gift card) – two of four innovator’s food groups!
Process: 6 well-defined steps to go through when pursuing a project.

The traditional process of approvals assumes it is possible to pick winning ideas. Kickbox turns that assumption on its head by making the ideas prove themselves and thereby overcome selection bias. That does not mean the idea’s sponsor isn’t held accountable, it means that funding is incrementally provided through Portfolio Management reviews as assumptions about the innovation are validated through experimentation. Anywhere along the process the idea may fail, and that’s OK.

Don’t fear failure. take risks

We are taught at an early age that mistakes are bad. And although we never want to encourage reckless behavior in the workplace, the fastest way to kill creativity is to fear failure. Create a culture that turns each failure into a valuable learning experience. Make time to discuss recent failures in weekly meetings and brainstorming sessions. Discuss what went wrong, and how the failure could have been avoided or produced a different outcome. Everyone can learn from mistakes and open dialog about past failures will result in future successes. Never put off the creative flow by penalizing those whose ideas don’t work out.

Create an intrapreneurship program

As Steve Jobs famously said: “you don’t hire smart people to tell them what to do, you hire smart people so they can tell you what to do.” An intrapreneur is a person who develops new ideas and businesses within a company – and it can be absolutely anyone.

Think about creating a structured program that allows employees to pursue their ideas. It provides them with a clear outlet – or sounding board – for new innovations AND shows that you’re serious about it. Intrapreneurship programs are often run by a dedicated team of mentors or coaches, who help employees develop an idea into something more tangible. They also offer support when it comes to other areas of product development, such as marketing or legal considerations.

By encouraging intrapreneurship, companies can tap into employees’ extraordinary potential for innovation. At the same time, this gives an incentive for people to work on new businesses while leveraging the capabilities and resources of established companies

Recommendations

Innovation governance simply means having a consistent approach for making the organization constantly better in the long run. Constant improvement is, after all, just a continuous learning process aiming to drive the business forward, and innovation governance is part of that constant improvement.

This, however, doesn’t mean that there wouldn’t be practices that are more likely to work than others when striving towards greatness in innovation management.

We’ve listed six key factors for successful innovation that we think are worth considering for most businesses.

Constant improvement – Have you ever mastered a skill without a systematic plan and hours of practice? Succeeding in innovation management is all about continuous improvement both as a company and on a personal level. To be able to compete and successfully drive desired progress, you need become better than you were yesterday.

Create value for your customers – Second, and one of the most important success factors for innovation management is the ability to constantly rethink how to operate to keep creating as much value as possible. Whatever you decide to focus on, ask yourself and your team: “Is this really creating more value for our customers?”

Implement the Build-Measure-Learn Loop – Build-Measure-Learn-Feedback Loop is the core component of the Lean Startup Model for building and testing new ideas with velocity. Based on the feedback, you’re able to identify what can be done better and whether to pivot to the new or preserve existing. The experiments and results generated out of these efforts form the basis for evidence-based decision making. This works for individual innovation projects and innovation governance itself.

Allocate resources properly to support your strategy – As there are countless possibilities, it’s vital for you to find the right areas of focus and allocate your resources to support your strategy. Evaluate your assets (both human and financial) and utilize them where they have the most potential. Managing your innovation portfolio is all about finding the right balance. You should allocate your resources according to your strategic goals, unique capabilities and chosen portfolio management principles, such as your investment period, target returns and willingness to tolerate risk.

Develop / Procure Capabilities – Innovation is a group sport, and you need other people to succeed. In fact, you need the right people to succeed. The companies that have gotten innovation right have created a culture of innovation where people are excited to improve everything and are willing and capable of seeing ideas through execution. But that doesn’t mean all those people are in your company. Take advantage of different innovation channels as a means of balancing risks and rewards.

Stay focused – Many companies make the mistake of doing too much and losing focus from what works and what really matters in the long run. Focus on things where you have a realistic chance of becoming the best in the world. From a governance point of view, you should keep in mind that for your innovation teams to stay focused, you need to give your them guardrails and clear goals but also enough freedom to create and test their ideas.

About TechVision

World-class research requires world-class consulting analysts, and our team is just that. Gaining value from research also means having access to research. All TechVision Research licenses are enterprise licenses; this means everyone that needs access to content can have access to content. We know major technology initiatives involve many different skillsets across an organization and limiting content to a few can compromise the effectiveness of the team and the success of the initiative. Our research leverages our team’s in-depth knowledge as well as their real-world consulting experience. We combine great analyst skills with real world client experiences to provide a deep and balanced perspective.

TechVision Consulting builds off our research with specific projects to help organizations better understand, architect, select, build, and deploy infrastructure technologies. Our well-rounded experience and strong analytical skills help us separate the “hype” from the reality. This provides organizations with a deeper understanding of the full scope of vendor capabilities, product life cycles, and a basis for making more informed decisions. We also support vendors in areas such as product and strategy reviews and assessments, requirement analysis, target market assessment, technology trend analysis, go-to-market plan assessment, and gap analysis.

TechVision will provide regular updates on the latest developments with respect to the issues addressed in this report.

About the Author

Gary Zimmerman is an experienced executive known for helping companies deliver new offers and expand markets. Accomplishments include launching four companies, 20+ products, building high-performance organizations, and generating millions in sales.

His experience at Neustar, Respect Network, and Sovrin allows him to provide a broad perspective on a variety of subjects including self-sovereign identity, blockchain, enterprise data management, and the data brokerage industry. His experience in both enterprise and startup product development gives him a unique perspective on innovation.

Attachment A

This matrix of innovation channels an enterprise can explore as part of its develop / procure capabilities efforts. Each cell also contains some prospective metrics that can be used to manage channel effectiveness.

Learn	Transform	Discover	Co-create
Internal Incubator – A virtual or physical space to grow internal startups outside of the core organization and validate the market fit. Key metrics: # transformed processes # projects launched	Innovation Lab – A separate entity that hosts internal ventures with high potential before they are profitable. Key metrics: # successful lab venture # employees in each venture	External Incubator – A (physical) environment to support the growth and evaluate the value of external start-ups. Key metrics: # validated scale-ups # commercial collaborations	Venture Fund – A corporate venture capital fund invests in external opportunities that could create growth outside of the core of the organization. Key metrics: # successful ventures # new values created
Community of Practice – A cross functional group of innovation ambassadors. Key metrics: # practitioners/ ambassadors # people impacted	Innovation Transformation – A central group of innovation leaders responsible for knowledge development. Key metrics: # transformed processes # projects launched	Co-experimentation Track – A joint test between 2 or more organizations to validate the solution fit of an idea. Key metrics: # validated pilots # business synergies	Structural Partnership – A formal collaboration between 2 companies with the aim to launch multiple joint ventures. Key metrics: # successful partnerships # licensed IP
Design Sprint – A short effort to answer business questions through designing, prototyping, and testing with customers. Key metrics: # solution created & selected # business challenges addressed	Internal Accelerator – Separates intrapreneurs outside of the organization to validate the solution fit of ideas. Key metrics: # validated ventures # intrapreneurs/teams	Scouting – Scouting startups is a methodological process to identify relevant startups in your field, validate their potential and engage with their founding members. Key metrics: # start-ups scouted # meetings with founders	External Accelerator – A program to support the validation of external startups. Key metrics: # validated scale-ups # commercial collaborations
Innovation Training – A curriculum to grow the knowledge and interest of employees. Key metrics: # employees trained # mature/ satisfied participants	Center of Excellence – A formal group of experts, that coordinates innovation initiatives, to embed innovation in the organization. Key metrics: # innovation experts # people impacted	Co-creation Session – A short ideation with customers or partners to turn mutual problems into ideas. Key metrics: # ideas co-created & selected # business synergies	Co-development Track – A co-development track aims to validate the market fit of ventures created by 2 or more organizations. Key metrics: # validated ventures # business synergies

Learn

Transform

Discover

Co-create

Internal Incubator – A virtual or physical space to grow internal startups outside of the core organization and validate the market fit.

Key metrics:
# transformed processes

# projects launched

Innovation Lab – A separate entity that hosts internal ventures with high potential before they are profitable.

Key metrics:

# successful lab venture
# employees in each venture

External Incubator – A (physical) environment to support the growth and evaluate the value of external start-ups.

Key metrics:
# validated scale-ups
# commercial collaborations

Venture Fund – A corporate venture capital fund invests in external opportunities that could create growth outside of the core of the organization.

Key metrics:
# successful ventures

# new values created

Community of Practice – A cross functional group of innovation ambassadors.

Key metrics:

# practitioners/ ambassadors

# people impacted

Innovation Transformation – A central group of innovation leaders responsible for knowledge development.

Key metrics:
# transformed processes

# projects launched

Co-experimentation Track – A joint test between 2 or more organizations to validate the solution fit of an idea.

Key metrics:
# validated pilots
# business synergies

Structural Partnership – A formal collaboration between 2 companies with the aim to launch multiple joint ventures.

Key metrics:
# successful partnerships

# licensed IP

Design Sprint – A short effort to answer business questions through designing, prototyping, and testing with customers.

Key metrics:
# solution created & selected
# business challenges addressed

Internal Accelerator – Separates intrapreneurs outside of the organization to validate the solution fit of ideas.

Key metrics:
# validated ventures

# intrapreneurs/teams

Scouting – Scouting startups is a methodological process to identify relevant startups in your field, validate their potential and engage with their founding members.

Key metrics:
# start-ups scouted
# meetings with founders

External Accelerator – A program to support the validation of external startups.

Key metrics:
# validated scale-ups
# commercial collaborations

Innovation Training – A curriculum to grow the knowledge and interest of employees.

Key metrics:

# employees trained
# mature/ satisfied participants

Center of Excellence – A formal group of experts, that coordinates innovation initiatives, to embed innovation in the organization.

Key metrics:
# innovation experts

# people impacted

Co-creation Session – A short ideation with customers or partners to turn mutual problems into ideas.

Key metrics:
# ideas co-created & selected
# business synergies

Co-development Track – A co-development track aims to validate the market fit of ventures created by 2 or more organizations.

Key metrics:

# validated ventures

# business synergies

Attachment B

Positioning Projects on the Risk Matrix – Position each innovation product or concept by completing each statement in the left-hand column with one of the options offered across the top to arrive at a score from 1 to 5. Add the six scores in the “Intended Market” section to determine the project’s x-axis coordinate on the risk matrix. Add the seven scores in the “Product/ Technology” section to determine its y-axis coordinate.

	Intended Market
	…be the same as our present market		…partially overlap with our present market		…be entirely different than our present market or are unknown
Customer’s behavior and decision-making processes will…	1	2	3	4	5
Our distribution and sales activities will…	1	2	3	4	5
The competitive set (incumbents or new entrants) will…	1	2	3	4	5
	…highly relevant		…somewhat relevant		…not at all relevant
Our brand promise is…	1	2	3	4	5
Our current customer relationships are…	1	2	3	4	5
Our knowledge of competitors behavior and intentions is…	1	2	3	4	5
					Total (x axis coordinate)

	Product/Technology
	…is fully applicable		…will require significant adaptation.		…completely differ from those of our current offerings.
Our current development capability…	1	2	3	4	5
Our technology competency…	1	2	3	4	5
Our intellectual property protection…	1	2	3	4	5
Our manufacturing and service delivery system…	1	2	3	4	5
	…are identical to our current service offerings.		…overlap somewhat with those of our current offerings.		…completely differ from those of our current offerings.
Required knowledge bases…	1	2	3	4	5
The necessary product and service functions…	1	2	3	4	5
The expected quality standards…	1	2	3	4	5
					Total (y axis coordinate)

[1] “Knowing When to Reinvent Detecting marketplace “fault lines” is the key to building the case for preemptive change.” by Mark Bertolini, David Duncan, and Andrew Waldeck, Harvard Business Review, 2015

Tags:

Innovation Governance

Abstract

Executive Summary

Introduction

The pandemic forced rapid changes in customer behavior.

Crises tend to reshape spending patterns

B2B enterprises are not immune

Reviewing the innovation reference architecture

Governance Defined

What is innovation governance?

Building a vision and strategy

Sourcing / Developing capabilities

Steering execution

Promoting innovation broadly

Innovation assessment

Building a Vision and Strategy

The Strategy Layer

The Tactical Layer

The need for ambidexterity or balance

Sourcing / Developing Capabilities

Open vs Closed Innovation

Open innovation

The shift from closed innovation to open innovation.

Intellectual Property Management in open innovation

Steering Execution

Allocating Resources

Portfolio Management

Investment Allocation

Innovation Accounting

Managing Risk

The Risk Matrix

Screening with R-W-W

Is It Real?

Can we win?

Is it worth it?

Establishing and Improving Structures

Getting started with innovation metrics

Promoting Innovation Broadly

Tell people about it

Give employees a reason to care

Calm the naysayers

Don’t just acknowledge ideas; act on them

Give everyone the opportunity to innovate

Empower employees & reward creativity

Don’t make it too hard to innovate

Don’t fear failure. take risks

Create an intrapreneurship program

Recommendations

About TechVision

About the Author

Attachment A

Attachment B

Architecture

Artificial Intelligence

Identity

Privacy

Security

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