Just like it is easy to get lost in the wilderness, it is easy to get lost on the path to innovation capability. Building an innovation capability means facing many complex and difficult choices. Multiple paths may look equally attractive, but all involve their own trade-offs. You must choose among paths with far less than perfect information. And then you must make sure that everyone is heading in the same direction, with the same destination in mind. To navigate tough choices and trade-offs, you need an innovation strategy. That is always true of course but especially so for larger enterprises.
In this chapter, I will lay out a conceptual framework for innovation strategy. Then, in Chapter 2, I will describe how you can use this framework to design an innovation strategy that is right for your company.
The Concept of an Innovation Strategy and Why You Need One
A strategy is nothing more than a commitment to a set of coherent, mutually reinforcing policies or behaviors aimed at achieving a specific goal.1 Do not be intimidated by the concept. We all develop and use strategies. “Hit to Jane’s backhand and get to the net” is a strategy you may be using in your Saturday morning tennis game. It does not mean you hit to Jane’s backhand and go to the net every stroke or even every point. It just means you are looking for that opportunity as much as possible because you believe that exploiting Jane’s relatively weak backhand (and getting to the net behind it) gives you the best chance to win (your goal). Similarly, “Eat more vegetables and exercise more” is a wellness strategy you might be pursuing. It does not mean becoming a militant vegetarian and working out like a Navy Seal every day. It just means you start prioritizing vegetables in your diet and exercise in your schedule. It’s not that complicated. Strategies define patterns of behavior and priorities. They are not exhaustive to-do lists.
Company strategies do not need to be complicated. Southwest Airlines, arguably the most successful airline over the past four decades, has had a pretty simple strategy: offer convenient (nonstop and frequent), low-cost service between medium-sized cities not typically served by traditional airlines. This strategy framed many of the company’s subsequent decisions (e.g., which routes? what type of planes? how to staff? etc.). As a principle, strategies should be simple and clear. They should not require a seventy-five-page PowerPoint presentation. (In fact, seventy-five pages is a pretty good indication that this document does not contain a strategy!) Good strategies promote alignment among diverse groups within an organization, clarify objectives and priorities, and help focus efforts around them. In essence, they act like a map and compass. They provide direction. They also speed up decision making. Without a strategy, every decision has to be debated. Should we advertise more this month or less? Should we open a new store in Midtown Manhattan? Should we enter that partnership? Should we launch that product? A strategy should be clear enough to take certain options off the table and to make others no-brainers. Companies regularly create overall business strategies that specify the type of customers they are seeking, the ways they differentiate themselves, and the key value proposition they offer. They also create strategies for how various functions like R&D, marketing, operations, human resources, and finance will support the overall business strategy.
Surprisingly, though, leaders rarely articulate strategies to align innovation with their business strategy. Too often, as with the contact lens company, leaders start the journey of building a new innovation capability with only a vague sense of what they are trying achieve. They do not grapple with the fundamental question, “Why exactly do we want to innovate?” Instead, they start with generalities like “We must innovate to grow” or “We must innovate to stay ahead of competitors,” but these are not strategies. They do not provide any clarity about the specific types of innovation that might help the company achieve its competitive objectives and those that won’t.
A robust innovation strategy specifies the kinds of innovation that are important for the company to pursue. It requires being clear about how innovation is supposed to create value for potential customers and how the company will capture value from innovation. Becton Dickinson’s (BD) strategy around medical device safety in the 1990s had a clear value proposition to focus its innovation efforts. BD makes a wide range of medical devices for either delivering therapeutic products into the body (e.g., syringes and infusion therapy systems) or removing fluids from the body (e.g., blood sample collection systems and catheters). What they all have in common is some kind of sharp cannula to pierce the patient’s skin. “Sharps”—as they are called—expose health-care workers to risks of fluid-borne diseases like AIDS or hepatitis through accidental “needle sticks” or through inappropriate disposal. Recognizing that safety could create a lot of value for the health-care system, BD began to focus its innovation efforts around designing safer devices (e.g., syringes with auto-retractable needles). This was not a one-off effort. It required focused investment over years and over multiple projects, and a commitment to redesigning the entire product portfolio. There was no ambiguity inside the company: safety was not optional. BD’s safety-focused innovation strategy is one of the key reasons the company maintained its dominance and attractive margins in a business that had been rapidly commoditizing.
The innovation strategies of many companies focus on a coherent value proposition. Over the decades, Apple has launched multiple different innovations (the Apple II, the iPod, iTunes, the iPhone, the iPad, the App Store), but they all share a common value proposition theme—make the user experience easy and delightful through intuitive interfaces, integrated hardware and software design, and (increasingly) seamless integration of different aspects of our digital lives (music, photos, communication, shopping, etc.). Amazon’s focus on making the shopper’s experience as convenient and secure as possible shows up in a constellation of innovations—from their one-click checkout and user product reviews to Amazon Prime and Amazon Echo.
Without an explicit innovation strategy, no one actually knows what kinds of innovation are really important to the organization. Anything is possible, and, when anything is possible, everything is potentially important. And when everything is potentially important, nothing is particularly important. If nothing is particularly important, nothing gets done. That’s why good strategies lay the groundwork for good execution. Without clarity around the questions of how innovation is supposed to create value and lead to value capture, different parts of the organization can easily wind up pursuing conflicting priorities. Sales representatives hear daily about the pressing needs of the biggest customers. Marketing may see opportunities to leverage the brand through complementary products or to expand market share through new distribution channels. Business unit heads are focused on their target markets and their particular P&L pressures. R&D scientists and engineers tend to see opportunities in new technologies. A corporate venturing group is looking at riskier long-term bets on young firms with new business models. Every one of these perspectives may be legitimate, and diversity of perspective is critical to successful innovation. But, without a strategy to integrate and align those perspectives around common priorities, the power of diversity is blunted or, worse, becomes self-defeating.
An innovation strategy is also needed to focus the organization’s resources and energy on building the right set of capabilities. Without an innovation strategy, innovation improvement efforts easily become a grab bag of much-touted best practices: dividing R&D into decentralized autonomous teams, spawning internal entrepreneurial ventures, setting up corporate venture-capital arms, pursuing external alliances, embracing open innovation and crowdsourcing, collaborating with customers, and implementing rapid prototyping, to name just a few. There is nothing wrong with any of those practices, per se. The problem is that an organization’s capacity for innovation stems from an innovation system: a coherent set of interdependent processes and structures that dictates how the company searches for novel problems and solutions, synthesizes ideas into a business concept and product designs, and selects which
projects get funded. Individual best practices involve trade-offs. And adopting a specific practice generally requires a host of complementary changes to the rest of the organization’s innovation system. A company without an innovation strategy won’t be able to make trade-off decisions and tailor its innovation capabilities to it specific needs (a topic to which we return in Part II). An innovation strategy should provide a framework that sets priorities and clarifies objectives across multiple innovation projects over time.
Mapping Innovation Opportunities
If you are trying to get good at something, it helps to define what that something is. The same with innovation. Many organizations set out on their journey to build innovation capacity by stating something to the effect of, “We want to become excellent at innovation.” But what exactly does this mean? The problem is that “innovation” is a very broad term. It generally conveys something positive, but what specifically it implies is not clear. “Innovation” can mean anything—and, as a result, on its own it means nothing. We need to think about innovation in much finer-grained ways to make it useful.
Some things are obviously innovative. Think about breakthroughs like the telegraph, Edison’s light bulb, Ford’s assembly line, the first semiconductor, the first television, the first genetically engineered drug (human insulin), Intel’s microprocessor, the Netscape browser, or the iPad. There is not a lot of debate about the magnitude of these innovations. They were entirely new concepts that revolutionized industries and even major swaths of the economy after their introductions. However, if you think only about these headline-grabbing breakthroughs as innovation, you are missing about 99 percent of the innovation landscape.
Most innovation is much less obvious. It does not make headlines, and it does not even seem all that new. In fact, when you look at some of these innovations, you are tempted to ask, “So what’s really new here?” Consider ready-to-eat salad that comes already washed and cut in bags, first introduced in 1984 by a small California lettuce producer.2 It did involve some process innovations around mechanized cutting of the lettuce leaves and washing processes to ensure product safety and integrity, but the core components—lettuce and plastic bags—were hardly new (lettuce was cultivated by the ancient Egyptians as far as 3500 BC, and plastic bags were introduced in the early part of twentieth century). While such packaging innovations may not have the “whizz bang” character of an iPad, they are nonetheless economically important. Ready-to-eat produce now represents about half the US leafy vegetable market.3 Innovation pundits often dismiss improvements in packaging, manufacturing processes, and product features as “merely incremental,” but that misses the point. The way to judge innovation is not by whether it gathers headlines, but by whether it generates value. Many “merely incremental” innovations create a huge amount of economic value!
A lot of innovation actually has nothing to do with technology at all. I am going to venture a guess that at some point you have shopped at IKEA, now a dominant global force in the home furnishings market. How did it come so far? By offering a relatively unique value proposition: attractively designed furniture at low prices. The shopping experience is totally different at IKEA than at a traditional furniture store. It is essentially all self-serve, including the picking and packing. The novel part of IKEA is the value proposition combined with the way it has organized the shopping experience and structured its operations. Sure, it uses technology systems to track inventory and sales, but this is pretty standard stuff in retail. The innovation at IKEA is the business model.
Even some new companies that start in Silicon Valley are not necessarily technology innovators. Think about the original Netflix business model of sending DVDs through the mail. Yes, Netflix had some new software to track customer preferences and to make recommendations, but the bulk of what it did was not new. It was taking DVDs, sticking them in envelopes (by hand), and mailing them (using the US Postal Service, which was established in 1775!) to customers’ homes. Yet although there was not a lot of new technology, this was a completely new business model for the video rental business. It had a new value proposition (you did not have to go the store and the selection was huge) and new pricing structure (you paid a fixed membership charge, no late fees).
There are many examples of companies that have transformed industries through business model innovation. Think about Ryanair in the airline industry, Boston Beer Company in the craft beer business, Uber or Lyft in ride-sharing services. They may all use technology, but the novelty of these players lies in their business models. We return to the topic of business model innovation in Chapter 3.
You can see why statements like “We want to be a leading innovator” are not particularly helpful. If different people inside a company have a different definition in their minds about what they mean by innovation, the organization can easily get pulled in many different directions. And it is going to be impossible to build the required organizational capabilities to achieve any one priority if you are chasing after them all. A key part of an innovation strategy is deciding which types of innovation are most important to you. Which types of innovation can create the most value for customers and lead to the most value capture for your company? This enables the organization to focus resources and attention on those specific types of innovation that will matter most to it.
A Framework for Innovation Strategy
Whenever we are faced with choices, it helps to have a framework to categorize the different options and to provide nomenclature. Over the past thirty years, there has been quite a bit of careful scholarly research attempting to identify economically and strategically meaningful distinctions among different types of innovation.4 There are many differences in these studies. They investigated a variety of different industries and at different times in history. And, not surprisingly, each developed somewhat different concepts and different nomenclature. But, as a whole, they highlight two critical dimensions of innovation that are relevant across a broad range of industries: first, the degree to which innovation involves a significant change in technology; and, second, the degree to which innovation involves a significant change in business model.
We can use these two dimensions to map a firm’s innovation opportunities (Figure 1.1). For the technology dimension, we can think about whether a particular innovation will either leverage a firm’s existing technological capabilities or require it to develop new ones. For instance, if you are a leader in a business whose traditional technological competences are in software development, an innovation embedding novel software is much closer to existing competences than, say, an innovation requiring new hardware. The same logic applies for the business model dimension. Does an innovation build upon our existing business model (say, selling products), or does it require us to master a new business model (say, selling services)? Although each dimension exists on a continuum, together they suggest four distinct categories of innovation.
FIGURE 1.1
The Innovation Landscape Map
Source: Gary Pisano, “You Need an Innovation Strategy,” Harvard Business Review, June 2015.
• Routine innovation leverages a company’s existing technological competences and fits with its existing business model. An example would be Intel launching ever-more-powerful microprocessors. This exploits Intel’s deep technological expertise in the design and manufacture of microprocessors while fitting perfectly with the business model that has fueled its growth for decades. New wide-bodied aircraft from Boeing, next-generation iPhones from Apple, additional automated warehouses at Amazon, or new animated films from Pixar are all examples of routine innovation. I should note that “routine” does not imply easy or trivial. In each of these cases, the companies involved are investing significant resources and are working on and solving tough technical problems. It just means that they are working within the bounds of their existing repertoire of competences.
• Disruptive innovation, a category named by my Harvard Business School colleague Clay Christensen, r
equires a new business model but not necessarily a technical breakthrough. For that reason, it also challenges, or disrupts, the business models of other companies. For example, Google’s Android operating system for mobile devices is a potentially disruptive innovation for companies like Apple and Microsoft not because of any large technical difference but because of its business model: Android is given away for free; the operating systems of Apple and Microsoft are not.
• Radical innovation is the polar opposite of disruptive innovation. The challenge here is purely technological. The emergence of genetic engineering and biotechnology in the 1970s and 1980s as an approach to drug discovery is an example. Established pharmaceutical companies with decades of experience in chemically synthesized drugs faced a major hurdle in building competences in molecular biology. But drugs derived from biotechnology are a good fit with the companies’ business models, which call for heavy investment in R&D, funded by a few high-margin products.
• Architectural innovation combines significant technological and business model changes. An example is digital photography. For companies such as Kodak and Polaroid, entering the digital world meant mastering completely new competences in solid-state electronics, camera design, software, and display technology. It also meant finding a way to earn profits from cameras rather than from “disposables” (film, paper, processing chemicals, and services). Not surprisingly, architectural innovations are the most difficult for incumbents to pursue.
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