Killing Innovation Labs Isn't the Solution. Understanding the Disconnect.

I want to add some nuance to the now common bashing of Innovation Labs, claiming that 'Innovation Labs just don’t work'.

Indeed, it appears some innovation labs are being closed down, but is that ratio significantly higher than the shutdown of departments or other corporate (sub-) structures? Or is it that the closure of an innovation lab tends to come with higher media coverage and exposure?

Beyond that bias, I’d like to offer potential explanations of why innovation labs are actually failing.

Building and successfully running a corporate innovation lab is not an easy endeavor. I know this because I’ve built and consulted corporate innovation labs in Europe, the US, New Zealand, and Africa.

Why is building and running a Corporate Innovation Lab so difficult?

Innovation labs face strong opposing forces that they must navigate and withstand. Some of these forces require them to choose a side, while others present genuine dilemmas to navigate. While there is no ‘right solution’ to a dilemma, some options are usually better than others. Sometimes, innovation labs find themselves pulled in different directions at the same time, requiring them to juggle multiple priorities.

Those dimensions and distinctions are fundamental when designing or operating an innovation lab. It’s a tool to think strategically about innovation and finding the right balance for your organization and its relative market position.

Let me explain by taking this a step further:

• If innovation labs are external and have a high degree of autonomy, they pull towards the right of the above dimensions. This makes it likely that the core organization either rejects the innovation lab as something that is ‘foreign’, or even treats it as a threat. Or the core organization ignores it and doesn’t learn much from ‘its’ innovation lab.

• If innovation labs are internal and highly dependent on the core organization, they are pulled towards the left side of the above dimensions. Over time that can lead to cultural assimilation. Being no different than the rest of the business (units) comes with the duty to secure profits today, and not in some distant future. As a result, the lab risks losing its reason for being.

How can you navigate and withstand those conflicting forces?

It depends on your organization, the market you operate in, and your relative position in it.

For example:

• If you need to catch up on your competition - shift your lab to the right, but not too much, or you risk losing connection with your core organization.

• If your innovation lab is getting too much cultural backlash from the corporate immune system of the core organization, risking successful cooperation - shift a bit to the left. But not too much, or you diminish the impact on your core organization.

• If your core organization is operating in crisis mode and budgets are tight, you’re better off if you shift to the left for now and help out. To do this well, I recommend following a balanced portfolio approach, which I’ll write about in a separate post.

There’s no recipe, no one-size-fits-all, but you can use the above dimensions as a strategic tool to help reflect and navigate your options.

If you’re interested in more content on Innovation Labs, have a look at my 10 lessons learned when building Innovation Labs and 5 more lessons on the same topic.

Corporate Innovation: A Framework for Defining Innovation Initiatives

Corporations around the world are investing in innovation hubs, hackathons, agile training and design thinking workshops. Why? So that they can learn to innovate, become more agile, customer-centred, purpose-driven, profitable, efficient or disruptive.

I'm interested in how corporations make sense of the sometimes vague topic of innovation — how they manage innovation initiatives, and how they allocate funding. In my work as an innovation consultant I noticed that many innovation managers struggled to describe what type of innovation methodology they follow, and why they use one particular method over others. I believe this lack of clarity is due to the absence of a single model for reference. Moreover, the growing number of methodologies is adding to the confusion. If you check ask-flip.com, you'll see there is a categorisation of 565 distinct frameworks and tools for innovation. In this article, I outline the specifics of the framework I’ve developed for defining innovation initiatives. The different manifestations of corporate innovation initiatives lie in focus area (organization vs market focus) and innovation creation (problem-focused vs opportunity-focused).

I wrote this to help — to guide your innovation efforts or sharpen the value proposition of your innovation hub. It can also further serve as a model to create value streams by applying a portfolio approach to innovation. I'll talk more about this in a follow-up post.

Corporate Innovation Framework

Do you care more about the the inner workings of your organisation or about your customers?

Organisations with an internal focus typically aim at increasing efficiency by optimising processes and internal operations. Fast, repeatable processes are a prerequisite for quality and growth as they allow organisations to scale production or service delivery reliably. This is not new; many organisations participated in optimisation programs (Lean Management, Lean Manufacturing, Total Quality Management) during the mid-80s and 90s. Over the last ten years, the optimisation focus shifted towards digitalisation and digital transformation, while currently, artificial intelligence and process automation fuel optimisation approaches.

When it comes to reinventing your business model, one of the most significant barriers is the dominant industry logic and the things everyone takes for granted. It's likely for an industry outsider or a challenger brand to come up with a game-changing business model.

Organisations with an external innovation focus aim at improving either the customer experience, or they try to create new products/services that increase revenue. Currently, their organisations are undergoing a strategic shift —  from an internal perspective towards one that is more customer-centric. They now apply customer journey mapping and focus on designing services, touchpoints and experiences with the end-user in mind.

Creating original product, service or business model innovations is more complicated than merely improving upon products and services that already exist. This is because it's intellectually challenging, and it requires long-term orientation. Few organisations are able and willing to take a radical perspective on product innovation. Take Fujifilm, for example. Their innovation had nothing to do with digital photography but with skincare products. Fujifilm recognised that ageing film and ageing skin have a lot in common and that they could build on their expertise to introduce innovative Fujifilm skincare products.

Innovation always has risk association, with an uncertain and often distant payoff. Most organisations are just not patient enough: a study of innovation at Xerox showed that over 35 years, its most successful product extensions took an average of 7.5 years to generate an acceptable return on investment. However, the innovation programs that produced those spin-offs survived an average of only four years before they were shut down and replaced by new ones.

Corporate Innovation Framework

Are you solving problems or are you creating something new?

The horizontal axis looks at how an organisation creates innovation. The majority of corporates focus on improving the status quo by solving problems. Those can be problems the organisation faces internally, or it can be problems or needs their customers have — this is a great starting point. The right issues provide an area of focus, and your customer or employee advocates investment in finding a solution is high. There are a plethora of well-documented methods to approach innovation this way, with Design Thinking being the most prominent Human-Centred Design method (HCD). While I believe it's possible to come up with innovative solutions through HCD, Design Thinking is not an exact innovation method; instead, it's an excellent approach towards creative problem-solving.

On the contrary, you have opportunity-focused approaches — creating something new! Few corporates actively explore this radical field of innovation — because there is no problem to be solved, it’s harder to do well. Risk and ROI are often the deciding factors in pursuing a new product or service.

The opportunity-focused approach combined with an organisational focus (War Gaming, Build Your Own Enemy) can lead to uncover questions that can impact the very core of the organisation: 'How might we reinvent our own business or operating model?', or 'How might we create a new company that puts us out of business'? Of course, problem-solving and customer-focused design methods don't provide answers to those questions. While there are methods available for radical business model innovation or industry disruption, in-house expertise on how to apply those methods and overall adoption of radical innovation methods is low or non-existent.

What method should you apply for innovation? It depends on where you sit in the framework.

Let's look at the methods and tools you can apply to drive innovation initiatives in each quadrant.

The top-left quadrant (organizational & problem-solving) — Optimize is your efficiency and optimization toolbox. If the problem is well understood (and defined!) methods like Six Sigma, Lean Management, and Process Improvement do the job well. If the problem is ill-defined and confusing, and impacts people, consider a HCD approach.

The bottom left quadrant (problem-solving & market focus) — Improve. Here, your goal is to improve the experience your customers have. An excellent way of tackling this is to focus on the most common pain points or problems your customers currently experience, and to find solutions by following an iterative HCD approach.

Corporate Innovation Framework

The bottom right quadrant (market focus & opportunity-focus) — Create, is for those corporates who are creating value for customers and the organization - from scratch. Unfortunately, here, there may not be any pain points or customer problems to guide you. Thus, Human-Centred Design methods are of limited value. Your tools of choice are Foresight and Futures Thinking as well as Radical Reframing and Innovation of Meaning.

Few organizations dare to explore the top right quadrant (internal & opportunity-focus) — Reinvent because looking inwards at ways to improve your company can be uncomfortable, challenging, and disruptive. Change is difficult. There are only a few methods available to help you rethink your organization. Build Your Own Enemy, Wargaming, Business Model Innovation and Radical Reframing help you to go beyond the dominant logic of your industry.

How can you use this framework?

Having a clear understanding of the purpose and direction of corporate innovation endeavors helps you to communicate your why. It also supports course corrections and acts as a north star when facilitating strategic shifts of focus for your organization.

The final thing you should take away from this is that the four quadrants of this innovation framework are (hopefully obviously?) different in nature and execution; therefore, they require specific team arrangements and ways of working. Success metrics, budgets et al need to adapt to the characteristics of the quadrant you want to explore.

This follow up post provides content on the right team setup and budgeting approach for each quadrant.

Check www.innovate-strategy.com for more information and get in touch sebastian@innovate-strategy.com.

Posted by Dr. Sebastian Vetter

Corporate innovation: Team Setup, Budgeting Strategies and Return On Investment (roi)

In a previous article, I have outlined the specifics of a framework I’ve developed for defining innovation initiatives. In short, the framework differentiates corporate innovation initiatives by focus area (internal vs external) and innovation creation (problem-focused vs opportunity-driven). The resulting 4 quadrants can be labelled as optimise, improve, create, and reinvent. This follow-up blog post focuses on the right team setup, budgeting strategies and return on investment (roi) for each quadrant.

Practical Tips for Innovation Management within each Quadrant

When you’re positioned in the optimize quadrant your goal is to improve the way the organisation operates. You want to streamline processes and improve value creation. A two-pizza sized team does best, success criteria are easy to determine as you can refer to the current status quo as a baseline measure. In order to optimize existing processes of value creation you need people with deep process expertise and you need experienced facilitators and method experts who can manage team dynamics and support a productive working environment. From a budgeting point of view these teams cost mainly time and they should be able to quickly create efficiency gains that are higher than their cumulative costs.

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In the bottom-left quadrant your goal is to provide a great customer experience and to improve existing products and services. Here the two-pizza rule applies as well. Conducting customer interviews and making sense of qualitative data is something most organisations don’t do on a regular basis. If you don’t have the skills in-house you might want to hire experts who can support you. The Return On Investment (ROI) can be easy to measure for example in the form of a higher customer acquisition rate due to an improved sign-up process. The ROI can also manifest itself in behaviour that is not directly visible and therefore more difficult to assess. Think of a product improvement that leads to customers not switching to a competitors’ product.

Investing in a seamless customer experience pays off most of the time. You might also get beneficial carry-over effect for example from a reduced number of calls to the contact centre (costs-to-serve) due to an intuitive user experience.

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Positioned in the create quadrant, your focus is on creating innovative products and new services that will drive future revenue. In order to do so you will need people with a unique mind- and skillset. You want people who can imagine something that does not exist yet. Here I deviate from the two-pizza rule as smaller teams usually do a better job. A team of 3 to 5, not necessarily industry experts, is best suited to create future business opportunities. Don’t think ROI here, most of the future product or service ideas will not make it to the market. You simply can’t get the winners without investing in the losers. Also it could take years until a new product or service creates revenue. Hacking Industry Conventions and Cultural Beliefs and Innovation through a shift in meaning are your methods of choice.

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The reinvent quadrant is your innovation masterclass. Your team has the mandate to reinvent the core business and come up with new business models that can disrupt whole industries. Here you want to work with people who can leave the boundaries of what is considered normal. You need unconventional thinkers who are not only able to challenge but to reinvent the status quo. Keep the group small and don’t hire for industry expertise as it often comes with being conditioned to a certain way of thinking. The dominant industry beliefs can be the biggest barrier to disruption. Regarding budget and ROI, if you decide to operate in this field you will need to write the investment off. Don’t expect any return on investment and see it as an experiment. If you know it’s going to work it’s not an experiment. If this scares you, remember that you do not have to operate in this quadrant – in fact many organizations don’t. That’s okay but keep in mind that there are companies out there who are doing exactly this – trying to put you out of business or even changing your whole industry. If you don’t reinvent your own business or industry someone else might.

Don’t get stuck in the middle

You might have wondered what the area in the centre of the framework stands for. This is where you don’t want to be. It’s the danger zone of no focus. Trying to do everything for everyone, applying new methods because they are fashionable, and constantly shifting focus between business needs and customer needs and between problem solving and innovating. This is tiring to everyone in your team and hardly successful.

More details on the framework for managing corporate innovation initiatives can be found here.

Check www.innovate-strategy.com for more information and get in touch sebastian@innovate-strategy.com.

Posted by Dr. Sebastian Vetter

Successful innovation patterns for a crisis

Corporate innovation has been under serious pressure during covid19. Innovation budgets were frozen, teams were made redundant and innovation hubs came to a halt. Why did this happen, what can we learn from this crisis (for the next), and what does this tell us about the standing and maturity of corporate innovation?

Covid19 hit organizations with full force within just a few weeks. Supply chains were disrupted, existing business models became obsolete, and modes of service delivery didn’t work anymore.

What made covid19 unique is that it was a global crisis that affects us on many levels simultaneously. In addition to the impact it had on businesses, covid19 had a direct impact on our personal and social life. It was a crisis that affected us on an emotional level too. The root cause of covid19 - a highly contagious virus - is simple, something we can easily understand. In contrast, the financial crisis of 2007/2008 took years to unfold, its root causes were complex and difficult to understand and its impact was primarily economically.

A crisis is the ultimate stress test for corporate innovation. A crisis can help flush out unnecessary surface-level innovation initiatives that can be labeled as innovation theatre. As budgets are tighter than usual, existing projects need to justify spending and new projects need an even stronger case to kick off.

A key challenge of a crisis as severe as covid19 is that it can put organizations into survival mode. Survival mode is a necessary strategy for some organizations as it provides focus and helps deal with the situation at hand. However, the survival mode comes with a strong bias toward the short-term. As a result, many organizations have reduced their innovation budget and stopped promising innovation initiatives. In some cases, entire innovation teams have been made redundant. Furthermore, survival mode can be contagious. Even organizations that have the financial means to navigate a global crisis join in a collective survival mode by cutting innovation budgets.

Survival mode is about preserving the status quo. Innovation is about creating future opportunities.

• How are organizations responding?

• How do they manage to integrate both short-term fire fighting and exploring new possibilities?

• What approaches to innovation do organizations apply in a crisis?

From my perspective, you can observe three distinct survival mode patterns: back to the core, expand the core, and reinvent the core.

Back to the core

This pattern is followed by organizations that reduce their innovation efforts to save costs in the short term. Functions that are not essential to the core business are being deprioritized and existing innovation initiatives are being paused or shut down. Innovation is seen as a ‘nice to have exercise when things are going well. 



Advantages:

• 
cost savings can be realized in a short time frame. 


• serves as an emergency approach to keep the organization alive. 


• can be a valid approach for a short time frame only.



Disadvantages:

• 
organizations that don’t make innovation part of their core business risk their future business.


• reducing innovation budgets sends the wrong signals to corporate innovators and the rest of the organization.

• it’s difficult to ramp up innovation again when the crisis is over.

Back to the core is an effective pattern that produces results immediately and can help ensure survival. If followed for a prolonged time, however ‘back to the core’ is a risky approach and can be a sign of low innovation maturity. Most likely innovation has no seat at the table when it comes to strategic management decisions.

Expand the core

In the ‘expand the core’ pattern organizations do consider innovation as a means to navigate a crisis. Organizations that apply this pattern understand that saving costs is not sufficient to bring an organization back on course. Innovation is applied to expand the product and service offering. 



Advantages:

• a burning platform can accelerate innovation. 


• if successful, innovation can achieve new revenue opportunities.


• expanding the core is seen as a less risky move.



Disadvantages: 


• innovation is under immense pressure to save the day.


• designing new service offerings and business models takes time - innovation is no quick fix in a crisis.

• in order to make a real impact, fast innovation teams need more budget and manpower.

Organizations that apply an ‘expand the core’ pattern successfully can persist and even thrive during a crisis. The chances of success are high if innovation has sufficient management attention, is well resourced and innovation teams have already investigated new opportunities outside the core business. A neglected and under-resourced innovation function will have a hard time turning a crisis into an opportunity.

Reinvent the core

Organizations that apply a ‘reinvent the core’ pattern are either bold or desperate. Following this pattern is not just about seeking new revenue opportunities outside (new customers, or markets). It’s about the need to reinvent the core of the business completely in order to not only survive the current crisis but also to become more resilient in the future.



Advantages:

• a crisis is a unique situation to reflect on outdated belief systems.

• a crisis releases energy and organizational development can be accelerated.

• adaptability is a competitive advantage. Adaptable organizations are more likely to succeed in the future. 



Disadvantages:

• bold strategic moves during a crisis can create even more uncertainty. A balanced approach and good communication are key.


• reinventing an organization requires developing a vision, having long-term focus, and patience.


• the common fail fast and break things mantra of innovation can be harmful if applied to organizational development.

Organizations that follow the reinvent the core pattern realize that innovation can be applied internally as a means of organizational transformation and development. They understand that this is not a project that can be managed with your usual innovation approaches. It’s a complex social system of written and unwritten rules, conscious and unconscious beliefs, and formal and informal expectations including a corporate immune system that will push back if triggered. Reinventing the core benefits from a systems perspective and thinking techniques that are counter-intuitive yet effective.

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Check www.innovate-strategy.com for more information and get in touch sebastian@innovate-strategy.com.

Posted by Dr. Sebastian Vetter