Incubating innovation: Companies must leverage the full spectrum of innovation, from the incremental to the revolutionary. (Special Focus).
Journal of Business Strategy
Copyright Dow Jones & Company, Inc. All Rights Reserved.
WEDNESDAY, MAY 1, 2002
Very few companies manage to produce a continuously flowing pipeline of innovations ranging from the incremental to the revolutionary. This is not surprising. The fact is, few companies can focus systematically and simultaneously on both the present and the future, and continual breakthrough innovation usually depends more on systematic focus and simultaneous concentration than it does on hiring new creative talent or seizing upon new market opportunities.
Attempts to create innovations through Skunkworks[TM] and other forms of isolated incubation rarely produce continuous results because they usually operate too far outside the existing organization, creating a difficult-to-bridge chasm between the convergent organization and the divergent incubation. Convergent thinking systems, which include most established business organizations, survive on order, measurement, and predictability. In contrast, most innovations (except some incremental innovations) result from divergent thinking environments that thrive on disorder, imagination, and ambiguity.
If a company's culture embraces one orientation and spurns the other, or keeps them too separated from one another, neither the organization nor the innovation will flourish. The convergent-thinking organization that discriminates against divergent-thinking innovators because of their odd and disruptive ways will always lack the creativity and passion to make breakthrough innovations a consistent and continuous reality. By the same token, divergent-thinking innovators who loathe the convergent-thinking organization because of its rigid and stifling norms will always lack the perception and persistence to realize the potential of their innovations within the current organizational context. What's the solution? A systematic approach to innovation that integrates convergent implementation with divergent incubation.
Easy to conceptualize but hard to implement, right? Not for companies such as Nokia Corporation, the $30 billion world leader in mobile communications headquartered in Espoo, Finland. Because of the company's unusually flexible organizational philosophy and strong commitment to tightly integrating operating businesses with innovation, Nokia has been able to achieve a highly productive balance between innovation and execution, between convergent-thinking and divergent-thinking systems.
How does Nokia do it? By engaging everyone in the organization in the innovation process and facilitating their efforts through a Nokia-wide network of internal ventures that provide for the "catalytic incubation" of new business ideas. Nokia's new venturing network, based on the idea that innovation includes everything from the incremental to the revolutionary, derives its innovations from a variety of internal venturing incubators linked to existing businesses and also from external venturing efforts that extend well beyond existing businesses, technologies, and markets.
Nokia strives ceaselessly to make sure that every good business idea along the continuum from the incremental to the revolutionary finds a temporary home where it can incubate. In the words of Nokia Chairman and CEO Jorma Ollia: "Why have we been a successful company? If you want a very simple answer, it is getting the balance right between innovation and execution. In a technology business, you need a tremendous amount of innovation, but with these volumes and growth, you need to execute or it will kill you. So it is balance. I think we have done that better than anybody else."
Four Innovation Perspectives
The four innovation perspectives illustrated in Figure 1 offer a simple framework for simultaneously accelerating and integrating four basic categories of innovation from the incremental to the revolutionary.
The four innovation perspectives provide a common language for specifying what type, level, and category of innovation a team or organizational unit can attack at any given time. They also help forge a cohesive bond between divergent thinkers and convergent thinkers by addressing two fundamental dimensions of any business model: strategic scope (limited or unlimited) and organizational capabilities (existing or new). With this sort of framework, any company can organize its innovation efforts to quickly achieve positive results. Consider the following brief descriptions and company examples from each of the four perspectives of innovation.
Perspective One (P1) Innovation: Improving Core Businesses P1 innovation focuses on stretching a brand or product/service line as far as it can go without demanding major changes in the company's strategic scope or organizational capabilities. In other words, come up with incremental innovations that can be developed and implemented rapidly and inexpensively (e.g., new and improved product/service variations, more convenient packaging, streamlined delivery, or other so-called product/service line extensions). Innovation in this realm means remaining within the company's current strategic scope and utilizing the company's existing organizational capabilities to improve core businesses.
Frito-Lay has perfected the art and science of incremental innovation.
Frito-Lay's mission "to be the world's favorite snack and always within arm's reach" has turned its global brands into household words--Chee-tos, Doritos, Lays, and Ruffles to name a few-but the company's real prowess stems from its P1 innovation. This is a company that has perfected the art and science of incremental innovation by continuously adding new flavors, varieties, sizes, packages, and shapes of snacks year after year. Recent innovations include 3D's, a three-dimensional corn snack that's exciting customers from Venezuela to Australia, and WOW, a line of low-fat, low-calorie versions of Frito-Lay's leading brand snacks that taste much like the originals. The company continuously cranks out round after round of product line and brand extensions that keep its core businesses and global brands thriving.
Here's a brief summary of P1 innovation:
* Focus: continually enhance, refine, and improve primary businesses through product/service-line extensions, new and improved product/service variations, more convenient packaging and delivery, and other product/service modifications.
* Key Strengths: rapid implementation and relative cost efficiency.
* Potential Weakness: market myopia and inadequate responsiveness to market and competitor changes.
* Examples: Frito-Lay's 3D and WOW snacks, Microsoft's Windows XP, and Ford's 2002 Thunderbird.
* Organization: dependence on in-house innovation and incrementalism.
Perspective Two (P2) Innovation: Exploiting Strategic Advantages
P2 innovation focuses on transporting the brand or product line to new customers and markets beyond the company's current strategic scope without requiring major changes in organizational capabilities. In other words, come up with new ways to apply the company's existing capabilities to new product/service categories, market/customer segments, usage occasions/patterns, and channels of distribution. Innovation in this realm means moving beyond the company's current strategic scope and involves leveraging strategic advantages (i.e., unique brand, value, and cost positions relative to competitors) by spreading them across a broader range of markets and customers.
The Coleman Company, famous for its lanterns and stoves, has been around for more than a century but never produced anything other than camping products until recently. With growth pressure from parent company Sunbeam and a commitment to P2 innovation, Coleman decided to transport its brand and engineering know-how to a new market--the home market and backyard grills. Design teams surveyed devoted customers to find out what they already suspected: Coleman loyalists appreciated the sturdy, traditional design, reliability, and durability of Coleman products. So focusing on what it did best, Coleman created a backyard gas grill that looked like a Coleman. It sports a sturdy design, a cast iron grill that doesn't rust, a classic Coleman hunter-green hood, side tables that resemble Coleman cooler lids, oversized thick rubber tires, and the company's overall look and feel of reliable durability.
The new grills exploited Coleman's strategic advantages of quality brand recognition, engineering design respectability, and product durability by focusing on a new product category (backyard gas grills), a new customer segment (non-campers), a new usage occasion (backyard barbecues), and new channel of distribution (outdoor home furniture outlets). The Coleman backyard grills are one of the few new bright spots for a beleaguered but hopeful Sunbeam as it continues fighting its way out of bankruptcy. In Coleman's case, P2 innovation included applications in all four of the main indicators of a major change in strategic scope--new products/service categories, new market/customer segments, new usage occasions/patterns, and new channels of distribution--but that's not always the case, you don't need all four to come up with a P2 innovation.
A brief summary of P2 innovation follows:
* Focus: dramatically broaden the scope of strategic thinking to find new product/service categories, market/customer segments, usage occasions/patterns, and channels of distribution that can exploit the company's strategic brand/value/cost advantages.
* Key Strengths: relatively low risk investment for potential high return and strategic value/cost leverage.
* Potential Weaknesses: relative ease of duplication by competitors with similar advantages, and dependence on talent with exceptional strategic versatility.
* Examples: Coleman's backyard gas grill, Subway Sandwich's weight-loss campaign, and Federal Express' Home Delivery Service.
* Organization: high utilization of consultants, researchers, ad agencies, and contract employees.
Perspective Three (P3) Innovation: Developing New Capabilities
P3 innovation focuses on deepening customer satisfaction and loyalty to the brand or product/service line by adding new organizational capabilities without introducing major changes in strategic scope. In other words, develop or acquire new technologies, talents, services, and businesses to better serve the company's current strategic scope of customers and markets. Innovation in this realm means moving beyond the company's existing organizational capabilities to better satisfy the needs of current customers by introducing new technologies and services through newly acquired talents and business acquisitions.
AOL Time Warner is a globally recognized media and entertainment giant committed to becoming "the world's most respected and valued company by connecting, informing, and entertaining people everywhere in innovative ways that will enrich their lives." One of the primary avenues for accomplishing this lofty goal is P3 innovation, namely the ongoing development and acquisition of new technologies (AOL, ICQ, Time Warner Cable), new talents (Times Mirror Magazines, Turner Broadcasting, HBO), new services (MapQuest, AOL Time Warner Interactive Video) and new businesses (iPlanet, Moviefone, Little, Brown & Company) all representing the development of new organizational capabilities to better serve the company's base of customers who want to be connected, informed, and entertained.
In the fast-paced world of technology, information, and entertainment, there's no way to meet customers' ever-expanding needs without a plethora of innovations flowing from P3 innovation. The merger between AOL and Time Warner itself symbolizes the company's commitment to developing new organizational capabilities to better serve its customers. After the merger was completed, Chairman Steve Case described it this way: "AOL Time Warner will lead the convergence of the media, entertainment, communications, and Internet industries, and provide wide-ranging, innovative benefits for consumers. Our brands, services, and technologies already touch hundreds of millions of people and, by closely integrating our assets, we will embed the AOL Time Warner experience more deeply into their everyday lives."
For AOL Time Warner, acquisitions, alliances, joint ventures, licensing arrangements, and a host of other creative strategic partnerships have become a way of life and the primary avenue for developing new organizational capabilities to enhance customer satisfaction, increase brand loyalty, and further growth.
Below is a brief summary of P3 innovation:
* Focus: substantially expand the company's capabilities through the acquisition or development of new technologies, talents, services, and business enterprises.
* Key Strengths: long-term customer advantage and brand/loyalty leverage.
* Potential Weaknesses: investment cost and implementation time.
* Examples: Time-Warner's merger with AOL; Sam's Club's online auction, travel, and garment personalization services; and Hewlett-Packard's acquisition of Compaq.
* Organization: use of outsourcing, acquisitions, joint ventures, strategic alliances, licensing, and franchising.
Perspective Four [P4] Innovation: Creating Revolutionary Change
P4 innovation focuses on transcending current product/service lines or brands to orchestrate fundamental changes in both strategic scope and organizational capabilities. In other words, envision new business models, new markets and industries, new approaches to organizations and work, and other game-changing solutions that are completely outside the company's current experience both in terms of the internal organization and the external marketplace. Innovation in this realm means removing all the barriers to imagination and implementation to create a revolutionary new future for the company and its stakeholders.
Nokia has not only mastered innovation in P1, P2, P3, but also works ever-diligently to master P4 innovation. From creative consortiums with rivals designed to create software that will allow any mobile user in the world to tap into common services, to venture funds to explore new technologies and business models outside the company's current reach, to a network of internal venturing units focused on turning the company's best ideas into internal start-ups and future businesses, Nokia is leading the way toward a revolutionary new world. In this new world, Nokia believes, mobile, handheld devices will become integral to people's daily lives allowing them to access a wide range of shopping, travel, news, education, entertainment, sports, or personal information services in an instant. Nokia clearly understands the need for continuously flowing innovation from all four perspectives, which is one of the main reasons why the company is so good at innovation in P4--once a company masters the first three, the fourth becomes less daunting and more approachable.
Consider this brief summary of P4 innovation:
* Focus: transform the future of the business enterprise by introducing new business models and groundbreaking organizational forms, and by creating new industries and markets.
* Key Strength: first mover advantage and heightened competence in creative destruction.
* Potential Weaknesses: lack of urgency and high risk of failure/irrelevance.
* Examples: Nokia, Starbucks, and Amazon.com.
* Organization: reliance upon perpetual outsourcing and virtualism (virtual teams, virtual solution environments, virtual alliances).
The "S" Path to Growth by Incubating Innovation
The overriding purpose behind the four perspectives of innovation is to help business leaders apply four fundamentally different levels or manifestations of innovation systematically and simultaneously. In other words, it allows them to embark on a new "S" path to growth (the "S" stands for systematic and simultaneous, which is the central symbol on Figure 1). Unfortunately, most business enterprises and their management teams focus on innovation from one or two of the perspectives and consider the others only when a crisis forces them to shift perspectives, at which time they usually begin a new, yet similar, cycle of focus and neglect. The only way out of this dilemma is to adopt and foster all four innovation perspectives simultaneously. Here are a few guidelines for doing so:
1. Begin by providing each innovation perspective with time, space, and mass. Innovation activities such as imagining, discussing, and planning in each of the four perspectives need sufficient time away from the operating system and its bias toward convergent thinking--i.e., time away from routines, schedules, deadlines, and short-term results. Every perspective needs a space away from the office where teams can reflect on, discuss, and reinterpret everything--i.e., space away from daily symbols, familiar icons, regular corridors of travel (on the ground or in the air), and established convergent-thinking institutions. Finally, each perspective needs a critical mass of questions (more than most convergent-thinking people and organizations would consider necessary) to discover which questions will lead to new strategic insights, inventions, and breakthroughs. It may take asking a thousand questions about one particular aspect of a strategic advantage, an organizational capability, a new technology, a new usag e pattern, etc., before finding the question that leads to a major breakthrough. Any company or group can learn to implement the four innovation perspectives, if they'll begin by giving themselves sufficient time, space, and mass to do so.
2. Next, move toward providing each of the innovation perspectives with its own incubator organization, each having unique organizational processes, systems, and leadership. These incubator organizations should emphasize differentiation and divergence from (rather than separation and isolation from) the larger convergent organization. Each innovation incubator needs some sort of structural form to distinguish, support, protect, and nurture it. For example, it could take the form of a cross-functional team, innovation task force, new business unit, ad hoc strategy development committee, product/service group, research & development forum, or any number of other organizational forms composed of full-time, part-time, contract, shared, or project people.
People selected to work in an innovation incubator should develop their own divergent-thinking processes and systems, not simply replicate those of the convergent-thinking organization that surrounds them. The group can begin by deciding not to run its meetings the same way meetings are run in the convergent organization and let creativity take it from there. Organizational processes such as rewards, talent selection, performance management, and communications should be different in the incubators from what happens in the rest of the organization, even when team members spend only a fraction of their work time in the innovation incubator.
Leadership of divergent-thinking groups is vastly different from leadership of convergent-thinking organizations. Divergent leadership focuses on empowering creativity, encouraging risk-taking, escaping order and routine, breaking the rules, fostering experimentation, ignoring traditions, questioning the conventional, and finding a better way. Convergent leadership, on the other hand, stresses maintaining control, establishing order, clarifying responsibilities, measuring all stages of performance, predicting outcomes, removing undue uncertainty, and protecting the institution. When it's time to diverge, do it well; when it's time to converge, do that well, too. Do both, simultaneously and systematically, but always allow for the needed differentiation and integration between them.
3. Once incubator organizations are operational, continue developing and fostering different ways of working within each perspective. With P1 innovation, where the focus is on improvement of core businesses, consider using more conservative and incremental techniques, such as idea listing and prioritization, to help the group generate concrete and realistic improvement ideas for current businesses. With P2 and P3 innovation, consider using more insightful and inventive techniques such as creating alternative futures and implication scenarios as ways to exploit strategic advantages and develop new organizational capabilities. With P4 innovation, consider using more highly open, creative, and experimental brainstorming techniques to generate fundamentally new approaches to the business.
Participants in the incubator organizations should continue searching for new techniques to improve the generation and exploration of ideas within their targeted perspectives. Leaders for each of the incubator organizations should be selected based on their natural preferences and demonstrated competencies relative to each of the four innovation perspectives. For example, using Myers-Briggs typology, logistical (SJ) and tactical (SP) leaders might be selected to direct P1 innovation, strategic (NT) leaders could be utilized to guide P2 innovation, diplomatic (NF) leaders may be deployed to facilitate P3 innovation, and a combination of leaders (SJ/SP with NT/NF) might be used to orchestrate the full range of talent and orientations needed to deliver P4 innovation.
4. Finally, whenever an innovation from an incubator meets with market success, everything about incubator's process, people, teams, struggles, breakthroughs, highs, lows, mistakes, revelations, serendipity, and results needs to be illuminated in both conceptual and concrete terms so that everyone inside and outside the company can learn from it and draw inspiration from it. This practice will not only boost organizational morale but, more importantly, it will fuel further innovation.
Achieving the right balance between innovation and execution, blending divergent thinking with convergent thinking, and nurturing innovation from the incremental to the revolutionary are never easily accomplished in large organizations, but the four innovation perspectives can help speed and simplify the process.
Craig Hickman is the author of An Innovator's Tale (Wiley, 2002). He and Christopher Raia are partners with Provation LLC, a consulting firm specializing in helping leaders apply principles of innovation to the development of organizational and strategic capability (www.provation.com).