Driving the innovation machine

What makes a company successful? This is perhaps a billion-dollar question (probably even more).
Throughout history, an infinite number of theories have been put forward and perhaps there is no single, unambiguous answer. However, if we compare all the big companies that have revolutionised their markets and then held strong over time, we notice a common characteristic. 

All these companies combine two souls: on the one hand, the management of business as usual, i.e. the ability to best manage their resources and business to be profitable today and, on the other hand, the ability to build their success for tomorrow, i.e. innovation. These two souls of the organisation are extremely different and as such must be managed differently. 

In day-to-day operations, the company can count on relatively certain returns from established, high-performance business models; therefore, the aim to be pursued will be efficiency. On the contrary, when we talk about innovation we are talking about an area that refers to the new, the unknown, the uncertain, where the outcome of a project is never guaranteed at the outset. 

Consequently, the returns associated with innovation initiatives will be characterised by high risk. This risk associated with entering new markets with new products or new business models requires us to change the way we do things. 

Let’s step out of the world of big business for a moment and think about what is perhaps the most fitting and best-known example when we talk about innovation: the world of start-ups. A start-up is nothing more than a group of entrepreneurs trying to untangle the uncertainties and risks of an unknown market to gather all the information they need to validate their idea with the market itself, before investing everything and pushing their luck. Indeed, this point is of utmost importance in the context of innovation. The best approach for carrying out such an initiative is to abandon the linearity of traditional projects, where all steps are planned at the outset, and to work with rapid cycles of conception, experimentation and learning.
Instead of investing everything in the beginning, planning and implementing the idea in all its detail, and then trying to sell it blindly to the market (traditional business approach), a rough idea is used, which may even be a diagram, scribbled on a paper napkin at a business lunch. This idea is then tested with the customer, as early as possible, and based on their feedback, if positive, a prototype or technical drawing can be constructed, which in turn can be put to the customer to generate further feedback. And so on until the final result. In this way, it is possible to progressively test the quality of the business idea on the market and invest in it incrementally. Initially, the investment is only the time devoted to carrying out the analysis; once the customer’s initial feedback has been received, further work can be invested to produce a more complete and exhaustive drawing, and then one or more prototypes. As supporting evidence emerges and the risk is reduced, the idea becomes more detailed and the investment gradually increases, with the benefit of minimising the economic impact of possible failure.

Returning to our initial focus, i.e. the corporate world, the question we have to ask ourselves is: how can we bring this start-up approach into a mature and established organisation? Changing the approach to project management, although this iterative approach can be effective and adapt well to the characteristics of innovation projects, is not enough. When we talk about innovation in a large company, we cannot narrow it down to just one project at a time. At the same time, there will be different teams of corporate-entrepreneurs, working with a focus on different products or business models, at different stages of the related validation and development cycle. To hold the reins of such a complex system, which involves all levels of the company, it is essential to have an organisational system that allows for the best possible management and harmonisation of the 3 key activities of the innovation process, supported by a monitoring system (Key Performance Indicators) that is able to gather information from the field and transfer it to all stakeholders.

Specifically, these 3 key activities are:

1. Managing innovation projects: the project team works through rapid cycles of conception, experimentation and learning, in which their hypotheses are validated or re-discussed directly with customers. In doing so, all the activities performed and results obtained are collected by the team itself, to create a database that is then converted into a first level of KPIs (key performance indicators). These indicators will summarise how the individual project is performing and how the team is working; some examples are: the number of experiments done with customers, the speed at which hypotheses are created and then validated/disapproved by the customer (speed of learning loops), how much effort the team is devoting to the project, how much capital has been invested in the initiative in the form of costs (time resources and material investments). With this supporting information, the project leader can at any time define the best actions for managing the project and motivating team members, emphasising the speed and pace of the cycles, the most important factor at this level.
2. Investing incrementally in initiatives and monitoring their success: data collected from individual projects can be aggregated to serve as reports for decision makers on the health and progress of the individual initiative and thus facilitate the incremental investment process, the heart of our innovation process. Indeed, the role of portfolio managers is to keep track of the evidence that individual innovation initiatives are bringing, to understand which are the most promising and to allocate the available resources in the best possible way. In this way, investments in innovation can be distributed consistently and in a balanced way. For example, a project that is bringing good evidence from the market can be accelerated and scaled up through the provision of additional funds, while a project that is not bringing evidence or where the market is showing little interest in the proposed idea, can be discontinued, thus preventing valuable resources from being spent on businesses that are proving to produce low profits or none at all. The return of the entire portfolio will be generated by the subset of successful initiatives and thus by the products/services to be launched on the market, which will offset the costs of the entire portfolio that will be contained overall due to the incremental investment approach itself.
   In order to do this, in addition to monitoring the costs and activities/outcomes of individual projects at all times, it is therefore necessary to adopt a broader view, which allows the balance of the entire portfolio to be monitored. The practice of incremental investment can also be facilitated by dividing innovation projects into phases, so that checkpoints can be imposed to connect the team and the investment committee, and the maturity of the innovation idea and the associated risk can be more easily tracked.
3. Assessing the impact of the innovation strategy on the company’s business: innovation is certainly one of the most important activities a successful company has to manage. A company that does not innovate, sooner or later, grinds to a halt. For this reason, the innovation process must always be aligned and guided by strategy. At this level, the key decisions to be made by governance are related to how much to invest in innovation, which innovation strategy to pursue, whether to favour more conservative initiatives where innovation affects better known markets or technologies, or whether to venture into more unexplored territories. 
   Given the importance of innovation, it will be equally important to monitor how well the innovation strategy is performing, with a view to making the right decisions and finding the right balance. In addition to the strictly economic return on investment over time (ROI, new market shares, cost savings, etc.), we need to keep track of the assets being built through this process (patents, academic collaborations, etc.), as they could be the basis for the company’s future success. In addition to the more tangible assets, there is also another fundamental baggage that the innovation process enhances and which must be monitored over time, namely all the lessons learned from the experimentation-test-learning cycles, which will be an enormous source of competitive advantage. Finally, we must not forget the people component: we can see innovation as a flywheel, where the more people involved and therefore the more embedded the culture, the more the results will multiply over time. For this reason, we must monitor and increase as much as possible the portion of the company involved in this type of initiatives.

As we have seen, innovation is not a linear practice with a beginning and an end, but is more a complex machine, which absorbs as input a flow of investment from the company and which at its core is made up of numerous cogs, i.e. fast cycles, where teams work in a structured way to produce on the one hand a short-term output (new business and new products), and on the other hand, in the long run, invaluable knowledge capital. Therefore, just like a complex machine, the innovation process must be managed with a scientific method and monitored using the right indicators.