By Jürgen Stetter
This article first appeared in the MIT Sloan Management Review Blog on March 29, 2019.
Considering how deeply companies rely on innovation, it is astonishing how bad most of them are at finding, developing, and implementing new ideas. Global companies pour roughly $1 trillion yearly into innovation; we estimate at least 10% of that sum — $100 billion — is completely wasted.
This means that across the business world, would-be pacesetters are enviously studying and imitating the innovation methods of Amazon, Google, SpaceX, and the like. But in our experience working with major companies in industries ranging from manufacturing to financial services, we have found that imitation rarely works. There is no single best way to structure and operate an innovation unit. The innovation toolbox is large and varied, containing dozens of techniques: startup competitions, investments in corporate or external startups, academic partnerships, dedicated internal units, acquisitions, and spin-offs. The real key to success is to find the tools and structure that fit your company’s needs, strategies, and culture.
Find the tools and structure that fit your company’s needs, strategies, and culture.
This typically becomes much easier conceptually if you focus on four key steps within your organization:
1. Identify the kind of innovation you need. Companies use innovation to achieve a variety of goals, from cutting costs and building value for customers to fending off disruptive attacks by competitors and creating new business models for the future. The innovations they need cover a lot of ground: new products, improved back-office processes, new technology platforms, new customer experiences — all the way to the kind of full-fledged industry disruption created by companies like Amazon or Uber.
Different types of innovation generally require different approaches. For example, if your most urgent challenges are primarily technical and internal — for example, automating processes or building apps — the best approach might combine focused internal development and selective use of made-elsewhere tech tools. Prioritization, control, and implementation would be key, which suggests that the best solution might be an internal unit, adhering tightly to a strategic plan and with substantial support from corporate leadership.
On the other hand, market-facing innovations — which include new products, new ways of relating to customers, and new potentially disrupting businesses — are often trickier. This type of innovation requires a strong sense of the customer and relative freedom from the parent company’s core assumptions. As a result, companies pursuing this goal will tend to favor models that encourage independence: venture capital funds, external partnerships, and open innovation models.
Culture is also an important consideration here. For example, when one airline wanted to start developing new models for relating to customers, it feared that its traditional compliance-oriented culture would interfere. To prevent that, it launched its innovation unit as a separate operating company, physically isolated from the parent.
2. Find the best source (or sources) of new ideas. It is tempting to think that you can innovate simply by putting the right group of people in a room and letting them work. In practice, that’s not a very efficient way to proceed. Many of the ideas you need have already been discovered or are in the process of being pioneered somewhere in the world. The trick is to understand where that’s happening — and then to determine how to form a productive relationship with the people and organizations that can give you access to what you need.
Often, your existing staff have a deep understanding not only of your customers and their needs and desires, but also of unexploited capabilities and opportunities within your walls. Many companies have found internal competitions help them find new ideas for products and services. In some cases, they even offer employees the possibility of receiving funding for new companies. Programs like these not only provide valuable innovations, but assist companies in adopting more creative cultures in general because they involve more of the employee base in the ideation phase.
Tapping external sources of innovation can also be helpful. Partnerships within academia are useful, especially when you are looking 10 or more years into the future. Top universities have served as incubators to a remarkable number of new businesses. For example, in Germany, one in 10 new tech startups come from spin-offs of Munich Technical University.
In some cases, acquiring tech startups can assist companies in taking the lead. For example, some retailers are buying startups to speed up and increase their reach in e-commerce.
Alternatively, companies can also find success with establishing innovation hubs that bring together innovators and sponsors. It can be extremely helpful to plug into geographies where particular kinds of innovation are taking place, such as Singapore for financial technology; Albany, New York, for nanotechnology; or Tel Aviv for next-generation automotive technology.
3. Determine how much of the innovation you need to own. Sometimes it is crucial to own an innovation — for example, when holding the patent on a new product or technique gives you a defensible competitive edge. In other cases, ownership may make little difference or actually count as a disadvantage, especially if ownership increases cost while adding little to the benefits of a new development.
As a result, companies need to think hard about whether they should be innovating — or whether their role is to encourage and help others to innovate. For example, large technology companies patent new technologies and then share them broadly so that other developers will use them as a platform for further innovations, rather than invest in developing all of the potential applications themselves. By adopting that strategy, Apple’s App Store has been able to grow exponentially.
Sometimes companies even participate in multicompany or industry-wide partnerships. For example, German luxury automakers BMW, Audi, and Daimler are sharing data through digital mapmaker Here to advance their driverless cars.
4. Create a process. Innovation is a powerful force in business, but it isn’t magic. Great ideas don’t implement themselves; indeed, far too many die before having the chance to create any real impact. The trick is to understand that an innovation, like any other business output, requires a process. The innovation process won’t necessarily resemble a traditional workflow — it will likely involve more interaction, iteration, and feedback. But there are still discrete steps that need to be taken, starting with the selection of priorities and proceeding through implementation.
Along the way, new ideas need to be embedded within a broader corporate strategy. Progress needs to be tracked, business models built, and incentives managed both for the innovators and for those who will put innovations into practice.
In theory, the innovation unit itself could be put in charge of all of these tasks, but more likely there will be a series of handoffs between various parts of the company — and designing those handoffs is a crucial, but often neglected, part of developing an innovation process. When addressing potential solutions, it is vital for companies to stay aware of both their current internal dynamics and those of the often more nimble and creative innovation unit.
Some companies with a strong track record for innovating may need to steer the innovation unit in productive directions. Others, and this is especially true in highly regulated industries like finance and aviation, need to plan on substantial resistance to change. To counter this, companies often enlist key managers to help establish the innovation unit early on so that they will have a stake in its success, especially on projects that require the innovation unit to collaborate with divisions in the main company.
Broader Innovation Capabilities
The challenges of building an innovation unit do not fall cleanly in the laps of one particular part of the business. They overlap and bleed into each other at many points. With that being the case, where is the best place to start?
First, identify low-hanging fruit. Internally, you can look for straightforward problems in your existing business that you can solve with internal resources. Alternatively, you might look externally and launch a competition that asks startups to make more disruptive proposals. For example, a company might share anonymized historical data with startups to see if they have proposals for new processes, services, or products that can be developed from them. Approaches like these tend to be relatively easy to manage, and they force businesses to start tackling the four innovation challenges.
Once the appropriate structure, process, and management are in place, you should be able to identify and rectify the cracks in your innovation capabilities not just in your innovation unit but also in your organization more broadly. Then, you can move the organization closer to its overall goals — and eventually, a strong innovation culture.