If an athletic department at a large university made a decision to develop a world class rowing program, but the university administrators banned all water sports as too risky, we could hardly expect much in terms of rowing greatness. However, all too often large corporations do the equivalent when they decide to pursue non-core innovation efforts. They set business boundaries so tightly that it is impossible to discover new growth platforms.
Innovation is often cited as a top three strategic priority for many corporate leaders, and if there is one topic that gets their attention, it’s building innovation capabilities within their organizations. The prospect of having a crack team of internal innovators churn out new growth businesses is certainly attractive.
Setting the right boundaries
Yet, before companies start to tackle the many challenges of getting the innovation engine humming, they need to address two key questions; namely “why do we need an innovation team” and “where and how will we deploy the team.” We encounter all too often companies that are determined to develop strategic innovation capabilities, but have defined very narrow business boundaries within which those capabilities will be deployed. Sometimes we see broad and well defined business boundaries, without any credible plan to build the requisite innovation capabilities. The first results in frustration, other second is simply wishful thinking.
You can map out the simple options in a simple two by two (see chart).
In the first scenario (the one that leads to frustration), companies build innovation capabilities, but define the business boundaries so narrowly that it’s impossible, even for a crack innovation team, to find meaningful new growth opportunities. If the business boundaries are so close to the core business, typically all the opportunities therein have either been investigated by the established business units and are actively pursued or have been discarded as unattractive. In either circumstance, there is little for the innovation team to do except to catalogue and categorize the opportunities.
Learning from a dead end
An episode at a large conglomerate we advised exemplifies the challenge. The company wanted to build innovation capabilities in all of its business units (BUs). The problem was that some of those BUs had very tight business boundaries and actually it made little strategic sense to expand them. Despite long discussions about the dangers of applying a ‘one size fits all’ model to building innovation capabilities, the company ultimately decided to develop identical innovation capabilities across the BUs. The warning signs were quickly manifested: The teams sensed that they had been given an impossible task and voiced their frustrations.
The good news is that the company learned from going down that dead end. A few years later, after the teams were disbanded, the BUs focused all their efforts on the core, exactly as they should have done from the beginning. But meanwhile, in the other BUs that had more expansive boundaries, the innovation teams were able to identify and launch several new business models that grew into real businesses.
The lesson here is clear. Don’t build extensive non-core innovation capabilities without first expanding the business boundaries. Doing so will lead only to frustration; indeed, the better trained the team members are, the more frustrated they will become.
When innovation is just a wish
The ‘limited capabilities, broad business boundaries’ quadrant has the opposite problem. Here companies define expansive boundaries for non-core innovation without investing in the corresponding innovation capabilities. The challenge with this approach is that without the resources, systems, processes, skills and capabilities needed to pursue new opportunities, the frontier that the leadership has defined cannot be effectively explored or developed.
We recently saw an example where a large financial institution had defined several new strategic growth areas. However, they decided to pursue those opportunities with an inexperienced team that had never done anything material in the area of business model innovation. Even worse, the teams were small, part time, junior, and had little leadership support. Topping it all off, the half a dozen strategic opportunity areas that had been identified were complex, competitive and expansive.
The mismatch between the public announcements and the actual resources committed to achieving the goals could not have been starker. Here the outcomes of the innovation efforts are highly predictable. Without systematic investment in and development of innovation capabilities, it’s impossible to discovered and launch profitable and scalable business models. Simply put, it’s wishful thinking.
Rules for launching an innovation engine
To avoid the frustration and wishful thinking and to build a real innovation engine, companies must address innovation capabilities and business boundaries as two sides of the same coin. There are five simple rules that help companies navigate this space.
- Ensure innovation capabilities and business boundaries are aligned.
- The business boundaries should be defined by the size of the growth gap and the strategic capabilities & assets of the company.
- The investments in innovation capabilities should be defined by the growth gap and the business boundaries.
- A long term plan with requisite investments should be put in place and top talent must be assigned to the team.
- The leadership must remain closely engaged with the innovation initiatives.
If companies can’t align business boundaries and innovation capabilities, it’s better to focus only on the core business, because the outcomes of misaligned innovation efforts are highly predictable. One will result in frustration and the other is simply wishful thinking. For the innovation engine to hum, the innovation capabilities and business boundaries must be aligned.
Pontus Siren is a partner at Innosight based in Singapore.