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Making Innovation Work - Book Review

1 April 2009
Dr. Moria Levy
book cover

This book, "Making Innovation Work," presents a truly innovative exploration of innovation. Authored by David Epstein (The Jewish Connection?) and Shelton, it effectively challenges prevalent stigmas associated with innovation. The book elucidates why innovation often falls short of expectations, even in organizations investing significant resources, and provides insights into the importance, methodologies, and tools for fostering innovation. It emphasizes that innovation is distinct from creativity and may not be as flashy as commonly perceived; instead, it requires effective management, measurement, and the ability to derive benefits.


Notably, there are two distinctive chapters: one tailored for those interested in business intelligence, focusing on measurement, and another seemingly designed for knowledge management professionals, delving into learning. Exploring innovators' perspectives on these areas is intriguing, as an external viewpoint brings freshness and essential insights.


The book is structured with chapters that methodically guide readers through the process of restructuring:
  • Innovation: What and Why?

  • Innovation Model

  • Strategy

  • Organizational Structure

  • Workflows

  • Measurement

  • Reward

  • Learning

  • Culture


Innovation: What and Why?

Organizations have gleaned a vital lesson – innovation is not merely a tool for development and growth but a survival tool. Instances of organizations failing to innovate and subsequently disappearing are abundant, in contrast to well-known innovators like Apple, Toyota, Dell, and others who seamlessly integrate innovation into their ethos. Peter Drucker succinctly defines innovation as "an effort to create a focused change in the economic or social potential of an organization," encapsulating its essence as a driver of change and a crucial tool for CEOs. Innovation is not a one-time endeavor but an ongoing, integral aspect of an organization's routine.


The text introduces seven rules for innovation, each contributing to the understanding and implementation of this essential concept:

  1. Employing strong leadership to define an innovation strategy, build a suitable portfolio, and encourage value creation.

  2. Adapting innovation to the company's strategy.

  3. Making strategy an integral part of the company's business concept, including process and cultural support.

  4. Balancing creativity and value creation.

  5. Neutralizing organizational antibodies that resist change.

  6. Creating innovation networks inside and outside the organization (emphasizing networks over individuals).

  7. Realizing measurement and reward in innovation; in essence, managing innovation.


These rules are elaborated in subsequent chapters, with each rule naturally aligning with multiple aspects discussed. Crucially, it is emphasized that the approach to innovation varies across organizations, tailored to their unique structures, cultures, and characters. The key to success lies not in copying others' innovation but in learning from it and adapting judiciously to one's organization. As detailed below, intelligent matching is likely the linchpin for success.


Innovation Model

An innovation model is constructed with two axes, each requiring consideration when developing the innovation model within an organization:


Innovation Levers:

There are six levers for innovation grouped into two main categories:

  1. Technological innovation: Products and services; technological workflows; enabling technologies.

  2. Business model innovation: Value offered, supply chain, target customer.


Successful progress demands companies to generate both technological and business model innovation. For instance, with its focus on technological innovation, Xerox faltered due to the absence of business innovation.


Types of Innovation:

There are three types of innovation:

  1. Incremental innovation: Small technological or business model advancements (e.g., a new vehicle model).

  2. Semi-radical innovation: Prominent technological or business model changes (but not both), typically resulting in incremental innovation of the second type (e.g., changes made by Walmart in the supply chain to lower prices).

  3. Revolutionary (radical) innovation: Stands out in technological and business model aspects (e.g., Apple's iPod).


The key is to incorporate both types adeptly. Revolutionary innovation occurs every few years, interspersed with numerous smaller waves of innovation. This rhythm is crucial for engaging with customers and allowing the company to breathe and prepare for the next revolutionary innovation. The model establishes the foundation for crafting the innovation strategy within the organization.


Strategy

An organization must actively decide how to pursue innovation rather than being compelled into a predetermined situation – this is a strategic endeavor. In this decision-making process, two primary components must be considered: the extent and the type of innovation (incremental, semi-revolutionary, or revolutionary). The often-repeated phrase that the "how" (strategy) in innovation determines the "what" underscores the significance of this strategic approach.


There are two main strategies determined by the extent and type of innovation, each suitable for different organizational periods:


  1. Play-to-Win Strategy:

    a. It focuses on creating a critical advantage the organization is willing to invest in.

    b. Characterizes startup companies aiming for a leading-to-market business model or technology.

    c. It emphasizes revolutionary innovation, but success may necessitate a shift to semi-revolutionary or incremental innovation.

    d. Limited resources demand a focused approach.

  2. Play-not-to-Lose Strategy:

    a. Adopted when internal or external conditions impede the realization of a victory strategy.

    b. Primarily, it involves incremental innovation with rapid movement, calculated risk-taking, and potential adjustment to or overtaking of competitors.


Internal conditions to consider include technological capabilities, enterprise capabilities, success of the existing business model, budgeting, and management vision. External conditions encompass creating a supportive, collaborative external network, industry structure, competition, and the pace of required technological change.


In practice, external and internal conditions may indicate intermediate situations, requiring the CEO and management to decide and choose between the two strategies. Caution is emphasized, as both a lack and an excess of innovation, especially revolutionary innovation, can lead to failure. Timing and dosing are critical, necessitating effective risk management. General Electric is an example of a company successfully transitioning between these two strategies, adapting the pace and level of innovation to prevailing conditions.


The responsibilities of the CEO include:

  • Choosing an innovation strategy aligned with the overall business strategy.

  • Deciding on a play-to-win or play-not-to-lose strategy.

  • Creating a balanced innovation portfolio includes incremental, semi-revolutionary, and revolutionary innovation.

  • Identifying the relative role of technological innovation and innovation in the appropriate business model.

  • Repeatedly communicating the strategy throughout the organization using various channels and expanding measurement and remuneration considerations.

  • Ensuring that opponents of change do not hinder the value derived from investing in innovation.


Organizational Structure

Organizing an organization for innovation poses a significant challenge in many companies, a sentiment that I readily acknowledge. Integrating innovation seamlessly into the fabric of the organization is a challenging feat.


Key Points to Note:

  • Recommended Method: Develop an internal "market" for innovation. For instance, Bank of America established an I&D (Innovation and Development) unit responsible for leading product and service development. The internal market method involves project teams and others presenting creative ideas to management. If management embraces these ideas, the activity is budgeted based on the proposed value and need.

  • Changing Organizational Structure and Perception: As an organization progresses through its life cycle, it shifts from an entity oriented towards significant innovation during its establishment (startup) to one focused on creating customer value and revenue as it matures. Adjust the organizational structure accordingly, and in overcoming organizations, consider implementing an internal market as described above.

  • Not Recommended: Avoid creating independent units dedicated to innovation; instead, integrate innovation holistically into the organization. Outsourcing the entire innovation activity is not advisable, as it can lead to organizational loss. Establish strong relationships with partners, recognizing the value of networks and partnerships.


Signals of Organizational Resistance to Creativity and Innovation:

  • A portfolio of innovation projects primarily composed of incremental innovation.

  • Innovation measurement is limited to tools like ROI (Return On Investment) and DCF (Discounted Cash Flow).

  • Annual or infrequent innovation budgeting rather than responding to good ideas as they emerge.

  • Measuring innovation in terms of efficiency rather than overall value to the innovation portfolio.

  • Indifferent managerial responses to good innovative ideas.

  • Managers criticize innovators instead of encouraging and supporting them.


The book provides numerous examples of excellent companies founded on good ideas that founders couldn't realize in their parent organizations.


Five Steps to Achieve Balance Between Creativity and Business Processes:

  1. Develop supporting platforms for different types of innovation (e.g., broad interests, networks, metrics, rewards, and supportive management systems).

  2. Examine each project to ensure an internal balance between creativity and business goals.

  3. Establish internal and external networks for collaborations.

  4. Ensure transparency in internal markets for creativity and the diffusion of innovative ideas.

  5. Exercise caution and vigilance against organizational opponents of change.


Workflows

We recognize that simply "convincing" and offering cultural tools fall short; process adjustments are crucial for cultural cha. This is particularly challenging in larger organizations, where size-related clumsiness hinders the natural development of these tools amid shifting perceptions and thinking. Innovation systems encompass diverse tools facilitating innovation maintenance, such as policies, procedures, and information-related mechanisms, serving functions like efficiency, channeling, coordination, learning, and alignment to perception.


Potential process tools include:

  • Idea tools: Identifying gaps in existing products, services, business models, or processes.

  • Structured Idea Management: A methodology with stages like criteria development, brainstorming preparation, sessions, review meetings, grading workshops, preliminary research, and final grading.

  • Experiences: Forming the basis for revolutionary innovation.

  • Prototypes: Simulations, Excel sheets, process maps, etc.

  • Processes that transform ideas into a comprehensive picture showcasing value for both the customer and the company.


For managing innovation and ensuring progress, potential managerial tools include:

  • Standard tools from other activities: reward and recognition, innovation project planning, resource allocation, measurement, monitoring, and tracking.

  • Innovation-focused tools: market research, strategic planning, innovation portfolio management, culture, learning tools, knowledge management, partnerships, and external monitoring of competitors and products.


In the age of connectivity, electronic collaboration is encouraged. While this is beneficial, including it in face-to-face meetings is advisable.


Measurement

The authors of this chapter argue that most organizations mismeasure innovation parameters, resulting in substantial investment with minimal value. They assert:

  1. Measuring innovation is crucial for organizational advancement.

  2. It's only possible to measure some things; thus, choose 5-7 metrics, focusing on the most relevant indices.


Measurement objectives include:

  • Planning: Assist in defining and communicating innovation within the organization.

  • Monitoring attempts to implement innovation and tracking performance.

  • Learning and identifying new opportunities for innovation.


Similar to the Balanced Scorecard for examining business strategy, it's proposed to establish a Balanced Scorecard for the innovation strategy and its business realization model. Focus on measuring key aspects:

  • Investments:

    - Tangible resources (time, software, and financial resources).

    - Intangible resources (talent, motivation, culture, knowledge, channeling, and brand).

    - Supporting structures, including interest groups and those responsible for investment management.

    - Innovation strategy, measuring innovation platforms and integrating them into innovation levers.

    - An external network involving partners, leading customers, and critical suppliers.

  • Processes:

    - Creativity processes (culture, exposure to innovation, understanding strategy, managing supportive structures for ideas).

    - Monitoring execution of innovation projects.

    - Integrative project performance tracking (overall visibility, integrative realization capability, leverage).

    - Measuring the balance of the innovation portfolio (time to value, risk, value, type of innovation, realization status).

  • Deliverables:

    - Profit (share price, equity increase).

    - Technological leadership.

    - Project completion (expected sales and profit percentage increase from new products).

    - Introduction of new products.

    - Business improvement processes (process efficiency).

    - Market leadership.

  • Outputs:

    - Project profitability and value obtained (amount of products and services offered to the client).

    - Profitability from customers, products, and values obtained (new customers, returning customers).

    - Return on investment (profits in various parameters).

    - Long-term value (customer profitability).


Reward

Incentives and rewards stand out as powerful managerial tools. Four key motivational factors include:

  • Expected incentive linked to activity.

  • Passion invested in executing the activity.

  • Trust in the appreciation they will receive.

  • A vision outlining the intention of the activity.


Individuals may have a unique mix of motivational factors based on the activity. Appreciation serves as a reward, achievable even without measurement.


Incentives:

  • Begin before innovation and serve as the bridge between measurement and reward.

  • Are intertwined with management culture and systems, forming the foundation for measuring performance, goals, and incentive contracts.


Performance measurement:

  • Evaluated against goals.


Objectives:

  • Serve as the foundation for defining performance.


Axes of reference:

  • Quantitative or qualitative.

  • Specific or broad.

  • Realistic or ambitious.

  • Success-based or failure-prevention-based.


Incentive contracts:

  • Define a rewards system, addressing decisions on team or individual focus, objective or subjective evaluation, and the nature of compensation (payment level, payment-to-performance ratio, timing, and method).


Risks:

  1. Inappropriate rewards cause damage, exemplified by the dot-com crash due to over-incentivization.

  2. Excessive use, potentially favoring incremental over revolutionary innovation, negatively impacts overall performance.

  3. Rewards translate into punishment for failure, stifling innovation.


Learning

In today's rapidly evolving environments, the capability to learn faster, more efficiently, and cost-effectively can be the differentiator between a standard competitor and the market leader.


Learning in our context operates on two levels:

  • Learning related to products, services, and the business model.

  • A gauge of how to enhance the innovation process within the organization.


Organizational learning and change are inseparable as innovation is fundamentally rooted in change; whether incremental or revolutionary, learning becomes a crucial and intrinsic component. Learning in an innovative organization exhibits several characteristics (referencing Sanji's concept of the learning organization M.L.):

  1. Dedicated processes for learning and change aligned with strategy and continuous improvement efforts.

  2. Systemic perception considers the organization's dynamism.

  3. A shared vision fosters a collective understanding of organizational priorities.

  4. Flexibility and agility in driving change and cultivating an environment conducive to continuous innovation.

  5. Proactive anticipation of challenges and threats rather than reactive crisis management.

  6. A collaborative and challenging environment.


The authors of the book highlight two learning methods:

  • Learning how to act: Continuous professional improvement.

  • Learning how to learn.

Both incremental and revolutionary innovation leverage both methods, but the nature of learning differs. Incremental innovation relies more on open knowledge (explicit knowledge), managed through platforms like professional websites. In contrast, revolutionary innovation relies more on tacit knowledge, managed through the active involvement of knowledge holders.


Supporting systems:

  1. Systems for delivering value – embody the knowledge amassed by defining processes and work requirements (e.g., a set of procedures), reflecting organizational open knowledge, and promoting its utilization.

  2. Systems for enhancing and refining the work model – organizational mechanisms supporting knowledge creation through hands-on experience, whether gained from the actual work, visits to other locations, or insights from experts or consultants. These systems make tacit knowledge visible.

  3. Systems for cultivating future competitive capability – a more intricate process arising from a blend of initiated activities (strategic brainstorming) and field experience, emphasizing a dynamic interplay between vision and action.

  4. Systems for developing strategic skills – mechanisms allowing novel ideas to permeate and be embraced within the organized system, fostering innovation.


To succeed and learn, an organization must integrate knowledge management mechanisms with the ability to discern information, knowing when to preserve existing knowledge and when to innovate. One final point: learning commences at the technological level, later shifting to performance, market dynamics, efficiency, and ultimately, mastery with complementary tools.


Culture

The organizational culture, encompassing unwritten rules, shared beliefs, and employee thought models, profoundly influences organizational innovation, and reciprocally, innovation can shape the organizational culture. In specific organizations, the culture attains a sanctity comparable to "religion." Contrary to some misconceptions, organizational culture is not static; it evolves and transforms, proactively influenced by defined managerial actions. An example of this dynamic is the cultural shift at Dell, pivotal to their success. Therefore, effecting organizational innovation mandates action at the cultural level.


Harnessing organizational innovation through culture necessitates a delicate equilibrium among ostensibly contradictory dimensions and behaviors:

  1. Balancing defined and structured goals with an inclination for unpredictability.

  2. Striking a balance between stability and a propensity for change, influencing the spectrum between perceptible and revolutionary innovation.

  3. Harmonizing focus for immediate efficiency and speed with an emphasis on countering for future value.

  4. Balancing discipline that supports existing processes and knowledge by introducing surprises from unexpected learning events.

  5. Maintaining a balance between pride, fostering confidence essential for innovation, and recognizing threats that spur groundbreaking ideas.

  6. Juggling conservatism for prudent resource utilization with a willingness to take calculated risks.

  7. Balancing guidance and freedom.

  8. Striking a balance between control and trust.


Pertinent issues related to culture and innovation include:

  • Success poses the primary threat to innovation, transitioning from contemplation to the peril of complacency.

  • The physical environment, encompassing colors and shapes, influences a culture of innovation.

  • Residents in different global regions tend to evaluate innovation through distinct lenses: Asia emphasizes technological leadership, the US prioritizes product performance, and Europe emphasizes time-to-market.

  • Investments should focus on hiring and retaining innovation-oriented individuals, acknowledging the inherent challenges of retention.

  • Some argue that innovation benefits from external perspectives, advocating for individuals outside the profession/knowledge/environment to foster innovation.


Leadership undeniably plays a pivotal role in shaping culture and driving innovation. Innovative leadership embodies:

  1. Inspiring challenges that encourage individuals to exceed expectations, explore, create, and surprise.

  2. A visionary perspective outlining the organization's trajectory.

  3. Commitment to providing necessary resources.

  4. Implementation of an innovation strategy, along with processes and supporting systems.

  5. Leading by example.

  6. Commanding ability, adept decision-making, and reasonable compromise.

  7. Cultivating a culture adept at embracing new ideas and change.


The book began its exploration with a discourse on innovation and its seven rules, with the first rule centering on leadership. Leadership, therefore, stands as the concluding message.

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