Innovation is one of those overloaded terms that in popular discussion can mean anything that you want it to. In some ways, it’s similar to the parable of the four blind men and the elephant: depending on where you work on innovation, it will look and feel different.
As a consequence, I still need to meet the first company that will admit to not being innovative. All companies will have activities ongoing that they put under there, independent of what you think of it. So, I feel it’s really helpful to put a bit of structure into the topic.
First, it’s useful to distinguish between technology-driven and user-driven innovation. Both are important, but each requires very different approaches to the innovation process. In later posts, we’ll look at technology-driven innovation, but here, I’m going to talk about user innovation.
User innovation is focused on identifying unmet or underserved customer needs that can be addressed better by the company. Of course, new technologies may often be the key enabler for this, but it can also be inertia in the business ecosystem, conservative customers or other causes of lack of innovation in a particular business domain.
One of the models I find particularly helpful is McKinsey’s three horizons model. In this model, horizon 1 is about the company’s mature businesses that today pay the bills. Horizon 2 is concerned with proven, but smaller and fast-growing businesses. Finally, horizon 3 is about finding new businesses that could become future horizon 1 businesses.
In my experience, all companies I work with are predominantly focused on horizon 1 innovation efforts, which tend to be more sustaining in nature. Typically, they’re focused on improving some of the defined and appreciated KPIs of horizon 1 products, such as performance, efficiency and level of automation. So, when companies claim to be innovative, most often they’re referring to the efforts in horizon 1. The good news is that these tend to be quite predictable in outcome, meaning that you have a decent understanding of the return of investment (RoI). In particular, the RoI tends to follow a gaussian bell curve and virtually all innovations have a positive return.
Horizon 3 innovation falls in the radical innovation category and requires a very different approach. We’re looking to create new businesses that may be, and typically are, adjacent to our existing businesses but sufficiently separate that they can’t be viewed as extensions. Horizon 3 innovation, consequently, tends to take more of a “let a thousand flowers bloom” approach, combined with a relentless, proactive and aggressive pruning activity to shut down ideas that don’t show enough promise.
The typical models used in horizon 3 innovation tend to be along the lines of design thinking and lean startup approaches. The return function tends to be a power function, meaning that most of the ideas will fail but the few that succeed generate outsized returns that justify the investment in hundreds or thousands of ideas.
The source of ideas to evaluate tends to be some form of design thinking where the concept is to develop deep empathy with customers as a basis for brainstorming and idea generation. Once we have promising ideas, the next concept is the lean startup approach where you take ideas through a funnel to evaluate whether the problem is real, the solution suitable, the small-scale MVP successful and the large-scale MVP successful before scaling. I discussed this in a post a few years ago.
The third element of user innovation is interaction with real users. Especially for B2B companies, this is hard for two reasons. First, the people buying your product tend to be different from those using it. Second, the key contacts at the customer as well as in the company itself tend to be quite protective and look to avoid having others ‘mess up’ the relationship with the customer.
The challenge is that most companies operate based on a set of outdated, incorrect assumptions about the customer that potentially result in attempted innovations that fail to meet real customer needs and/or provide suboptimal innovations that don’t fully meet customer demand. The only way to address this is through continuous customer and user interaction. For B2B companies, this means deeply understanding and having empathy for the needs of all stakeholders at the customer. This isn’t achieved through surveys and customer interviews, but rather by shadowing customers, working with them, and so on.
All companies claim to be innovative, but in practice, most innovation efforts tend to be technology driven, focusing on horizon 1 offerings. To thrive in a digital transformation, companies need to adjust their approach to focus on more radical, disruptive innovations as digital technologies allow for fundamentally new ways of solving customer needs. This requires adopting a horizon model approach, employing design thinking and lean startup principles and engaging in continuous interaction with customers and users. Such an innovation approach will be experienced as inefficient by many, but industry best practice has shown that it’s the most effective as it generates a small number of crazily successful innovations providing outsized returns that justify the approach. Innovation is hard, but slowly sinking into the moras of commoditization is much worse in the long run!