One of the well-known struggles of every company I work with is to combine innovation with efficiency-oriented operations. This is the classic problem of ambidexterity: the company needs to deliver on today’s revenue and margins while securing its future. The problem is not that companies aren’t aware of the challenge but that they lack the tools or mechanisms to achieve the balance in a good way. This is in some ways surprising as many reams of paper have been written about the challenge, ranging from books to research papers and from blog posts to company presentations.
The key challenge is that the two systems of operation are fundamentally different. In operations, we use the classical assembly-line way of thinking by chopping up the work in chunks, giving it to different people and functions and having handovers between them. The focus is on how each step in the process can be executed at the lowest cost. On the sales side, the focus is on tactics to make customers that have a known and established need for the product to choose us over competitors and to buy now rather than later. This leads to waterfall processes, hierarchical organizations, transactional business models and a relentless focus on efficiency. Resource allocation is based on operational needs and investments sustaining innovation typically have a predictable RoI that follows a Gaussian probability curve.
Innovation, on the other hand, is concerned with finding new opportunities. This means experimenting with new concepts to existing customers and, potentially, selling existing concepts to new customers. As we look to test as many concepts as possible against the lowest cost per experiment and, at the same time, the concept has to cover all relevant aspects including technology, engineering, business model and support, the nature of innovation requires empowered cross-functional teams that engage in continuous relationships with potential customers. The RoI of this type of innovation tends to follow a power function, meaning that the RoI of the most successful innovation is higher than the return of all other innovation initiatives combined. By its very nature, innovation is a high-risk, high-return game.
Many companies go wrong in clearly separating the two operating systems, resulting in a host of issues around innovation. As the majority of resources are on the operations side of the business, innovation efforts tend to be evaluated based on criteria driven by an operations mindset. This tends to lead to two extremes. The first is where any innovative idea is killed before it has had any chance to prove itself. As innovation is, by definition, breaking the existing rules of the game, it’s obvious that the opinions inside the company will seek to kill the idea unless it’s protected. At the other end of the spectrum, there are situations where an innovative concept needs to be fully developed and ready for production before we’re even willing to show it to a customer. This leads to the minimal viable elephant I wrote about earlier.
Combining innovation and operation is hard. In my experience, there are at least two tools that are useful in this context, ie the three horizons model and unstructured time. The three horizons model (attributed to McKinsey) divides the business of the company into three categories. Horizon 1 are the mature cash cow products that generate the majority of the revenue. The model says that this horizon should receive 70 percent of all resources in the company but also that individual products in this category should receive a resource allocation that’s 5-10 percent below the growth rate. That means that if the product grows at 5 percent per year, it may still mean that the available resources are flat or shrink every year.
Horizon 2 is concerned with the proven, rapidly growing products that aspire to become future H1 products. This part of the business should receive 20 percent of the resources and resource allocation to individual products can and likely should grow faster than revenue growth in order to accelerate things.
Horizon 3 is concerned with new innovation concepts that are unproven. This part of the business should receive 10 percent of the resources and these resources are allocated to running experiments with customers with the intent of finding viable options. In earlier columns, I’ve described how, in my experience, this should be organized.
The important part is to realize that any organization needs to allocate at least 10 percent of the total resources to innovation. One way to allocate those resources is by offering employees unstructured time for innovation. So, everyone who wants to can use 10 percent of their time for innovation efforts without any approval required from any manager. These hours can be used to build teams of people that all use their 10 percent to explore a particular innovation. In this article, I provide more details.
Concluding, combining innovation and operation is difficult but also essential to ensure the longevity of the company. We need to survive today and ensure a viable future. Although everyone understands this conceptually, my experience is that in most companies, these two systems of operation are conflicting, with the investment in innovation often being the victim. So, think about this: for all the talk about innovation, does your organization really conduct innovation, protect it and grow new businesses out of its innovation efforts? Or is it just ‘feel good’ talk?