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Innovation Capacity Building

Mushtaq MALIK, Innovation Realization Consultant OLiTYS

Disruptive innovations have the greatest chance of creating blockbuster business growth. Disruptive innovations either create new markets or reshape existing markets by delivering relatively simple, convenient, low-cost innovations to a set of customers whose jobs-to-bedone are ignored by industry leaders. Business heads and managers continue to remain perplexed about the right approach and where that BIG idea will come from, how would it take shape and how innovation itself can be managed? Breakthrough research by Kim and Mauborgne Blue Ocean Strategy holds the answer to such questions. Blue Ocean Strategy focuses on the creation of new markets or uncontested markets. Blue Ocean Strategy does not focus on the competitive advantage question: how to be better than the competition? Instead, Blue Ocean Strategy model focuses on making the competition irrelevant by creating blue ocean opportunities. Blue oceans are uncontested marketplaces in which new demands of customers are satisfied. In contrast Red Oceans are competitive arenas in which competitors fight and consequently weaken each other. The essence of the Blue Ocean Strategy lies in labouring at innovating value creation for the customer. In other words, Value Innovation (Mauborgne, 2005). Authors (Kim and Mauborgne) in their book Blue Ocean Strategy elaborate on the process of Value Innovation and detail the steps/stages involved in the formulation of a strategy for an uncontested market.

However, the challenge is how businesses can build innovation capacity and culture to ensure Value Innovation. This paper attempts to propose Value Innovation capacity building practices through examples and case evaluations.

Introduction

Innovationthe ability to define and develop new products and services and deliver them to marketis the fundamental source of value creation in companies and an important enabler of competitive advantage (Booz Allen Hamilton). Innovation is inherently a highly crossfunctional activity that, when it works well, creates a constructive tension between competing objectives of development cost, product value, performance, quality, and time to market. Product/Service development touches every part of the company. Functions like strategic planning, sales, operations; customer support, purchasing, and finance are just as important to successful innovation as R&D and engineering. How well these very different functions work together in large measure determines how effective a company will be at developing successful products and services. An organizations structure suggests the relative roles and authorities of these functions (Booz Allen Hamilton).

Booz Allen study found that over half of all companies had restructured their innovation organizations within the prior two years. Likewise, Dr. Went points that organizational structure significantly facilitates innovation pace and cites examples from Toyota, Procter & Gamble , GE, 3M, IBM, Google, Microsoft, Sony, and Whirlpool having adopted an organizational structure that is more affable towards innovation (Wentz). On the other hand, Gary & Bruce authors of the book Results: Keep Whats Good, Fix Whats Wrong, and Unlock Great Performance articulate that their experience indicates there is no one right structure for a given innovation organization. They emphasize that different structures work successfully under different circumstances. Interestingly Gary & Bruce accentuate a contrasting fact that organization structure in itself is a poor predictor of how an organization will really behave (Gary Neilson, 2005). They further point in their book that there are deeper factors at work. Factors that, to use a biological metaphor, are embedded in a companys Organizational DNA (Gary Neilson, 2005), which determines the purpose for which organizations are designed and expected to produce results.

What remains more intriguing is the fact that organizations opt for different kinds of innovations. Among all types of innovation organizations undertake, Disruptive innovations have the greatest chance of creating blockbuster business growth. Disruptive innovations either create new markets or reshape existing markets by delivering relatively simple, convenient, low-cost innovations to a set of customers whose jobs-to-be-done are ignored by industry leaders. Breakthrough research by Kim and Mauborgne Blue Ocean Strategy bring forth a newer dimension of Value Innovation that focuses on lowering costs and

increasing value for and organizations most important customer (Mauborgne, 2005). Authors elaborate on the process of Value Innovation and detail the steps/stages in the formulation of a strategy for an uncontested market.

All this indicates and points at two things. One, organisational structure alone does not determine the ability to innovate. Two, organizations labouring at value innovating consciously and deliberately work at creating their ability and hence the capacity to innovate. The bigger question, however is how and what organizations do to ensure that innovation (disruptive and value enhancing in nature) takes place. Let us first understand the two aspects mentioned above and then proceed to evaluating/analyzing from example.

Organizational DNA
Just as natures DNA spells out the exact instructions required to create a unique organism, organizational DNA determines how an organization will function. An organization can be defined in terms of four organizational dimensionsstructure, decision rights, motivators, and information (see figure 1). These four dimensions, when combined in myriad ways, define an organizations DNA (Booz Allen Hamilton). The health of a companys innovation can be directly linked to a companys ability to generate value and growth. Research indicates that companies with healthy innovation organizations reported stronger financial performance than those with unhealthy OrgDNA (see Figure 3). Those companies with resilient organizations reported the best financial performance of all. The roots of these performance differences can be traced to
Figure 1 Basics of Organizational DNA

how different organization types deliver on some of the fundamental requirements of successful innovation. There are many organizational characteristics that are needed to create and sustain successful

innovation, but three are among the most significant speed, transparency and accountability (Gary Neilson, 2005).

Speed

The increasing pace of innovation requires companies in virtually every industry to innovate faster. Speed in decision making enables companies to mobilize against new opportunities in order to capture first-to-market advantages as well as to respond quickly to changes in the customer environment or to the actions of competitors (Gary Neilson, 2005). Over-managed organizations tend to be caught in analysis paralysis and have a difficult time making decisions quickly. Over-managed innovation organizations also tend to have numerous layers of management. These layers by their nature are an impediment to the information flow(s) and decision making upon which responsive innovation depends. Govindrajan and Trimble say that each additional layer of the organization is a potential gate or handling point through which information and decisions have to pass (Govindrajan, 2010).

The result is slow decision making, as most ideas take a long time to reach the end-decisionmakers. Not only does all this handling slow down information and decision flows, but it introduces additions or modifications to the original messages. These delays help create long cycle-time development processes. These lengthy development cycles open the window for changes in designs or requirements that drive engineering churn, poor quality, and even longer delays (Gary Neilson, 2005).

Figure 2 Organization Profiles

Missed opportunity is the primary effect of slow innovation processes. Companies that are fortunate enough to have robust idea creation capability may be unable to capitalize on the value of their innovation due to delays in getting the ideas commercialized and introduced. The redirection and changes to requirements that are inherent in slow innovation processes drive higher costs and exacerbate delays. Additionally, every company, even the market leaders, faces situations in which it has to respond to unanticipated moves by competitors or changes in the marketplace (new customer need, regulatory changes, etc.). Slow innovators are unable to mobilize their organizations to respond effectively to these events (Sapolsky, 1967).

Transparency

Transparency is the property that allows direction and action to be made visible throughout an organization. Creating transparency in engineering and R&D organizations is particularly important as senior executives often view them as black boxes. For effective innovation, transparency ensures that development priorities and efforts can be aligned with strategic priorities. It provides for the exchange of information between functions that is so critical to cross-functional processes like innovation. It is also the means by which the performance of the organization is made visible to senior management, enabling a closing of the loop between objectives and performance. Lack of transparency can have a very detrimental effect on innovation performance (Govindrajan, 2010).

Also lack of transparency prevents the communication and common understanding of organizational priorities, leaving key decision makers uncertain as to individual and collective goals. This uncertainty erodes the trust and collaboration between functions that are so essential to responsive
Figure 3 Influence of DNA on Relative Financial Performance

innovation.

Accountability

Accountability is the glue that holds an organization together. For innovation, like other complex processes, it is the mechanism that ensures cross-functional commitments are taken seriously, and it establishes personal ownership for performance and outcomes. The topdown direction and multiple layers in over-managed organizations tend to dilute direct accountability (Booz Allen Hamilton). Unclear decision authority within and across levels blurs the accountability for decisions and actions, which can result in widespread abdication of responsibility (Sapolsky, 1967).

Lack of accountability in innovation organizations shows up, among other places, in long cycle times and poor product launches. Failure to meet functional commitments results in disruptions and missed milestones. Poor accountability also undermines confidence in the many functional commitments that are required to make a new product or service a success (Booz Allen Hamilton).

Figure 4 Most Innovative Companies (Bloomberg Businessweek, 2006)

Characteristics of Organizations that have pro-Innovation Structures


Innovative organizations like Apple, Google, Samsung, GE, 3M, IBM, etc. (The World's Most Innovative Companies) have adopted an organizational structure of innovation that significantly facilitates accelerated Innovation and mostly disruptive innovation. They have taken the following seven key actions in order to structure their innovation management and organization for Innovation (Wentz):
# Structure Characteristic 1 Delegation of Decisions to Innovation Teams Impact Decisions need to be delegated to the innovation team(s) in order to avoid delays and enable quick paced Innovation. The consent of (top) management should be sought only at the milestones or gates of the innovation process. The members of the innovation team should be available to the team with 100% of their time in order to get the innovations to market as quickly as possible. The organizational integration of the majority of R&D into business units makes innovation management more effective. It fosters collaboration with other departments of the business unit and enables orientation towards the customer (customer pull) in lieu of an exclusive focus on the technology (technology push). Furthermore it improves the preconditions for innovation. Co-Location (organization structure of co-located teams and co-located divisional departments) fosters integration of teams and departments and a free-flowing communication. By locating all innovation team members and relevant departments of a division in the same place, companies can make sure that everybody hears the same thing at the same time. This way information does not get distorted. Spontaneous communication and exchange of ideas are facilitated. Co-location raises the probability that in the management of an innovation the necessities of the market-place and of the technology are simultaneously taken into consideration, and that the innovation gets to market faster (Govindrajan, 2010). The management of disruptive innovations (Wentz), often necessitates the

2 Integration of R&D into Business Unit

3 Co-Location of Teams and Departments

4 Central Innovation

Teams

5 Central Innovation Funds

6 Central Interface for Open Innovation

7 Mergers & Acquisitions Department

use of central innovation teams that are not assigned to individual divisions. Such central innovation teams typically report to a manager at the corporate headquarter. As an alternative organizational structure of innovation management central innovation teams are established at the divisional level, and they will report to the head of the division, and not to the head of an individual category, product group or brand. Such central teams are mainly utilized in cases when the motivation and resources of individual divisions, categories, product groups or brands are insufficient in order to get the respective innovation to market with maximum effort and at maximum speed despite the daily pressure and distraction from the established operation. The innovation projects in most cases need a special budget to get funded because the divisions shy away from making funds available given the typically high risk of such projects. Without a central innovation fund these innovations would not be launched fast, if they would get to market at all. Fast Innovation would be impossible (Mauborgne, 2005). Open Innovation is a core strategy of innovation management in order to get innovations to market more rapidly and enable Fast Innovation. In order to execute Open Innovation and to channel external solutions and ideas into the company, innovation management needs an effective external interface (Wentz). Alternatively it facilitates in shortening the time-to-market time periods. A special organizational structure of managing for Innovation via Open Innovation is the M&A department which is involved in the acquisition of innovative companies. Via acquisitions an enterprise can significantly strengthen its innovation capacity, and can be in the market-place with innovations much faster.

Building True Innovation Capacity


Going forward from the organization structure characteristics it is easy to take a cue that an organizations innovation capacity building exercise must be pro-change, ready to deal with complexity and outclass the competition through bringing more and more value to the most important customer. In this light, Ogunfayo Temitope says that we live in a world that is referred to as a world of 3Cs Accelerated Changes, Overwhelming Complexity and Intense Competition (Temitope, 2007). Innovative organizations need to be decentralized, informal, minimally stratified, and generalized rather than specialized. Essentially, innovative organization must have cultures that value independent thinking, risk taking, and learning. Tolerance for failure and valuing diversity need to be a part of the culture (Sapolsky, 1967). Open communication is reinforced and there is a high degree of trust and respect between individuals. In particular Innovation Capacity of an organization is more realistically built when organizations have the following (Villa, 1990):

Vision

Organizations with vision are better able to appreciate and use peoples creative talents. When an organization has vision it is focused on long-term outcomes. True vision is the ability to create a future from nothing. All organizations have a past, a history. Visionaries are able to create or design their future without being constrained by what has happened before.

They do not determine what will work in the future from what has, or has not, worked in the past. Paradoxically, this is balanced by their ability to learn lessons from experience. It means having a future that is informed by the past rather than dictated by it.

Ability to Change

They are able to continually re-invent themselves in a focused, yet flexible fashion. They are pushing forward from today, driven by a compelling vision of the future. There is a huge difference between creating your own future and reacting to a future that hits you between the eyes! Too often, change is only considered as a last resort to save the day.

Willingness to Do Things in New Ways

They know their customers, and are constantly learning from them, using the most demanding customers to drive their own innovation and competitiveness. The organization continuously engages in thinking and action that directly or indirectly affect the future bottom-line. In other words, they maintain intense customer focus.

Value Substance over Form

This is a very important characteristics of innovative organizations. Results-oriented cultures will always have more creativity. Form over substance cultures, where following the rules and sticking with defined processes are more important than coming up with the correct answer, are the bane of creativity and innovation. Creativity and innovation are present in every culture, but flourish best in those cultures that can put the ideas to work rather than smother them in formal review processes. Therefore, they tend to be tight/loose organizations; tight on the outcome measures of success but loose on the processes of how the outcomes are achieved.

Rewarding Creativity and Innovation

When a problem needs a solution, the default position is: How can we do this more creatively? Creativity is both explicitly and (more importantly) implicitly encouraged. The management team knows what to do when someone comes to it with an idea. Managers provide support and recognition for the creative temperament. Creative individuals are used as role models. Legends are told (and retold) about innovators. Creativity is not seen just as the prerogative of a few selected individuals; the expectation exists that everyone can be creative in their own field.

Encourage Openness and Playfulness

Innovative organizations practice open book management. All go to great lengths to encourage communication throughout all levels of the organization. Most recognize the value of random meetings and interactions and have designed their facilities to encourage such activities. A company I heard about, eLab (now part of Sapient) in Chicago included a Napatorium, a Leave-Me-Alone Room, and a room where each project was displayed for feedback from other teams and individuals in its offices. Most other companies designed their facilities with numerous small meeting areas throughout, each with a unique, fun, playful dcor, intended to facilitate random conversations. Some have regular events with fun, often family oriented themes. These all have a way of bringing out innovation in the work force.

Support Cross Functional Teams

This is one key strategy of companies that are innovative they incorporate cross functional teams and/or cross functional training as a regular, formal methodology. They look out for skills they need in a particular team and fill it up. Each project in development was team based, teams, at a minimum, were composed of designers, engineers, planners and marketing people.

Conclusion

An innovative organization engages everyone throughout the organization in the task of developing and implementing new ways to reach the organization's goals. And everyone indeed includes everyone from the chief executive to frontline workers. Getting the chief executive to be innovative ought not to be too difficult. After all, the chief executive was not repeatedly promoted to more and more sophisticated responsibilities without a few creative ideas along the way. We expect that the chief executive of a business division or a government agency will be innovative (though, all too often, we are disappointed).

Regardless of how difficult it is to get the chief executive to be innovative it will certainly be more difficult to get middle managers to be innovative, still more difficult to get frontline supervisors to be innovative, and perhaps even more difficult to convince frontline workers that part of their job includes being innovative. This raises important questions: Is it possible to create an innovative organization? Is it possible to persuade every individual in the organization that an important part of his or her responsibility is to develop and implement new ways of achieving the organization's purposes? For most people, we suspect, the answer to these questions is yes.

Innovation capacity building is a serious endeavour and cannot happen by chance. While it involves the organizations willingness to accept and adopt change within; it also demands the need to live the change. Innovation capacity is measurable only when there are results that emerge as tangible from the efforts. Innovation Capacity building is a continuous effort and requires to be renewed with each new innovation it vies at.

Works Cited
Blue Ocean Strategy. (2005). Boston: Harvard Business School Publishing. Bloomberg Businessweek. (2006, April 24). Retrieved January 5, 2011, from Businessweek: http://www.businessweek.com/magazine/content/06_17/b3981408.htm Booz Allen Hamilton. (n.d.). ORganizational DNA. Retrieved November 25, 2010, from Innovation's OrgDNA: http://www.orgdna.com/downloads/InnovationsOrgDNA.pdf Gary Neilson, A. B. (2005). Results: Keep What's Good, Fix What's Wrong, and Unlock Great Performance. New York: Crown Publishing.

Govindrajan, C. T. (2010). The Other Side of Innovation: Solving the Execution Challenge. Boston: Harvard Business School Publishing. Mauborgne, W. C. (2005). Blue Ocean Strategy. Boston: Harvard Business School Publishing. Sapolsky, H. M. (1967). Organizational Structure and Innovation. The Journal of Business, 4(40), 497510. Temitope, O. (2007, June 28). Retrieved February 14, 2011, from Innovative Organization: http://pastortea.blogspot.com/2007/06/innovative-organizations.html Villa, P. (1990). Invention, Inventive Learning and Innovative Capacity. Behavioral Science, 35(4), 290310. Wentz, D. (n.d.). The Innovation Machine. Retrieved July 22, 2010, from http://www.the-innovationmachine.com/?p=83