Throughout the history of mankind, progress has been marked by an ability to systematically predict and then repeat the outcomes of increasingly complex processes or behaviors. From hunting/gathering to farming to reusing rockets – innovation undoubtedly continues to happen, and primarily because it addresses a need, stated or unstated.
As there is a plethora of innovation definitions, let us define innovation – and innovation success by the same measure – as: “The creation of something novel that is of value to customers and therefore results in earning more cash than it has burned creating.” (Note that this definition does not mention any “new technology” or “-process”)
Accepting this premise, many of our prospects and clients seem to ask the same questions:
- How can we have or incorporate more innovation into our business?
- Is there anything we can do to reduce or better manage innovation risk and improve success rates?
- How do we digitize our company – and what does digitalization tangibly mean for us?
- Everybody uses a lot of jargon – but how can we make anything happen for real?
Innovation and Digitalisation
With European digitalisation risk for the coming ten years being gauged at about Euro 800 B by the German consultancy Roland Berger, the order seems to be for something more concrete than the innovation theater (“innovation outposts”, “internet ambassadors”, “centers for digitalisation”, …) often heralded by business press and others.
And in fact, innovation and digitalisation can be systematic repeatable processes. There are tools and methods that we believe to systematically increase chances of success – regardless of company size.
Since successful innovations usually get commoditised over time and growth and cash flows dwindle as a result, companies must innovate to stay viable while executing the business created by prior innovations (this is called an “ambidextrous organization” by Harvard and Stanford professors Tushman and O’Reilly in their 2004 HBR article).
Three Horizons of Innovation
Researching the typical “S” curves of technology innovations, former McKinsey consultants Baghai, Coley, and White demanded already in 1999 that enterprises needed to manage multiple innovations in parallel over what they call “three horizons,” to ensure long term success. In their view, companies must continually improve cash-generating Horizon 1 innovations, expand current business models or technologies into adjacent markets in Horizon 2, while looking for disruptive breakthroughs in Horizon 3. And, all in parallel.
The reality is, however, that many companies almost exclusively focus on Horizon 1 innovations, failing to balance short-term profit and long term value that way. Demands for short-term shareholder returns and the well-developed management practices that drive incremental improvements (“Stage-Gate”, …) that are the staples of Horizon 1 are the traps they easily stumble into.
Google: 70% – 20% – 10%
Few companies make a conscious effort to build and manage an innovation portfolio across all three horizons; Google is one of the more vocal ones: “We spend 70% of our time on core search and ads. We spend 20% on adjacent businesses, ones related to the core businesses in some interesting way. … And then 10% of our time should be on things that are truly new…” (Eric Schmidt, then Google CEO, 12/2005). Another well-known example is tax- and financial software powerhouse Intuit.
Even if a company strives to manage an innovation portfolio spanning two or three horizons, we often find that innovation projects are being mismanaged and sadly ultimately killed because established “management science”, which produces tangible results in Horizon 1, simply doesn’t work in the other horizons. Most managers fail to understand that each of the horizons requires a different mind- and toolset. To the extent, that Google ended up putting related projects into different rooms at some point to avoid confusion.
Thankfully, the recent insights into how startups succeed as well as the evolution of lean and agile innovation practices provides us with the tools required to address these challenges.
The go3consulting Innovation Cube – Systematic Innovation Management
To make these insights applicable and address our customer’s innovation challenges in a tangible fashion, we (Ansgar Gerling, Daniel Niederberger, Markus Breunig, and me, Godehard Gerling at go3consulting) have developed a method matrix that spans our view of the three horizons: Incremental (Optimize), Adjacent (Test & Expand), Disruptive (Explore & Create) across three fundamental Dimensions: People (covering customers and partners), Process, and Organization.
Each of the resulting nonants is driven by a tenet, which in turn is matched with a set of applicable methodologies and approaches.
The Innovation Cube – 3 Horizons in Practice
For example: Looking at “People” in the “Incremental” Horizon 1 we – in line with the “Optimize” tenet – suggest to apply quantitative and qualitative market research as well as social media scanning methods in tune with optimizing a well-introduced product’s or service’s performance in a largely understood market.
For “Organization” in the “Disruptive” Horizon 3 we – following the “Mutate” tenet – suggest implementing nimble temporary- and objective-driven organizations based on knowledge- and task-based role structures to foster startup-like, local, and problem-oriented behaviors; ideally catalyzed by “leaders” – as opposed to the more “traditional managers” one might appoint under the “Develop & Coach” tenet for a project in Horizon 1.
As innovations today tend to have a digital data component, we have added a quasi-orthogonal fourth “+1” “Digital Data” Dimension to our method matrix, which describes the methodical application of “Big/Smart Data” methods across the 3 horizons (watch Markus’ and my talk on a related subject at last year’s “Lean Big Data Forum” here).
By way of example, we would, in the “Adjacent” Horizon 2 apply the “(Re-)Model & Expand” tenet, develop a Business Model Canvas and select data-driven innovation tactics derived from the “10-Types of Innovation” to create and test a portfolio of adjacent business model innovation hypotheses.
Methodical and Tangible Guidance for Real-Life Businesses
Applying our matrix, we are able to provide methodical and tangible guidance in meaningful dimensions for the management of innovation projects across all 3 Innovation Horizons.
Being that granular, we see a temptation arise to apply methods piecemeal in a “traditional” management format, trying to use, for example, the methods associated with the Horizon 3 “Explore” tenet in a Stage-Gate process framework. Our experience is that such an approach will fail as the methods only work in their proper organisational and process contexts. The benefits are reaped only when what is described in the matrix is applied systematically and systemically.
In addition, we advise our clients to develop a strategy-driven innovation portfolio management process in order to actively balance the innovation portfolio.
Key Learnings:
- Organisations must be incented and set up to embrace all three innovation horizons
- Innovations must be managed as a strategy-driven portfolio across the 3 horizons to ensure long term enterprise viability and success
- Horizons 2 and 3 require different innovation approaches and methods than prescribed by traditional “management science” to become successful
- Recent advances in innovation management driven by a better understanding of startup success factors afford us systematic and methodical innovation approaches for horizons 2 and 3
- Breaking these methods down into 3+1 dimensions allows for the tangible application of these methods across an innovation portfolio and massively increased innovation success as a result
If you want to learn how to apply the Innovation Cube to your business, please get in touch!