Innovation Leadership

Innovation Leadership How to understand and manage innovation By Berte Helgestad and Nina Charlotte Melleby Edge Consultants AS Oscars gt. 55, 0258 Oslo T +47 94 78 85 58 E-mail: info@edgeconsultants.com http://www.edgeconsultants.com

Berte Helgestad is an Innovation Lead in Edge Consultants and responsible for development of the firms frameworks for innovation. She has substantial experience in Innovation Management from companies such as Norsk Tipping and Accenture. Nina Charlotte Melleby is holds the position as Industrial Designer and has worked in numerous prestegious projects for many our largest clients. Copyright 2013 Edge Consultants AS. All rights reserved. Innovation Leadership 2

Innovation Leadership Innovation Leadership is the sum of disciplines and areas you need to focus on to ensure future competitiveness. Innovation Leadership requires a duality among the top management team members. The ability to maintain current operations and short-term profitability, combined with the ability to drive innovation efforts future-proofs organizations. Innovation Leadership and innovation management are a combination of different disciplines. This document describes the various discipline and dimensions that are important to focus on in order to have a good innovation. All businesses should be subject to continuous renewal in order ensure future competitiveness. If a company does not focus on renewing its business models, products, services, skills and frameworks - it will undoubtly loose with its competitors over time. Continuous innovation is particularly a challenge in established and successful companies, who tend to largely focus on short-term profitability and operational performance. To the extent that systematic innovation is most often focused on improvements to existing products, services and capabilities, and pursuing innovation in entirely new areas is rare and oftentimes random. Good innovation with a balanced portfolio is the outcome of an innovation focus at the leadership level. Innovation is the hype word of the day. Everyone wants it and everyone talks about it. What is less certain is whether they know what good innovation entails and what implications it has on business. Definition of innovation Innovation is a term that encompasses a lot of abstract concepts and can be understood very differently from person to person. The word innovation derives from latin innovare which means to renew or change. At the same time, the number of different academic definitions is overwhelming. We have gathered a few, which we find most useful. Fagerberg et al (2006) highlights the difference between an invention and an innovation, where an invention is described as an idea for a product or process while innovation is the commercialization of such idea. Innovation then depends on combining different types of knowledge, skills, facilities and resources. The Austrian economist Schumpeter (1996) already in the 1930s described the term innovation. He defined innovation as new combinations of existing resources which he divides into five different areas: Introduction of a new product; Introduction of new production methods; Open new markets; use of new procurement and distribution sources; New competition that leads to the restructuring of the industry. Schumpeter believed that we could put together two known resources and shape them into an in- novation. Porter (1990) in turn provides a relatively consistent definition of innovation that Schumpeter. He also argues that innovation is just as much a result of organizational learning from core activities. Porter looks at innovation from a competitive perspective. Goffin and Mitchell (2005, 9-10) describe the various dimensions of innovation. Dimensions can partly be compared with Schumpeter's five different aspects or Porter's definition of innovation. Goffin and Mitchell highlight that innovation can happen in more than one dimension of a single product or service to see how they can complement each other. Degrees of innovation Discussing innovation without being specific on the degree level of innovation can lead to a lot of confusion. This is because projects with a high degree of innovation will require more resources and involves greater risks compared to projects at the other end of the scale with a low degree of innovation. Both simply require a different focus. If a company is not aware of or does not distinguish between degrees of innovation it may soon run into seriouse trouble of having an unbalanced portfolio. If all innovation projects are incremental it can potentially be a challenge in ensuring long-term profitability. If the company has too many breakthrough projects, it can lead to an unsustainable risk profile of the company. Innovation Leadership 3

At Edge, we describe the degrees of innovation with a scale - existing, incremental, platform and breakthroughs. Goffin and Mitchell (2005) describe this similarly, with breakthrough or radical innovations in the one extreme (such as penicillin or Post-It notes). With the other end of the scale hosting incremental innovations described as small changes to existing products, services or processes. Dimensions of innovation In addition to the degree of innovation, it is also useful to distinguish the different dimensions of innovation. Innovation is not just about products. An innovation can be a new business model, an existing product improvement, or an innovation in production processes or a new user experiences - to name just a few. With this we can conclude that innovation is something that involves far more than an innovation responsible or an R & D department. It s a streamlined, internal process which needs to be used to enhance all dimensions of the company. «The most popular dimensions in which companies innovate today (products, processes) are not necessarily the dimensions that are the most profitable. It is actually the exact opposite dimensions such as business model or user experience innovations are the ones that bring biggest return on investement.» Focus on innovation across management team Management team is the most crucial factor in making a business become innovation and market leaders. A coherent understanding and knowledge of innovation across senior management is key to to ensuring innovation becomes core of your business. Management must take on the necessary responsibility for innovation, not to mention what it further required of the rest of company. Although there are many areas, which are important to ensure innovation is insitutionalized and becomes part of organizational culture - management and leadership are absolutely key to success. According to Finkelstein (1990) the top management's ability to see the value of an innovation depends on management's dominant logic or worldview according to the experience they have and the dominant logic behind an organization or industry. Connor and Rice (2001) assert that the support of top management is essential in legitimizing and enabling radical innovation. A push from the top management and their committed support are key factors in creating innovation success stories. Ability and focus on change management is often critical in achieving a culture of innovation in a company (Goffin and Mitchell 2005). One of the most important and difficult responsibilities of a leader is to lead change processes as described by Yukl (2006). Change is often perceived as a threat and is often resisted. Connor (1995) and Yukl (2006) have defined nine main reasons: lack of confidence, a lack of belief that change is necessary, a lack of belief that changes can be implemented, economic threats, relatively high costs, fear of failure, loss of power and status, threats to the values and ideals and interference unwillingness. Resistance occurs because people have strong values and feelings about their work. If change is handled right, it is possible to convert resistance into commitment (Yukl 2006). Innovation Strategy Innovation strategy is part of the company's overall strategy and should be the core responsibility of top management. It will provide guidance on areas that a company needs to innovate and should also provide guidelines for the degrees and dimensions of innovation that are necessary for a balanced portfolio. Innovation startegy identifies what is the greatest need for innovation; clarify which type of innovation is necessary to meet the needs and lastly create guidelines for implementation. According to Porter (1990) there are five different forces affecting competition in an industry: current competitors, suppliers, potential new businesses in the industry, buyers and substitutes. In choosing competitive strategies Porter (1990) describes three generic strategic directions: cost leader, differentiation, focus. Chosen strategy will have impact on the design of an innovation strategy. Choosing to be the cost leader means having other requirements and Innovation Leadership 4

goals for innovation strategy, than opting for a differentiation strategy, which will focus on increasing value through innovation and new products to customers. Freeman (1982, in Afuah 2003) describes different innovation strategies: offensive, defensive, imitative, dependent, traditional and opportunistic. These will each lead to different requirements for the organization, and the various strategic choices will have great influence over company s relationship with innovation. Culture of innovation An important starting point for organizations that want to be innovative is a great cultural that will support innovation. The difficulty with culture is that it is not something you can decide or change in a day, but something you have to practice and consolidate through long-term action. Organizational culture is defined in many different ways. "Culture is the way we do things around here." (Deal & Kennedy 1982). "Organizational culture is the set of common shared norms, values and perceptions of reality that develops in an organization when members interact with each other and their environment." (Bang 2003, 23).Four core elements are highlighted: Values - must appear through new actions and behaviors Standards - precepts or rules Basic assumptions - learned or solutions Perceptions of reality - beliefs about reality that create meaning According to Bang (2003) culture will be more susceptible to an organization that is exposed to stress or pressure and this cannot be ignored. Schein (1985) says among other things that the leaders are the most important creators of cultural organizations and affect organization-shoulder walk through five different channels: What management draws attention to, measure and control the organization Managers' reactions to critical incidents and crises in the organization Deliberate role modeling, guidance and training Criteria for allocation of rewards and status Criteria for recruitment and selection, promotion, retirement and dismissal «A culture that supports innovation must be value- rather than rule-based. It must reward initiative, teamwork and the willingness to try. At the same time it must be allowed to fail.» Process Great innovation requires a coherent, effective and complied with innovation process. Innovation process is the most important of all tools that drive innovation in a company - it should be a common process across all company levels - this improves communication and collaboration across teams, units and levels. Most importantly, it creates efficiency. An innovation process consists of various phases, with creative and more unstructured initial stages all the way to the more structured final stages. Development funnel describes how to start with a diversity of ideas that are being processed and where one selects the most promising ideas for the development and implementation of the market. Cooper (1990) describes this process systematically through a "stage-gate system". Stage-gate model consists of different phases with defined tasks with a formal evaluation and assessment between each phase. A set of defined criteria and the fulfillment of these determine whether the project should be killed, reworked or carried forward to the next phase. A well-defined innovation process does not lead a business in itself be more innovative, but it is a good tool to ensure effective implementation as it provides a sense of security for the organization while acts as guiding management tool for better execution. Moreover, it is also a good basis for managing innovation projects and the company s innovation portfolio. Innovation Leadership 5

Stage-gate model can be seen as a rigid model where the different phases will occur in stages and how one should not allow a project to proceed to the next stage if all the criteria are not met. Indeed, with such an interpretation this model can be a bad fit for radical and breakthrough innovations. The results of the research project at Minnesota Institute Research Program (MIRP) by Van de Ven (2003) reveal that there is reason to question whether the current methods and explanations around innovation process are valid. The results of the study show that "the innovation journey" neither is sequential or orderly, nor based on random trial and error. The process can be characterized as a non-linear dynamic system consisting of diverging and converging activities. The steps in an innovation process will be the same, but depending on the degrees and dimensions of innovation the process needs to be tweaked. Breakthrough innovation need several iterations to reach the goal and in some cases need to be maintained in two phases simultaneously. The important thing is not that the steps in the process are followed consecutively, but that they serve as a guideline and that we should be aware of consequence when we choose to deviate from the process. This is crucial to control corporate risk profile in the innovation portfolio. Organization Companies often struggle with silos thinking and distances between various levels in companies. Innovation is not something that only concerns a part of an organization - instead it touches every part of the business and requires good teamwork across the organization and between different levels of the organization. It is important to be aware of what is required of the management team and how to organize innovation projects. This will depend on innovation startegy in place and the degrees and dimensions of innovation, as well as on the stage the project is in. Organizations evolve through periods of incremental or evolutionary change. The challenge for business leaders is to adapt the corporate culture and strategy of the current environment, but also do so in a way that does not undermine the company's ability to adapt to radical change (Tushman and O'Reilly 2004). For a company to succeed over a long period, Tushman and O'Reilly argue that managers should create "ambidexterity" - a dual organization, an organization that can drive both incremental and breakthrough or radical innovations. Such an ambidextrous organization is dependent on a management that has its focus on current earnings, but also on future opportunities and changes in market conditions. Gjelsvik (2004, 18) describes a business internally performed and organised from two different perspectives: centrally focused or decentralized entrepreneurship, and dispersed entrepreneurship. As Gjelsvik also emphasizes these two extremes need not be mutually exclusive. What then becomes important is an agreement on which perspective is leading in what kind of situations. This should be embedded in the innovation strategy. Hargadon (2003) argues that innovators need a large network of different actors and knowledge to create new ideas, and they need strong community of collaboration. He talks about building new worlds or bridges between existing worlds. Hargadon (2003, 208-215) says "Make sure that different groups in the organization with different competence, skills and knowledge come together, make knowledge accessible and facilitate a new community." Goffin and Mitchell (2005, 282) claim it is important to focus on choosing appropriate team structure and focus on the right composition of teams to ensure an organization supports innovation. Roles and responsibilities As in any project, it is essential to be aware of the different roles required in the various phases of an innovation project. Each role must be associated with a clear responsibility. The weight and composition of roles vary throughout innovation project phases and between different projects. It is important that the project is managed according to where in the process it is at any given time. While the creative roles have a stronger position in the initial phases, a controller role needs to have a stronger position in the final stages. Innovation Leadership 6

Talent In order to have a great capacity for innovation and a good innovation culture it is essential to have systematic talent management in place as this will create a preference for change and development. It is therefore essential that a company has a good understanding of existing skills and what is needed to fulfill the innovation strategy - in an established business that is both new knowledge and the sharing of existing knowledge. Both as individuals and as a company we have limits to our absorption capacity. «There may be various reasons why a company is unable to take in knowledge. In a well- established company that has been successful over a long period of time, how strong communities and a dominant logic sometimes has evolved, the absorption capacity can be bad.» They also claims that there is a connection between a company's existing knowledge and the ability to acquire new knowledge, and thus increase the absorption capacity. A company's absorption capacity is the sum of all employees' absorption capacity. It depends largely on the people sitting at the interfaces between internal units and external actors (Cohen and Levinthal 1990). Zahra and George (2002), divides a company's absorptive capacity into two elements: potential, which consists of the ability to obtain or acquire external knowledge; and a realized capacity which consists of the ability to transform and exploit knowledge. Recording capacity depends on two key elements, the former knowledge and the will and energy one has to acquire new knowledge (Kim, Tushman and Anderson 2004). "The ability to recognize the value of new external information, acquire it and use it commercially is critical to a company's innovation success " and described as the company's absorption capacity (Cohen and Levinthal 1990). Innovation Leadership 7