By S. Lettig and Dr. V. Davidovski
Innovation is a key factor for a firm’s growth and long-term survival. But innovation is a like a coin with two sides; it can be “incremental” by adding to existing processes, or it can be “radical” by making existing processes redundant and demanding new technology, expertise, and resources to establish fresh processes.
It’s now time for next-generation enterprises to get out of the furrow of the “also-rans” and the “also-exists” and galvanize themselves to the uncharted course of the new and the innovative. It’s time for enterprises to cast ad-hoc innovation processes by the wayside and jump onto the fast rack of structured innovation and adopt the Strategic Innovation Framework (SIF).
SIF is, as the name implies, a “strategized” or “deliberate” innovation structure that calls for increased user or customer feedback in the innovation journey.
An apparent roadblock to successful innovation is uncertainty. Typically, uncertainties may be endogenous (those within control of the company, such as technical, organizational and financial uncertainties) and exogenous (those outside the control of the company, which include technological, market, socio-economic and environmental uncertainties). Often, uncertainty is treated with a negative risk point of view and has a negative undercurrent, but a shift in perception and execution can reduce uncertainties progressively during the innovation journey and thus create the “positive effect of risk”.
Unlike enterprises with an ad-hoc innovation program, wherein managers often lack a sound theory, model and toolset for handling innovations successfully, SIF ensures structural innovation by meeting head-on the key factors of change such as efficiency, productivity, quality, competitiveness and market share.
STRATEGIC INNOVATION FRAMEWORK
SIF is a cutting-edge methodology to measure, evaluate and implement institutionalized innovation management. Backed with the latest achievements in academia and the field of innovation, SIF helps enterprises benchmark their innovation readiness, assess their innovation portfolio for characterizing innovations (radical and incremental and linking it to revenue), establish innovation across all levels (service, product and operations), economically value the capacity & potential of innovation opportunities and finally, establish a measurable innovation management process. It steers clear from unstructured and vague opportunities and opens the highway to structured and capitalizable innovations.
SIF IS BUILT ON FIVE INDIVIDUAL CONCEPTS:
1) Innovation Maturity Scoring—provides the firm with a quick-check on their innovation status and capabilities compared to industry, cross-industry and world standards and benchmarks of innovation readiness.
2) Innovation Portfolio Assessment—assesses the existing innovation portfolio and provides recommendations for further improvements.
3) Innovation Portfolio Development—based on the recommendations from the Innovation Portfolio Assessment, it ensures the development of an innovation portfolio that is able to catalyze between incremental and radical innovations, and which peruses according diffusion strategies for innovations.
4) Economic Valuation of Innovation and Investment Projects—values innovations in terms of their economic and financial feasibility and potential and considering viable options.
5) Innovation Portfolio Management and Implementation—lays the foundation for institutionalizing an innovation portfolio, provides a framework for innovation portfolio management and institutionalizes structured innovation leadership.
INNOVATION MATURITY SCORING
As said by Sun Tzu, a well-known Chinese military strategist, “If you know the enemy and know yourself you need not fear the results of a hundred battles.” You need to first understand the environment (self and the competition) to reduce uncertainty and set the foundation for success. In this sense, scoring for innovation maturity is the starting point, providing an easy and inexpensive way to evaluate whether a company is on track in its innovation management and in positioning itself as a market leader, or suffers from unmanaged innovation and risks becoming a market follower.
To determine the status of a customer’s innovation portfolio, surveys and interviews function as a vehicle to gather data on the company’s innovation readiness across four dimensions: Business, Process, People and Technology. Within these four dimensions, R&D, Marketing, and User Involvement are considered to be driving forces of the innovation process. These dimensions and driving forces are assessed and positioned against the five-level maturity continuum of the Capability Maturity Model (CMM): Initial, Repeatable, Defined, Managed and Optimizing.
INNOVATION PORTFOLIO ASSESSMENT
This stage characterizes the innovation portfolio and provides for a distinction between radical and incremental innovations, as well as laying the ground for the direct link to revenue, profit and ergo to a firm’s performance. First, raw information linked to innovation is identified, collected, distilled and cultivated to crystallize out concrete and relevant data, the attributes necessary for inductive coding. At the inductive coding a first rough innovation portfolio model of is created.
Further, based on the identified innovation type, the level of customer involvement is defined. Then, the innovation portfolio is linked to firm performance in terms of financial data, revenue, profit and ergo performance. Using multiple regression analysis and through integration into a statistical model and simulation, innovations are evaluated for their contribution, linking them to performance with fitting argumentation and recommendations for future actions. Particularly, the variables identified in the inductive coding are statistically modeled and simulated for analyzing their behaviour in comparison to revenue. These steps can be conducted at every stage of the framework.
INNOVATION PORTFOLIO DEVELOPMENT
Based on the outcome of the innovation portfolio assessment and as a result of the identified critical gaps in the innovation maturity scoring, the organization might be in need of a structured innovation portfolio development as a catalyzer for joining the innovation frontline. This step starts with an innovation ideation program, which involves so-called “innovation labs” by engaging the customer in a direct or indirect manner, combined with relevant feasibility studies, opportunity evaluation and maturity analysis and market screening to create a gamut of innovation prospects. What follows is rapid innovation prototyping based on one of the following models: Outsourcing, Off shoring, Spin off and Internal development.
ECONOMIC VALUATION OF INNOVATION
This stage brings deep dives into the economics of innovation. Contrary to traditional project valuation methods (e.g. Payback Period, Net Present Value, Internal Rate of Return, Profitability Index, etc.), which provide only limited mechanisms for calculating the real economic value of innovation projects, SIF applies the Real Options Analysis (ROA), which facilitates mechanisms to more realistically assess the potential value of innovation projects.
The Strategic Innovation Framework builds upon the argument that real options in innovation projects are by nature close to American options, i.e. they can be executed at any time during the period of validity of the options and use the so-called binomial model of Cox, Ross and Rubinstein combined with Monte-Carlo simulations.
Innovation is more than just a marketing gimmick; it drives revenue and growth of a firm and is a strategic prerequisite for any next-generation enterprise targeting business success. Towards this end, SIF provides the much-needed competitive advantage and concretizes a bold innovative path to winning the future.
Stefan Lettig researches innovation theory at Strathclyde University Business School in Glasgow . Dr. Vlatko Davidovski holds a PhD degree in Economics from the St. Petersburg State Polytechnical State University in Russia.