For at least two decades, business executives have emphasized the value of innovation for their businesses. Even today, it is difficult to find an annual report that does not include mentions of innovation, or to listen to a CEO speak about his or her company, without finding a mention of innovation as an area of focus. A strong focus on innovation is necessary for organic growth, corporate renewal, and competitive advantage, but often the concept of innovation doesn’t match the goals or strategy of the organization, and innovation becomes more of a talking point or mantra than it does an implemented capability.
Likewise, most corporations have a defined strategy, but it is often poorly articulated and does not direct the company and its actions in ways that the executive team hope for. Good strategy, clearly defined and articulated, can make a good company a great company. Both innovation and strategy can be key components for new revenue growth, differentiation, and long-term competitive advantage, but both are often mis-understood, and the linkages between innovation and strategy are overlooked.
This is unfortunate because there are many vital links between strategy and innovation. In this short article, I’ll explore why I believe that strategy and innovation are almost symbiotic, and why many executives have made mistakes considering strategy and innovation as separate entities or capabilities.
Common Definitions
First, let’s set out our ground rules and agreed frameworks. Strategy is what a business creates to help it win in its market. Michael Treacy, building on Porter’s work, wrote that a business has three viable strategic positions: innovation or product leadership, operational excellence, and customer intimacy. These are strategic positions and philosophies that companies can pursue. For instance, Nordstrom’s has long prided itself, and spends a lot of energy, remaining the leader in the retail sector in customer service and intimacy.
Apple, on the other hand, spends a lot of its time and focus on product leadership, creating very compelling and well-designed products that lead the industry. These positions and the success of these companies is based on definitive strategy.
Innovation, on the other hand, is simply converting creative ideas into valuable products and services that customers want. This means that innovation can be realized in a wide array of outputs from incremental to disruptive. Incremental innovation defines a small change to an existing product or service – think of toothpaste and the assortments of flavors – while disruptive change in a product or market creates dramatic change. A good example of disruptive change is Airbnb, which created an entirely new market and is now worth more than the major hotel chains such as Marriott.
Symbiotic means that these two concepts benefit from a mutual reliance – that they are stronger together and benefit from the presence of the other. This concept will be the main thesis of this article.
How Innovation and Strategy are alike
Innovation and Strategy are alike in that any individual or any company of any size can use strategy and innovation to their advantage. Small startups are by their very nature innovative, and they follow a specific strategy to help shape and grow their businesses and use innovation to create new products and services. Larger corporations define a strategy that helps them align their resources to compete in a very difficult marketplace and to grow and differentiate. Innovation in large organizations, however, often becomes an afterthought because it introduces risk and uncertainty in companies that value consistent operations and predictable revenues and margins.
It is this gap between strategy and innovation, especially in corporations, which seems so puzzling to me. It appears that as companies grow and mature, they forget how powerful the combination of good strategy and good innovation can be and rely more and more on a conservative strategy and rely less and less on innovation. This shift in focus is self-fulfilling: the more conservative, risk adverse and cost conscious a company becomes, the riskier innovation appears and the more stagnant the company becomes. The logical result of this trajectory is a late realization that innovation is necessary for growth and renewal, often followed by desperate, failed attempts to catch up on the lack of innovation over time.
It is important to recognize how tightly linked strategy and innovation are, and how this link extends across industries, over time and up and down a corporate hierarchy. It’s also important to understand that when executives fail to understand the vital link between strategy and innovation, both suffer.
How is strategy related to innovation?
Strategy – the concept of defining where and how to win, and what makes a company differentiated from its competitors, is tied to innovation in a number of interesting ways. First, there is the concept of growth. Companies regularly forecast growth and revenue in future years, building from a baseline and projecting stair-step or exponential growth in future years. Revenue growth often comes from four components – baseline and recurring revenue, new revenue from existing customers, winning new customers and new revenue from new customers or new products or services. The first two categories of revenue represent relatively predictable revenue, while the last two categories represent instances where the company is moving into new markets or offering new technologies or products. These last two categories are much more difficult to predict and are much more aligned with innovation – winning new customers that are unfamiliar with existing products and services OR creating new products and services to drive new revenue. Innovation – the creation of new products and services to meet emerging customer needs, helps to create products and services that fill revenue and profit gaps.
Second, good strategy dictates that companies and product, or services offerings create a clear differentiation, whether that differentiation is based on new products, new services, unique experiences, or highly efficient processes. Innovation can help create or improve these differentiators. When we think of innovation, we often think of new products or possibly new services, but innovation tools and techniques can be applied to the concept of experiences (to improve customer service or experience) or internal processes or business models (to increase efficiency). Many companies do not think about business model changes or process improvements (or process elimination) as innovation outcomes, but this is again a place where executives or corporations are pigeon-holing innovation and not using it to its full advantage.
In the best approach, strategy should dictate the kind of innovation organizations attempt. Just as most companies maintain a product or service portfolio, they should also have an innovation portfolio, which dictates how much or how many innovations are needed across three horizons of innovation outcomes: incremental, transformative, and disruptive. Beyond the impact of the anticipated innovation, strategy should also dictate the “type” of innovation, based on Doblin’s “ten types” model: product, service, business model, experience, channel, value chain and more.
With these two models (the three horizons model and the Doblin model, we are defining an innovation portfolio, informed by current and future strategy. What should be evident is the important role strategy must play in establishing the size, scope and nature of innovation activities. This is true at every level within a business – for innovation at a strategic, corporate level, or at a business unit or product group level.
A third linkage between strategy and innovation is when strategy uncovers an innovation opportunity. Good strategic thinking and planning will inevitably uncover emerging markets, emerging needs, and emerging segments. When these emerging opportunities are identified, teams may be able to provide existing products or services to meet the emerging opportunities or may need to frame innovation activities to create new products or services to address the emerging demand. In this way, strategy becomes an initiator of innovation. We often see the reverse – strategy used to stymie or stop innovation activities, because ideas or concepts that seemed compelling to an innovation team don’t align with corporate strategic needs or goals.
Within this brief overview, I’ve established that innovation is an enabler for strategy and that strategy should dictate the range of innovation activities and outcomes. We can see that the two, while subtly different, are symbiotic.
Why isn’t this link between innovation and strategy understood?
There are a number of reasons why the vital and necessary link between innovation and strategy is often missed or misunderstood.
First, companies of all sizes rarely develop or review strategy. Most strategy is somewhat implicit – it is rare to find a company that has a well-documented or current strategy capably communicated. Most strategy is anecdotal or dictated to the company by business conditions rather than regularly reviewed and updated. Strategy is important but not always urgent, because it seems relatively obvious. In this regard, many executives talk about strategy, but few are actively involved in developing, reviewing, and maintaining existing strategy or building new strategy. This lack of engagement with strategy means that any aspect of the business that is reliant on strategy or strategic thinking can get short shrift from the management team.
Second, careers are built in most organizations in key functional posts – sales, marketing and especially finance. Strategy is often viewed as interesting but not core to operations, so few executives and certainly few CEOs advanced to their position from a strategy role, and I’m sure very few achieved senior leadership roles from an innovation post. This means that many executives are familiar with strategy and its components but don’t practice it regularly – a similar issue for innovation.
Innovation suffers from a lack of engagement and attention as well, but for different reasons. While innovation promises high returns, it also has high risks. Therefore, more careful, and cautious executives will dabble in innovation only occasionally and at an incremental level. It is easier and faster to move up and through an organization in traditional functional roles such as finance or sales. Innovation does not have a traditional functional home, so it often seeks to partner with leaders in other functional roles and often has less power since it isn’t considered a profit center. Thus, few senior executives have deep innovation experience and most consider innovation a lifeline when going gets difficult or a tool for continuous improvement.
What should be a powerful driver for growth and differentiation – the combination of strategy and innovation – is often overlooked or sidelined because of a lack of understanding, a lack of familiarity or the sense that innovation is simply too risky. For those companies that do understand the power of the combination of innovation and strategy – Apple in Job’s tenure, Google, 3M, Gore, and a few others – the results speak for themselves.
Changing the dynamic
Good business must start deploying these two enablers together in the roles for which they were built. Good strategy should describe where and how the company will win, and innovation should create new products and services indicated by the strategic goals. New innovative products and services will support strategies by creating differentiation and new revenue streams. It is only when these two capabilities are recognized for what they are, and how they work together, that real value can be created.
Today, some companies create a strategy and then place it on the shelf, and act in a passive manner, responding to competitive moves or threats rather than taking action and fulfilling their strategy. These companies consider any innovation beyond incremental innovation risky and uncertain, so they create new products and services that barely maintains existing revenue, and which do not create higher margins.
Companies will be far more successful when they invest deeply into both strategy development and innovation capability and competence. These two concepts will create more direction for the business (strategy) and the urgency and capability to create the products and services that will drive higher revenues and profits and create differentiation (innovation). Companies need leaders who understand the vital link between these two concepts and what that linkage can do for their business.
What leaders can do now
Leaders who are interested in developing better and more useful strategies, and who hope to capitalize on growth and differentiation that innovation can bring, need to:
- Recognize the tight linkage between strategy and innovation
- Ensure the right order of operations – strategy first, then innovation
- Understand the role that innovation plays in developing products, services, and business models to help achieve strategic goals
- Provide great clarity about corporate strategy, strengths, and gaps, to innovation teams
- Build innovation competencies within the business
- Establish innovation portfolios using common models like the Three Horizons (incremental, transformative, disruptive) and establishing a true portfolio model for innovation investments and outcomes
