Governing Innovation in Practice – The Role of Top Management

By: Jean-Philippe Deschamps

What role does the C-Suite have in exercising the company’s innovation governance responsibilities? In this article, the last in a series of five, professor Jean-Philippe Deschamps, defines six domains that are essential to organize and mobilize for innovation. They will condition the way innovation will be carried out and sustained by the organization and hence belong to the prime innovation governance duties of the top management team.

In a previous series of three articles published by InnovationManagement I introduced the concept of innovation governance. These first articles covered: (1) the definition and scope of innovation governance; (2) the organizational models that companies have chosen to allocate innovation management responsibilities; and (3) a first assessment of the perceived effectiveness of these models.

In a new series of two articles on “governing innovation in practice” I first reviewed the specific role of the board of directors.  In this second article I will summarize the role of the C-Suite in exercising the company’s innovation governance responsibilities.

If you compete through new products or services, your company has, by necessity, a new product development system and organization in place. As part of it, management allocates functional and process responsibilities for the planning, design, production and introduction of new offerings. In some companies the process works well and smoothly. In others, it may be more chaotic as different functional interests collide and conflict resolution takes time. As a client once said in describing his company’s approach, “In our organization, getting new products out is akin to mating elephants! It involves a lot of trumpeting, tree crushing and you wait very long for results!”

Innovation is clearly broader in scope than the new product development process; it pervades all functions and activities.

But innovation is clearly broader in scope than the new product development process; it pervades all functions and activities. It is both richer in results, for example when it leads to the creation of new business models, and more complex because it involves a combination of ‘hard’ and ‘soft’ elements. Innovation is therefore more than a set of processes; it is foremost a mindset. It builds upon everyone’s creativity and ideas, and the organizational discipline of teams working constructively across functions and units to implement them.

So, whereas many companies have a satisfactory new product development process in place, fewer have set up a comprehensive innovation management system and organization, capable of developing a range of innovations and sustaining a high level of creativity over time. This lack of formal innovation management system often reflects past legacies that are seldom challenged by management. Occasionally, a new CEO or CTO will launch an ‘innovation revival’ campaign, but it is often limited in scope and duration. Old practices tend to survive!

It is therefore a healthy practice to regularly engage in a comprehensive reassessment of the company’s innovation system and organization and introduce new innovation governance guidelines. The role of the top management team in this effort is critical. It goes beyond making minor structural changes and appointing new persons in charge of existing departments. As I will detail in this article, the role of the C-Suite in governing innovation effectively covers at least six areas:

1. Setting an overall frame for innovation by clarifying a vision and mission for innovation, proposing a set of values to guide innovation activities and auditing current innovation performance.
2. Defining how the company will identify and generate value from innovation; how it will analyze and create value; and how it intends to realize and capture value.
3. Choosing organizational models for the allocation of primary and supporting responsibilities for innovation, and setting up dedicated process management mechanisms.
4. Allocating resources and establishing priorities for innovation as part of an explicit innovation strategy and plan in support of the company’s objectives.
5. Identifying and addressing current obstacles in the company’s organizational system and sources of resistance within the structure in order to build a lasting innovation culture.
6. Monitoring and evaluating results on an on-going basis, and setting up a process to address conflicts of interest within the top management team so as to make innovation sustainable.

I will comment on each of these innovation governance areas.

Setting an overall frame for innovation

In some companies, the innovation tradition and culture seems almost like a magic potion that guarantees ongoing innovation success — think of Apple, Google, and 3M. But even in such companies it is useful for top management to reflect at regular intervals on how innovation can contribute to the realization of their overall company vision and mission.

In defining the scope of innovation governance in an earlier article, I suggested that it should address three questions on content:

• Why innovate? i.e. what concrete benefits are we trying to achieve given our current market and competitive position?
• Where to innovate? i.e. in what areas should we concentrate our efforts beyond our traditional product renewal activities?
• How much to innovate? i.e. how ambitious and risk-prone should we be, and can we afford to be, and for what objective?

These are questions worth asking, for example as part of a top management off-site strategy retreat. Answering them formally may generate new perspectives. But even if they only confirm current management views, they will at least ensure that all the members of the C-Suite are aligned behind common beliefs and a shared innovation vision.

Many companies include ‘innovation’ or ‘innovativeness’ in their corporate values. However few detail in an explicit fashion what this means practically.

These innovation-specific management discussions may also be useful to reaffirm a set of specific values concerning innovation. Many companies include ‘innovation’ or ‘innovativeness’ in their corporate values. However few detail in an explicit fashion what this means practically, in terms of attitudes – e.g. how we value and support openness, risk-taking and entrepreneurship – and also interactions – e.g. how we work together across organizations and functions. It is therefore the role of the CEO and his/her direct reports to regularly review and specify the values they want to promote, values which can then be broadcast through management publications, speeches and individual performance reviews.

Finally, setting the frame for innovation includes the completion of a thorough audit to establish the starting base before launching improvement programs. Innovation audits can be outsourced – a number of specialized consultants offer their benchmarking services. But it can also be carried out internally using an established framework such as the one proposed by Beebe Nelson and Valerie Kijewski¹. It is one of the most comprehensive frameworks available because it focuses on the whole value creation process, i.e. business design, value identification and value realization. Maximizing value creation is indeed one of the most important management priorities in innovation governance, as discussed below.

Defining value

It is a well-accepted truism that innovation is about turning market opportunities into value. In established management theories, this means identifying, analysing, evaluating, designing, creating and – arguably the most difficult step – capturing value.

Without clear mandates from top management, most organizations will naturally search for value within their current industries and markets. In this way, value is generated by developing and introducing new products or services that replace or complement the company’s existing product lines. Some of these products or services will be incrementally better or cheaper; others more radically new. But their common denominator is the fact that they remain, for the most part, within the company’s existing industry value chain and keep converging towards the same competitive arena, i.e. the same “red ocean” as Kim and Mauborgne call it². This is why the potential value created by most new products is seldom fully captured. In fact, it is not rare to hear CEOs complain that the new products or services generated by their organization are often less profitable than the original ones on which the company built its growth. These new products or services may revitalize their current market segments but, quickly imitated or superseded by competitors’ entries, they do not lead to a sustainable competitive advantage. An important element of the innovation governance mission of top management is to stop this new product merry-go-round and initiate new ways to redefine value.

An important element of the innovation governance mission of top management is to stop this new product merry-go-round and initiate new ways to redefine value.

Redefining value requires broadening the scope of the search for opportunities. This can be done by introducing a totally new basis of competition, as well as up to now neglected yet critical attributes, to create new market space – Kim and Mauborgne’s “blue vs. red ocean strategy” mentioned earlier. It can also result from a systematic exploitation of opportunities to redesign the industry value chain to one’s advantage, or in some cases to create a totally new value chain. Such a move requires a thorough understanding of value chain dynamics, alternative business models and of competitors’ blind spots.

Apple provides a striking example of that value creation strategy. Its financial success is in large part the result of having recognized, before any of its hardware competitors, the importance of ‘content’ in terms of sustainable value creation… and of having cornered that value through its novel iTunes system and its focus on smartphone applications. This winning value chain strategy is largely attributed to Steve Jobs and his top management team. They fully exercised their innovation governance role, which was to steer the company towards greener new pastures rather than to compete against the conventional hardware business model of its competitors.

Choosing an innovation governance model

Steering, promoting and sustaining innovation, in the broadest sense of the term – i.e. not just the new product development process – is a major task that straddles all company functions and organizational units. It needs to be entrusted, explicitly, either to a single leader or to several senior leaders sharing that responsibility. In a previous article in this series on innovation governance³, I identified and described nine models for the allocation of overall responsibilities for innovation.

In some of these models, the overall responsibility for innovation is assigned to a single individual. The CEO may hold this responsibility, which is most likely to be the case if he/she is the company founder. Other individuals who may hold this role are the chief technology or research officer (CTO or CRO), or a dedicated chief innovation officer (CIO) – their actual title can be quite fancy like “Chief Yahoo” – or a high-level innovation manager. In financial industries the chief information officer can play that role; in other non-manufacturing sectors another CxO or a business unit manager can be given that responsibility.

There are as well models in which a group of leaders takes over the responsibility for innovation collectively, whether they represent a subset of the top management team or constitute a high-level cross-functional steering group or a network of ‘champions’.

There are therefore a number of models to choose from, and management should be advised to refrain sticking to the model they adopted years ago or choosing the one most frequently found in their industry, for example the CTO model in engineering industries. It is management’s responsibility to ponder the pros and cons of each model and the suitability of each to the company’s position and leadership resources. The choice will indeed depend on the personal preferences of the top team – do they want to remain involved personally or do they prefer to delegate the responsibility to the level below? It will also reflect the type of innovation that is pursued – e.g., is technology the main driver? – and of course the availability of suitable candidates for the job. Choosing a suitable organizational model is important, but it is equally important to realize that conditions do change. It is therefore a good practice to review regularly the adequacy of the model in use given the company’s changing market situation, leadership structure, and strategy.

Establishing innovation priorities and allocating resources

Steering innovation, i.e. deciding on the company’s priorities concerning where and in what domain to innovate, is one of the key governance missions of top management. It is generally done, at least indirectly, through project portfolio decisions. Business units typically identify their most attractive projects and management consolidates the various portfolios to check whether, once combined, they provide the right balance of growth, margin and risk. Such a consolidated bottom-up approach should be complemented by a proactive and ambition-led top-down innovation strategy. The sum of business projects included in the portfolio reflects the company’s implicit innovation strategy — what Peter Senge would call the “theory in use.” However, several elements need to be made explicit in order for the strategy to meet the company’s innovation priorities and to provide investment guidelines.

How much do we want to spend on innovation that will reinforce our current businesses vs. innovative efforts to create entirely new activities?

The first element, often considered implicitly but not always specified, is an indication of how the various objectives of the company’s innovation strategy will be funded. How much do we want to spend on innovation that will reinforce our current businesses vs. innovative efforts to create entirely new activities? And which new market domains need to be canvassed in priority for these new activities? By specifying this type of broad resource allocation – covering not just R&D but also other upstream and downstream investments – management can achieve three important benefits:

1. pass a clear message regarding the company’s priorities;
2. set the frame for the development of its new business activities; and
3. ensure that the latter will be adequately funded.

The second element of a comprehensive innovation strategy is a characterization of the type of innovations favoured by the company, and if relevant, of the relative importance of each in terms of resources or results. This indication addresses the various questions listed in the definition of innovation governance featured in one of my previous articles.

• Where to innovate? Most businesses focus on only a few areas where innovation can make a difference, i.e. new better and cheaper products, new technologies and new production processes. It is therefore useful for management to stress the importance of other reinforcing innovations, e.g. in new business models, in the supply chain and/or value chain, in service, in marketing and channel distribution, etc. These may stimulate business managers to look more broadly at innovation.
• How much to innovate? This includes how much risk to take (or avoid). Answering this question establishes a general company policy which can be helpful when the company is leaning too far to one or the other side. For example, some managers seem to always look for breakthroughs. They behave as if incremental innovations, i.e. product derivatives, were not worth their efforts, with the result that they are missing major market and profit opportunities. Other managers, in contrast, stay permanently within their comfort zone and shy away from risky developments. In each case, it would help if management specified, for each of their businesses, what they consider as the right balance between incremental and radical innovation.
• With whom to innovate? Defining a policy on ‘open innovation’ is an important element of an innovation strategy, particularly in the new social network environment and the growing importance of crowdsourcing. It goes beyond a simple admonition to build upon external ideas and competencies. A policy on open innovation ought to specify:

1. the domains where external cooperation is desirable;
2. the boundaries of cooperative deals and the type of partners to be considered ‘off-limit’;
3. considerations on the protection of intellectual property; and
4. indicators measuring the level of achievement of that strategy.

Addressing obstacles and building an innovation culture

There is generally a strong correlation between innovation culture and innovation performance. The success of Google, for example, cannot be dissociated from the emphasis the company is putting on its ‘can-do’ entrepreneurial culture and from the concrete steps management is taking to sustain it. Google’s famous rule – modelled on 3M’s “15% rule” — allowing people to pursue their own ideas for up to 20% of their time is only one example of the company’s innovation-enhancing environment. By contrast, some excellent companies with huge technological resources never seem to reach the top performers of their industry, in large part because of an internal culture that stifles innovation.

By contrast, some excellent companies with huge technological resources never seem to reach the top performers of their industry, in large part because of an internal culture that stifles innovation.

Innovation calls for openness, experimentation and risk-taking and above all cooperation and constructive challenges across functions and organizational units, and all of these qualities need to be explicitly encouraged by management. But this is not sufficient; management must also address seven other organizational and cultural obstacles that hinder innovation. I have observed these seven vicious innovation killers in a wide range of companies.

The first innovation killer, present in most companies, is the excessive pressure put on managers as a result of their operational responsibilities and constant fire fighting. There is simply not enough time for innovative undertakings in many organizations. Management can counteract this pressure in two ways: first by identifying, appointing and guiding passionate innovation coaches to motivate, challenge and support local teams; and second by creating a counter pressure in favour of innovation, for example by introducing specific innovation performance measures in the balanced scorecard of every manager.

A second innovation killer is a fear of experimentation and taking risks, usually resulting from unrealistic financial benchmarks or from a culture which does not tolerate failures. There are two powerful antidotes to that fear. First, management can show the example at the top by asking senior leaders to personally coach high-risk/high-reward projects. Second, management can adopt a VC-like philosophy regarding investments, resource allocation, coaching and return expectations, as recommended by Gary Hamel in his famous article on Silicon Valley⁴.

Insufficient customer and user orientation is another classical innovation killer. Managers rely on superficial market knowledge, or knowledge from the past, or they neglect to define and target specific customer groups. Management can overcome this deficiency by making their staff share temporarily the life of various customers to understand their total experience. It can also engage selected customers to join with internal staff on idea searches and innovation projects.

Uncertainty on innovation priorities is also quite common as an innovation obstacle. It leads to ad-hoc idea generation, difficult evaluations, fuzzy screening and selection, and poor project justifications. As I recommended earlier, it can be overcome by clarifying the company’s innovation strategy, which means defining and broadcasting why, where, how and with whom to innovate. Management can also beef up the project briefing process by requesting that projects be linked explicitly to the company’s innovation objectives and strategy.

The lack of management patience regarding results is also a strong innovation inhibitor. It creates a tendency to pull the plug too soon on longer-term, high-risk/high-impact projects. This temptation can be fought by earmarking resources to long-term projects after validating their potential to realize their expected contribution – in the case of these projects, what we might call a “quantum jump” in value.

Functional and regional silos are another widespread innovation killer, present in many large organizations. Organizational isolationism, inability to build on each other’s ideas, domineering attitudes on the part of certain departments, and fights on ideas and budgets prevent people from cooperating across organizational boundaries. Classical antidotes include the adoption of cross-functional and/or cross-regional innovation project teams, from idea and concept to market launch. Management can also try to develop a ‘one company spirit’ through common innovation training and shared innovation performance measures.

Last but not least among the most widespread innovation killers is the prevalence of a rigid and over-regimented environment, as exists in many traditional companies. It will stifle innovation through excessive rules and regulations. Management can overcome this risk in two ways: first through an explicit effort to combat bureaucracy, promote freedom, and empower ‘useless-rule finders/breakers’ across the organization. Second, it can fully empower – i.e. free from most corporate binding rules – project teams that Bill Fischer and Andy Boynton characterize as “virtuoso teams⁵” and encourage a high conflict/high respect team attitude.

Monitoring and evaluating results

Last but not least, management needs to set up and monitor a range of performance indicators to track progress and identify new improvement targets as some of the initial goals are reached. At the least, indicators ought to cover both input factors – i.e. how much resource is pumped by the company into innovation – as well as output measures – i.e. how much the company is getting out of its innovation investments. But advanced innovators will typically go beyond these two broad categories and introduce a pyramid of metrics with four types of carefully selected indicators, e.g.

• Lagging indicators, which measure process results, typically on the basis of market or financial performance. The percentage of sales coming from products introduced in the past several years, depending on the lifecycle of the industry, is a typical lagging indicator. So is ‘time to profit’, which measures the time it takes for cumulated profits to pass cumulated investments.
• Leading indicators, which measure process input quality and/or quantity or factors conditioning innovation. The number of patents issued and granted is one of those leading indicators — and not an overall innovation performance indicator as some companies believe! So is, for example, the percentage of R&D spent on long term, high-risk/high-impact projects.
• In-process indicators, which measure process quality in terms of deliverables and time or cost compliance. Classical indicators in this category include the number of non-value-adding changes in projects past a certain point, or the percentage of project review gates passed according to schedule.
• Finally, learning indicators, which measure the improvement rate on critical performance targets for the business. Examples include the product stabilisation period (from launch until quality and performance meet expectations) or more generally the ‘half-life’ of a specific improvement (the time it takes to improve a given performance by 50%).

In conclusion: A call for action

The six areas described in this article highlight a number of responsibilities that will typically not be carried out by the second or third line of a company’s hierarchy. The latter can be expected to manage processes and projects within a set of overall guidelines, not to come up with an overall framework for innovation.

These six domains:

• Setting an overall frame for innovation
• Defining value
• Choosing an innovation governance model
• Establishing innovation priorities and allocating resources
• Addressing obstacles and building an innovation culture
• Monitoring and evaluating results

are essential to organize and mobilize for innovation. They will condition the way innovation will be carried out and sustained by the organization. They belong therefore to the prime innovation governance duties of the top management team. It is critical that the top management team address them collectively, that they broadcast their outcomes, and that they introduce them as a regular topic of the top management agenda.

By Jean-Philippe Deschamps

References