Innovation Governance: Why Should Top Management Care?

By: Jean-Philippe Deschamps

In its research report “CEO Challenge 2014, ”[1] The Conference Board lists the ten most important challenges facing CEOs in 2014. Innovation ranks N°3 in this survey of 1,020 responses, on a par with operational excellence. Innovation was the N°1 issue in 2012, and in 2014 it is still the N°1 challenge in China. This article (in a series of seven) looks at the theme of innovation governance from a top management angle.

In the rest of the world, innovation is overtaken as a top CEO challenge only by the development of human capital (N°1) and customer relationships (N°2). Note that “human capital” and “innovation” are closely connected issues. The top five strategies CEOs propose to meet their innovation challenge support this connection, since three of them deal with people and culture (see N° 1, 3 and 5 below):

1. Create a culture of innovation by promoting and rewarding entrepreneurship and risk taking
2. Apply new technologies (product, process, information, etc.)
3. Find, engage, and incentivize key talent for innovation
4. Engage in strategic alliances with customers, suppliers, and/or other business partners
5. Develop innovation skills for all employees

This list highlights that CEOs and their top management teams are starting to consider innovation from a much broader perspective than just traditional technology and new product development. They are looking for “total innovation,” i.e. pursuing and combining all types of innovation, and doing so in all its aspects, both “hard” (process) and “soft” (culture). This requires building an organizational leadership competence that we refer to as innovation governance. For this to happen, companies need a holistic system to set and align goals, define policies and values, prioritize processes, allocate resources, and assign roles, responsibilities and decision-making authority for innovation. Given its breadth, this system has to originate from the C-suite, with strong personal involvement of the CEO.

There are many reasons that CEOs and the C-suite should take “total innovation” very seriously, and hence should focus on innovation governance. I can think of at least nine such reasons, all of which will greatly benefit the corporation, and which translate into nine broad objectives or benefits to be met by an effective innovation governance system:

Objective 1: To build a holistic “big picture view” of the company’s innovation process

Establishing a comprehensive map of the innovation process is one of the first tasks of innovation governance. This map should extend from the “fuzzy front-end,” which builds on deep market and technology knowledge and organizational creativity, to the “speedy back-end,” which requires process discipline and risk management. If it is detailed enough, such a map and its associated processes should make the top management team more aware of the drivers of creativity and discipline in the company.

An effective innovation governance system makes the CEO and the top management team fully aware of all the drivers, hard and soft, of “total innovation.

Both result from a combination of two complementary cultures: on the one hand, entrepreneurship and risk-taking to generate and develop innovative ideas and concepts; and on the other hand, operational excellence to ensure these new ideas, concepts and products are compatible with the company’s operations and processes. Taking a helicopter view of the innovation challenge – an approach that an innovation governance system encourages – therefore helps management adopt a comprehensive set of values, policies and processes to build innovation into one of the corporation’s core competences.

Objective 2: To sharpen the company’s ability to build market foresight

If the C-suite is committed to innovation governance, it will ensure that all businesses and functions engage in constant and structured environment scanning to identify and react to all kinds of changes in their industry, technologies and markets. The aim of the scanning effort is: (1) to build insight and foresight in terms of industry structure, value chain dynamics and regulations; (2) to sense early signs of convergence of markets or creation of new segments; (3) to monitor and anticipate emerging trends in customer and channel behavior; (4) to detect alarming pressures on current business models; and (5) to be aware of and prepare for emerging technologies and competitors, and many other potentially disruptive factors.

An effective innovation governance system establishes responsibilities and a process for detecting and reacting appropriately to meaningful weak signals in the environment.

To be effective, environment scanning needs to be stimulated and steered by dedicated groups within key functions, e.g. a technology gate-keeping group in R&D, and intelligence networks focusing on markets, customers and competitors within the company’s advanced marketing function. In a comprehensive innovation governance system, management will consider the operations of such groups to be a necessary strategic investment, not an overhead that needs to be reduced to a minimum.

Objective 3: To ensure leaders display openness, curiosity and humility in all circumstances

Openness, curiosity and humility are essential management qualities for challenging old paradigms and preparing for new developments in technologies, industries and markets. As part of its innovation governance values, the C-suite should encourage observation, confrontation of ideas and questioning of all prior hypotheses as part of the company’s ongoing strategy dialogues.

An effective innovation governance system helps leaders collectively challenge their own assumptions and past beliefs and, whenever necessary, it encourages them to “unlearn” things.

Such an attitude can be reinforced by management development programs that focus on broadening the traditional intelligence questions, i.e. to ask not only what? but also what if? and what else?; not only why? but also why not?; not only who? but also who else?; not only how? or how much? but also how else? Ultimately, the C-suite should be the permanent challenger of “business-as-usual” management attitudes and “if-it-ain’t-broke-don’t-fix-it” principles. It should also detect, early on, the paradigm shifts that necessitate a radical change of direction, and thus the ability to “unlearn” the old ways to adopt newer ones.

Objective 4: To reduce the risk of flawed or late innovation choices

One of the most important tasks of an innovation governance system is to prevent leaders from falling in love and sticking with the strategy that made them successful in the past, despite signs of a paradigm change in the technological or market environment. This assumes that board directors participate actively in the company’s innovation governance. Indeed, boards need to support courageous changes by management to anticipate radical industry, technology and market changes, even at the risk of cannibalizing short-term revenue and profit sources. This type of attitude can only come from boards that encourage a long-term approach to business valuation and free management from the tyranny of quarterly profitability targets.

An effective innovation governance system induces management and board leaders to scrutinize and challenge the future validity of past strategies and success formulae.

The strategic misfortune of both Nokia and Research-in-Motion/Blackberry with smartphones, in contrast to Samsung, is undoubtedly linked to their inability to adapt their strategies fast enough to the new technology and application paradigms introduced by Apple and aggressively followed by Samsung. It also reflects the disconnection of their boards of directors from their management’s innovation choices.

Objective 5: To better assess the future impact of disruptive technologies

The decision to adopt – or not – a disruptive technology, and at what stage of maturity to adopt it, is one of the most complex dilemmas senior leaders must confront, particularly if it means jettisoning the incumbent technology and all previous investments in it. This requires a detailed analysis of the performance-to-cost ratio of the new technology and its future risk outlook. This is something only “neutral” experts can do – neutral here means with no personal investment in the decision at stake or the current technology.

An effective innovation governance system ensures that critical technology choices are made only after consulting with “wise” experts and careful analysis of the pros and cons.

The appointment by top management of such experts – something external technology advisory councils will guarantee – is one of the critical tasks of an innovation governance system. But, knowledge in itself is not sufficient; management needs to show both courage and determination in following the advice of the experts it has appointed, and wisdom in implementing the recommended changes to reduce its risk.

Objective 6: To link innovation and business strategies explicitly

It is the role of top management to clearly define its business strategy, i.e. where, how, when and against whom to compete, and to determine how it intends to build a sustainable competitive advantage. Innovation is generally expected to create or reinforce this competitive advantage in terms of new concepts, new product features or costs, new services, systems, solutions or business models.

An effective innovation governance system makes it clear and explicit to all where innovation is expected as a priority.

The innovation strategy is therefore inherently part of the business strategy, and top management needs to steer the two processes in parallel as part of the regular strategy cycle. Once this innovation strategy has been formulated, its priorities need to be broadly communicated to all those managers who need to know.

Objective 7: To focus all functions on the challenge of innovation commercialization

The chipmaker Intel defines innovation around three words – newness, value and adoption – thus recognizing the critical importance of a new product finding its market. Innovation commercialization – ensuring the fast adoption by the market and smooth roll-out of a new product, system, solution or service – is generally a risky and costly process, particularly for large “make or break” projects.

An effective innovation governance system aligns and mobilizes all functions from the concept stage onwards for a smooth launch and roll-out.

Contrary to what some traditional management teams believe, the commercialization of an innovation is not the sole responsibility of the marketing and sales organization, and it does not start only when the new product or service has been developed and is ready for launch. It is part of the innovation governance system to run the commercialization of a new product – from the concept stage – as a parallel process alongside its development, and to ensure all functions are fully aware of product/service adoption barriers.

Objective 8: To choose an appropriate innovation governance model

Governing innovation requires that the allocation of overall responsibilities for innovation, in all its dimensions – hard and soft, process and culture – be made explicit. The second article in the collection referred to above lists the nine different types of organizational models companies have adopted for allocating this prime oversight task. In some of these models, a single leader is entrusted with overall responsibility – for example the CEO, the CTO, or a dedicated chief innovation officer or innovation manager. In others the responsibility may be allocated either to a duo of leaders or even to a larger group – for example a subset of the top management team, an innovation steering group or board, or a network of champions.

An effective innovation governance system defines clearly who is in overall charge of innovation, and the level of delegated authority, as well as changes to the chosen model when necessary.

Each model has its advantages and disadvantages, thus the choice of an innovation governance model is an important decision that needs to be made at C-suite level to ensure maximum compatibility with the company’s management philosophy and its staff resources. Since company situations and staffing change, it is critical for top management to regularly review the appropriateness of its governance model and make the necessary adaptations. Communicating changes to the rest of the organization is of course essential to guarantee buy-in and optimum functional alignment.

Objective 9: To build a path for new generations of innovation leaders

As mentioned at the beginning of this article, CEOs believe that building human capital is their N°1 challenge in 2014. Given the general importance of innovation – N° 3 in the list of CEO challenges – it would be reasonable to assume that most CEOs are keen to develop new generations of innovation leaders. Ravi Kant, vice chairman of Indian giant Tata Motors, characterizes these leaders as “talented executives who can think globally and execute projects in a complex and dispersed organization.”

An effective innovation governance system pays top-level attention to hiring, leadership development and coaching of innovation leaders.

There is therefore a human capital element in any innovation governance system. It starts with hiring staff with a strong innovation orientation – curiosity and passion are always good markers for this quality. It also involves an explicit innovation leadership development program with an appropriate career path – alternating project and people management tasks – and an organized system of coaching by senior innovation leaders.

In conclusion, as Bill George – former CEO and chairman of Medtronic and now a Harvard Business School professor – states in his foreword to our Innovation Governance book: “In my experience sustaining innovation requires both innovation leaders and a rigorous system of innovation governance. One without the other is insufficient. Innovation governance without leadership from the top will ultimately wither as the immediate takes precedence over the important. Innovation leaders without a well-established governance process are too dependent on individuals and vulnerable to losing focus when those leaders move on.”

By: Jean-Philippe Deschamps

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[1] www.conferenceboard.org

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