Ambidextrous innovation in interlinked units

Strategic Renewal with a Holistic Innovation Management System: Organizational structures & interfaces

This article is part 5 of an article series about building an innovation management system for strategic renewal. This article was originally published in German at the?Haufe Group?New Management Magazine together with Lucas Sauberschwarz . You can find the introductory article here. ?

To continuously adapt to today's uncertain and dynamic environment, companies need the organizational capabilities for continuous and effective innovation. These capabilities can be developed through a holistic innovation management system. The individual levers of this system are discussed in this series of articles. After the basic introduction, this article focuses on the "organizational structures & interfaces" lever.

Interlinked-ambidextrous innovation units

At their best, established companies pursue innovation to create new competitive advantages for future growth. But this poses significant challenges. Unlike start-ups, they cannot focus solely on developing and scaling new competitive advantages. Instead, they must continue to leverage and optimize their current and usually profitable core business. To enable continuous strategic renewal, the "exploration" of new business opportunities must be combined with the "exploitation" of the existing core business. In the best case, companies can then act ambidextrously, using existing competitive advantages from the core business to develop new competitive advantages through innovation.

Exploratory and exploitative activities have diametrically opposed characteristics. Exploration requires flexibility, autonomy, and continuous adaptation, while exploitation relies on efficient processes, structures, and routines.

The ability to balance between exploration and exploitation is called "ambidexterity" in innovation theory. As usual, however, practice is not as easy as theory. This is because explorative and exploitative activities have diametrically opposed characteristics. Exploration requires flexibility, autonomy, and continuous adaptation, while exploitation relies on efficient processes, structures, and routines (see Figure 1).

To overcome this contradiction, different approaches are used in practice to achieve ambidexterity. These approaches basically follow either a trade-off or a paradoxical view of ambidexterity. The trade-off perspective always sees exploration and exploitation as two ends of a continuum, and thus requires a structural or temporary separation of the two activities, which must then be reintegrated at another place or time. The paradox perspective attempts to cover the entire continuum in order to apply and combine exploration and exploitation simultaneously. These two main philosophies can be applied to the entire organization (or all employees) or to specific organizational units (functions). Accordingly, there are four basic organizational forms for ambidexterity (see Figure 2).

The most modern approach here is known as procedural ambidexterity, because it allows the combination of exploration and exploitation in dedicated organizational units, thus providing a systematic organizational approach to realizing the paradoxical view. Dedicated innovation units are used in this approach, but they are not completely separated from the core business, as is the case in structural ambidexterity. Instead, they are connected as "interlinked" units with the internal organization and the external ecosystem to link new opportunities with existing competitive advantages using appropriate processes and methods. Following this approach, this article shows how such interlinked ambidextrous units can be structured organizationally to enable strategic innovation.

Formal and Informal Interfaces of the Innovation Unit

Interlinked ambidextrous innovation units require appropriate formal and informal organizational interfaces. Formal interfaces are any processes, meetings, or committees that have been defined to coordinate specific issues. For example, the innovation portfolio is discussed in cross-functional committees, the achievement of goals is reviewed in regular meetings with management, or cooperation with external start-ups or research institutions is organized in specific formats.

Informal interfaces, on the other hand, refer to all organic or serendipitous and other unstructured relationships between different people inside and outside the organization. Although these contacts, by their very nature, cannot be planned in detail, a context can be created in which such a network is fostered. This can be done, for example, by setting up common areas in the office ("water coolers"), by organizing "networking events", or by creating an ecosystem with official "multipliers" or "ambassadors" for certain topics. Participation in (external) events, e.g. in the start-up sector or at research institutions, can also make a decisive contribution to establishing suitable informal interfaces in the long term, if active networking takes place there.

Interlinked ambidextrous innovation units require appropriate formal and informal organizational interfaces.

Such formal and informal interfaces should be used to connect the innovation unit vertically with management and strategy, horizontally with business units and operational functions in the core business, and externally with the ecosystem.

1. Vertical interfaces with strategy / top managementBy definition, the vertical link to the top management and strategic functions of corporate development is crucial for strategic innovation units. It is these links that enable the strategic alignment of innovation activities with corporate goals and the continuous prioritization of the innovation portfolio for optimal goal achievement. In particular, the CEO is responsible for agreeing on the fundamental goals and focus areas to which the innovation unit should be aligned. Collaboration with the CFO can help develop the most appropriate strategic goals as measurable key performance indicators (KPIs) for managing the innovation portfolio. The CTO is usually more involved in the innovation portfolio development in the case of technical companies, the COO in manufacturing companies, and the CMO in FMCG and retail companies. And together with the CHRO, the skills and competencies required in the future can be defined and planned.In addition, continuous coordination with the strategy department or corporate development helps to optimally manage the innovation portfolio in conjunction with possible other strategic (growth) initiatives (or ideally even to jointly evaluate the initiatives in an overarching portfolio).These links are not a one-way street, as the insights, methods and contacts of the innovation unit can also provide important impetus for management and strategy, so their targeted integration into corresponding strategic processes should be ensured!
2. Horizontal interfaces to the core businessThe horizontal interfaces between the innovation unit and the core business play a key role in enabling the innovation unit to act ambidextrously and leverage existing competitive advantages to develop new strategic solutions. Through formal and informal interfaces with business units and operational functions, new opportunities can be linked to existing capabilities in the core business. For example, employees from business units can collaborate on innovation projects that fall within their area of expertise. Functions such as IT, legal or marketing can support the concrete definition and validation of new innovations at an early stage to ensure their subsequent implementation. And key stakeholders from the core business can be involved early in the prioritization of the innovation portfolio to ensure subsequent implementation within the organization.
3. External Interfaces with the EcosystemIn the spirit of open innovation, it is no longer enough for any company to search for new ideas and drive development within its own organization. Technological change is too fast and global markets are too complex for companies to have all the necessary skills and capabilities in-house. It is therefore imperative that innovation units are connected to the external ecosystem of start-ups, investors, research institutions, other companies, etc. through appropriate informal and formal interfaces. These connections can be used to identify new opportunities, evaluate them with appropriate experts, or find partners for development and implementation. External service providers such as consultancies, freelancers and technology companies can also be brought in to initiate or advance new projects without having to build up too many fixed resources themselves.

Companies should therefore define and establish specific formal and informal vertical, horizontal, and external interfaces to create a well-networked, ambidextrous innovation unit (see Figure 3).

Agile Organization of the Innovation Unit

In addition to the interlinking of the innovation unit, its internal organization is also crucial for achieving processual ambidexterity. For a successful combination of exploration and exploitation, appropriate structures and competencies must be established to enable the targeted development of strategic innovations. On the one hand, the innovation unit needs a high degree of adaptability in order to be able to quickly identify and act on new opportunities and thus be as adaptable as possible in a dynamic environment. On the other hand, a high degree of alignment with corporate goals is required to manage the innovation portfolio effectively and to deploy resources in a targeted manner to realize strategic value. Such (Innovation) units with high adaptability and high alignment can also be described as agile organizations and have the best prerequisites to deliver high performance in the sense of a profit center in the long term in terms of a countable strategic value contribution.

The basis for such an agile organization of the strategic innovation unit are self-organized project teams for innovation development that are interlinked and cross-functional. These project teams should be able to be flexibly staffed from a pool of available project employees in order to enable dynamic adaptation of resources. Ideally, this pool can be filled with people from the innovation unit itself, with experts from functions and business units of the core business, and with external partners and service providers as needed. Not everyone needs to be available 100% of the time, but a certain amount of "organizational slack" in terms of unplanned capacity is necessary. After all, if all of the skills required for a project are used 100% in day-to-day business, it will be difficult to get an effective innovation project off the ground. Therefore, it is particularly important to plan for this if employees from the day-to-day business are to be used for innovation projects.

If all the skills needed for a project are fully utilized in day-to-day business, it will be difficult to get an effective innovation project off the ground

The pool of potential project members can then be used to form appropriate teams for new innovation projects, covering as many of the required skills as possible. Cross-functional here means that project team members may be experts in specific functions, such as customer research or testing, but are still organized around specific topics (projects, activities) rather than separate functions. It is therefore important to connect these experts with each other in order to make decisions as quickly as possible within and between the cross-functional project teams, involving all relevant knowledge holders and thus as decentralized as possible - and at the same time to build up overarching knowledge. The exact structure and composition of these project teams, as well as the roles and skills they include, will therefore always depend on the portfolio of innovation projects, which means that the composition of the teams may change from time to time and people may be assigned to several teams.

In the best case, such interlinked, cross-functional project teams have all the skills on board to find the best solution for an innovation potential in a self-organized way. Accordingly, while a basic systematic innovation process should be defined, it should be left to the project teams to decide exactly how to proceed, which activities should take place when, and how much time and money should be invested in them. This ensures a high level of speed and adaptability of the innovation unit.

Alignment Must Be Right

To keep these self-organized teams moving in the right direction, alignment must be ensured. Of course, this needs to be organized across the individual project teams in order to deploy them as purposefully as possible and to define the most relevant projects. In addition to the agile project organization, an overarching portfolio management and strategy team must be established. This team is responsible for evaluating, managing, and optimizing the portfolio to ensure that the innovation effort as a whole is meeting its goals. In coordination with key stakeholders, the team can prioritize projects and (re)allocate resources accordingly.

At best, it has a dedicated budget for this purpose, which can at least be used to pre-finance new innovation potential until enough information is available about its usefulness and separate project budgets are set up. However, if the innovation unit is really supposed to function like a profit center, the dedicated budget can even finance the complete development and, if necessary, implementation of innovation projects - which can then replenish the budget pot after a few years. In either case, this overarching control function ensures that innovation projects (and their resources) are continuously aligned with strategic goals and objectives, and that the expected value contribution is achieved.

This ensures the adaptability and alignment of the strategic innovation unit in terms of an agile organization. Of course, for this setup to be operational, a coordinating and supporting "management" function is also required, which sets the rules of the game, has the teams' backs, can escalate decisions, and ensures appropriate working conditions in addition to the strategic framework. Overall, the cross-functional and interlinked project teams can then carry out their innovation projects in a self-organized manner, with the leadership function working with management to define the goals and the strategic framework and to create the appropriate resources, while the overarching portfolio management function ensures that these resources are always used as effectively as possible to achieve the goals (see Figure 4).

Impact on dynamic capabilities

The structures and interfaces described for a interlinked ambidextrous innovation unit have a positive impact on the establishment and application of the "dynamic capabilities" required for strategic innovation (see introductory article). Together, they enable the organization to (continuously) integrate, build, and reconfigure internal and external resources and capabilities to create new competitive advantage. All capabilities are influenced by the different components of the strategic innovation organization. Innovation management is responsible for scoping, which defines the strategic framework for innovation activities. Portfolio management and strategy enable scoping by continuously capturing and evaluating the innovation portfolio and aligning it with the strategic framework.

The self-organized project teams then ensure "sensing" and "seizing" by identifying new opportunities and addressing them through the development of new solutions. And the formal and informal interfaces for interlinking the innovation unit as a whole ensure the best possible "transformation" by involving all relevant external and internal stakeholders in the implementation of new solutions. The interlinked ambidextrous innovation unit is therefore an important basis for developing new competitive advantages while leveraging existing ones - and thus for successfully using the innovation unit for the strategic renewal of the entire company!

But to develop innovation capabilities, you also need to consider the other levers discussed in the other articles in this series. Do you want to know where your company stands on the road to continuous strategic innovation? The "Capability Check" provides a free, quick self-assessment of all dynamic capabilities using a scientific questionnaire. And stay tuned for the next articles in this series, which will reveal other key levers for building them!

The next articles in this series will continue with the next lever of the innovation system: resources and infrastructure for innovation. #follow and stay tuned to not miss out and get an overview of the complete innovation management system!