The Destination is the Journey

Strategic Renewal with a Holistic Innovation System: Strategic Frame

This article is part 2 of an article series about building an innovation 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 "strategic frame" lever.

Innovation on the way from "nice to have" to "must have

Traditionally, the Confucian wisdom that "the journey is the destination" applies well to innovation. Since innovation by definition involves a high degree of uncertainty, no precise goals are formulated, but new opportunities are explored and developed opportunistically following the classic "innovation funnel". In the worst case, the organization has at least learned something, and in the best case, a new breakthrough may have been achieved. This approach has its advantages when it comes to collecting all possible ideas to identify potential innovations. However, innovation always remains an unpredictable part of the business or strategy that way, and therefore more of a "nice to have": If something comes out of it, everyone is happy - if not, it does not matter too much.

Unfortunately, in today's uncertain and dynamic environment, companies can hardly afford to maintain such a nice to have attitude towards innovation. In the face of constant change, companies quickly lose their "strategic fit" when their business capabilities no longer match the environment. In this case, the company can no longer achieve its future goals with its existing competitive advantages. This "growth gap" must therefore be closed through innovation, by specifically developing new competitive advantages that restore the "strategic fit". In that context, innovation becomes a must-have instead of a nice-to-have!

In this "must-have" scenario, the destination is the journey. If the company depends on innovation for its survival and future growth, it must be able to meet specific strategic objectives. Accordingly, innovation must become more predictable rather than opportunistic, using, for example, a portfolio approach to balance uncertainties and allocate resources in a targeted manner to deliver the planned strategic contribution.

Accordingly, a suitable strategic framework is a critical lever for a holistic innovation management system because it sets the guardrails that provide direction and focus for innovation in line with the desired strategic development (or gaps in that development). Without this framework, the best that can be achieved is to move fast - but only this framework ensures that (speedy) innovation activities also move in the right direction. But how can you plan for something that does not yet exist, or give direction to something that has yet to be invented?

Creating a strategic framework for innovation

These are the questions that all innovation managers face sooner or later. After all, if it were clear what needed to be done, there would be no need to innovate. In this sense, strategic planning for innovation seems not only paradox, but even impossible. To avoid this problem and still provide direction, the trick is to begin by focusing only on goals and not yet defining “paths”.

1. Set strategic goals (KPIs) for innovation

Strategic goals for innovation can best be derived directly from the corporate strategy - after all, innovation should contribute to it. Financial goals such as revenue, profitability or costs are always a good choice due to their measurability. However, softer goals such as competitiveness, customer satisfaction, or sustainability can also complement the innovation goals.?

In any case - don't choose the objectives in isolation. The most important thing in the selection process is to involve all stakeholders who will later decide on the implementation and resources for innovation. Traditionally, the board should set the goals. A "ranking" mechanism helps to avoid that all possible objectives are simply superimposed on the innovation activities.

In addition to the final joint selection of objectives, it is also important to define the objectives as measurable key performance indicators (KPIs) so that they can be operationalized with specific scales for evaluating innovation projects. These can then be transferred to appropriate evaluation tools - from simple Excel spreadsheets and Powerpoints to digital project management or portfolio management tools (which we'll describe in the next article).

2. Determine "growth gap" and "strategic fit"

Defining goals is not enough. While this allows innovation projects or new opportunities to be (pre-)evaluated for their desired strategic contribution, the extent of this contribution has not yet been determined.

To do this, the "growth gap" must first be determined. This is the potential gap in the company's future ability to achieve its goals, measured by the difference between the goals and the target contribution from current or planned business activities and strategic initiatives. If there is a difference, this is the gap that needs to be closed through innovation (including possible M&A) and thus defines the necessary strategic contribution for innovation.

However, since this growth gap only looks at existing business activities, future "strategic fit" should also be examined. This describes how well the current or planned business capabilities match the future market potential. A 100% strategic fit allows the optimal use of existing competitive advantages, while a low fit creates the need to develop new competitive advantages.

This review requires a comparison of the internal strengths and weaknesses of the existing business model with the future potential of external trends, which can be done through an appropriate internal (business model) and external (trend) analysis. In this way, chances and risks can be identified that need to be resolved for the future strategic fit. Chances describe the possibility that the market potential in an area exceeds the business capabilities, so that additional business would be possible. Risks, on the other hand, describe the reverse possibility that the business capabilities in an area exceed the market potential, so that declining business is to be expected. For example, for a traditional car manufacturer, the market for electric cars may offer new opportunities that are not currently covered by business capabilities, while the market for combustion cars represents a risk where there are many business capabilities but the market potential is declining.

3. Identify the innovation gap

Armed with the defined strategic contribution as a target for innovation activities, this can now be compared with the existing innovation portfolio to determine a possible "innovation gap". To determine the total potential in the existing innovation portfolio, all current and planned innovation projects must be evaluated against the defined strategic KPIs. The assessment always reflects the current assumptions for the projects and should therefore - like the growth gap - be reassessed on a regular basis. The innovation gap then describes a possible (negative) difference between the total potential of the existing innovation portfolio and the defined growth gap.

If risks or chances for strategic fit have also been identified, the portfolio can also be analyzed with respect to these to determine the extent to which existing or planned innovation projects already address them. Depending on the results, the innovation gap may need to be adjusted accordingly to meet the strategic fit - in addition, fundamental and exciting "paths" for the further development of the portfolio can be selected according to the opportunities and risks.

4. Derive an innovation thesis

Venture capitalists who also invest in innovation have investment theses that not only define their return targets, but also provide rough hypotheses about the types of companies and markets in which they will invest. In the same way, companies can define an innovation thesis that determines what a company will and will not invest in. It therefore contains fundamental hypotheses about the goals and focus of further portfolio development. This innovation thesis can now be formulated - again with key stakeholders - using the results of the previous steps to finalize the strategic framework.?At best, the innovation thesis is more than just a sentence, but a differentiated target picture with concluding statements about the current positioning of the company compared to assessments of where the world is heading in the future (growth gap, strategic fit) and how the company will react to this with the help of innovations (KPIs, innovation gap). The innovation thesis must therefore always be aligned with the overall corporate strategy and clearly state the company's view of the future and the strategic goals of innovation. Since the future cannot be predicted, it can be seen as a hypothesis that evolves over time. Accordingly, all of the previous steps in establishing the innovation hypothesis must be periodically reviewed and adjusted as necessary.

Impact on dynamic capabilities

Such a strategic framework has a positive impact on the creation and application of the "dynamic capabilities" required for strategic innovation. Together, they enable the organization to (continuously) integrate, build, and reconfigure internal and external resources and capabilities to create new competitive advantage.

In particular, it influences scoping, which describes the ability to derive, operationalize, and communicate clear goals and criteria for innovation from the corporate strategy. At the same time, a strong scoping capability has a positive impact on all other dynamic capabilities, as it ensures that they are applied in a targeted manner, which ultimately benefits transforming in particular: the ability to implement and scale selected innovations with appropriate resources and processes. If the strategic contribution of the innovation is clearly defined from the outset and thus fits in with the further development of the company, it is much easier to successfully tackle the implementation and scaling of an innovation developed for this purpose.

However, the further development of innovation capabilities also requires the consideration of other levers, which can be found (or will be found) in the other articles of 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.

The next articles in this series will continue with the next lever of the innovation system: an agile governance with a strategic portfolio management. #follow and stay tuned to not miss out and get an overview of the complete innovation system!