Innovation Strategy - What Is It and Why Do You Need One?

A 2024 BCG study revealed a staggering paradox that I wanted to talk about today:

83% of companies see innovation as a top-three priority for their business, but only 3% are ready to translate their priorities to results.

For a lack of a more refined analysis: This is an insane discrepancy!

But what’s the key reason? A lack of a strong link between innovation and strategy, it turns out.

Seems like a clear problem worth fixing. So what’s behind it?

What is innovation and why is it crucial for companies?

Before jumping into the thick of things, let’s get some key definitions out the way first so that we’re on the same page.

Innovation is the practical implementation of new ideas that result in the introduction of new goods, services, or improvements to existing offerings.

It involves transforming creative concepts into tangible solutions that add value in economic and social spheres.

Clear enough, moving on.

Different types of innovation are usually categorised into four buckets:

1. Incremental innovation: Gradual improvements to existing products or services.

2. Architectural innovation: Applying existing technology to new markets.

3. Disruptive innovation: Using new technology to enter existing markets, often starting at the lower end.

4. Radical innovation: Developing new technology for new markets.

Innovation can also be targeted at different levels of an organisation:

1. Product or service innovation: Creating new or improved products or services.

2. Process innovation: Enhancing internal company processes.

3. Business model innovation: Changing how a company creates or distributes value.

Still with me? Great! Why does all of this matter then?

Companies need to innovate for several crucial reasons:

1. Increased profitability: Innovative products create new revenue streams, while innovative processes can reduce costs.

2. Competitive advantage: Innovation helps businesses stand out in the market and attract customers.

3. Company growth: Expanding into new markets through innovation drives growth.

4. Adaptability: Innovation allows companies to respond to changing market conditions and avoid obsolescence.

5. Market creation: Groundbreaking innovations can generate demand for entirely new products or services.

Ok. I think we’ve covered the basics. Moving on.

What is an innovation strategy?

My definition of a good innovation strategy is as follows:

It’s a clear choice about where and why an organisation focuses its innovation efforts, and what sort of value that creates. It should be based on the company’s unique strengths, and outline how they go about initiating and developing innovation initiatives.?

It’s worth defining this because strategy in general is such a misunderstood term. Ask 100 people for a definition, and you’ll probably hear 100 different answers.

A good strategy is simple and actionable. It should make it obvious to everyone what to focus their efforts on. Also worth mentioning: a strategy is not a goal. It’s an actionable direction.?

An innovation strategy should thus align innovation efforts with overall business strategy and provide an actionable roadmap for turning creative concepts into tangible value.

For example, Apple’s innovation strategy probably centres somewhere around creating products that enrich people’s daily lives while utilising their deep technical expertise and vast ecosystem.?

To be clear, this is not an official strategy statement from Apple. It’s just an outsider’s guess on what it might look like, based on the sorts of innovations that the company has launched. Just to illustrate the point.

Now, going deeper into the nitty gritty:

BCG’s report highlights six crucial aspects for a successful innovation strategy:

1. Senior executive ownership: Innovation is championed by the C-suite.

2. Clarity on innovation’s role: There’s a shared story within the organisation on how innovation supports the company’s strategic direction.

3. Focus on competitive advantage: Innovation utilises the company’s unique strengths and chooses to win in these domains.

4. Clearly specified domains: Innovation efforts are concentrated on chosen areas that support overall strategy.

5. Target portfolio structure: A clear vision on talent and resources deployed on a mix of different types of innovation, ranging different time horizons.

6. Quantified objectives: A fact based perspective of evaluating innovations is in place, along with timelines and an analytical approach to quantifying risks.

What do we do with all of this then??

How to implement an innovation strategy?

This is a topic for a complete book, but let’s look at some basic elements that one should consider:

1. Define your innovation mission: Clearly articulate the purpose and goals of your innovation efforts, ensuring they align with your broader business strategy.

2. Assess your current state: Evaluate your existing innovation capabilities, resources, and culture to identify strengths and areas for improvement.

3. Choose your focus: Determine which types of innovation (e.g., incremental, disruptive, radical) best suit your organisation's goals and capabilities, and choose the domains in which you’ll innovate.

4. Develop an actionable plan: Create a detailed roadmap that outlines specific initiatives, timelines, and resource allocations to achieve your innovation objectives.

5. Foster an innovation culture: Encourage creativity, risk-taking, and collaboration across all levels of the organisation.

6. Establish metrics and governance: Define key performance indicators (KPIs) to measure innovation success and set up a governance structure to oversee and guide innovation efforts.

7. Allocate resources: Ensure adequate funding, talent, and tools are available to support innovation initiatives.

8. Implement and iterate: Execute your plan, regularly assess progress, and be prepared to adapt your strategy as needed based on results and changing market conditions.

9. Build external partnerships: Collaborate with customers, suppliers, startups, or academic institutions to access new ideas and capabilities. Ecosystems are crucial for innovation - you’ll rarely be able to develop everything in house.

10. Communicate and celebrate: Share innovation successes and learnings throughout the organisation to maintain momentum and engagement.

In my view, a prerequisite for good strategy making is a vision of a future that an organisation wants to build. The best way to set one comes from sensing different potential futures by the means of strategic foresight. This is yet another topic to write a whole book about (innovation is complicated!), so I’ll just leave it at that in order to avoid completely overblowing this article.

Summary

To recap, in today's competitive business landscape, innovation is essential yet often elusive for many companies. The paradox where 83% of companies prioritise innovation, but only 3% are prepared to act on it, is largely due to a lack of a cohesive innovation strategy.?

An effective innovation strategy clearly defines where and why a company focuses its efforts, aligns with the overall business strategy, and is actionable. Key elements of successful innovation strategies include executive ownership, clarity on innovation’s role, focused competitive advantage, and well-specified domains.?

Implementation involves defining a mission, assessing current capabilities, choosing focus areas, developing actionable plans, fostering a culture of innovation, establishing metrics, allocating resources, iterating on the strategy, building external partnerships, and celebrating successes.

Let's talk?

Phew, that’s about as short as I could squeeze this complex topic into. Anything crucial missing? I would love to hear your thoughts on this.

If you’d like to discuss how I might be able to help your organisation in reaching its innovation goals, please feel free to book a call: https://cal.com/miikka-paakkinen/30min?

#innovation #strategy #entrepreneurship #creativity