“Innovation Labs” are flourishing in many companies and leading to the development of collaborative links with external innovation players, including startup incubators, or directly with them.
We also see the emerging concept of “excubators”: large companies are starting to outsource entrepreneurship projects in environments that are considered more open and more agile. Proof of this enthusiasm: a new function appears even in some companies, that of IEO (Innovation Ecosystem Officer).
Innovation Thesis
Innovation should not be conducted as a guerilla movement, hidden and protected from the main business. It must be part of and aligned with the overall strategic goals of the organization. This is important when it comes to later transitioning innovation projects into the core product portfolio.
Just like venture capitalist investors have investment theses, every large company must have an innovation thesis. An innovation thesis clearly sets out a company’s view of the future and the strategic objectives of innovation. A thesis also sets the boundaries or guard rails for which innovation projects the company will or will not consider investing in. In addition to deliberate strategy, the company must also use its innovation process as a source of emergent strategy that is responsive to changes in the market.
Just like venture capitalist investors have investment theses, every large company must have an innovation thesis. An innovation thesis clearly sets out a company’s view of the future and the strategic objectives of innovation. A thesis also sets the boundaries or guard rails for which innovation projects the company will or will not consider investing in. In addition to deliberate strategy, the company must also use its innovation process as a source of emergent strategy that is responsive to changes in the market.
Innovation Portfolio
To achieve its innovation thesis and strategic goals, an established company should set itself up as a portfolio of products and services. This portfolio should contain products that cover the whole spectrum of innovation; i.e. core, adjacent and
The goal is to have a balanced portfolio in which the company is managing various business models that are at different stages of their life. The balance of the product portfolio should be an expression of the company’s overall strategy and innovation thesis.
Innovation Framework
In order to execute on its thesis and manage its portfolio of products and services, the company needs a framework for managing the journey from searching to execution. There are several great innovation frameworks out there; for example Ash Maurya’s Running Lean framework and Steve Blank’s Investment Readiness model. All these frameworks can be synthesized into the three simple steps for innovation; creating ideas, testing ideas and scaling ideas.
Every now and again, a company may decide to refresh the business models of it existing products through renewing ideas. Having an innovation framework provides a unifying language for the business. Everybody knows what phase each product or business model is in. This then provides the basis of how a company can manage its investment decisions and product development practices.
Innovation Accounting
With an innovation framework in place, the company now needs to make sure they are using the right investment practices and metrics to measure success. Traditional accounting methods are great for managing core products.
However, when managing innovation a different set of tools are needed. We propose that companies should use incremental investing based on the innovation stage of their products. This philosophy is based on Dave McClure’s Moneyball for Startups.
We also propose three sets of innovation KPIs that companies should be tracking. Reporting KPIs are designed to track the activity and work being done on new ventures as they move from idea through to scale (e.g. validation velocity). Governance KPIs help paint a better picture for the company as to whether or not to continue investing in particular ideas (e.g. how close are the teams to finding product-market fit). Global KPIs examine the overall performance of innovation within the context of the larger business (e.g. percent of revenue in the last 3 years).
Innovation Practice
In addition to managing investments in innovation the right way, the way product teams develop products has to be aligned to the innovation framework. Pearson’s Lean Product Lifecycle is accompanied by great playbook that provides guidance to product teams as to the right behaviors to engage in during searching versus executing. Adobe’s Kickbox provides similar guidance, tools and resources. The core principle for innovation practice is simply that no product can be taken to scale until it has a validated business model.
As such, during the search phase the job of innovators is to validated their value hypotheses (i.e. does our product meet customer needs) and their growth hypotheses (i.e. how will we grow revenues and customer numbers). This process requires that teams validate both the attractiveness of the product to customers and the potential profitability of the business model. This is product-market fit and our definition of lean innovation.
These five principles combine to help create an innovation ecosystem.
The first two principles (i.e. thesis and portfolio) focus on innovation strategy, the next two principles (i.e. framework and accounting) focus on innovation management and the last principle is where rubber meets the road and the company begins interacting with customers and validating business models. Most innovation labs tend to just focus on this last part (i.e. innovation practice). However, without a supportive ecosystem in place, products coming out of innovation labs have high mortality rates. This is why applying all five principles is important.
