Strategizing Innovation Management

Innovation is a chaotic activity, particularly at the early stages of idea generation, and can be unruly if left without a clear strategy. Innovation strategy defines how top management intends to use the organization's innovative capacity to enhance performance and attain the targeted competitive position. It may seem that the most innovative organizations don't have an inno­vation strategy, since they give free rein to their employees' innovative flair to take them in any direction. The fact of the matter, however, is that they do have a very defined strategy - an employee-driven innovation strategy, as will be explained in this section. Innovation strategy is crucial, particularly with innovation being pushed as far down as possible to the frontline, emphasizing the need to direct the innovative surge from the top of the organization with defined strategies. Innovation strategies play two roles. First, they form part of the competitive strategy of the organization by defining the areas in which new products will be introduced (i.e., the markets and segments they will compete in). Second, innovation strategies shape the mix of the innovation portfolio and the way innovation is managed across the whole organiza­tion at the operational level.

Following is an account of a number of innovation strategies for managing the innovation process.9 The interaction of these strategies with the organization's overall competitive strategies and the creation and management of the innovation portfolio will be outlined.

Innovation Strategies and Competitive Positioning

Trade-offs are essential to strategy. They create the need for choice and purposefully limit what a company offers.

- Michael Porter10

In 1980, Michael Porter, of Harvard Business School, identified three main generic competitive strategies that organizations use for long-term competitive positioning in the market.11 According to Porter, the three strategies are cost leadership, differentiation, and focus. In cost leadership, a business strives to supply a more cost-effective product compared to competitors, and compete through price. Differentiation is achieved by supplying products with higher value to the cus­tomers, commanding premium prices. Differentiation can be achieved by producing superior product qualities, new features, branding, and customer service. Focus strategies narrow the focus of a business to a certain product market segment, where both cost-leadership and differ­entiation strategies can be pursued.

Porter explains that usually an organization adopts one of the three as the primary competitive strategy without losing sight of cost control or operational efficiency under a differentiation strat­egy, and of quality and customer service under a primarily cost-leadership strategy. Porter further explains that while cost-leadership strategies require tight cost control and the need to meet strict targets, differentiation strategies require strong coordination among functions and the ability to attract skilled and creative people (see also about capital management).

Despite the insight that Porter's analysis provides, it remains too broad for the strategic man­agement of the innovation process. This is because whether an organization adopts a cost-leadership as opposed to differentiation competitive strategy, innovation will remain the main enabler for operationalizing both strategies. This applies in cases in which innovation is applied inwardly to finding new ways of doing things, making products with less cost, or alternatively making new differentiated products. The challenge is that innovation is a very broad activity that includes any new development under the sun, big and small, accentuating the need for an inno­vation strategy that sets some parameters to lead the innovation process, and to make the neces­sary trade-offs.

Though strategic planning is a situation-specific exercise, there are a number of generic inno­vation strategies that can be used to steer the innovation surge. Four innovation strategies are identified: customer-driven, inward employee-driven, outward employee-driven, and technology-driven innovation strategies. These strategies can be combined with Porter's differentiation and focus strategies, while cost leadership can be combined only with inward employee-driven inno­vation strategies. Choosing one of the generic innovation strategies guides top management as to steering the innovation surge of the whole organization, as well as selecting the innovation prac­tices and methods that are aligned with the innovation strategy. How to choose the strategy that suits the organizational situation and needs is dealt with in Chapter 11. But for now the four inno­vation strategies are outlined.

Customer-driven innovation strategies steer the organization's innovation activity to satisfy the perceived needs of the customers, where customers' input into the innovation process is essential. Many service businesses adopt customer-driven strategies, particularly if the majority of their business revolves around one or few primary customers. The use of such strategies, how­ever, is not limited to the service industry, and has been used for breakthrough innovations in other industries. The use of this strategy requires careful definition by each business of who the customer is and what needs are to be focused on. As a result, the role of marketing, sales, and cus­tomer service departments in the NPD process is integral, since they have maximum exposure to customers' needs.

Inward employee-driven innovation strategies tap into the organization's employees' innovative capability, and steer it inward to the improvement of the way business is done (i.e., process inno­vation). Though less studied than the NPD process, process innovation has always been used by organizations to secure competitive positions through cost leadership. PricewaterhouseCoopers 'Technological Barometer 2000" reports that 83 percent of organizations direct their resources to the development of new products, while 47 percent direct their resources for cost reductions through process innovation.13 Though this strategy may seem similar to cost leadership, it should be distinguished from economizing and cost control as it relates to innovating new ways that may or may not reduce costs but always improve job performance and hence productivity. This strategy entails empowerment of employees by allowing them to implement their process innovation ideas within set budgetary limits. Organizations adopting these strategies can compete through cost leadership (e.g., Wal-Mart) or differentiation (e.g., Home Depot).

Outward employee-driven innovation strategies are a new development in the knowledge economy. Organizations that adopt these strategies emancipate the innovative capability of their employees and allow it to flow in any direction, unhampered by strict control but smoothly steered into broad business areas. They practice what can be called organic innovation, wherein the innovative spirit is left to its natural dynamics. This strategy is adopted by organizations that see innovation as what they do and who they are. They usually grow into huge conglomerates by diversifying into a multitude of businesses in which their innovative capability enables them to compete. An example is 3M, which, following this strategy, has grown tenfold, with 100 core technologies and 66,000 products, compared to Norton, which started the same time as 3M in the abrasives business and remained an abrasives company. Many of the organizations adopting this strategy, when not as revolutionary as 3M, have independent skunk works where employees may experiment freely with their own projects. It must be noted, however, that those organizations that built such skunk works without adopting an employee-driven strategy failed to attain the same degree of success.

Technology-driven strategies14 steer the organization's innovative activity to join and win the technology race. Most of their NPD process is directed to developing the more technologically superior product or service, or the next generation of technology. Being a race, organizations operating under such strategies compete to invent the next new thing, and to establish their tech­nology as a market standard. Organizations adopting this strategy use patenting heavily, given that patents can be the strongest competitive weapons in the fierce technological race. This made patenting strategies among the most important of technology-driven strategies.15

Alignment of the innovation strategy with the organizational values, culture, purpose, people, and practices is essential to extract maximum value from the innovation process. It should be noted, however, that, like the competitive strategies, adopting one innovation strategy should not blind management as to the main enablers under the other strategies (i.e., customer involvement, employee empowerment, and technological advancement). For example, adopting employee-driven innovation strategies should not cause management to lose sight of customer needs even though it is not adopting a customer-driven innovation strategy. That being said, it is important for top management to decide on one innovation strategy as the primary one, to provide the focus required for strategic purposes.16 At all times, however, the organization cannot lose sight of the competitive landscape at the strategic planning phase, as will be further explained in Chapter 10. Innovation management at the strategic level also involves the choice of the innovation port­folio mix. Top management needs to decide whether they will compete by pursuing incremental (or evolutionary) or radical (or revolutionary) innovation projects. More accurately, they need to answer the question of "What is the mix of incremental and radical innovation projects that would best enable the organization to attain its targeted competitive position?" Managing inno­vation as a portfolio is critical both for allocating resources according to strategy and for manag­ing innovation-related risks. To that we now turn.