How to Innovate (Linked-In)

TEN QUESTIONS & ANSWERS ABOUT HOW TO MANAGE INNOVATION

I’ve written this short document to help leaders at established companies understand and

embrace a different management theory stack when they try to manage innovation. Its written

for big-company staff, in hopes they already know or suspect that what drives established

businesses (planning & execution) is at best secondary for innovation.

by Jonah McIntireUpdated July 2015

Published July 2015, By Jonah McIntire

This Presentation Answers These Ten Questions About Managing Innovation

1. What do innovation managers do?

2. What characterizes an innovation team?

3. What is the lifecycle of innovations?

4. Where can and should innovation occur?

5. How to balance innovation ambitions?

6. How to run an innovation?

7. When and how to exit innovations?

8. How to evaluate an innovation?

9. How to track the value of innovations?

10.What publications and experts support these recommendations?

Innovation does not fail due to lack of creativity, but rather because of a lack of discipline.


What do Innovation Managers Do?

Managers of innovation should be doing mainly four things: (1) providing guidance

on how best to run innovations (i.e. from creative insight to viable business), (2)

pooling and cultivating resources, and (3) balancing the deployment of resources

across innovation ambitions, and (4) rendering innovation profit contribution

transparent and predictable. They are not the “idea generators” since creative

insights can and should occur everywhere.

Exploit

Discover

Define How to Innovate Husband Resources Balance Ambitions

Creative InsightsNew Profit

Contribution

Innovation Incubator


What characterizes an innovation team?

An innovation team should be a temporary grouping of staff seeking

to create a new business of interest, under conditions of extreme

uncertainty. An innovation team’s mission is not to build or grow

the product or service but rather to reduce the uncertainty. The

innovation team’s mission ends at the point that an investment in

the new service or product of X amount has a predictable return of Y.

An innovation team should be small enough to have no hierarchy,

and all members are full-time dedicated. The innovation team acts

with a high degree of autonomy: (1) once capitalized they manage

their own resources without external tampering, (2) they have

authority to act, (3) the team has a personal stake in its success


What is the lifecycle of an innovation?

Concept Validate Scale

• Formulate a business model

worthy of investment

• Balance innovation ambitions, i.e.

selection of innovations to pursue

based on their merits and to

balance portfolio

• Identify “leap of faith” assumptions

and experiments to falsify them

• Minimize both time and expense to

exit the validation stage

• If early versions were created, do

more of a good thing without

screwing it up

• Exit the innovation phase and simply

run the new business

• Collect ideas from all sources

• Polish ideas in to falsifiable

business models / hypotheses

• Define MVPs, candidate innovation

teams, and minimum capitalization

• Periodically balance capitalization

• Innovation team is formed, capitalized,

and works independently

• Service or products are created as

needed to achieve learning goals

• Innovation is evaluated bi-weekly using

the Investment Readiness Level:

resources assigned or cut as needed.

• Innovation team moves to next

innovation and a line-of-business

owner takes over

• The service or product is built and

deployed

• Position the new alongside the

existing in a way that enriches both

Ph

ase

Go

al

Wh

o &

Wh

at


Where can innovation occur?

Who is the

Customer?

How do we Obtain &

Retain Customers?

What is the Product

or Service?

How do we run the

Product or Service?

Who are our

partners?

How to structure

costs?

Resources?

Key Delivery

Channels?

How to structure

pricing?


Where can innovation occur? The most certain way to fail at innovation is to assume that the only place an

innovation can occur is in the product…

Resource-led Innovations Customer-led Innovations Product-led Innovations Finance-led Innovations

Example

What new business could be

created using our experienced

staff or core assets?

Example

We want to expand in to Chinese

consumers, what do they need in

particular?

Example

Our product runs 5x faster than

competitors. What business

concepts would capitalize on this?

Example

If we changed pricing to charge

per results, how would the rest of

the business model best leverage

this?


How to balance innovation ambition?Leaders of multi-line businesses needs to

balance their ambition to innovate, in terms of

where they innovate, how deep these

innovations are targeted, and in what timeline.

The figures below show suggested investment

split.

Ne

w M

ark

et

Ne

w C

usto

me

r

Exi

sti

ng

Cu

sto

me

rExisting Improved New

What Is Sold

Wh

o B

uys

Transforms or

creates markets

that don’t exist yet

“New to Us” lines of

business, but delivers

on the current brand

promise

Efficiently sell

existing stuff to

existing customers

70%

Core

Improve the

efficiency of the

current business

model

20%

10%

Adjacent

New but near

products or

clients. No

fundamental

shift in brand. Transformational

Sell new stuff to

markets never

served before and

those that may not

even yet exist.


How to balance innovation ambition?

Transformational 10%

Investment

Adjacent 20%

Core 70%

10%6 to 12 Months

Time to Go or No-Go Decision to Scale

20%3 to 6 Months

70% < 3 Months

Where to Innovate

Resource-led 25%

Customer-led 25%

Product-led 25%

Finance-led 25%


How to Run an Innovation: Instrument 1 of 4

An innovation is run via four key instruments. The first instrument, shown below,

overlays the business model canvas as a series of business strategy questions, shown in

logical order of how they should be resolved and according to the established

aspirations— positioning – capabilities framework.

#2- Which Market to

Pursue? (Where

to Play)

#1- What are our Goals? (What We Want to Win)

#3- What and How We Sell?(How to Win)

#4- What Resources & Activities Are

In-House?(What We Do

Better)

#5- What Resources & Activities Are Outsourced? (What Others Do

Better)

Aspirations

PositioningCapabilities



The second instrument is shown below in the form of a business model canvas. It

documents what the innovation’s desired end state will be. Complete this on a single

page and then compare it to the strategy from instrument #1 to ensure alignment of

strategy to business model. Then identify high-risk assumptions which must be validated.

Partners Key Activities to CreateProduct or Service Solution Propositions

Customer Obtainment & Retention

Customer Segments

Critical Resources Delivery Channels

Cost Structure Pricing



The third instrument, shown below, is the “two week learning loop”. It formalizes

the purpose of the innovation team at any given time. The innovation team does

not build a product or service, instead they build something only so they can

measure and falsify a given assumption. Each iteration of the loop has a resource

outlay, decided up-front, to achieve a learning milestone.

Identify Assumptions

Measure to Falsify

Build to Measure

2 Week

Learning Loop

Vanity metrics are the Achilles's Heel of the learning loop… these are metrics that will look good but not actually reduce uncertainty.

Always strive to build the minimum product or service needed to test. At times this is not building at all

Callouts



The Investment Readiness Level (IRL) instrument below provides three specific

benefits: (1) it ties together the business model canvas and the learning loop; (2) it

is Prescriptive – i.e. “what-you-need-to-do-next” guidance to moving to exit; (3) it

enables better mentoring: the IRL provides a vocabulary to discuss innovation

readiness. Each level represents a must—have hypothesis that has been verified.

4: Validate Client-Facing (Right Side) of Business Model

3: Market Sizing / Competitor Analysis

2: Problem / Opportunity Validated

1: Compelling Business Model Canvas

6: Validate Scaling Factors

5: Validate Delivery (Left Side) of Business Model

An idea…

… corresponding to real pain …

…that could be big…

…where our offer is compelling…

…and profitably delivered…

…that can grow easily


When and How to Exit Innovations

Innovations always end. A good assumption is that 70% should end within 3

months, 90% within 6 months, and 100% within 12 months. Innovations end when

uncertainty of the business is low enough that a go / no-go decision can be made

about building & scaling it.

Innovations must be exited quickly for both intrinsic and extrinsic reasons.

Extrinsically, the innovation process is a resource drain that has lower net

expected return if prolonged. All evidence is that small incremental innovations

deliver better total returns than protracted ones. Intrinsically, innovation is about a

learning cycle applied to the uncertainty of a new business model. The longer that

takes to finish, the more the original market assumptions will have changed.

Innovations can be exited as followed:

1. They no longer merit exploration (because of something that was learned). This is

a net loss on invested capital.

2. They demonstrate viable businesses but not as attractive as alternate uses of

resources. Therefore, they are on hold or spun-off. This is either a net loss on

invested capital, or a one-off return that may yield ROIC profit.

3. They demonstrate viable businesses that are also attractive uses of scarce

resources. Therefore, they (should) get funded and become parts of the core

business. This should yield a profit on invested capital.

70% likelihood

30% likelihood

10% likelihood


How to Evaluate an Innovation?

Forget average return % and downside

risk: focus on maximum upside potential

20x

1x

Most people without start-up, angel, or venture capital experience

mistakenly evaluate innovations by a blended average return rate.

For example, they assume that an innovative business that has a

small chance of losing money and should produce a profit of 10%

across a broad range of what-if scenarios would be attractive.

Experience with funding innovations (and especially start-ups) has

demonstrated that its better to focus on maximum upside potential.

This is because (1) the downside potential has a strict and obvious

limit because we cannot lose more than 100% of the investment, (2)

it has proven more effective to assume that no one can know how

good or bad a new business will perform… its better to not even

waste the time to evaluate “average” outcomes. Spend precious time

and resources evaluating maximum potential upside and ignore the

cloudy partial-success scenarios in the middle.

Taking a note from angels and venture funds, a good innovation

presents a 20x to 30x upside potential for any $1 invested.


How to Evaluate Scalability?

In addition to maximum upside potential, also assess the ease or cost of scaling up. To assess scale-up ease and cost, ask what resource the innovation needs, but doesn’t have today, in order to double in size. This is a left-side-of-the-canvas question, referring to internal and external resources. Most innovative businesses will have one or two bottlenecked resources that act as their scaling factor, effectively limiting the ease and expense of growing. The scaling factors tend to fall in to discreet categories, as shown on the left. More attractive categories are at the bottom, and less attractive at the top.


How to Track the Value of the Innovation?

Innovations provide soft benefits. But their direct, quantifiable ROI should be

compelling. The three categories below show how the profit from individual

innovations are evaluated. Overall value from innovation is then judged by its

ROIC = (total profit contribution from innovations over 12 months – Innovation

total budget) / (Innovation total budget)

Adjacent innovations deliver “new

to us” lines of business either

through product & service

extensions or new but nearby

customers. The value is from new

profit contribution or market share

in situations where profit is traded

for market share.

Transformational innovations create

entire new markets, or bring the

company in to markets their current

brand does not address. The value is

from new profit contribution or

market share in situations where

profit is traded for market share.

Core innovations improve the ability

to sell existing products or services to

existing customers or customer

segments. Their value is either in

efficiency (same revenue for less cost),

or top line revenue growth.

Core Innovations Adjacent Innovations Transformational Innovations

Reported Value = (Profit Margin Increase X Impacted Revenue from Last 12

Months) + (Increased Revenue from Last

12 Months X Average Profit Margin)

Reported Value = (Revenue from Products, Services, or Clients Not

Existing 12 Months Ago X Average Profit

Margin)

Reported Value = (Revenue from Markets Not Entered or Existing 12 Months Ago X

Average Profit Margin)


Innovation Challenge Best Management Approach Publication, Author, & Year

How to organize innovation teams within established companies Dedicated teams with autonomy & authority Innovators Dilemma - Clayton Christensen - 1997

What is an innovation? A new potential business with high uncertainty Lean Startup – Eric Ries - 2011

What should a team do to drive an innovation forward? Fast cycles of building something that will generate data

needed to verify assumptions, hence lowering uncertainty

Lean Startup – Eric Ries - 2011

What are the logical stages for an innovation as it matures? Verify Market, Verify Solution, Scale Startup Pyramid – Sean Ellis – 2006

4 Steps to Epiphany- Steve Blank – 2005

Nail It Then Scale It – Nathan Furr – 2011

Lean Startup – Eric Ries - 2011

Running Lean – Ash Maurya - 2012

Where can and should innovations occur? Innovate the business model, not the product Business Model Generation - Alexander

Osterwalder and Yves Pigneur – 2010

Ten Types of Innovation – Doblin - 2013

How to assess the cost and ease of growth if successful? Find the resource that must be acquired for incremental

growth

Scaling Factors– Jonah McIntire, 2015

What Expertise Lies Behind Good Innovation Management?


Innovation Challenge Best Management Approach Publication, Author, & Year

How to align technical development with business value? Agile Software Development Many sources – 2001 and onward

How to assess the maturity of an innovation and when to

abandon or begin scaling it?

Verify a sequence of logical business hypotheses that must

be met before a business could be predicted to succeed

Investment Readiness Level – Steve Blank - 2013

How to balance the ambitions (and hence scope) of innovations? Innovation Ambitions Matrix HBR Article - Bansi Nagji & Geoff Tuff - 2012

How to Align Strategy with Business Models? Document the strategy first, in terms of aspirations–

positioning – capabilities, and then align to the business

model. The strategy answers:

1. What are the goals

2. What market to pursue

3. What and how to sell

4. What to keep in house

5. What to get via partners

Playing to Win: How Strategy Really Works,-- A.G.

Lafley & Roger L. Martin – 2013

Strategy and the Business Model – Mihai Ionescu

(https://www.linkedin.com/pulse/strategy-

business-model-mihai-ionescu)

What Expertise Lies Behind Good Innovation Management?

How to Innovate (Linked-In)

Documents

innovation managers

managers of innovation

innovation ive

innovation phase

capitalization innovation

innovation team acts

innovation teams mission

candidate innovation