Innovation A Core Business Concept Part2

Starting an Innovation Process

Life of any business is finite. For companies to endure, the drive for efficiency must be combined with excellence in entrepreneurship.

Through the process of innovation, new businesses must emerge before

the old ones decay”

Importance of Innovation• New business opportunities are emerging due

to:– Globalization– Ageing population in developed countries– Emergence of middle class in India & China

• Dynamic environment affects old and new businesses alike

• New opportunities emerge & So does new competition

• To succeed, one must have Strategic Innovation

What is Strategic Innovation• Strategic Innovation involves exploring the

unknown to create new knowledge and new business possibilities

• Strategic Innovation proceeds with strategic experiments to test the viability of new business ideas

• Strategic Innovation breaks with the past practice in at least one of three area: – Value chain design– Conceptualization of customer value – Identification of potential customers

How Firms Institute Innovation Process

• Innovation process happens to be a trial & Error process– Design an experiment– Predict outcomes based on hypothesis– Measure Outcomes – Compare Outcomes to predictions– Learn from the conclusions

Why Trial & Error Process?

• In ideal world, scientific experiments meet 5 criteria : – Results are unambiguous– Experiments are isolated from outside influence– Results are available quickly– Experiments are inexpensive– Experiments are repeatable

Why Trial & Error Process?• In business world such ideal conditions

does not exist.– Results are ambiguous, experiments are

expensive & influenced by external elements– Makes learning from strategic experiments

difficult• Therefore Executives develop an

Experiment and Learn Attitude– Planning cycle provides the business context– And Learning requires conscious efforts

Change the Conventional Planning Mind-Set

• Historically Planning cycle is meant to implement a proven strategy by ensuring accountability under the presumption of reliable predictability

• Planning cycle for strategic experiments should be designed to explore the future strategies by learning given the unpleasant reality of reliable unpredictability

Changing Mind-Sets• In a mature business, there is a

reasonable predictability of the outcomes, hence needs accountability of management performance

• When future is unknown, the foremost planning objectives must be learning and not accountability. Managers must be accountable but on subjective basis– How fast are they learning & responding to

the new information?

Alterations to Conventional Planning Process

• Change No.1 : Level of Detail

• Change No.2 : Communication of Expectations

• Change No.3 : Nature of Predictions

• Change No.4 : Frequency of Strategic Reviews

• Change No.5 : Perspective of Time

• Change No.6 : Measuring Systems

Change No.1 : Level of Detail

• Comparison between outcomes and prediction can isolate & resolve problems if the focus is on a small number of unknowns

• When there are too many unknowns, focus on critical unknowns that can make or break the business– Most Critical Market unknown– Most Critical Technology unknown– Most Critical Cost unknown

Change No.2 : Communication of Expectations

• In Strategic Experiments, Focus on the theory used to generate predictions and the theory’s underlying assumptions

• The assumptions & Theory must be communicated to everyone involved and described in the planning cycle

• For Management team to learn, theory must be recorded, shared and later revisited

• Good Communication technique for capturing the essence of theory is cause & effect relationship diagrams

The Influence diagram must convey how major category of spending effects revenue. If possible, each bubble in the diagram must represent something measurable

A framework to gather data which confirms or contradicts Cause-and-Effect Relationship is then established

Influence Diagram• Influence diagram can capture the basic

hypothesis about the relationship and the theory

• The diagram can also show how major increases in budgets on critical unknowns can impact revenues– Customer satisfaction – Marketing Budgets

Change No.3 : Nature of Predictions

• Instead of making specific numerical predictions for specific dates, Predict trends

• In Strategic Experiment, single point prediction is certain to be wrong

• In Dynamic business conditions, it makes sense to focus on trends.

• The rate of change as a performance measure is more important than a numerical target

Change No.4 : Frequency of Strategic Reviews

• Instead of reviewing outcomes annually to reevaluate fundamental assumptions, review monthly or as frequently as necessitated by new information

• Learning is the goal of strategic experiments. Frequent reviews increase learning opportunities, take corrective actions, avoid mistakes and lowers costs

Change No.5 : Perspective of Time

• Instead of reviewing only current period outcomes, consider the history of strategic experiment in its entirety and look at the trends over time

• New data must be augmented with historical data to generate new trend graphs with rates of change readily visible and reviewed

Change No.6 : Measuring Systems

• Key measurements for a strategic experiment should focus on lead indicators. Financial & Non-financials can add value but focus on lead indicators

• Business dynamics in a strategic experiment, critical unknowns and underlying assumptions are subjective in nature. Measurements based on numerical targets are not suitable

For many Influence diagrams is better than a long verbal Description.It allows people to focus on critical unknowns

Closing ThoughtsWhen facing an emerging industry, without a proven business model, Uncertainties will be so large that the basic relationship between activities and outcomes are not clear. In these contexts Strategic Innovation makes or breaks a firm.

Successful strategic innovation requires experimentation, Management willing to learn from experimentation and rapidly adapting to new realities as new information is revealed