Introduction Innovation Management

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INTRODUCTION:

This module is the first of a series of modules, in which various innovation activities discussed from “Foresight and Visioning” to “Opportunity analysis” and “Idea generation” and from the elaboration of an “idea into an innovative business model, the underlying business case and the business plan” to “Roadmapping and Portfolio management” and “Design for Six Sigma”. Altogether we have defined 20 such modules. In each of the modules we discussed the underlying principles and methods used during these innovation activities. Furthermore, each of the modules contains the tools that help to apply these methods. This first module is however different. Whereas the other modules are more practical, this one is modre theoretical. Here we will discuss the principles and concepts behind innovation. We will discuss the characteristics of the innovation process that makes it different from the other business processes such as production and logistics. We will discuss the non-linear character of innovation, that makes it inherently uncertain and risky. We will make clear the effect of these differences on the management of innovation.

We will start with a definition and the scope of the concept of INNOVATION:

According to the Austrian Economist Schumpter, innovations can be considered as new combinations of: 1. New technologies 2. New applications (products/services) 3. New markets (business models) 4. New organizations forms /-business processes.

We classify something as an innovation once we are able to earn money with it.

We make a distinction between 1. an invention (for example the new technology) and 2. an innovation (including the following, namely: 1. the application of this new technology in a product or process, 2. the implementation in the organization ( production and logistics) and last but not least 3. the market introduction and commercialization).

Each innovation consists of 6 aspects or domains, namely: 1. Strategy (business model innovation) 2. Technology/competence (technological innovation) 3. Applications (Product/service innovation) 4. Market positioning/approach and business model (market innovation) 5. Organizational/process (Organizational/process/social innovation) 6. Finance (Financial innovation)

These aspects are interrelated to each other. We name the space that is formed by these 6 aspects or domains the INNOVATION ARENA. An innovation may start with one of these aspects or within one of the domains. When we start for example with a technological innovation, we can see this as an OPTION to create new or improved products and/or services. Often a new technology will originally be used in an existing product to improve its performance, and later on it will be used in creating new types of product (for example the IPod). Also, new automating technologies introduced to make existing processes more efficient urge the organization to change (Business Process Re-engineering) and later on it may be the starting point for the creation of new services. Another example is the “peer to peer technology”, that has lead to "Skype". Often these types of innovation will not become successful until they are combined with a new revenue- or business model (take for example the new revenue model of “Skype”) (see Chesbrough, 2003 or Davenport, 1995). We also see that innovations such as e-mail and VOIP have an enormous effect on the way organizations structure their processes. Such new and improved organizations may, in its turn, lead to new innovations. For example Skype and VOIP combined with other core competences of the organization may lead to new services over internet. Ultimately, this can have huge consequences for the way we earn money (the revenue model) with our services. During innovation there is a CO-EVOLUTION of the 6 aspects or domains of the innovation arena. THE INNOVATION PROCESS is a SEARCHING, LEARNING, CREATION and CHANGE PROCES consisting of many small steps. It is a process that is executed in SMALL, MULTIDISCIPLINARY TEAMS that consists of members that have insight in the various domains of the innovation arena and are skilled in its searching, learning, creation and change (sub-)processes. Aside of the knowledge and skills of the team members, also the ORGANIZATIONAL CONTEXT of the process is essential. When the activities are not structured into a systematic and disciplinary process nothing will come out. The STRUCTURING and ORGANIZITION of the process and the VALUES and NORMS (CULTURE) that drive the behavior of the participants determine the EFFECTIVENESS of the innovation process. The enabling METHODS, TOOLS and MANAGEMENT SYSTEMS are important to ENABLE the innovation process and its sub-processes and determine its EFFICIENT and FAST.


When innovating we have to address all the six aspects of innovation (the 6 domains of the innovation arena) mentioned before. We have to ask ourselves: what is the best solution for each part of the 6 aspects in order to make the innovation a success? Because of the high uncertainty inherently coupled to each innovation, it starts with maximum uncertainty and developing the idea into a business model, making the business case and an accompanying plan this uncertainty is reduced by answering aa number of questions. We can list these questions and map them to each of the 6 domains (see below). To each question we have added the activities that are needed to answer the questions, and the methods that can be used to make these activities more successful.

These details are described in the detail knobs below.

The 6 domains of the innovation arena, namely 1. strategy 2. technology, 3, application, 4, market, 5, organization, 6. financials, can be clustered in 3 pairs of domains in which 1. SEARCHING ACTIVITIES are predominant (technology and market) 2. DESIGN ACTIVITIES are predominant (applications and organization) or 3. GOAL SETTING AND DECISION MAKING are predominant (strategy and financials). These 3 main groups of activities are all part of the INNOVATION PROCESS.

As discussed above, the INNOVATION PROCESS consists of many different ACTIVITIES to answer the above mentioned questions "from idea to market", with many interactions between these activities. There are many positive feedback loops (self reinforcing loops) making the process non-linear. Small changes can be reinforced. This makes the outcome of the innovation process inherently uncertain (the butterfly of Lorenz; a butterfly that flies up in the Amazon can create an hurricane in the Caribean). When we try to lower this uncertainty by making the innovation process more linear and more controllable as we do in production, we kill the innovativeness. Managing the uncertainty, that is inherently coupled to innovation, is therefore one of the main challenges of innovation management. We will discuss the innovation management approach (heuristics, methods and techniques) in the following +/- 20 training modules .

ASSIGNMENT1: Take an innovation project from the past. Write down the questions in the various domains. In the DSM tool introduce with drag and drop the various aspects that had to be studied in the Assignment view. Link them and make a DSM matrix.


In uncertain situations we create options. Take for example financial options or an option to buy a house. We take such an option (buying the house) when we do not know whether we can finance it. Only after we know that the bank will give us a loan, we execute the option and buy it. A new business idea can also be seen as an option. An option is a right and not a plight. When after developing the option it becomes clear that we can earn money with the option, the option is “in the money”. We will ”execute” the option. As long as we do not know which of the options are in the money we keep them open by building in flexibility in the product, in the organization or in the market plan. One way to build in flexibility in for example the organization is using the so-called “stage gate” process. In this process we take explicitly decisions about stop/go at the various gates that are lying in between the subsequent phases such as 1. Idea generation phase, 2. Concept definition phase, 3. Feasibility phase, 4, Development phase, 5. Implementation phase and 6. Market introduction phase. Beforehand we have to define the criteria to make these stop/go decisions at the various gates. Building in flexibility in the product can be done by using platform products and using these to define derivative products. After we know better the wishes of the customer we define the details of the product. We can also build in flexibility in the product by making it modular. The product can then exactly be fine tuned upon the wishes of the customer without letting him pay for functions he do not want.

To execute the option when it is in the money, we have to gather the necessary information for example about the customer requirements to make the decision at the gates. Summarizing, in uncertain situations option value can be created by 1. defining the various uncertain parameters (e.g. customer requirements, market size, cost of raw material) and define alternatives (options) for these various situations, 2. build in flexibility so that we can react in the right way to execute the option, 3. gather the necessary information to bring down the uncertainty, 4. create decision points and criteria that will be used in the decision process.

ASSIGNMENT 2: Play with the option model. When is their no longer option value?

INNOVATION can be considered as 1. AN ARTIFACT, for example the IPhone, 2. AN EVENT, for example the introduction of Skype, 3. or A PROCESS.

Whereas: 1. innovation as an artifact focuses only on the hardware and not on other aspects of innovation such as the accompanying services and business model and 2. innovation as an event assumes that we can point at a certain time, saying that the innovation took place at the time the idea was generated instead of when the concept was ready or at market introduction. We think that both ways to look at innovation have its disadvantages. Because innovation takes place in many small steps as already discusses before during the discussion of the 6 aspects/domains of innovation, we rather consider INNOVATION AS A PROCESS.

The INNOVATION PROCESS can be subdivided in 4 SUB-PROCESSES, namely

1. THE IDEATION PROCESS: This starts with perceiving (weak) signals from the environment, combining these and recognizing opportunities and threats followed by the creation of new (business) ideas based upon these perceived opportunities.

2. THE KNOWLEDGE/LEARNING PROCESS: A (business) idea has to be translated into a (business) concept. This concept has to be translated into a product development, production and market plan. In this process the knowledge from various experts have to be used and integrated.

3. THE DECISION MAKING PROCESS constitutes small and big choices between alternatives how to proceed. These choices must be made under high uncertainty. Therefore it is better to keep, if possible, options open. However, this often costs money. So we have a dilemma between keeping options open and create flexibility and choosing for a certain option and focus ourselves.

4. THE SENSE-MAKING, IMPLEMENTATION AND CHANGE PROCESS. Innovations imply a change for the innovator, the customers and other stakeholders in the process. People has to change their routines and must learn new things. Organizations have to change in order to make an innovation, for example automating a certain process, profitable. This often also means a change in the position of various people such as managers and laborers. They may fear for their position and their power in the organization. The uncertainty and fear about the outcome will make people unwilling to co-operate. To convince people and commit them, learning their what they value and what their drivers are and leadership to communicate the advantages, listen to them and give them trust is essential.

INNOVATION can be considered as 1. AN ARTIFACT, for example the IPhone, 2. AN EVENT, for example the introduction of Skype, 3. or A PROCESS. We will look at innovation as a process. This innovation process can be subdivided in 4 subprocessess, namely:

1. THE IDEATION SUB PROCESS: In this process intuition and gut feeling play an important part. It is important to articulate intuitions. In this process discussions and visualizations are important. Moreover to generate ideas a thorough analysis of the problem and/or bottleneck is of importance. Last but not least, associative, out of the box thinking is important to come up with completely new solutions.

2. THE KNOWLEDGE C.Q. LEARNING PROCESS: In this process information from the different domains of the innovation arena have to be collected to bring down uncertainty and to take decisions. During elaboration of the ideas knowledge from different disciplines such as engineering, marketing, finance, human resource management is needed. Because this knowledge has to be integrated, communication between the various specialists is essential. This is partly done by visualization using mind- c.q.cognitive mapping techniques.

3. THE DECISION PROCESS: During the ideation- and knowledge processes the number of elements and the complexity of the business concept increases. These are divergent processes. To manage this, periodically we have to make choices between alternatives to focus again. To do this, one has to formulate criteria and benchmarks and score the alternatives against these criteria. To formulate these criteria we have to start with the needs and values of our customers and use competitive products as benchmarks.

4. THE SENSE MAKING, IMPLEMENTATION AND CHANGE PROCESS: People will only accept changes when these are understood and perceived as being to their own advantage. Communication and conviction play important roles. Moreover this change process is a very slow process. Some people like challenges and change, the innovators. Others hate it, the laggards. These laggards will only change when all other groups have changed their behavior and have accepted the innovation. They are very risk averse. In planning the market introduction one has to take into account these differences between people. This means that we must segment the market and manage the roll out of the innovation. Planning and road mapping are the instruments to use.

ASSIGNMENT 3: Which of the subprocesses are dominating in your industry, company? Make as table with a Soll-Ist assessment of each of the subprocesses. Which process is the weakest point? What may be the causes? How can this be repaired? To do this assgnment you can also take 3-5 cases from the past and assess each of them.

THE COMPLEX AND DYNAMIC CHARACTER OF THE INNOVATION PROCESS and the UNCERTAINTY OF ITS OUTCOMES creates a NUMBER TENSIONS OR DILEMMA'S. We have divided these areas of tension of innovation management and innovative entrepreneurship into 10 groups. These are:


I. SOURCES OF INNOVATION: What is the best balance between serendipity and searching actively, between breakthroughs and incremental innovative steps? Use several sources of innovation but spreading too thin over too much sources may make all efforts useless. With other words we have to indicate “the scope of our search activities”.

II. INNOVATION APPROACH: What is the best balance between technology push and market pull?

III INTUITION/RATIO: What is the best balance between intuition and ratio?

IV. SPEED: What is the best balance between being early on the market getting feedback from customers and maturity of the technology and product

V. PARTNERING- AND BUSINESS MODEL; OPEN INNOVATION: What is the best balance between creating value for the various stakeholders, such as customers, shareholders, management, key employees and certain suppliers? What is the best balance between a. spinning-out and developing it ourselves and b. spinning-in and partnering: What is the best balance between independence and complementarity, between quick decisions and a broad competence base?


VI. PROTECTION OF INTELLECTUAL PROPERTY: What is the best balance between public and formal protection and trade secrecy. Or with other words between patents, trade secrecies, brand name, learning curve, market barriers (scale, distribution channels, control over resources)? The question here is: how high are the barriers that we plan to build between the organization and its environment.

VII. ACQUIRING THE NEEDED RESOURCES FOR INNOVATION: What is the best balance between waiting before attracting new (financial) resources and expensive shares and high risks on the one hand, and quickly attracting capital, cheap shares and low risks?

VIII. PORTFOLIO MANAGEMENT: What is the best balance between distribution across many activities and a focused approach, between exploration and exploitation?

IX. GROWTH RATE: What is the best balance between growth and expansion on the one hand and consolidation and building a solid base for growth and expansion later on?


X. INNOVATION MANAGEMENT: What is the best balance between ENTREPRENEURSHIP, LEADERSHIP AND MANAGEMENT?


The best balance in each of these 10 areas of tension depends very much on the type of intended innovation, the life cycle and maturity level of the organization, strategy and business conditions. Whereas these conditions are changing over time, we constantly have to manage these areas of tensions.

ASSIGNMENT 4: Make a list of the 3 most important innovation dilemma's in your company or industry. How can these be best solved?

Innovation Landscapes™ diagnostic will show the overall shape of the terrain that leaders need to understand and manage innovation. They show 10 types of innovation and reveal that the most sophisticated innovation strategies combine these in thoughtful ways. They permit a view over time that allows basic innovation patterns to leap out. This way you can tell at a glance how intense an innovation challenge is (the heights of the peaks), how diverse it is (the numbers of peaks) and how it is changing (new peaks forming or changes in slope for any of the peaks). Landscapes are especially useful if you want to build a good innovation system: they help identify the right type, number and rate of innovations. Together these goals can help shape an overall adequate innovation strategy for the enterprise.

How many kinds of innovations are there? Doblin counted ten. He looked at common variables used to reinvent businesses today and discovered that they could be clustered into ten high level categories. Categories are useful because they allow us to break down industry activity into discrete chunks, then track that activity over a period of years -- forming the basic parameters of every Innovation Landscape diagnostic. Which ones matter most? As Doblin studied industry after industry he compiled the most innovative tactics -- along with the most prevalent techniques -- that he encountered in each category. Simply click below to find recurring popular approaches.

1. Finance: a. Business models, How you make your money b.Networking, The ownership structure 2. Processes a. Enabling processes, Secondary processes that support your business b. Processes that directly add value to your offerings 3. Offerings a. Product performance; The functionality of your core offering b. Product systems; additional offerings that enhance your core offering c. Service; Systems that support your customers after purchase 4. Delivery a. Channel; the way you get your offering to the market b. Brand: how you identify and communicate your offering to the market c. Customer experience; designing a magical moment for your customers

Which ones matter most to you? At different stages of an industry's evolution, innovation will shift from some categories to others. Firms that precipitate those shifts tend to be winners in that industry; the most successful strategies selectively combine innovations from across categories.

Where does this stuff come from, anyway? In the library sciences, they call it biblio-metric database research methods. This database search process allows our researchers to sort company activities and announcements by our categories of innovation. Doblin then use supplemental qualitative research and interviews to create explanations of leading innovations and trends. Used together, these methods provide patterns of innovation, graphically shown as Innovation Landscape diagnostics.

ASSIGNMENT 5: Which of the industry landscapes apply best to your industry. How fits the innovation strategy with this landscape? What could be improved?


To make the innovation process successful and to organize it in the right way the organization must fulfill certain characteristics.

Below these characteristics are defined.

1. SENSE OF URGENCY: This is needed to convince everyone that something must be done and to commit them. It also helps people to accept change

2. CUSTOMER ORIENTATION: This is needed to create a common vision and goal. Without customers there is no innovation. It is therefore important therefore to make clear who our customers are. We have to create superior value for them and distinguish ourselves from our competitors.

3. VARIETY: For innovation a certain tension is needed to feed the discussion. This discussion is needed for articulation of the intuitions and gut feelings. Furthermore variety is needed to be able to get information about the various aspects of the innovation.

4. TOLERANCE: To give deviant standpoints a chance and to study the deviant opinions (avoid the “Not Invented Here Syndrome”)

5. OPENNESS: To make sure that weak signals from outside and inside the organization are perceived and studied.

6. FLEXIBILITY: To be able to react adequately on new signals and new information.

7. SELF ORGANIZATION AND SELF STEERING OF TEAMS: To help teams to react quickly on new information without every time going to senior management

8. A CLEAR VISION AND MISSION: To take care of the fact the all noses are pointed in the same direction.

9. Senior management commitment: To assure that the teams are not afraid to take risky decisions.

10. A SYSTEMATIC AND DISCIPLINED PROCESS: To make sure that the right questions are asked and the input of all the people involved are used and result in a new product. However, with a systematic and disciplined process we do not mean a rigid process.

The innovation process is a complex non-linear process, characterized by the fact that small causes may have huge effect. It start with an accidental observation and new business idea and may end with the establishment of a huge organization. A lot of research on evolution and innovation has learned us, that this happens best at what is called the “EDGE OF CHAOS”. This is the situation between complete chaos, where everything is possible but nothing remain of stick, and stiffened structures, where nothing can change and everything stay as it was. Loose structures and networks provide the best organizational form for innovation. Companies balancing at the EDGE OF CHAOS are most innovative. Therefore, network organizations are much better suited for innovation then bureaucracies. Tolerance, openness, flexibility and self organization and self steering teams helps organizations to operate at this EDGE OF CHAOS.


In the audit below we can test an organization on the characteristics, mentioned above.

This module started with an analysis of what innovation is about. Next we have defined the various activities and their interactions. We have established that the innovation process is characterized by many feedback loops. This complex process is non-linear and the outcome is therefore inherently uncertain. When the innovation is more radical this uncertainty is higher. Part of the management of the innovation process consists of reducing this uncertainty. One can create value (option value) by making sure that one can react adequately to the new information by building in flexibility. In order to let these processes evolve successfully they have to be organized correctly. Innovative organizations have certain specific characteristics. In short, there exist a certain interaction between (innovation) process and (innovative) organization. This interaction results in a evolution process from low innovative organization to highly innovative organization by executing and pursuing innovation. A low innovative organization cannot become innovative by just designing and changing the organization. There is an evolution process in which the skills of the people, the organization culture, the structure and systems are evolving and co-evolving to higher levels. For this we use the so-called Innovation Capability Maturity Model. In this model 5 level of innovativeness are defined:

ASSIGNMENT 6: Do the innovation audit for your company. Where are the gaps between Soll-Ist? How can this gap be closed?

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