Your Strength may Soon Become your Weakness.The Hidden Danger of Performing Businesses
For the past decade, I’ve explored a wide range of reasons why innovation has struggled to establish itself as a core function within organisations.
Through this journey, I’ve realized that every obstacle falls into one of four distinct traps. Any company caught in at least one of these traps will inevitably struggle to innovate.
The Metrics Trap
If you are like me and majored in economics or have been working in a corporate environment for at least few years, you are familiar with metrics such as Return on Investment, Internal Rate of Return, Return on Net Assets, Revenue Growth, Customer Lifetime Value, EBITDA, Profit Margin and the list could significantly continue.
All these metrics indicate if a company made good past decisions and if a company is heading in the right direction in the foreseeable future. While these metrics are essential for maintaining short-term stability, an over-reliance on them can (actually does) stifle long-term innovation.
Why it stifles? Because these metrics can hardly say anything about innovation projects before scale. In fact, the danger most innovation projects face is that companies (better said executives) use the same metrics that guide their day to day decisions to evaluate innovation performance as well.
If executives and shareholders of a company are happy with business performance and incremental improvements, they will not sacrifice so easily their ROI or IRR or RONA, to try something new. On the short term, investing in innovation eats up from the immediate metrics.
However, it is a false and dangerous impression that small steps will add up to a large leap.
So, to measure innovation correctly, you need Innovation metrics.
If you are an Executive, I am sure you want a pre-defined list of metrics just as you are using one to measure business profitability and performance. Innovation projects vary a lot, from reaching new markets and clients, to launching products and services for existing customers, or designing a whole new internal process. This variation requires personalised and specific metrics that can hardly be simplified in a pre-defined list.
However, here are some key categories of metrics, along with examples, that I strongly encourage my clients to track and leverage for making informed decisions.
Strategic metrics
Innovation budget (input = money, people, technology, time, other resources) - how much effort are you allocating on innovation projects in your total spending?
Payoff (output = money) - how much is innovation contributing to your bottom line? If you just started, consider this metric after 2-3 years from initial investments.
Portfolio maturity - how many of your innovation projects are incremental innovations and how many are aiming for disruption or new business models?
Stage - gate metrics
Problem validation: number of customer interviews, recurring insights from interviews and experiments, diversity of experiments, failures and lessons learned.
Solution validation - number of experiments, experiment metrics (CTR, sign up, pre-sales), customer interviews, number of prototypes, lessons learned.
Product validation and market validation - pirate metrics (acquisition, activation, retention, referral, and revenue).
Innovation process metrics
Speed: How fast you are moving from one stage to another without compromising on the quality of insights and results?
Versatility: how you are combining tools and methods to improve speed and gain superior insights?
Scalability: how easy it is for the organization to adopt the process and create a smooth transition from innovation into business?
Crafting and refining your innovation metrics requires time, learning and adaptability. The better you become at measuring innovation (correctly), the more educated decisions you will make in conditions of uncertainty.
Companies fall into The Metrics Trap when they use metrics relevant for a known business, to evaluate innovation projects, and to compare them against the whole pipeline of corporate initiatives.
The Lean Trap
Lean methodologies have been developed to help organisations enhance productivity, streamline processes and reduce waste. While these principles are essential for business performance and operational efficiency, an obsession for efficiency can create a rigid environment where experimentation and creativity are discouraged.
Lean and Innovation should not be in competition. Lean should not exclude Innovation, just as Innovation should not dismiss Lean. Lean works in favour of the business metrics that I mentioned in the The Metrics Trap, therefor it is understandable why Lean and ROI and RONA are buddies, and try to kick Innovation out of the game.
The more efficient an organization becomes the harder it is to innovate. For once, because lean feeds into the business metrics. Secondly, an excessive focus on process optimization can discourage employees from stepping outside established procedures, ultimately stifling creative problem-solving. When the primary goal is to eliminate variability, a culture emerges where risk-taking is discouraged, and failures are seen as inefficiencies rather than valuable learning opportunities.
Third, lean creates the false impression of progress, profit and growth. Cost reduction or waste reduction is not growth. Becoming better and better on executing the core, a predictable business, does not lead to the creation of something new.
Get over the lean euphoria
To overcome this paradox, you should create a space (= time, money, people and resources) within your operations that allow for exploration and experimentation. You can do that with:
Innovation Labs
Rapid Innovation Teams
Innovation Projects
Innovation Ecosystems
Open Innovation
However you choose to start, it is significantly better than not starting at all. In the absence of existing innovation initiatives, whatever you try and how ever you try it will generate learnings and progress.
Companies fall into The Lean Trap when they believe that efficiency, just because it helps fine tune the existing business, is enough to also generate new growth engines.
The Culture Trap
A culture conductive to innovation means you are not measuring only your current business and you are not obsessed only with efficiency. It means you are encouraging initiative, creativity, experimentation and moon shot thinking. This kind of culture is rarely inherited, so if you are not working in companies such as Netflix, Spotify, Zalando or IBM, keep reading.
You think culture eats strategy for breakfast? Culture kills innovation in an eye blink.
Culture is a reflection of where an organization puts its effort. If all efforts go into efficiency, productivity, and cost-cutting, that becomes the culture. If efforts are balanced between efficiency, creativity, market exploration, and customer-driven problem-solving, innovation emerges. However, businesses often fall into the trap of believing that incremental process improvements equate to innovation. While such optimizations improve margins, they do not necessarily drive long-term growth. Sustainable success requires a mix of process improvements, new market explorations, and business model innovations to remain competitive in an evolving landscape.
In this high performing, highly efficient culture, your employees, especially your top performers, are results oriented. Companies love results oriented employees. The trap is that your employees are “immediate results” oriented, quarter to quarter bonus incentivised and less likely to thrive in an environment of uncertainty. You need to find those who thrive in uncertainty, who are more driven by curiosity and experimenting, than hitting tomorrow’s numbers. These employees are also results oriented, no doubt about it. They know how to work under pressure, how to adapt, are patient and have true grit to build something bigger, smarter. You have them, you just haven’t found them. Or didn’t notice them because of their profile which made them invisible to a company obsessed with efficiency.
Culture takes a lot of work and determination.
That’s why it is important to set the right expectations on the time and effort required to change culture. Cultures deeply rooted in efficiency and increased numbers year on year, no matter what, are the hardest to crack. As an executive you need to have a legacy vision. What does that mean? It means you are willing to put in the effort and not reap the effects. This is especially the case of executives with 3-4 years mandate.
When you want to build innovation confidence in a high performing, efficient organization, you are starting a journey of transformation for many years to come. First 2-3 years are about creating small evidence, small wins. It is the season of hard work with little reward. Following years are about harvesting the first effects. You might be on your next mandate, in a different company, while someone else is taking the credit. That someone else will step into big shoes and has (at least) the moral obligation to protect and nurture your efforts. This is how evidence and trust in the new growth system are built. This is how you set the course for a company to become agile, responsive and to be able to reinvent itself to stay ahead of change and disruption.
How do you start Culture change?
With evidence.
Companies fall into The Culture Trap when they over simplify innovation and treat it as another operational sprint and not a strategic marathon.
The False Pretend Trap
Both you and I can instantly think of at least 3 companies that market everything they do as innovation. And the interesting thing is that by labelling each project, each idea as innovation, they’ve come to the false belief that they are innovators. On the other spectre, people who truly work for the innovation agenda of their organisations, depicted a humbleness that comes from the very fact that they know how hard it is to innovate and how effort intensive it is to put something into the world that the world will call innovation.
Companies that label everything they do as innovation are in the space where they don’t know what they don’t know. Good luck proving them wrong.
When I do get a chance to discuss with leaders of such organisations (pretty rare I must say, because they are innovators, don’t need me) it goes without saying that I can not simply crush the dream. So what I do is I guide them in a reflective discussion about what innovation stands for, hoping that in the absence of answers and evidence, they will come to the realisation that maybe there is more to innovation than they think:
How much is innovation contributing to your bottom line?
What is your innovation budget?
What process are you following?
How are you measuring innovation and how do you decide which projects to pursue?
How do you balance day to day initiatives vs the portfolio of innovations?
How are you maintaining a constant dialogue with your customers?
Companies fall in the False Pretend Trap when there is limited know-how about innovation and little intent in finding out what innovation truly stands for.
Alexandra