Tuesday, October 5, 2021

3 flavours of innovation strategy

For a business, does it matter what the innovation efforts are led by? I feel it does. For example, is it led by technology creation? Or is customer experience primary and technology an enabler? Or is the primary focus continuous improvement? I feel there is no right or wrong answer. However, having clarity on this aspect makes a difference in the design and execution of innovation strategy. Here are 3 flavours of innovation strategy depending upon what it is led by. This view may be a bit simplistic but I feel it gives a good starting point in establishing clarity on the design of innovation strategy.

Customer experience-led: Amazon spends a lot of money on R&D – both in absolute terms and as a percentage of its sales. In 2020, in SEC filing it reported an expenditure of $42 billion (11% of sales) which includes both technology and content (such as films and web series). Amazon also filed 2244 patents in 2020. However, innovation strategy at Amazon seems to be customer experience-led. Every concept proposal starts with a 2-pager “press-release” describing how the product/service would be useful to the customer. Even the CTO, Werner Vogels says his main job is customer pain management. Even a futuristic fully automated grocery store such as Amazon Go had to go through several iterations of the “press-release”. For Echo/Alexa Amazon did significant idea testing with potential customers to determine which features to be included and also launch worthiness. After having launched the product in the market, Amazon updates product roadmap based on customer feedback.

A. G. Lafley led P&G’s innovation strategy during 2000-2010 was also customer experience-led. As Lefley wrote in “The game-changer”, it meant strengthening the design capability, launching programs such as Living-it and working-it for teams to spend time with potential customers to gather insights, creating structures such as Clay Street and innovation gyms to prototype ideas quickly and get customer feedback. Technology development continued to be an important element of the innovation strategy. However, customer experience was clearly the driving force.

Like Amazon and P&G, if your innovation strategy is customer experience-led, then you need to design structures, processes and capabilities that put customer experience at the centre of the innovation process. It might mean design thinking needs to be a crucial competency in the organization.

Technology-led: When Google invests in moonshots like self-driving cars or quantum computing, its innovation strategy is being led by technology development. It shows up in the accounts, the R&D expenses for Google (Alphabet) in 2020 were $27B, 15% of revenue. Technology at the cutting edge is risky, highly competitive, and needs a talent pool that is not easy to retain. When will quantum computing start generating revenue? and when it does will it be significant? Nobody knows. Hence, only companies with deep pockets like Google, technology-focused start-ups, government funded research labs like National Chemical Laboratories (NCL) take up this route.

Many technology-led start-ups like DeepMind eventually get acquired. Companies like Bose Corporation who manage to do technology-led innovation on their own typically remain privately held in order to avoid quarterly performance pressure. To be a technology-led innovator, you need to build a war chest to fight legal battles. This means building a legal team in addition to building intellectual property.  In fact, Bose has been described by the audio industry as a “litigious company”.

Continuous improvement led: I remember one of my early consulting engagements with an R&D organization more than a decade ago. The then Head of R&D said, “We don’t have an insight right now to take a big bet. However, for the next couple of years, we would like to democratize continuous improvement.” And we did and we created a process of logging, selecting, encouraging, helping employees implement ideas. Idea catalysts from various teams met every month to share their experience and learn from each other. We circulated an innovation dashboard every month. And it helped build creative confidence in the organization. After a couple of years, the Head of R&D was ready to build an innovation sandbox around the challenge of cloud migration. 

The point is continuous improvement can be a strategic direction for innovation efforts at least for a while. Creative confidence across all levels of the organization can be a huge advantage. A look at Toyota’s “40 years, 20 million ideas” gives us some idea. Katsuaki Watanabe, the then President of Toyota has said in an interview in Harvard Business Review, “There is no genius in our company. We just do whatever we believe is right, trying every day to improve every little bit and piece. But when 70 years of very small improvements accumulate, they become a revolution.”

In a large organization, different businesses may be pursuing different innovation strategies. It is possible that in one business unit innovation is technology-led while in another business unit it is customer experience-led and in yet another unit it is continuous improvement led.  

What is the flavour of your innovation strategy?

For Amazon's Echo/Alexa development, check out Chapter 1 of "Amazon unbound" by Brad Stone.

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