Emerald Group Publishing Limited
Article Type: Quick takes From: Strategy & Leadership, Volume 43, Issue 1
Catherine Gorrell is a veteran strategy consultant newly based in Portland, Oregon (firstname.lastname@example.org) and a contributing editor of Strategy & Leadership.
These brief summaries highlight the key points and action steps in the feature articles in this issue of Strategy & Leadership.
How to build the permanently innovative company: five tested sets of management practices
Kai Engel, Violetka Dirlea, Stephen Dyer and Jochen Graff
Long-term studies show that innovation can be a repeatable process that can be implemented effectively by systematically applying five tested sets of management practices. They are:
1. Build the foundations of an innovative organization. Best Innovators manage their innovation culture by nurturing an entrepreneurial mindset, encouraging appropriate risks, finding inspiration everywhere and committing to repeatable processes.
2. Do the early work on innovation strategy. Best Innovators link their understanding of market and technology dynamics to a broadly agreed upon search-field portfolio to steer the idea generation. This entails:
Knowing what the company wants to achieve.
Owning a point of view about the future.
Defining the innovation search fields.
Managing to the customer’s desired outcome.
Knowing the company’s competencies and investing accordingly.
Drawing the innovation roadmap.
3. Optimize the value of an innovation portfolio. Best Innovators generate as many ideas as possible for the innovation search fields and then apply the right evaluation criteria to quickly select and develop the most promising ideas, thus allocating limited resources effectively. Best Innovators have better processes in place to involve a broad range of stakeholders in generating ideas to fuel the idea portfolio. This necessitates managing an innovation portfolio holistically, pursuing truly open innovation and boosting the transfer rate.
4. Increase innovation efficiency and speed. Best Innovators bring the newly developed offering to market as fast and cost efficiently as possible. More specifically, this requires reducing time to profit, managing the big metrics, treating interoperability as a decisive capability and collaborating early with the right suppliers.
5. Improve innovation profitability. Best Innovators leverage their innovation process excellence and their growing innovation network. Success hinges on ensuring process coherence, managing complexity, leveraging agile and lean design and further improving interoperability and collaborative partnerships.
Who are best innovators?
Research shows these are not just the hot companies of the moment. Many have been in business for generations, often growing in traditional industries—automotive, rail transit, household appliances—where slow growth would be expected. But all do share two perspectives on innovation:
Their successful management of an idea stretches from insight to market entry, and
None of their initiatives earns the title “innovation” until it is making money.
In sum, Best Innovators address innovation management “from the market to the market” and manipulate five areas to improve their innovation performance and propel sustainable and profitable growth.
Masterclass: New lessons for leaders about continuous innovation
In today’s competitive environment, a major tech breakthrough is no longer enough to establish sustainable competitive advantage. Market making companies must keep innovating to continually delight their customers if they are to have a hope of maintaining an enduring advantage.
Becoming agile is essential to rapid continuous innovation. To see agility in action – as a model for any business’s processes—take a lesson from the most innovative software companies.
What, you think that you are not like a software company? Wrong. Software is at the heart of your operations – core systems and processes are already running on software. The reality is that most firms today, whether they know it or not, are already software companies and will steadily become more so. Their competence in dealing with software will be a key part of their competitive edge—or lack thereof. In effect, for most companies, failure to acquire digital agility will be an existential threat and so, establishing digital agility has become in effect a strategic necessity.
How to do rapid innovation?
1. Identify the ways and aspects and processes that are customer facing and driven by software.
2. The success lesson from leading software businesses is that changes are best done in small chunks, frequently. Each change is small, but a small change can be significant, sometimes adding millions of dollars in sales. Doing all this change in tiny increments at warp speed within the framework of a central strategy enables extremely rapid innovation and learning, as well as much greater facility in spotting and fixing any problems that may emerge.
3. To make agility happen, basic changes must be made in the implementation and the management approval process. The case of Etsy is offered to illustrate. Instead of management approval being required for all changes, all improvements that have been fully tested are deployed immediately. The same staff devising the improvement oversees implementation. Obviously this can only work in an environment with a work culture of trust and delegation and collaboration.
Key question: to what degree is your company saddled with legacy cultures of hierarchical bureaucracy, slow-moving processes with approvals up and down the chain, and the structural barriers of organizational silos? The cost to continue in this mode is becoming much higher each day.
Masterclass: Three ideas for creating new value through managing risk in today’s dynamic environment
We are operating in an increasingly dynamic and volatile business environment that places a premium on innovation, entrepreneurship and adaptability. Less obvious is the premium that it also places on new approaches to identifying and managing risk and the hidden opportunities for value creation that lie therein. This is the intriguing insight linking three recent books for business leaders.
Business model risk
In The Risk-Driven Business Model, technology and innovation experts Karan Girotra and Serguei Netessine highlight the very substantial opportunities for value creation to be found in business model innovations aimed mainly at the mitigation of information risk and incentive-alignment risk.
By “making seemingly small modifications to your business models in a programmatic way, you will find that you can create significant – even game-changing – competitive differences.” Because an existing business model is essentially a “set of key decisions that collectively determine how a business earns its revenue, incurs its costs and manages its risks,” innovations to the model occur as changes to those decisions are made.
The choices will either increase or decrease two important types of risk, information risk and incentive-alignment risk. Both types of risk give rise to “business model inefficiencies that powerfully affect performance.”
To help surface these inefficiencies, Girota and Netessine offer a “four W” framework, systematically questioning the “WHAT, WHEN, WHO and WHY” of key decisions within any business model.
Modifying customer risk
In Niraj Dawar’s book, Tilt: Shifting your Strategy from Products to Customers the marketing guru highlights the strategic advantages to be gained by focusing on customer needs. Downstream activities “aimed at reducing customers’ costs and risks” are rapidly emerging as the new “drivers” of value creation and competitiveness (see Table 3-1). Dawar highlights four areas for particular attention: changing the current “center of gravity” of your business, recognizing the value to be found in seeking a “big picture” perspective on customers’ needs, developing deeper insight into what it means to win the battle for share of consumers’ minds and appreciating how and why advantages created in downstream activities are more likely to be sustainable.
The risk of losing flexibility vs. the risk of losing talent
The book by Reid Hoffman co-founder and chairman of LinkedIn and his co-authors Ben Casnocha and Chris Yeh, The Alliance: Managing Talent in the Networked Age aims to minimize the risks of managing talent in an era where the traditional compact of job-security for loyalty is no longer tenable.
The central principle underlying a new approach to balancing risks to employees and employers is “reciprocity” or mutual investment and obligation. Throughout and even beyond the tenure of the employment contract, it is, at its best, an alliance between the organization and the employee “aimed at helping both succeed.” The ‘tour of duty’ approach aims to give the employer and employee a “clear basis for working together,” where both agree in advance “on the purpose of the relationship, the expected benefits for each and the planned end.”
A leader’s guide to strategic risk management
Joseph Calandro, Jr
A re-reading of a number of highly respected financial books written before and after the 2007-2008 financial crisis demonstrates that such extreme events are not “black swans,” as is commonly argued, but rather are “predictable surprises” and thus candidates for risk identification, tracking and mitigation activities.
The solution: Strategic Risk Management (SRM)
To prevent being caught unprepared again, a more strategic or comprehensive risk management solution is required. Strategic Risk Management (SRM) is a process of identifying, assessing and economically managing potentially enterprise-threatening losses over time; in other words, it is a way to mitigate developing ambiguous threats before they manifest themselves and then spiral out of control.
The scope of Strategic Risk Management
As Exhibit 1 illustrates, SRM encompasses six general considerations:
1. Exposure concentrations – These are large counterparty, sector, geographical and/or product exposures. Firms should assess exposure concentrations on both a gross and net (or after recovery) basis.
2. Periphery monitoring – Monitoring the risk of failure includes evaluating information seemingly not core or not directly pertinent to a firm’s immediate business activities or risk profile. As history has repeatedly shown, many emerging risks develop over time and in peripheral markets and some of those trigger concentrated losses.
3. Ambiguous threat analysis – Ambiguous threats are everywhere, so a key challenge is to prioritize the threats that could be more strategically significant. These threats need to be tracked over time using peripheral information sources and integrative forms of analysis.
4. Risk mitigation – There are a number of ways to mitigate significant exposure concentrations at risk of an ambiguous threat, for example concentration reduction protocols, product mix changes and hedging strategy.
5. Risk tracking – Monitoring early warning indicators that highlight closeness to and actual breaches of risk limits equates to tracking all noteworthy SRM developments over a given time frame via common reporting and dashboard structures. (Summarized in Exhibit 2)
6. Managing the integrity of the business model – Assessing business model risk requires fully integrated, cross-discipline analyses and governance.
Strategic Risk Management can help leaders identify and track the weak signals of ambiguous threats and thus gain a head start to invest in emerging opportunities and also to mitigate risk before their firm is in jeopardy. Of course, there is no guarantee that such a function will sound a loud alarm long before the next crisis – and there is always a next crisis – but it is a virtual certainty that those signals will be missed without such a function.
The next digital gold rush: how the Internet of Things will create liquid, transparent markets
Paul Brody and Veena Pureswaran
The Internet of Things (IoT) is the networked connection of uniquely identifiable, embedded computing devices—such as smart phones, appliances, car computers, door locks, usage monitors, wearables and money transferring devices – within the existing Internet infrastructure. Within a decade, there will be hundreds of billions intelligent devices in use: smartphones, fitness bracelets, cars, tablets, household and industrial equipment and products, and business process machines.
The next generation of IoT technology, which will promote greater connectivity, will have repercussions across the business spectrum because it will merge the physical and online worlds, opening up a host of new market opportunities and challenges for companies, governments and consumers.
Five vectors of disruption
Before the IoT, there was simply the Internet, which has created and transformed markets for digital content such as music, news, maps and other information.
The evolving IoT will enable a similar set of transformations, making the physical world as liquid, personalized and efficient as the digital one. Based on historical case studies of digital discontinuity, five compelling vectors of disruption are likely to emerge:
1. Unlocking excess capacity of physical assets. Physical assets will become digital services – such as warehouse bays can themselves report capacity.
2. Creating liquid, transparent marketplaces. Devices will be able to compete in real-time, be reviewed and recommended by consensus and trade on their own, resulting in highly efficient digital marketplaces.
3. Radical re-pricing of credit and risk. Combining device instrumentation with mobile money, GPS logs and social networks, it will be possible for companies to build much more accurate pictures of real risk, reduce moral hazard and the cost of repossession.
4. Improving operational efficiency. Economic sectors with the lowest IT intensity, such as farming, will be remade to be information-intensive.
5. Digitally integrating value chains. The IoT will enable consumers and businesses to operate high value-creating integration across enterprises and systems at a tiny fraction of the cost of integration in the past.
As more and more devices around us become connected and intelligent, many physical products as we know them will be transformed into digital experiences. Many machine-human interactions will be replaced by machine-machine interactions, and new machine-human interactions will emerge. A large majority of machine-machine communication will become invisible while machine-human communication will become highly interactive.
Companies across all industries must grasp the scale of transformation that will occur over the next decade with the IoT and prepare now for its impact. Several questions are offered to help to identify useful steps executives can take toward that goal.