How to Better Align Innovation with Strategy

Fall in Love with the Problem, Not the Solution

Although they understandably feel the need to stay on top of trends, the way many companies approach new technologies is often a distraction, rather than a way to solve their problems.

“I get a lot of calls from companies who want to talk to me about their AI strategy or even their ChatGPT strategy,” David says. “And I have to start the discussion by reminding them that ChatGPT is not a strategy. Metaverse was not a strategy, Web 3.0 is not a strategy, blockchain is not a strategy.

We don’t want to, as we say in innovation, fall in love with a solution and then, sort of backwards, start searching for something to do with it. We want to start from the point of view of our strategic priorities, or, as I would say: ‘what are the problems we're trying to solve?’”

David shares the example of Khan Academy, which aims to support young students learning around the world. With research showing the best way to help students progress is to provide them with a personal tutor with whom they can review their work, but with the cost of tutors a huge barrier to most, the Khan Academy developed an AI program that students can interact with for free at home.

Problems can also be very specific to a business, such as the picking and packing process in fulfillment centers of an e-commerce business. In order to succeed in the e-commerce world, these organizations have to become more effective and efficient at selecting the right items from around the warehouse to fulfill an order. Although one solution is to move people around the warehouse more quickly, another could be to move the items to the people.

For David, these examples show the importance of businesses having clarity on the specific, strategic problem they want to solve - which then enables them to find different ways to experiment with solutions.

Linking Innovation to Your Unique Advantages as a Business

David’s second parameter for innovation in established organizations is linking innovation efforts to their unique advantages as a business.

“If you are an established business, it is actually not enough for you to come up with a great idea - meaning an idea that achieves product-market fit, that there's demand for the solution that you're developing or proposing to to develop,” he says.

“That's great if you're starting from scratch, but if you're an established business, it's not really enough to find an opportunity that someone should do. You actually need to find something where you as a business already have a leg up on others. Where you are going to be able to deliver that outcome more cheaply, to more people, maybe with higher accuracy or reliability or personalization.

In order to do that, the opportunity has to somehow leverage some unique advantages that you already have as a business. What I see is that established businesses that have productive or fruitful innovation practices and functions within them tend to have a pretty clear focus or understanding and spend time thinking about their unique advantages versus others in their space.”

To illustrate this, we can look to the moment Disney entered the streaming market, launching Disney+ with a back catalog of unique content, characters and stories that consumers know, love, and can’t access anywhere else.

Walmart’s exploration of e-commerce is a further example.

“One of the unique advantages Walmart has is physical proximity to the customer, particularly in North America,” David says. “90% of the US population lives within 10 miles of a Walmart store, and that is something no other company can say - nobody else in the business, not Amazon, and not a physical retailer.

So they're thinking about, how do we leverage that as we solve problems around the last mile of e-commerce, as well as experiences that bridge together online and offline shopping experiences?

When I'm working with a company and we're trying to identify strategic, unique areas of advantage, we start by looking at a variety of areas, from assets, both tangible and intangible, to unique capabilities, relationships, and customers. Companies usually think they're unique and great at a lot of things. So we typically start with a really long list, and then we have to get really honest about our competitive advantage relative to others.”

David advises companies to think about the business benefits of these advantages, such as a culture that better enables them to retain talent, or a brand that enables them to charge a premium, or inspires greater uptake in new products. They should then rank these benefits according to their business impact, before defining exactly how unique they are in the market.

“What I find is that going through this practice allows you to go from what's typically an initial mindset of, “Oh, there's a whole bunch of things we're really good at as a business,” to really narrowing that down, and becoming clear that there are maybe just a few things where you have a real strategic advantage because of a different feature about your company.

You then want to think about to what degree you can link any new innovation efforts to that advantage, so you will be better able to compete with this specific innovation idea versus others.”

Working Within Strategic Constraints

When thinking about how to leverage their unique advantages, organizations should also consider whether they also offer any limitations. For example, a business might have an established and well-loved brand, but they then have to operate in line with the values and expectations this brand brings.

Looking again at Walmart, David notes that this caused challenges in the e-commerce space.

“We usually think of a brand as a benefit, but the Walmart brand is about everyday low prices, so they knew they couldn’t do what virtually everyone else is doing in online grocery delivery, which is to pad it with fees, or to have a lot of hidden costs,” he says.

“So they started experimenting. They found a certain customer segment which was open to the idea of a membership plan where you pay an annual fee and then you get free grocery delivery all year. It’s an attractive benefit, and some people like that, but a lot of their customers weren’t interested.”

Continuing to experiment, Walmart then offered an enhanced online ordering experience, with saved preferences and product suggestions generated by an algorithm. Using their unique advantage of physical proximity to their customers, they then created a grocery pick up service in the car parks of their stores.

“This turned out to appeal to a lot of customers,” David says. “And not only did it appeal to a lot of customers, but it also was something that played to Walmart's unique advantage of proximity to the customer. It's not nearly such a big ask to stop by a Walmart store if it’s 10 miles or less from you at any given time, so this service took off and did very well in the market.”

Setting Up Your Innovation Stack

As David says, even when they hit on something that works well, it’s important for organizations to keep experimenting as markets and consumer preferences will always change.

“Walmart continues to experiment, and one of the things they discovered is that those who are paying for home delivery, are actually willing to pay a premium for it. They are happy to have you not just come and deliver the groceries on your doorstep, but to come inside and put them away for you, so your ice cream doesn’t melt, or your fruit doesn’t go moldy... This is what innovation linked to clear strategic principles looks like in practice.”

In order to facilitate the kind of rapid experimentation with different solutions like that seen at Walmart, innovation teams need to be small and multifunctional, and they must be given autonomy and the ability to make decisions. This also means a clear definition of what success is and transparent metrics to analyze their work.

“We also have to think about the two layers above the teams, in what I call an innovation stack,” David notes. “How do you structure them in order to manage not just one venture idea problem that you're trying to solve, but to go after multiple problems that matter to the business at the same time with different efforts, knowing that most of them will not succeed?”

This involves setting up the right processes around green lighting projects, iterative funding, shutdowns and scaling. It’s also important for strategy to be defined at every level of the business.

“You want to have an enterprise level strategy in terms of what the business is focused on, where the growth is, and how you’re trying to position the firm,” David says.

“But then you also want to translate that at the level of different business units and functions, such as HR and supply chain, and then share that strategy across every level of the organization as well.”