Building a New Business Growth & Innovation Engine

Before we look at how to build a new business growth and innovation engine, let’s get clear on what the main reasons for failure are, so that you have the opportunity to pro-actively address the underlying dynamics.

Three Reasons Why Innovation Efforts Fail

The first failure mechanism is a lack of clearly defined objectives and success metrics for innovation and growth. Without a clear understanding of where the organization wants to go and how much growth is needed, building a strategy becomes challenging.

The second is an ambiguous portfolio strategy or poor discipline in its application. A disciplined approach to portfolio management is crucial to identify and eliminate mediocre opportunities and make way for new ones.

The final key aspect is inappropriate governance, which is often observed when companies struggle to apply a different governance approach to new business growth opportunities compared to their core business.

The challenge lies in finding a balance between being agile and responsive to market changes while leveraging synergies with the core business effectively. Companies often make the mistake of trying to leverage these synergies too soon. It is important to have ambidextrous leadership that recognizes the need for different governance and knows how to manage new business growth opportunities differently.

Now, let’s look at ways to prevent these failures from happening. We assume and suggest that your growth and innovation strategy includes a “portfolio investment” approach, and that the portfolio focus includes disruptive innovation.

Key Elements of a Portfolio Strategy and Management

When considering portfolio strategy, there are three levels of strategy to keep in mind. Firstly, it's important to understand how portfolio strategy fits into the overall growth strategy of the organization. If it's not part of the corporate growth strategy, there may be challenges in aligning resources and the ambidextrous leadership you need.

Secondly, the portfolio strategy itself involves defining the target for growth, the diversity criteria and mix within the portfolio, the methodology for investing in opportunities, and the governance for managing the portfolio.

Finally, there are the specific opportunity strategy hypotheses within the portfolio. These strategies and opportunities within the portfolio need to be articulated and managed separately. Opportunities are hypotheses until proven and validated in the market. Each opportunity strategy has unique requirements, and without a fully articulated strategy, it becomes difficult to evaluate them effectively. By considering these assumptions and levels of strategy, you can gain a better understanding of portfolio strategy and how to approach it.

Portfolio strategy is focused on managing risk, and there are two main approaches to achieve it. The first is through diversification, where you make multiple small investments rather than a few big risky ones. This keeps the risk of loss relatively low if you fail while giving you more options. The specific allocation of investment varies based on the nature of the business and the growth agenda. There is no singular pattern, as it depends on the unique circumstances and objectives of the organization.

The second approach is to de-risk opportunities by gradually scaling investments based on evidence and increasing confidence in the outcomes. To effectively implement these strategies, a disciplined methodology is crucial.

In order to do this, you have to leverage a disciplined innovation methodology. The foundation for any disciplined methodology is to define clear innovation objectives and measures aligned to company goals

Then, precisely define or refine your strategy hypothesis and key assumptions. Articulate the fundamentals of the strategy assumptions. As there may be many uncertain questions, you may define one element of the strategy rather than create a comprehensive strategy. In such cases, it's better to define multiple strategies that are self-consistent and complete so that you can compare and evaluate them.

Next, you identify which assumptions or uncertainties you need to validate or get better data to reduce the uncertainty and risk. Define activities to validate the assumptions you're making in your strategy hypothesis and what data can you gather that helps you reduce the uncertainties and key assumptions. It should be a tight and iterative process of refining your strategy and assumptions.

In this stage you either have defined your strategy and validated it with evidence at enough level of rigor to move to the next stage and scale up the investment. Or you make a conscious decision to pivot and redefine your strategy hypothesis.

There is value to creating such a transparent process as it helps reinforce the discipline in the methodology that can be difficult to do. Now, let's understand how a portfolio strategy differs from a traditional roadmap.

Portfolio Strategy vs Traditional Roadmap

In a portfolio strategy, the focus is on intentionally creating a mix of opportunities, rather than simply executing individual opportunities as in a traditional roadmap. The portfolio approach acknowledges that outcomes are uncertain and non-deterministic. Therefore, the target profile of the business and its attributes should drive the composition of the portfolio mix. Many of the concepts explored in the portfolio may fail to meet the criteria and need to be discontinued. The emphasis should be on the overall progress and success of the portfolio as a whole, rather than any individual opportunity.

This approach requires investment discipline, efficiently aligning opportunities with investment levels and timeframes in each stage and removing failed concepts. Avoid making revenue commitments until the scaling stage of the business when critical uncertainties are resolved, and the business model is proven in the market. By deferring revenue dependencies and focusing on the collective progress of the portfolio, you can better manage risk and make informed decisions on resource allocation and growth targets.

How Governance Reduces the Risk of Disruptive Innovation

Disruptive innovation involves exploring new markets, products, and business models that differ from the core business in terms of product nature, market segments, value chain position, or business models used. The farther you stray from the core, the more disruptive the opportunity and greater the risk of execution success.

If it is possible to achieve strategic growth objectives through incremental innovation in the core business, focus on that first. This approach has the lowest risk and the highest synergies with the core. However, typically, the goals for growth go beyond than what can be achieved through incremental innovation and the existing business. Then, it becomes necessary to explore disruptive opportunities. That's when the execution risk goes up and you can take special action to deal with it.

The biggest challenge you'll face is that the disruptive opportunities are misaligned with the resources, processes, and priorities of the core business. The more disruptive the innovation, the higher the risk of misalignment with the company's resources, processes, and priorities (RPPs).

Unmitigated RPP Alignment is The #1 Killer of Innovation

Resource, Process, and Priority (RPP) Systems are crucial aspects of a company's core business. Resources include budgets, technology, people, and assets, while processes refer to the methodologies employed to achieve goals. Priorities represent the main focus of the core business model.

Challenges arise when decisions are primarily based on resources, which can be easily redirected and changed. Processes and priorities become deeply ingrained in a company's culture and are often implicit rather than explicitly stated. These elements are difficult to change and can hinder new business opportunities.

Misalignments, although seemingly small, can accumulate and negatively impact the organization. These obstacles are commonly referred to as "antibodies" that impede innovation and lead to frustration. They may cause delays or compromises, ultimately rendering the new business non-competitive, which is similar to the analogy of a slowly boiling frog. This phenomenon is the number one killer of innovation in mature organizations, and its impact is significant.

The Catch-22 (And The Solution)

The difference between sustaining the core business and exploring new business opportunities lies in the focus on optimization, predictability, and low risk in the former, and greater flexibility and adaptability in the latter. In managing a company's core business and exploring new opportunities, two distinct approaches are necessary. The core business requires optimization, predictability, and low risk while maximizing returns. Failure is not an option in this context. On the other hand, exploring new opportunities involves discovery and quick learning with minimal financial losses.

Ambidextrous leaders recognize these differences and manage the two types of activities differently. Ambidextrous organizations establish tailored governance systems and interfaces to handle these operations separately. However, for mature companies, there is a catch-22 situation where creating value through new business innovation requires synergy with the core business, but executing significantly different ventures poses risks due to misalignments. To address this challenge, a custom governance structure and ambidextrous leadership are necessary.

Governance is the means to manage the balance of a new business' autonomy from and synergy with the core business RPPs. It consists of a charter and priorities (vision, purpose, goals, and execution priorities), oversight and decision-making (who makes decisions, budget and resource allocation and others), talent (requisite skills, incentives, performance measurement and more), and structural and operational practices and procedures.

Determine which one of these elements you can successfully leverage from the core business, which of those do you have to build uniquely, and which ones can you outsource or acquire. It will be different for every opportunity.

Framework for Appropriate Governance

When structuring governance, there are important factors to consider. Proximity to the core helps identify risk and alignment. Maturity of the opportunity is also crucial, whether it's in its early stages, proven in the market, or scaling. Different governance approaches exist and can be categorized based on maturity and adjacency.

For the core business, ideas may flow from R&D to new product development, and finally to operations. Adjacent or transformational opportunities may start in an incubator and evolve into a special business unit. As you start to scale that business, look for opportunities to leverage synergies with your core before it gets to the scale where it starts to change the definition of the core as it's big enough to be self-sustaining and integrates with the core.

Ultimately, governance balances efficiency and synergies of the core business with the autonomy and responsiveness of new opportunities. The goal is to create a framework that allows for semi-autonomous capabilities and appropriate management throughout the business lifecycle.

Timeline For Implementation

The timeline for implementing these aligned functions within an organization can vary based on the size of the organization, the support from senior leadership, and their engagement in the process. It also depends on the organization's culture and its understanding of exploratory capabilities versus optimization for the core. Companies with multiple business models find it easier to set up this process compared to those with a single business model.

Generally, it may take six months to a year, but smaller organizations may take less time. To start with, apply these methods to a single, low-risk opportunity as a demonstration of the process. Then gradually scale up the number of experiments to showcase the effectiveness of the approach.