We have finally realized that innovation and transformation are not optional for the long-run well-being of a large organization. But that is a far cry from having the capability to do something with that understanding.

The good news is that the things that sink innovation efforts are often easy to eliminate. Yet we first need to identify them.

By managing innovation in separate phases – ideation, incubation, and acceleration – and taking into account the uncertainty that each innovation project has to deal with, organizations should be able to spot and eliminate what hinders their path. Easier said than done?

Rita McGrath, best-selling author, professor at Columbia Business School and founder at Valize, joined us for Innov8rs Unconference 2022 to take us through the three phases of the innovation process, and how to change the definition of value when facing increasing uncertainty. Here's what we discussed.

The Phases Of The Innovation Process - Where Innovation Efforts Sink

By default, the weight of the core business is so powerful that it may sink anything new that you're trying to introduce- which, by definition, when it first starts, it's small.

As you try to navigate the innovation process, you have to get through three different phases- and in each of those, bad things can happen.

1st Phase: Ideation

Getting ideas and getting other people enthusiastic about them (and nurturing them) are all part of this first stage. Innovation theater finds room in the ideation phase. Boot camps, accelerators, incubators, hackathons, and more: none of this is bad by itself. Yet the problem is that firms often have all these ideas, but then there's no process to govern them- there's no process to say which ones deserve the green light or to provide funding for nurturing them or to turn them into something that might be a commercial product.

2nd Phase: Incubation

The second stage is about turning all those ideas into a working prototype that demonstrates the product’s market fit and that there's an actual demand. Yet that often is badly mismanaged. Do not assume that your new venture will behave like your existing business at the incubation stage. Do not expect it to deliver funds in a short payback period. "What's the return on investment?" or "What's my payback period?" are impossible to answer questions at this stage.

3rd Phase: Acceleration

Lastly, you have the acceleration stage. When an innovation is ready to actually grow up and join the parent firm, you can think of it almost as being on the “on” ramp while your main business is hurtling along quickly. And your new little business has to grow up and become part of that mainstream.

At the acceleration stage, many mismatches may arise: the business unit heads that are supposed to receive this business want nothing to do with it- to them, it's a disruption, it's unusual. The sales force doesn't know what to do with it if the business model is different and calls into question what's happening in the core business.

“If it’s an entirely new business model, from the perspective of the leaders of an existing business, your thing is a nuisance. It’s going to take extra effort to incorporate and manage it”.

Even inherently good projects may fall into the trap of being framed the way the existing business is framed. In such a context, Rita believes the first challenge that we need to grapple with is that our definition of value needs to change when we're facing conditions of increasing uncertainty.

Changing The Definition Of Value When Facing Increasing Uncertainty

In situations of predictable businesses – e.g., a law firm that sees big corporate clients sign up year after year or a business school whose entering class of 2023 is going to be a lot like the entering class of 2022 – the “normal business practice” makes a lot of sense. That means you can anticipate the ROI and predict outcomes.

Yet as uncertainty increases, the value created is increasingly “option value”, which is the value of the right to make a future choice. And you can’t really anticipate all the advantages you can eventually get. It's a very intuitive concept, but when we get into business, suddenly, we tend to impose an assumed level of predictability about the business that has nothing to do with the actual business. And that can’t be realistic.

Changing the definition of value from “present value” to “option value” has significant implications for managing our portfolios across the three stages mentioned above: getting great ideas, nurturing them, and eventually getting them into the mainstream.

Following this new definition, Rita frames “an activity portfolio” in terms of two dimensions of uncertainty:

  • Across the bottom is uncertainty about markets – i.e., Who is the customer going to be? What's my channel? What's my ecosystem? What are the networks of suppliers that I need to have?
  • Up beside is uncertainty about technology and capabilities – i.e., How am I going to do this? Do I have the skill set that I need? Can I get the skill set that I need?

And depending on how much uncertainty is prevalent in that situation, different kinds of projects have a different job to do for business leaders:

1. Core enhancement (lowest levels of uncertainty)

The core business is the top priority because you won't have the resources to do much else if you don't do that well. All these new launches make the core business stronger: expanding customer satisfaction, improving efficiency, taking costs out, being responsive, and investing in quality improvement. You basically know who you're doing the work for, and you know what customers want.

For instance, digitizing your tech infrastructure, moving into the cloud, and embracing different new technologies for serving customers are all very innovative, but you know who you're doing them for, you likely know how to do them. Generally speaking, these innovations are usually easy to implement and don't fall victim to the terrible things happening to new projects.

2. Platforms

Moving out of a level of uncertainty, platforms are candidates to be added to your existing core business. But a new platform has much need for commitment and requires that you plan to be there for the immediate term. Indeed, a lot of the failures in the platform space don't actually have that much to do with the business. Yet, they have to do with the internal politics of the organization.

A great example here would be when Adobe decided to completely re-platform its offerings by moving it to the cloud and making it an on-demand solution. And transforming the company and taking it into new space required a huge commitment; it was a multi-year effort.

Another example is Amazon Web Services which was created because Amazon had run into a bottleneck with their existing technology. Accordingly, they had to completely reformat it to make it much more scalable and divisible into chunks, where each chunk could operate independently. Because before that, if you wanted to make a change to the Amazon software core, you had to make a change to this monolithic thing- and risked the whole system.

Both Adobe and Amazon invented the platforms for themselves. They knew what they were doing- and then they had ended up selling the solution to whoever might have the same problem.

3. Positioning options

Once you get into high uncertainty on either of these dimensions, you're in the world of options. And an option is a small investment we make today that buys us the right but not the obligation to make a future investment.

What Rita calls a “positioning option” is a case where you’re pretty sure there's a demand of some kind. You don't actually know which solution will meet the demand, whether the potential solutions will work, or what the standards will be.

You basically know what matters to your business, and you can place small bets or make some small equity investments accordingly. It’s important to remember that these options might be mutually exclusive, warns Rita. And in “option land”, that's totally fine. You don't want to do that with platforms and core because there you want to stick to every bet you make. While with options, you can have things that are actually mutually exclusive that work.

4. Scouting options

A scouting option is a case where you know how to do something, but you're trying to figure out how to get it into the market. This is the business equivalent of an experiment- in this area, the purpose is to test well-developed hypotheses. And even if the test fails, at least you've learned something.

At this point, Rita brings in the example of one of her clients, Varo Bank, whose target market is millennials. Varo Bank is a completely branchless bank, it's all on mobile phones, and it's mediated by a chatbot named Val. The design team fell into two camps about what personality Val should have: conversational and friendly vs. highly formal.

In a typical company, these decisions are often made by the most powerful person in the room. But this is fact-free. Going back to Varo Bank, both of those were reasonable hypotheses. Still, the company had no data to rely on at that time. What’s better than an experiment to get some data?

Rita tells how the bank wireframed mock-ups of what the interface would look like and then lured target customers into a conference room (with promises of free pizza) where they played with the mock-ups. And it turns out that when it comes to financial security, people want something more than the “Hey, dude!”. And so, through that experiment, Varo Bank learned a lot.

5. Stepping Stones (highest levels of uncertainty)

These are the cases where you think there's a great opportunity, a great market with an irresistible long-run potential but don't know how to do it nor if anyone wants it. Many really big opportunities start out with this super high level of uncertainty.

Let’s take autonomous vehicles as an example. We've been talking about autonomous cars ever since, and technology has improved. But we don't have an ownership regime, we don't know how to make the decision when we all want to get picked up at the same time, and we don't know how insurance works in an accident.

“I would argue” – says Rita – “these things are not going to be mass-market opportunities until a lot of those issues get resolved”. In short, a stepping stone market is a small, highly profitable business niche that you can’t actually run today.

Innovation Projects Need An Organizational Sherpa

What we’ve described is a hypothetical portfolio. The dilemma is that a typical corporate portfolio profile is a complete mess because the following four specific processes don’t work together as they should: creating strategy, setting budgets, allocating and removing resources from projects, and figuring out how people are going to benefit from the offering.

Breakthrough ideas are initially managed by a small team of committed people who are passionate believers in something everybody else thinks is crazy. And these ideas then have to have an impact to ultimately be commercialized. But for an idea to go from the ideation phase to prototyping and then get the most benefit from that prototype, a specific leadership character is needed- the organizational sherpa.

Rita has extensively talked about this in a previous article. The idea is that just as if you were going to go climb Mount Everest, you'd hire a sherpa to guide you on the path. Hence, organizational sherpas perform that same function for the organization.

The organizational sherpa knows what it means when the organizational wind blows one way or another. They give a bit of a heat shield for the new fledgling things that are being innovated.

And when those are ready, they’re able to provide a lot of that “organizational glue” that gets the thing from that little band of true believers into much more of a mainstream thing.

How To Get Started?

The nature of competitive advantage has shifted: in the past, we used to have advantages that lasted a long time, but today advantages are getting compressed. So we need to build innovation, which creates new advantages, and we also have to be able to run our new businesses. And so, when an old advantage fades, we need to have the ability to transform or replace it with something else. And here's a new problem.

For innovation projects to succeed, having the top level endorsement is crucial. Yet it’s not enough. If the purpose of innovation is ultimately transformation, at some level, you've got to get the mainstream organization involved because innovation is going to inevitably change what they work. In sum, having the rest of the organization involved and engaged is equally important. To this end, Rita suggests starting with a few workshops to demonstrate proof of concept.

“Innovation is like a muscle. People have to begin to practice this way. It’s better if you can practice it on something that's not business risky or that's a small experiment, as an experiment is something anybody could get their head around.

Teach people to start small, do some experiments, and get them asking the right questions. That's a great way to get people's mindsets starting to turn. After all, as Michael Schrager says, ‘A good experiment beats on good ideas’”, concludes Rita.