Innovation is often hard to define, because it is used often to refer to many types of innovation from minor product or service improvements to the transformative or discontinuous variety as the slide above illustrates.
The hardest kind of innovation to manage is creating an entirely new way to deliver value to your customer or members (transformative). And it is this kind of innovation that has the greatest potential (like some of the open business models we explored in earlier posts) but often pursued in the same fashion as incremental innovation. This post looks at the “emerging business unit” as a strategy for transformative innovation.
The London School of Business believes the “emerging business unit” offers the best opportunity for success:
“We find they are significantly more effective in executing transformative innovation than functional designs, cross functional teams, or unsupported autonomous designs.”
Why Focus on Transformative Innovation?
The three greatest challenges to improve innovation effectiveness are: a lack of entrepreneurial skills, issues around managing and mitigating risk, and resource constraints.
A 2003 London School of Business Innovation Study shows that organizations who focus solely on “incremental” product or service enhancement cannot stem decline in their own market as they mature and new players come online. In fact, most organizations do not focus resources on building an innovation pipeline for entirely new forms of products and services.
- 80% of their resources on incremental improvements to existing markets
- 10% on incremental improvements to new markets
- 10% on radical innovation to new markets
- 0% on transformative innovation to new markets
Unless over time you can cultivate transformative innovation you increase your risk of marginalizing your product line or brand. Product innovation rather than enhancement is the key to an organization’s future. It’s an insurance policy against obsolescence.
The LSB found that almost half of the surveyed companies declared that less than 20% of (transformative) innovations they launched were successful while almost two thirds declared that at least 50% of their product enhancements were successful.
Well over 50% declared that these innovation efforts were not defined. So this suggests that the lack of a structured process for innovation was the likely cause for this poor performance.
Emerging Business Units As A Model Process for Innovation
EBU’s are small, autonomous, and multidisciplinary in composition whose role is to drive rapid implementation. Typically it has a staff, a physically distinct location, separate funding, specific performance metrics, and often has a highly entrepreneurial culture which may be different from the parent organization. This allows the group to effectively manage its own destiny without interference from the larger organization.
EBU’s establish strong operating agreements that protect them from more traditional business units within the organization in the early stages, especially in the area of financial and human resource allocation. They draw upon select organizational resources and may in some cases have special provisions that facilitate better access to resources or quicker turnaround.
They can engage third parties in order to develop a ‘track record in innovation management’, enhance ‘execution capabilities’, or provide ‘strategic capabilities’ it may not possess immediately.
LSB found that company size did not seem to make a difference to innovation performance of EBU’s.
A Look Inside the Unit
- They have their own FTE’s
- Teams physically work together
- Possess a distinct culture from its parent – standards, values, operating rules, stretch goals, new disciplines
- Provides a distinct reward system for team members – compensation, bonuses, promotion criteria targeting “group” growth targets
- Team members may come from existing staff (other BU’s or from outside or combo)
- Executive support – financial & management oversight provided by an executive evangelist who is likely to manage other business units but can focus on both
- Innovation manager – is the direct daily operational authority to manage the team
- Relationship between EBU Exec and Innovation Manager – must be secure, reliable, helpful, two-way
- EBU operations – separate groups focusing on design (improvisation) and implementation (efficient execution)
- External support – is integrated with the parent’s traditional business units (see slide above)
EBU’s can be useful to help the parent determine:
Market Success – of the innovation (e.g.profit, sales, usage, participation)
Acquire Learning/New Competencies – degree to which team easily acquires and uses new knowledge to design, produce or distribute the product
Market Learning – degree to which team easily acquires and uses customer knowledge to customize the product
Knowledge Transfer – to other units within the parent and to offer limited support to other units