Innovation capability: a matter of structure and culture

Innovation is the activity in which people and organisations change themselves and their environment. They break with routines and prevailing thinking, introduce new behaviours and processes, and create new products, services and standards. In companies, this usually includes customer and market understanding, technology management, and product planning and development.

Joseph Schumpeter distinguishes five cases: a new product or service, a new method of production, new sources of supply for raw materials or semi-finished goods, the opening up of a new market and a new market structure.

It is also common to distinguish between types. Product innovation produces new or improved offerings. Process innovation introduces new or significantly improved production or delivery methods, within the company or along the supply chain. Application innovation does not use a completely new technology but is new to the buyer and can change consumer behaviour.

Three corporate and leadership concepts can be distinguished for promoting innovation. The first puts the top executive at the centre: they recognise the need for change, discover the necessary innovation and move the organisation to follow it. The second relies on the development of new technologies at the lower levels of the organisation, combined with the challenge of winning the support of top management for them. The third uses competition within the company to drive innovation. Every company should decide which concept suits it best.

James March describes organisational learning as a trade-off between two options. Exploitation uses old certainties: refinement, efficiency, selection, implementation and execution. Exploration seeks new possibilities: search, variation, risk, experimentation, flexibility and discovery. Organisations decide explicitly how to divide their resources between the two.

More resources go into exploitation when the environment is stable, market and customer needs are predictable, short-term returns count and risks are avoided. Turbulent environments, dynamic and volatile markets and an appetite for risk favour more exploration. Internal make-up also has an effect: where everyone shares the same knowledge and the same understanding of the organisational code, openness to new knowledge tends to be lower. Diverse knowledge and an unequal understanding favour exploration.

An organisation's capacity to learn is the skilful balancing of change and continuity. The process of self-renewal rests on three basic mechanisms. Variation broadens the sources of irritation and thus increases the chances of learning impulses, for example through collaboration with customers, observation of market and competition, internal cross-networking and a willingness to experiment.

Selection increases the internal capacity to process impulses for innovation: through regular strategy reviews, functioning leadership teams, the courage to engage in controversy and shared criteria of relevance. Restabilisation is the ability to turn selected innovations back into usable routines. This includes a coherent overall concept of the implementation steps, professional project organisation and the rule of not overburdening the organisation.

Design thinking is an example of how exploration is deliberately triggered. It combines flexible spaces that support the development of ideas with multidisciplinary teams of different experiences and personalities and a trial-and-error process in seven steps: observe, point of view, idea, brainstorming, focus, prototype and test.

A study by Booz & Company of the 1,000 companies with the highest spending on research and development found no statistically significant relationship between this spending and financial performance. Five success factors can be derived from this series of studies and the IBM CEO Study of 2006.

The first is a well-defined innovation strategy with clear objectives. Almost a fifth of the companies surveyed at the time did not have one. The second is alignment with corporate strategy and culture, since culture proved to be a key factor regardless of the strategy chosen. The third is external innovation capability, because hardly any company can develop every innovation advantage in-house on its own.

The fourth factor is cross-boundary collaboration: according to IBM, around 40 per cent of new ideas came from business partners or customers. The fifth is company-wide engagement, because most ideas come from employees outside the research department. This requires a team-oriented environment, individual rewards for innovators and better integration of business and technology.

Following Booz & Company, three innovation strategies can be distinguished. Need Seekers proactively involve current and potential customers, determine their needs from the market and act as pioneers with new offerings. They need openness to ideas from outside, strong relationships with external partners and a collaborative culture across the company.

Market Readers also start from the market, but less proactively. They observe customers and competitors with equal intensity and rely on incremental change. Regional structures, clearly defined responsibilities and interfaces, and careful management of resources and market potential suit them.

Technology Drivers derive innovation from technological capabilities and breakthroughs and thereby address unspoken customer wishes. They are characterised by respect for technical talent, processes for developing and tracking new technologies, technical risk assessment and individual rewards.

A comparison of three well-known companies shows how differently these strategies can be anchored. 3M is classed as a Need Seeker: an organic structure of interlocking networks with many independently managed business units, a culture of open innovation with tolerance of disruption, and teams that become part of the customer's business. Employees move between departments and countries so that ideas rotate too.

Parker Hannifin stands for the Market Readers: a highly decentralised organisation with consistent lean management, a results- and values-oriented, cost-conscious culture and a disciplined system for reviewing ideas. Intel stands for the Technology Drivers: cross-functional high-performance teams, flexible roles, passion for the product, pronounced knowledge management and individual rewards.

The comparison covers four areas: organisation, culture, process and IT, and people. The examples support an assessment from within 3M according to which success in innovation depends more on culture than on organisational structure.

An innovation process as transformis sets it up in the form of an innovation workshop proceeds in three stages. In planning, the objective, search fields, team composition, methods and the criteria for an initial evaluation are clarified. In idea generation, teams work on each search field in workshops, record each idea in a profile and evaluate it for the first time. This creates a large pool of ideas.

In idea evaluation, the management team first reflects on its own established evaluation criteria, changes them where necessary and then prioritises the ideas into a shortlist. Selected ideas are evaluated in business terms before senior management decides on implementation.

An expansion map provides orientation. It organises opportunities around the core business in four directions: new product groups, new geographical markets in existing segments, variations of the company's own value chain or a changed role in customers' value chains, and new customer groups and channels. Each opportunity is assigned a risk level: manageable, medium or high.

Concrete growth approaches are evaluated against fixed points of observation. The review checks whether the company can achieve a leading position in the new field, whether core competencies are strengthened or put at risk and whether the expansion fits the value strategy of the core business. In addition, there is the added value for customers, the durability of the growth, possible reactions from competitors and the know-how to manage the new business.