Innovation is Strategic
‘Strategy is about choices, trade-offs. It is about deliberately choosing to be different.’
– Michael Porter
A robust strategy sets out a clear vision for the impact an organisation wants to have in the world. To do this well, leaders must decide what outcomes they are targeting and choose the activities they will prioritise to achieve them. Innovation should be no exception. It is a critical part of strategy, as illustrated by the second half of Porter’s quote — how can an organisation become truly different without innovation?
Unfortunately, innovation is often seen as a purely creative act which lacks the need for strategic rigour. This approach is dangerous for two reasons. Firstly, unguided innovation efforts can easily proliferate into a jumble of initiatives, all driving in different directions. Secondly, without specific outcomes to use as evaluation criteria, deciding what to fund becomes an arbitrary or political process. Even the best new ideas can fail in this context.
For example, a recent client had over 50 initiatives as part of its innovation portfolio, which spanned a range of new and adjacent markets. But there was no coherent overall direction, and after four years of investment none had made a meaningful dent in the bottom line. This sprawl of underperforming innovations could have been avoided with a more focused approach.
At a high-level, innovation comes in two strategic flavours: improving the business of today and creating the business of tomorrow. In the near-term, most companies will continue to operate in the same markets as they do already, so the first flavour of innovation is necessary to sustain competitive advantage. This is why automotive companies release an updated model every couple of years and why new kinds of toothpaste continue to be invented.
But to maintain long-term competitive advantage, and mitigate against disruptive threats, organisations must also forge new paths. This means building new businesses or even creating entirely new markets. Those that do this well consistently outperform competitors — think Amazon, Apple or Tencent. Those that fail often face a much darker future — think Blockbuster, Borders, or BlackBerry.
Strategic leaders must choose how to split innovation investment across these two horizons. This is a great start, but not enough on its own. To ensure that teams’ efforts result in a coherent portfolio, leaders must also set a north star for innovation. This should be derived from opportunities and threats faced by the organisation and made tangible with target outcomes. For example:
- Make our product more relevant to Gen Z consumers and grow this segment to 1m customers in the next 5 years
- Build a services ecosystem that solves more of our customers’ needs and boosts average revenue per user by 20%
- Develop a unique proposition that creates a new market with potential to grow a $1bn business
The aim here is not to prescribe ‘the answer’, as creativity and experimentation should still be encouraged, but rather to provide clarity on what success looks like. This ensures alignment across teams in the organisation to common innovation mission.
Just as with the overall business strategy, it is the job of leaders to choose what the business will and won’t do when it comes to innovation. Companies that are good at making these choices tend to have a clearer view of the future and back fewer, bolder innovation bets. Not all will succeed, but the ones that do are far more likely to become the businesses of tomorrow.
