Innovation Strategy – Defining how You Manage Uncertainty

Strategic thinking is about synthesis, about using intuition and creativity to formulate an integrated perspective, a vision, of where the organization should be heading.   – Henry Mintzberg

An interesting article on innovation strategy by Gary Pisano[i] was published in the June issue of Harvard Business Review[ii]. In the article, he makes the observation that too few companies have an explicit innovation strategy (as opposed to their corporate strategy). Too often, the corporate strategy is assumed to encompass a strategy for how the company innovates and the question of how and why a company innovates is one that never gets asked or answered.

An innovation strategy needs to address how a company will act in the face of uncertainty.

This may seem like a strange statement at first, but upon examination it makes perfect sense that to define how a company will deal with uncertainty is the fundamental and most important issue that a company’s innovation strategy must address.A company’s innovation strategy, while informed by and related to a corporate strategy, should be separate and distinct from it. It needs to energize the corporate strategy and support the strategic intentions of the company as well as its vision and mission but it needs to do more as well. An innovation strategy needs to address how a company will act in the face of uncertainty.

Uncertainty: Uncertainty is different than risk[iii]. Risk is about futures to which probabilities can be reasonably assigned. Uncertainty is about futures for which a probability distribution cannot be determined. Companies deal with risk every day and know how to manage with it. Often, though, companies become paralyzed in the face of uncertainty and they often mistake uncertainty for risk[iv]. Uncertainty is inherent in the complex ecosystems companies operate in. It comes from the constant evolution of customer demand, from new technological possibilities and designs, from competitive surprises and from political, economic and social shifts. Managing this uncertainty, and turning it into risk which the company can readily deal with, is critical to a company’s future.

Innovation (verb): Innovation is the act of creating new artifacts[v] that people and organizations adopt[vi]. Since uncertainty is created through the introduction of new artifacts, yours and others, that change future company and individual behavior, it makes sense that innovation is also the means to manage uncertainty. Innovation is the means a company has to ‘probe’ the future and influence it in ways that are beneficial to the company. Thus while other’s innovations create uncertainty, a company’s own innovations provide a means to reduce uncertainty (and turn it into risk) through a combination of testing, learning and influencing future behaviors.

Strategy: Strategy is the formulation of a company’s future. It has many aspects and perspectives[vii] but fundamentally it answers the questions of ‘who we are’, ‘what we do’ and ‘why do we do it’.   Future uncertainty affects the answer to all of these questions. An innovation strategy, as a subsidiary component of a comprehensive corporate strategy, is the formulation of what your company does to manage future uncertainty. Since innovation is the means for managing future uncertainty, an explicit innovation strategy is therefore necessary.

If one looks objectively at the act of innovating it is clear that one of the primary outcomes of any innovation endeavor is to turn uncertainty about the future, which companies find difficult to deal with, into risk, which companies are very comfortable dealing with. The unknown distribution of future possibilities gets turned into tangible artifacts that affect the future and, although those artifacts are very often very risky, these are risks that a company can quantify and determine, with a certain amount of confidence, what the future will look like.

The reason for approaching innovation strategy in this way is that it clarifies many issues related to innovation strategy. For example, a good way to address uncertainty is to get the inputs of a large number of diverse perspectives. Hence crowdsourced or open innovation efforts might be a good tool to use and the tactics a company employs might include these types of efforts.

Given this perspective on innovation strategy, here are some relevant innovation strategy questions companies should answer

  1. Where is the world going? What major transformations will take place over the next 10 – 20 years and how will they affect our current business and open up new opportunities for us?

The answers to these questions gives definition to uncertain but plausible futures. If your company does not have a well-defined and functioning futuring process, then it is lacking a key component of an innovation strategy.

  1. What domains (that are revealed by our view of the future) should we be focusing on to find new opportunities?

A view of plausible futures informs which realms it makes sense for a company to explore for new opportunities. If you do not have a clear definition of where you should explore (or at least a process to find out where you should explore), then you have an incomplete innovation strategy.

  1. What new cultures, organizational structures, brands, relationships etc. do we need to develop new competencies in?

Introduction of new artifacts changes behaviors, your company’s and others. New behaviors necessitate new organizational structures, competencies, processes and people. If you do not have an explicit vision of how the company should evolve in these areas, then you do not have an innovation strategy.

  1. How should we allocate our innovation resources and efforts in the space defined by the dimensions of new-to-the-world and new-to-the-company[viii]?

There is only so much time, attention and money to spend on innovation. The allocation of resources to tactical vs. strategic innovation (or incremental vs. disruptive, sustaining vs. breakthrough etc.) determines a company’s approach to managing uncertainty. If you do not have an explicit and shared definition of how your company’s innovation resources should be allocated (and why) then you do not have an innovation strategy.

  1. How do we innovate innovation? How do we advance our innovative capacity through new processes, methods, and tools? How do we create an innovation system that is more than the sum of its parts?

Any innovation strategy must address the issue of how the company improves their innovative capacity. This does not mean that the strategy needs to identify specific tools and methods. It does mean that the strategy needs to address what innovation competencies the company wants to develop and the amount and type of resources allocated to developing its own core innovation competencies.

Strategy is about long-term thinking. Long-term thinking must accommodate the uncertainties inherent in the dynamics of the complex system our companies live in. In most things a company does, there is a relatively tight feedback loop between cost and benefit. Companies can ramp their spending up and down according to the impact they see.  For innovation strategy, this is very counterproductive. Companies need to take a different approach to innovation strategy knowing that the feedback loop is often beyond even their longest strategic planning horizons. They need to commit to an innovation strategy that will survive changes in leadership, corporate reorganizations and generational changes in their people. This is the way to manage uncertainty and to control your own destiny.


 

[i]       Pisano, Gary; You Need an Innovation Strategy; Harvard Business review; June 2015

[ii]      A review of this article by the author can be found here

[iii]      Ritholz, B.; Defining Risk vs. Uncertainty; The Big Picture blog; Dec. 2012;

[iv]     Market research, which ‘predicts’ growth and demand based on past data is the epitome of risk analysis and this is why it can often mislead.

[v]      The term artifact is used here to refer to any human created entity. This can include physical and informational products or services as well as sets of rules such as business models, processes or laws. For more discussion on the nature of artifacts see Innovation or Artifact – An Objective View

[vi]     There are many definitions of innovation (see some of them here, here and here). The one used here is a short, precise and accurate definition that has proven to be very robust and useful in practice.

[vii]     For more definitions and discussions of strategy see here, here, and here.

[viii]    Schmitt, L.; Strategic Innovation; May 2012

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