1: Create an Innovation Strategy First

An innovation programme has, on average, 18 months between the time it’s initiated and cancellation. Most are cancelled because the innovators involved haven’t generated results quickly enough.

What is the number one reason innovators fail to get timely results? Surely, it must be they didn’t have a firm idea of what they were supposed to be achieving when they started.

You’d be surprised to discover the number of innovators with whom I discuss this who are unable to articulate their organisation’s innova­tion strategy. You know you are dealing with a team in this cate­gory when you ask the question “Why does your organi­sation have an innovation programme?” and it takes more than a sentence to answer.

Deciding the overall objective of an innovation programme is the most fun­damental, and most important, decision innovators and their sponsors will ever be asked to make.

It is a decision, though, that needn’t be especially com­plicated, as there are really only three strategic options available from which to choose.

The first is obvious: don’t do innovation at all.  Rely on what worked in the past. Accept a “back to basics” approach is possible, and con­tinuing practices appropriate a decade ago will, at least, let the business continue.

Some organisations have, indeed, adopted this strategy. It is a valid option, especially if what’s needed is tight cost control for a few years. Those years may be used productively to rebuild balance sheets or customer bases, though it will be at the expense of building new capability to compete.

This may, or may not, be an option depending on the nature of the com­petitive situation an organisation faces. If there are strong competi­tors taking a leadership position in the market, abandon­ing innovation is hardly a sensible strategic move. On the other hand, if there is no burning platform driving an innovation agenda, what’s to be gained by pushing it forward regardless?

Not doing innovation at all is a perfectly acceptable strategy, so long as everyone agrees up front.

The other end of the scale is Play-2-Win innovation. This is the inno­vation strategy you adopt when you can say, with no dis­agreement, “innovation is going to be the source of all competitive advantage in the future”.

Innovators doing Play-2-Win are a relatively large invest­ment in the short term, but (if they are any good) extremely profitable in the long term.

The kinds of investments one needs to make in a Play-2-Win situation can include corporate incubators, prototyping facilities, and other significant infrastructures. It’s likely that returns, at least initially, will not be that large compared to the upfront costs of establishing the capability.

Because the upfront investment in capability can be so signifi­cant, inno­vators must be pretty certain they have the support needed to adopt this strategy before doing so. Their efforts will be front and centre of every­thing an organisation does from the moment this strategy is adopted, so they are highly visible when things go wrong. That is an uncomfortable place to be, and senior leadership must be ready to provide appropriate air cover.

As we’ll see later in this book, things will almost always go wrong. Failure is a fact of life for innovation teams, and rates of 80% or more are not un­common.

But not all failures are bad.

A good failure is one which teaches an organisation some­thing. Usually, these lessons will be learnt after investment funds have already been committed. The best failures, therefore, are those where the lessons have been bought at the smallest possi­ble cost. In other words, where the innovation team has cancelled a project early.

In a culture that celebrates good failures, the money spent on a stopped project is seen as an investment that can usefully support the innovation team in their future endeavours.

By contrast, a bad failure is one which fails to create new lessons at all. Bad failures are also typified by wasting significant amounts of money.

If it is hard enough to celebrate a good failure, you can imagine how diffi­cult things become for an innovation team when they have to explain a series of bad failures. Usually, a string of bad failures results in the closure of an innovation programme altogether.

This is especially the case when an organisation has bet-the-bank on a Play-2-Win innovation strategy.

The third kind of innovation strategy is Play-Not-2-Lose. Play-Not-2-Lose accepts doing new things to maintain parity with competitors is the primary reason to have an innovation function. You may not get the market windfalls that accompany a big breakthrough, but you do get rela­tively good returns in the short term.

Even in an innovation economy, Play-Not-2-Lose can be very successful, because its main concern is the rapid improve­ment of that which an organi­sation does well now. In this strat­egy, innovators will typically concentrate on small, low risk changes, rather than big, grand, strategic projects. Com­pounded over time, Play-Not-2-Lose can generate massive increases in value.

Because each innovation is an incremental improvement on that which al­ready exists, organisations tend to find Play-Not-2-Lose much easier to adopt than Play-2-Win. There are far fewer powerful people likely to be threatened. Then, too, the downside risk is usually small, on account of the fact that each individual innovation is probably not that significant in the overall scheme of things.

Deciding which of these three strategies to adopt is really a matter of determining the risk appetite of the organisation considering an innovation programme.

It is usually a mistake to adopt a Play-2-Win strategy when you work for an organisation interested in short term returns. As a rule, the kinds of grand projects required for execution of this strategy take longer than 18 months to germinate, the maximum time most innovation teams have as a grace period before hard questions about their value start to be asked.

Indeed, the temptation of new innovators to do Play-2-Win is one of the main reasons programmes fail. Spending time working on a planning horizon beyond the present vision of an organisation never ingratiates one to manage­ment.

Organisations wanting Play-2-Win, but looking for immediate re­turns from their innovation capabilities, are often in considerable distress.

Faced with a business in trouble, man­agers often imagine innovation may be a silver bullet capable of changing the game substantially enough all their troubles vanish.

For innovators, this is a poison chalice, because it doesn’t take long for management to realise their expecta­tions have little chance of being met. Their response is closure of the innovation team as soon as possible, usually as part of a “cost saving” exercise.

If your organisation can’t be certain it wants to run a Play-2-Win strategy, it is perfectly appropriate to adopt Play-Not-2-Lose. Small, gradual, im­provements done at scale are be a lucra­tive way to create a better business. Toyota, for example, used incremental improvements in their produc­tion processes to become one of the leading car companies in the world, not withstanding the quality control difficulties they faced in 2010.

Play-Not-2-Lose strategies are often derided by both innova­tors and their sponsors. The question asked is “what’s the difference between incremental innovation and optimisation?”. Why bother to have an innovation function if they are just doing the same work as other teams already engaged in the business?

But Play-Not-2-Lose is not the same as doing ordinary business-as-usual improvements of the kind popularised by methodologies such as Six-Sigma and Lean.

Lean and Six-Sigma are methods which take various levers available to man­agers, and through a systematic procedure, seek to determine the best possible combination to maximise a set of outputs. One might, for ex­ample, explore what combina­tion of decisions and check points make best sense in a purchas­ing process.

Clearly, if there are too many of these checkpoints, everyone will be frustrated by how long it takes to buy anything. On the other hand, with no checks at all, an organisation might wind up buy­ing things it has no use for.

Incremental innovation is quite different because it seeks to find new levers, rather than change the position of those that already exist. Lean or similar methodologies might be used later to optimise the positions of the levers, but it is innovation that creates them in the first place.

An organi­sat­ion seeking to inno­vate its purchasing processes through innovation, for example, might explore crowd-souring methods for decisions-making, or reverse auctions for getting the best price, or any of an infinite number of other possibilities.

What the innovators would not do is work on fixing exist­ing purchasing processes. Most organisations have teams that are specifically tasked with doing that kind of work, so it is clearly redundant for the innovation team to do it as well.

Of course, if there are no business improvement teams pres­ently, it would certainly be a matter for innovators to propose that one be created.

In summary, then, the first thing a new innovation team (in conjunction with their executive spon­sors, of course) must do is make a decision on which of the three strategies outlined here they’ll adopt.

Everything that follows is deter­mined by this key decision, from the infrastructures built to generate new value, to the influence innovators must ensure they create with stakeholders.

Let us now examine how a Play-2-Win strategy allowed a bank – the famously orange-coloured ING Direct – to disrupt every market it’s entered since its inception in 1997.

Case Study

ING Direct Adopted a Play-2-Win Strategy when it first started in Canada.

From the start the proposition was unusual: a high interest savings account – a much higher rate than anywhere else in the market – in exchange for a reduction in the number of channels through which it could be accessed.

With the ING product, there were no expensive branches or ATMs, just rudimentary call centres and online access. Payments in and out of the account were done through the intermediary of other banks.

The introduction of this model in Canada was done in relative isolation from the ING parent company in the Netherlands, who by all accounts did not have much of an innovation strategy at all.

It is extremely doubtful whether the new model would have been allowed, in fact, had head office shown more than passing involvement in its germination:  if it was successful, it would likely have cannibalised INGs core businesses which were much more traditional in execution.

Luckily, the geographical separation of Canada from Europe meant leaders of the new business had a much freer hand than they would have done otherwise. They were able to adopt a Play-2-Win strategy whilst working under-the-radar.

Under-the-radar is a topic we will come back to later in this book, but suffice to say, ING Direct was launched, initially without getting much attention from the Netherlands.

Direct banking is quite different to models most banks pursue when they acquire savings accounts. Usually, they focus on customer experience in a full range of channels, including expensive branch and call centres. The competitive differentiation is the quality of the customer journey, not the interest rate. This makes operating a savings account very expensive, and to preserve margins, banks kept interest rates low.

ING Direct turned this model on its head. It kept its costs low and handed over the savings to customers. The new account was a huge hit.

Disruption of the savings market in Canada was rapid.

With this success under its belt, the once-doubting ING head-office repli­cated the model in many other markets. In every case, the com­petitive landscape for savings was disrupted completely. Banks with high cost bases structured for competition on customer ex­perience were forced to compete on price, whilst their existing customers continued to enjoy their expensive channels.

This is extremely painful for bankers faced with the arrival of direct banking, but the alternative is to lose deposit share altogether. As you might imagine, bankers are usu­ally not delighted when they discover ING Direct is planning to enter a new market.