Chapter 12: Leading Innovation

How Can Leaders Structure the Organization to Support Innovation?

Smaller businesses do not have much problem with the organizational structure getting in the way of innovation because most employees who have an innovative idea can speak directly with the owner of the business to get the idea reviewed and approved. Larger corporations have several types of organizational structures and some of those, such as hierarchical have many layers, so an employee may speak with their direct manager who then speaks to an area manager who then speaks to another manager, and so on.  Often in these large organizations, different departments are responsible for their own profit and loss, so they essentially compete with each other for company resources which is not the best structure to support collaborative innovation or make it easy to get big ideas into the innovation pipeline.

From small businesses to large organizations like global megacorporations, companies across the globe generally rely on four different types of organizational structures in the mechanistic model: Functional, Divisional, Matrix, and Hybrid. Matrix structures combine functional structures with divisional structures in a grid arrangement that combines vertical functions (e.g., organizational roles and titles) with horizontal divisions (e.g., directors of various product lines, projects, etc.). A matrix organization decentralizes decision-making and provides teams with increased autonomy while simultaneously improving cross-functional collaboration to boost overall productivity and encourage innovative approaches to problem-solving. Hybrid is similar to matrix structures, yet allows for collaborative sharing of data and resources while preserving division-specific specializations.^[1]

While the four organizational structures above are the most common, companies around the world also use four other types of organizational structures which are more organic in nature: Process, Circular, Flat, and Network. Process structures concentrate on end-to-end workflows for specific processes. This improves adaptability and flexibility to meet changing demand and market conditions. A circular structure is intended to encourage the dissemination of information and inspiration from the center and allow different divisions to participate as components of a single whole. In flat structures, management and executive staff take a more collaborative rather than supervisory role, working and communicating closely with team members and project managers.^[2]

To ensure operations are running smoothly, many businesses follow an organizational structure that best supports their size and business goals. Having and communicating a clear organizational structure helps employees understand their roles and corresponding expectations and informs goal-setting.^[3]

Play this YouTube video “How Apple is Organized for Innovation: The Functional Organization” to learn more about how to organize a company for innovation success.^[4] Transcript for “How Apple Is Organized for Innovation: The Functional Organization” Video [PDF–New Tab]. Closed captioning is available on YouTube.

How Can Leaders Create an Innovative Work Culture?

Creating an innovative culture at work can improve employee satisfaction, team productivity, and the quality of the company’s products and services. It can also help grow brands, attract prospective employees, keep talent in the workforce, and help generate revenue.^[5]

An innovative culture is a work environment that fosters and rewards employee creativity instead of focusing on deadlines and revenue. Tech companies often have an innovative culture since the tech industry constantly changes and generates new ideas.^[6]

Key characteristics of an innovative culture include:^[7]

• Unique strategy: An innovative strategy often involves specific goals and a strategy specifically designed for and by the company.
• Autonomy: When the workplace has an innovative culture, it often gives employees freedom in how they work to accomplish goals.
• Trust: An environment of trust encourages employees to share ideas and attempt new methods to accomplish goals.
• Accepting failures: Innovation may lead to some failures along the way. Allowing these failures helps employees be more creative without the fear of defeat or making a mistake.
• Leadership: Good leaders with effective management abilities help maintain an innovative culture. However, it’s best implemented when employees act as leaders, too.

An innovative work culture encourages continuous improvements which can help the company produce improved products and services which in turn helps the company retain existing customers and attract new customers.  An innovative company also attracts investors and new talent (new employees). Innovation can improve the company’s image and make it a leader in the industry, again bringing more customers, investors, and profit. Innovative companies often have higher revenues and profits than their competitors.

When companies trust, encourage, and reward their employees, their employees feel more creative and create new ideas at work. These new ideas are often beneficial to the company.  Innovative cultures create happier and more productive employees.  Innovation can prepare a company to adapt to its industry and market and this ability to adapt can lead to a company’s longevity as it must keep up with its competition to stay relevant. When a team searches for new methodologies or processes and creates new products, it may discover a groundbreaking idea or predict a future problem it may face. Both can help the company adapt to a changing landscape.^[8]

Listed below are a few of the benefits of having an innovative work culture.^[9]

• Sets a course for improvement
• Helps develop new ideas
• Leads to company growth
• Gives a competitive advantage
• Increases team efficiency
• Develops an adaptive nature
• Appeals to more talented professionals
• Improves the company brand

Leaders should do the following to help create an innovative work culture.

Play this YouTube video “Amazon’s culture of innovation” to learn more about how Amazon creates a culture of innovation.^[10] Transcript for “Amazon’s culture of innovation” Video [PDF–New Tab]. Closed captioning is available on YouTube.

How Can Leaders Nurture Innovation?

Leaders must create corporate structures that continuously nurture innovation. They should build connections to innovation within the company vision, mission, and values and ensure that company values and goals are communicated throughout the organization. It is also important for the leaders of the organization to model the behaviours they want to see in their employees and create a culture of innovation through providing training, motivation, encouragement, and support to employees. Leaders must examine new ideas with an open mind.  Many ideas are in their infancy when they first appear and it may take time to refine and perfect the concept.

Below is a list of some of the ways company leaders can support innovation and encourage its growth.

Create an Innovation Strategy

To nurture innovation a company should have an innovation strategy that is communicated to all stakeholders. An innovation strategy is a clearly-defined plan of structured steps a person or team must perform to achieve the growth and future sustainability goals of an organization. An innovation strategy provides people with a framework for critical decision-making. Leaders may consider the following questions when devising a strategy:^[11]

• In what areas will we invest?
• How much will we invest?
• Who will make investment decisions?
• What capabilities will we need to develop to support our investments?
• What capabilities can we not build, which we must then acquire or form a partnership to provide?

Holding on to traditional practices just because “that’s what we’ve always done” is not a strategy for success. That rigid approach is guaranteed to fail in the face of disruption, as proven by Kodak and Blockbuster.

The chapter entitled, “Growth Strategy” discusses innovation strategy as a growth strategy in more detail.

Use the Innovation Ambition Matrix

To nurture innovation, leaders who want an innovative company must ensure a balanced innovation portfolio; a combination of core, adjacent, and transformative innovation initiatives. Generally, 70% of innovation investments are in core innovations, 20% in adjacent innovations, and only 10% in disruptive innovations. In terms of value creation potential, however, the ratios are inverted:  core innovation efforts typically contribute 10% of the long-term cumulative return on innovation investment, adjacent initiatives contribute 20%, and transformational projects yield a huge 70%.  The right balance of innovation investment will vary from company to company according to particular factors like the age of the company, its competitive position in the market, and characteristics of the industry served (e.g. number of suppliers, market growth, and regulatory patterns). Most companies tend to be heavily oriented toward just core innovation and whilst this is understandable in terms of avoiding the greater risks and uncertainties associated with adjacent and transformational initiatives, the result will be a steady, long-term decline in business and attractiveness to customers if a company never tries some adjacent or transformational projects.^[12]

The chapter entitled, “Innovation Risks” discusses the Innovation Ambition Matrix as a way to mitigate risks in more detail.

Scan the Business Environment

To nurture innovation leaders must continually look for opportunities and threats and examine the company’s strengths and weaknesses so as to build weaknesses into strengths, use strengths to combat threats, and take advantage of opportunities. Using research and analysis tools such as a SWOT analysis, Competitor Analysis, PESTLE analysis, Porter’s Five Forces competitive landscape analysis, Ansoff’s Matrix for strategic planning, Innovation Matrix for innovation planning, and more, leaders can plan ahead, mitigate risks, and make informed decisions based on research.

The chapter entitled, “Innovation Risks” discusses how scanning the business environment can help reduce risks, and provides additional details about the analysis tools.

Accept Reasonable Risks

To nurture innovation leaders must be ready to accept risk and understand it is acceptable to fail and try again, as this is part of the innovative process. Investing in a knowledge management system will help the company make it easy to share information and ideas, track innovation progress, manage the budget, track ROI, and keep track of lessons learned from past failures so as to avoid these pitfalls in the future. An electronic system allows companies to capture the benefits of, and lessons learned from innovation.

The chapter entitled, “Innovation Risks” discusses how to reduce innovation risks in more detail.

Encourage Internal Collaboration

To nurture innovation, it is important to create cross-departmental teams and make communicating across departments easy. When, for example, the marketing team only speaks to the marketing team this creates a recipe for groupthink. To ensure employees understand how the different parts of the company work and how they must work together to achieve progress, leaders might, for example, create a policy whereby anyone who wishes to become a business unit general manager must have worked in at least two functional areas for two or more years. The CEO of a very successful technology company requires the R&D people to spend about 10% of their time in marketing and sales and vice versa.^[13]

A great example of internal or cross-company collaboration is Starbucks. As the rise of café culture birthed hipster pop-ups and independent shops, the dominant chains began to lose ground. Keen to avoid a Kodak moment, Howard Schultz jumped to action. The Starbucks CEO invited store managers from all over the world to come together for a conference to redesign the café experience.^[14]

Design Innovation Labs

Designing innovation labs is another way to nurture and support innovative initiatives. Innovation Labs focus on business growth. They can either be internal to a company that has the resources and the team available to run their own internal programs, or they can be external such as a consulting firm that supports the innovation process of other businesses. Innovation labs are strategic and goal-focused and are used as tools to address specific company innovation requirements. An innovation lab is a fast, flexible and creative concept that adapts to the needs of the host organization. Innovation Labs can be set up for just a few days, run over the course of a few months, or can become an ingrained part of a company that provides a constant source of innovation. Some well-known organizations create innovation lab spaces where their employees can experiment and work on innovative ideas.

Below is a list of a few companies with successful innovation labs.^[15]

• Kohl’s Innovation Center
• Google[x]
• Amazon Lab126
• Verizon 5G Labs
• Volkswagen Automative Innovation Lab
• Staples’ Velocity Lab
• Coca-Cola’s KOLab
• Lowe’s Innovation Lab
• Capital One Labs

Foster Intrapreneurship

Intrapreneurship is defined as entrepreneurship inside an existing company. Intrapreneurship programs are a great way to make innovative projects and ideas happen. It refers to the new businesses or ventures created within an established organization. Some companies nurture innovative ideas brought forth by employees by supporting them in intrapreneurship initiatives. These initiatives often take the form of company spin-offs or subsidiaries whereby the employee who came up with the idea often becomes a top-level manager of the new spin-off company. Often intrapreneurship is supported through an innovation lab.

Below is a list of a few successful intrapreneurship initiatives.

Vimeo

Vimeo is an exceptional example of how an Intrapreneur, Anjali Sud, transformed the company’s business model inside out and went from being the Marketing Director to the CEO of the company. Increasing sales by 54% in a year, Anjali Sud changed the struggling online video platform to a successful SaaS business.^[16]

BOXLAB

Through the intrapreneurship program at BASF, Chemovator, BOXLAB Services became the first corporate spin-off in the organization. Mischa Feig and Lisa Ruffin are the intrapreneurs behind the spin-off, which now operates as an independent startup on the market with BASF holding minority shares.^[17]

PlayStation

Back when gaming consoles were first being developed and marketed, Sony was not interested in entering this industry. It’s hard to believe this considering that today, gaming accounts for 29% of Sony’s revenue. Ken Kutaragi is the intrapreneur behind the launch of the first Sony PlayStation in December 1994 in Japan. It eventually became the first “computer entertainment platform” to ship over 100 million units, doing so in under a decade.^[18]

Consider Mergers or Acquisitions

To nurture innovation, large companies may work with smaller businesses that have a niche, expertise, technology, or specialty that the larger company does not have.  Many times large organizations purchase (acquire) these smaller companies so that the larger organization can expand its innovative skillset, technologies, processes, patents/trademarks, and expertise with what the smaller company brings. For example, software and application development might not be the company’s thing so the company might consider partnering with a Python developer to launch a brand new web application that the industry has never seen.^[19]

Cisco’s acquisition strategy generally targets smaller companies that have developed innovative new products,  but the key to making these acquisitions pay over the long term is the company’s ability to retain the talented engineers and managers from the acquired companies.^[20]

Collaborate with Competitors

Collaboration may be something the company needs to do to meet its innovation goals. These projects are often referred to as co-creation, joint ventures, coopetition, partnerships, or collaboration projects. Many new products are brought to consumers through this type of collaboration. “One of the most famous competitive collaborations is Microsoft and Intel. They created Wintel Alliance, in which Intel worked on hardware, and Microsoft created the software. While the alliance has since fizzled out, the two giants collaborated to build software and hardware platforms and brought their tech to virtually every home in the world.”^[21]

Below is an example of how Starbucks collaborated with Spotify to offer customers of both businesses an innovative music ecosystem. 

Collaborate with Government

The Government of Canada is encouraging greater partnerships among Canadian businesses, universities, and colleges to drive innovation and encourage the adoption of new processes and technologies that help Canadian businesses prepare to compete and win in the global marketplace.^[23] Businesses can get a list of financing programs, expertise, facilities, and more to support their innovation projects at the Government of Canada Innovation Funding and Support website.

The government often partners with businesses toward innovation, especially social, environmental, and technological innovation. Governmental organizations across the globe have launched their own innovation hubs often partnering with companies to find innovations that will bring value to entire communities.

Collaborate with Consultants

Innovation consultants can help guide and support the innovative process.  Companies can outsource these experts if they do not have an organizational structure for innovation or lack talent within the organization. Some well-known innovation consulting firms include IDEO, Innosight, frog, and the Board of Innovation. The expertise, experience, and services offered by each consulting firm may vary, but these experts can guide the innovation project, train internal managers, and help manage the project.

Collaborate with Customers

Open innovation is a business management model for innovation that promotes collaboration with people and organizations outside the company. Open innovation, also known as co-creation, means stepping away from the usual corporate culture of secrecy which is often associated with research and development. This innovation model becomes viable when the company acknowledges that there are many bright professionals and greater knowledge outside the organization. Companies might consider co-creation partnerships with customers, gathering ideas from crowdsourcing competitions, and working with universities, research organizations, suppliers, start-ups, and even competitors. Collaborating with customers by inviting them into innovation projects, through gathering feedback to participating in development, customers have helped companies make great strides.

An “open lab” can offer real benefits for organizations, for example, reinforcing corporate commitment to innovation and creativity in a physical space. Auto manufacturer, BMW, has a co-creation lab where its customers can share their ideas and become an integral part of concept vehicle development.^[24]

In early 2018, Swedish furniture and home goods retailer IKEA launched ‘Co-Create IKEA’, a digital platform encouraging customers and fans to develop new products. In 2018, Coca-Cola entered into a co-creation experiment with customers to make sure its Southeast Asia product strategy reflects the tastes of the region and its people.^[25]

Below is an example of how IKEA co-creates with customers. 

How Can Leaders Fund and Budget for Innovation?

When a company selects an innovative idea to pursue, management must determine where the money will come from to fund the innovation project.  Management must also create a budget for the project, a team to work on the project, a timeline for development, and track long-term returns on investment. Companies evaluate innovative ideas and select the ideas that align with corporate strategy and have the best chance of success because the investment of resources (i.e., time, labour, money) for one innovative project may mean lost opportunities on other innovative projects.

There are many ways to fund innovation projects and often companies will have money budgeted for a certain number of innovation projects to be supported over specific spans of time. If additional funds are needed, the Government provides support and funding for various types of innovation, crowdfunding may be an option for some innovative projects, bank loans may be an option, and investors or partnerships may also be a way to help support the company budget for innovation. The chapter entitled, “New Venture Innovation” discusses crowdfunding for financing innovative initiatives in more detail.

The process for establishing a funding source will differ depending on the company. For example, Allstate CIO, Suren Gupta, has described how a formal Innovation Council evaluates ideas and allocates funding. In other companies, if the innovation ties closely to a particular business unit, then funding may come from that group’s budget. The actual size of the budget depends on whether a company lab is building the technology itself, partnering with other organizations, or acquiring a company, product, or talent. For example, Amazon and Google have spent millions of dollars developing parcel delivery drones. Meanwhile, companies like UPS and Daimler AG have opted to partner with—and make strategic investments in—established drone makers, thus, reducing both the risk and the cost of innovation while still allowing the company to develop new capabilities.^[27]

How Can Leaders Measure Innovation Progress and Success?

It is not always easy to figure out the right mix of metrics to use to measure innovation. Some organizations measure what is easy rather than what is important. The most important function of measuring innovation is to ensure the project is moving in the right direction. Innovation metrics allow managers to see if the team is doing enough of the right kind of activities to be able to actually achieve results. Measuring innovation helps to guide resource allocation, hold the team accountable for their actions and responsibilities, and assess the effectiveness of innovation activities.

“By committing to measuring innovation, the company can encourage employees to be more conscious of the need for creativity and fresh thinking, no matter what their day-to-day responsibilities might be. If management regularly measures the company’s innovative output and shares these measurements with employees it will help encourage staff to think about innovation accountability on a daily basis and take responsibility for finding new ways of doing things.”^[28]

The chapter entitled, “Innovation Risks” discusses measuring innovation using specific types of metrics as a risk reduction tactic.

Example: Innovation Practices that Saved LEGO

 LEGO story sourced from The Leadership Network

From the brink of bankruptcy, LEGO has grown into a highly profitable toy brand that produces a staggering 22 billion plastic bricks a year. Fueled in part by LEGO movies, the privately held company surged ahead of its main rival, Mattel, in 2014 to become the biggest toy manufacturer in the world.  Against all odds, LEGO achieved one of the biggest turnarounds in history. How did they do it?

Setting a new direction

First, LEGO restructured and hired a new CEO, Jørgen Vig Knudstorp, a process-based thinker and father of four who arrived from McKinsey & Co. in 2001 and was promoted to CEO just three years later, at just 36. Knudstorp quickly realized that the problem was not with the product, but with the company’s attempts to become more relevant in the age of video games. LEGO had “over-innovated,” spreading itself far too thin and launching so many new initiatives that the company had lost its sense of identity.^[32]  

Innovation at the core

Knudstorp’s turnaround plan involved a mix of cost-cutting, philosophical revitalization, sustainable innovation, and back-to-basics simplicity. The goal was to rediscover the very essence of LEGO, innovate close to the core, and leverage their loyal and creative fan base. He set up “The Future Lab”, a secretive and highly ambitious R&D team tasked with inventing new, technologically enhanced “play experiences” for children all over the world based on detailed ethnographic studies of how children play. With The Future Lab, LEGO developed a range of low-risk, low-cost innovation practices to test ideas and cultivate expertise.^[33]  

Smart Licensing

LEGO’s breakthrough with licensed intellectual property began in 1999 with an agreement to license Star Wars characters and vehicles. On the heels of the Star Wars success, LEGO smartly committed itself to obtaining licensing arrangements with established brands, including Harry Potter, Lord of the Rings, DC Comics, Marvel, and Disney. The move paid off, while royalty expenses were in the hundreds of millions, profits reached billions.^[34]  

Rapid prototyping

Within its factories, LEGO has embraced a philosophy of rapid prototyping. Inspired by Google and other technology companies, they create minimum viable products to prototype and get new products to market quickly on a small scale. The Future Lab also cultivates intrapreneurship as its relationship with LEGO is more akin to an incubated start-up. By using market testing and validating their new products, The Future Lab is driving culture change to ensure that this new business model and way of working will be accepted across the organization.^[35]  

Open Innovation

Lego goes a step further with consumer feedback by putting customers, suppliers, and partners in the driving seat for innovation. LEGO Ideas is a crowdsourcing platform that allows fans to design their own sets, gather support from fellow fans (you need at least 10,000 votes), and eventually get LEGO to produce your set as one of its standard lines. Examples include Back to the Future’s DeLorean and the Ghostbusters Ectomobile, which are now widely popular.

The online platform now generates hundreds of new product suggestions each year and uses subtle and powerful open innovation techniques, employing everything from social media to peer selection to entice fans into contributing new designs and ideas.

LEGO Architecture is another good example. Several years ago, a Chicago architect and Adult Fan of LEGO (AFOL) reached out to LEGO, suggesting they create official kits similar to his homemade LEGO models of iconic buildings. The idea was initially met with some resistance, but fortunately, a free-thinking Norwegian LEGO executive saw value in AFOLs and created a stealthy, shoestring plan to prove their worth to the company. They tested the LEGO architecture line in just a couple of stores in Chicago and saw that they were able to charge “grown-up prices” for kits with the same number of LEGO bricks inside. The pilot was a success and the line remains hugely popular amongst adult fans of LEGO worldwide.^[36]  

Designing Products for Girls

Another example of audience diversification is LEGO Friends. In 2011, boys made up 90% of LEGO consumers and LEGO wanted to broaden its appeal to more girls. Their research showed that – while both girls and boys love the building aspect of LEGO – there is a key difference in how boys and girls tend to play with their sets. Whereas boys tend to be more compelled by a strong narrative, girls are more likely to use their sets for role-playing. After years of refinement, the company launched LEGO Friends, a new line designed specifically for girls. The line doubled sales expectations in 2012, the year it was launched, and in that year alone LEGO tripled its sales to girls.

Low-Risk Experimentation

In the past, LEGO wouldn’t have launched any “risky” products that could smear the brand’s reputation for quality. But that’s precisely why Knudstorp created Future Lab – so mistakes can be made relatively cheaply and vast amounts can be learned. For example, LEGO Universe, an online game that resembled World of Warcraft, was discontinued just over a year after its launch as they weren’t able to build a satisfactory revenue model. The experiment barely damaged LEGO’s reputation whilst providing multiple key insights and learning lessons to establish the company in the digital world.

In February 2015, LEGO launched a new game – LEGO Portal Racers – in partnership with augmented reality company Metaio. The game uses an Intel RealSense camera and depth technology to allow users to play without using their hands, instead of using head movements to steer left or right. The original idea was to have kids build their own vehicles out of bricks and scan them into the game, but it remains a digital-only experience for the time being. Like LEGO Fusion, it is a means for Future Lab to understand and experiment with new technologies.

Few businesses have mastered the digital/physical experience but LEGO’s ability to experiment quickly, cheaply and under the radar means it can continue to evolve, discover new forms of play, and delight its fans.^[37]  

So what can we learn from the ups and downs of innovation at LEGO?

1. Innovation without direction is risky.
2. Innovate close to the core first.
3. To experiment and test ideas in a safe way, without damaging your brand reputation, start with small projects and small budgets, then test, learn and improve.
4. Disrupt yourself – build the next big thing before a competitor does.
5. Foster open innovation and listen to the wisdom of your customers.
6. Build an innovation culture that gives people the freedom to be creative, as well as the direction and focus needed to deliver profitable innovation.

References

(Note: This list of sources used is NOT in APA citation style instead the auto-footnote and media citation features of Pressbooks were utilized to cite references throughout the chapter and generate a list at the end of the chapter.)