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Innovation Strategy

Strategy-First Innovation: Making Changes that Last

In many companies, an innovation team is allowed to pursue its own agenda and imagine itself to be a separate island from the rest of the company. The results are always disappointing: a lot of creative ideas, but a failure to deliver meaningful growth.

The root problem is the disconnect between strategy and innovation. To succeed, corporate innovation needs to be bounded by a clear set of strategic priorities that matter to the business. And it needs to play to the strengths of the firm — whether data, customer relationships, or brand — that will enable it to outcompete others attempting the same idea.

Below are three (3) steps that a mature business can follow to build a reliable innovation process that delivers results over time.

1. Define your strategic priorities

The first question that must be central to any corporate innovation effort is: What are the strategic priorities that matter most to our business?

When a business defines its strategic priorities, it is effectively orienting the map to allow innovative efforts to be undertaken in the right direction to support the business in achieving its strategic goals.

Priorities might include developing new products, expanding into new markets, enhancing the customer experience, increasing operational efficiency, or embracing sustainability.

For instance, one of Apple’s strategic priorities appears to have been the creation of an integrated ecosystem of products and services that enhance the customer experience and promote customer loyalty. This priority has guided their innovation efforts, leading to the development of software applications that enhance seamless integration across devices, such as iCloud, Handoff, and Airdrop.

2. Define your unique advantages

The second key question that should be central to any corporate innovation effort is: What unique advantages does our business hold over competitors?

Unique advantages include strengths that distinguish a business, add value to its products, and give it a competitive edge over the competition. To truly matter, an advantage should be:

  1. Distinctive – Enabling the business to operate in a way or produce a product that is different or superior to other companies
  2. Valuable – Increasing the perceived value that customers obtain from the business.  This could be based on a variety of factors such as price, quality, convenience, branding, customer service, or a unique combination of benefits.
  3. Durable – Although it will often be possible for competitors to replicate an advantage if they invest sufficient resources, it should be extremely difficult, expensive, and time consuming for them to do so.

Leveraging preexisting strengths will help you build competitive moats around new ventures to help you to stack the deck against other firms who bring similar innovations to market.

Unique advantages could include:

  • Physical assets – For example, Walmart’s chain of physical stores provide it with an established distribution network and logistics system that allow for efficient inventory management and fast delivery.
  • Data – For example, Amazon’s recommendation algorithm is built on a vast dataset of customer preferences. This helps Amazon to tailor product recommendations, which enhances customer satisfaction and sales revenue.
  • Network effects – For example, the value of Facebook for each user increases as more people use the site. This creates a self-reinforcing advantage that is challenging for new social networks to overcome.
  • Economies of scale – For example, McDonald’s enjoys large cost advantages due to its scale of operation. As one of the world’s largest buyers of beef, potatoes, and other ingredients McDonald’s can negotiate lower prices for these raw materials than smaller competitors, and benefit from improved working capital management by delaying payment to its suppliers.
  • Intellectual property – For example, Pfizer’s ability to patent its COVID-19 vaccine provided a temporary but crucial competitive advantage during the pandemic.

3. Embed strategy into the innovation process

Once a business’ strategic priorities and unique advantages are defined, the business can focus its resources on innovation projects that align with its priorities in a way that leverage its strengths. Alignment ensures that innovation is purposeful and directed towards achieving tangible business outcomes, rather than being innovation for innovation’s sake.

The key to linking strategy and innovation is to embed strategic principles into every step of your corporate innovation efforts. Making this linkage work requires rethinking innovation across at least six areas.

3.1 Set strategy at different levels

An enterprise-level strategy needs to be defined, which consists of a set of strategic priorities for the next 1-5 years, based on the firm’s strengths, customer needs, and the competitive landscape.

Business unit and functional-level strategies (e.g., risk, sustainability, marketing, HR) also need to be defined, distilled from the enterprise-level strategy.

3.2 Share your strategy with all employees

Use townhalls, virtual forums, strategy workshops, and other means of communication to ensure every employee is aware of the strategy.

3.3 Greenlight projects based on strategic fit

Approve innovation projects that include a clear problem statement and relate to a strategic priority. That is, is it clear from the outset how the innovation project fits within your strategic agenda?

3.4 Create protected spaces for innovation

Like young saplings, innovation projects need to be protected from the profitable yet fast spinning flywheel of existing business models that have the ability to crush new ideas before they have had a chance to put down roots.

Even if your innovation projects are aligned with strategic priorities, failure to cordon off a protected space for these projects can see them trampled under foot by more urgent day-to-day operations.

A protected space could include creating dedicated physical spaces like innovation labs and accelerators, as well as dedicated time in the form of hackathons.

3.5 Rapidly validate through experimentation

For approved projects, define the business model hypotheses and conduct quick, low-cost experiments to validate them.

3.6 Scale up projects that work, shutter those that don’t

Funding of new innovations needs to be iterative. Every team whose idea is approved should be required to return in 90 days with market data and a request for more funding.

The bottom line: Innovation that delivers results

Similar to a VC firm investing in startups, it will always be unclear at the outset which innovation projects will work out. As such, successful innovation depends on investing in a portfolio of innovation projects, experimenting rapidly, and providing incremental iterative rounds of funding.

For corporate innovation, however, one more thing is also essential: Every project must start from an idea that matches the strengths and strategy of the corporate parent.

To succeed, corporate innovation needs to be bounded by a clear set of strategic priorities that matter to the business. And it also needs to play to the strengths of the firm so that the innovation project has the ability to out compete other firms attempting the same idea, and the potential to deliver meaningful growth at scale.

Jason Oh is a Senior Manager at TD Bank’s Enterprise Strategy team. Previously, he was at Strategy&, EY, and Novantas as a strategy consultant, where he provided advisory services to senior management teams across financial services.

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