How to Become an Innovative Organization

Becoming an innovative firm capable of engaging in substantial and transformational innovation that will create new categories or subcategories requires an enabling organization. An innovative organization is difficult to create because it really requires three characteristics that are inconsistent with one another. The organization needs simultaneously to be “selectively opportunistic,” to have “dynamic strategic commitment” and to have an organization-wide resource allocation system.

Selective Opportunism

The organization practicing selective opportunism actively but selectively seeks to identify opportunities through insight or technology development, and then takes advantage of them. The idea is that the environment is so dynamic and uncertain that the prudent and profitable route is to detect and capture opportunities when they present themselves. Strategic opportunism requires an external orientation with the ability to sense emerging changes in the marketplace and an entrepreneurial culture with an ability to respond quickly to opportunities.

The opportunistic firm needs to screen opportunities in two ways. One screen involves eliminating those opportunities that lack the potential to create new categories and subcategories that the firm can dominate and leverage. A second screen is strategic. There should be an overarching strategy to make sure that each opportunity fits into the emerging sets of assets and competencies of the firm. The strategy can evolve and can allow for new platforms of growth, but those new platforms should represent substantial potential with acceptable success probabilities.

A significant risk is that the strategic opportunism model creates strategic drift. Investment decisions are made incrementally in response to opportunities rather than directed by a vision. As a result, a firm can wake up one morning and find that it’s in an industry for which it lacks the needed assets, competencies, scale and synergies. A related problem is that an organization well-suited to finding and pursuing opportunities can generate more projects than can be adequately funded, and at the extreme, the lack of resources can doom all of them.

Dynamic Strategic Commitment

At some point a new concept and its associated new category or subcategory may have enough promise to gain strategic commitment, and the organization including the top executives need to be willing to make that commitment. The organization needs to have an offering leader with passion and vision, a motivated team in place, the right resources allocated or created and a perceived fit into the overall culture and strategy of the organization.

The term dynamic strategic commitment implies that the commitment is not forever. There needs to be periodic review of the commitment. Is the new business meeting the target goals? Is the mature business experiencing any changes in the marketplace that shift the assumptions underlying the commitment? If so, the commitment strategy might be changed.

There is the risk that strategic commitment will turn into strategic stubbornness. A lot can go wrong. The vision surrounding the commitment may become obsolete or faulty and its pursuit may be a wasteful exercise. There may be implementation barriers in design or in execution. The new offering may be undercut by another paradigm shift, perhaps brought about by a competitor’s innovation. There can be over-investment and premature market entry, which may be difficult to reverse. There may be too much professional bias and organizational momentum to withdraw from the commitment.

Organization-Wide Resource Allocation

One antidote to strategic drift and strategy stubbornness is to develop a capability of allocating resources centrally through a process that is disciplined, objective and organization-wide. Resource allocation is indispensable to a viable innovative organization because it provides a way to make sure that the best options are funded.

An effective allocation process should have clarity in criteria and procedure, be supported by a team with credibility so that decisions will be respected, and have a wide scope. One of its goals should be not only to evaluate and prune those initiatives whose prospects have become risky or worse but also to protect those that have excellent prospects but lack political support and may have fit issues.

Centralized control of budget stresses the organization because these decisions involve life-and-death funding decisions affecting careers and the structure and mission of an organization. Further there is the risk that decisions will be affected by biases and inadequate understanding of markets and products. Some decisions may reflect an overall strategy that will not lead to future success. Others may have pessimistic sales and profit expectations in part because a needed innovation may seem unlikely. In any case, a mistake in funding and allocation is made.

Three Strategies that Conflict

The reality is that these three strategies are all necessary but do not co-exist comfortably. A certain culture, people and set of processes that work well in selective opportunism will usually not fit will with dynamic commitment. Both are inhibited by a central resource allocation system unfamiliar with their sometimes fast moving context. But the reality is that in these times with fast-changing markets and products, this is exactly what is needed.