Before embarking on any innovation programme, it's wise to consider what you would like it to achieve for your organisation. This should always be done in the context of your business strategy - any innovation programme not aligned with strategy is going to struggle to deliver real value because it will be focused on the wrong things.
There are many ways of ensuring balance in your innovation portfolio (see our article on the Three Horizons of Innovation). One approach is to consider what we call your Innovation Ambition - i.e. how far-reaching do you want your innovation to be? While it can be tempting to think of innovation as only being about huge, ground-breaking disruptions, those projects are few and far between. Not only that, but they are higher risk and generally take a long time to implement. On a day to day basis therefore, your innovation portfolio needs also to focus on the smaller, less radical projects that can still create value for your organisation at lower risk.
Deloitte consultants Nagji and Tuff created the Innovation Ambition Matrix in 2012 as a way of helping organisations balance their innovation portfolio - but what are the three types they outlined?
Incremental or Core Innovation
The first, incremental innovation, is about looking for ways of extending your current business. This is generally through making small scale improvements to add or sustain value to existing products, services and processes. A classic example of incremental innovation would be Gillette razors, where adding additional features such as extra blades and moisturising strips allows the company to extend the product range into higher priced items, while retaining existing products. The beauty of incremental innovation is that it is often reasonably quick to implement, as it tends to use the existing technology and business model.
Gillette is also an example of how incremental innovation can lead to a product remaining stuck in a particular form, however: a focus on adding features risks missing the possibilities of making more radical changes to either the product or the business model, as the Dollar Shave Club did successfully. While incremental innovation creates short-term value, in the long term it can lead to a proliferation of product extensions, which can result in simply slicing a finite market into ever smaller customer segments.
Breakthrough or Adjacent Innovation
This second type of innovation uses existing skills, specialisms or products that the organisation does well, and moves them into a new space. This might mean offering a technology in which the company has expertise to a new market, using new technology to offer existing customers a different product or service, or offering the same products on a different business model. For example, when car manufacturers started offering leasing alongside straightforward sales, or car rental firms moved into urban car sharing schemes, it opened up new customer segments with different needs.
One of the best examples of a company leveraging adjacent innovation is Amazon. Using its highly successful bookstore platform and fulfilment systems, it has moved into a huge number of markets other than book retailing. While each market will have required setting up new supply chains, it applied its expertise in e-commerce to each one to make them profitable as quickly as possible.
Because adjacent innovation requires setting up new business models or opening up new customer segments, it takes longer and requires more investment than incremental innovation, so the risks are higher. The potential for creating value, however, is often higher than with incremental innovation as the organisation is expanding its capabilities.
Radical or Transformational Innovation
Ironically, radical innovation is normally the type that hits the headlines, but it's generally the hardest and riskiest to achieve.
Radical or transformational innovation involves creating whole new offers or sometimes even a whole new business to serve completely new markets or a different set of customer needs. One way of assessing whether an innovation is radical or not is to consider whether it could have been achieved by improving the existing paradigm: for example, would digital photography have eventually have been achieved through improvements in film cameras, or the MP3 player by making cassette tapes better?
It is particularly hard for established organisations to achieve radical innovation because it relies on thinking completely differently about the market and the customer, or experimenting with a completely new technology. Organisations tend to become less flexible, less experimental and less able to think differently as they grow, so many businesses opt to create separate labs or skunkworks to focus on radical innovation in order to sidestep these constraints. Another approach is to partner with start-ups that have the ability to be nimble and respond quickly to opportunities.
Radical innovation can change the shape of a market, and create huge competitive advantage as others struggle to catch up, so the returns can be significant - but so, of course, are the risks.