Innovation

Process Model Innovation: A vital part of Modern Dual Innovation

The way we think about innovation has been trapped in stage-gate methodology for too long but now we have new theories of how innovation should work. However, there is a complexity to the economy and the enterprise that innovation thinkers need to boil down to a new set of principles.

March 27, 2017

This is a response to Haydn Shaughnessy’s post “Agile, Dual Innovation and Process Model Innovation : Where to lay your bets”, recently published in this journal. The thought-provoking post challenges the notion of dual approaches to innovation (for the sake of this post referred to as Dual Innovation), which may take on distinct manifestations, such as

  • Spin-off: Tackling disruptive innovation by setting up small, separated companies (Christensen et al.)
  • Bi-modal IT: Separating IT activities that are repeatable/predictable from those being exploratory/uncertain (Gartner)
  • Organisational ambidexterity : Balancing explorative and exploitative activities in corporate settings (e.g. Tushman & O’Reilly)  

While all of these forms build upon a dual setup, each of them involves a distinct tradeoff between separation from and integration with the core business.

Spin-offs usually show a complete separation.  Bi-modal IT (also referred to as Two-Speed IT) can often be considered an intermediate step towards full-scale agility and a digitally integrated core business.  

On the other hand, ambidextrous organisations balance separation and integration by connecting the an autonomous innovation venture with core assets and capabilities.

As a genuine proponent, I feel it’s worth stressing that Dual Innovation doesn’t necessarily imply building up ventures that are completely separated from the existing operations. By contrast, as initiatives begin to show a good strategic fit they are steadily integrated after their highly separated and protective incubation phase.

Let’s briefly have a look at recent research findings on Dual Innovation. Some voices on this, as in part mentioned here:

  • 70% of the most innovative companies deploy a dual innovation approach. (BCG)
  • 100% of the experts surveyed in a German study agreed that defining a dual (ambidextrous) innovation strategy is vital to corporate innovation capability. (Detecon)
  • “A two-engine operating model holds particular promise for companies looking to achieve flexibility, as well as higher returns from their innovation investments.” (Accenture)
  • […] we are truly delighted to find that 75% of the companies that report an above 10% growth expectation for the coming 24 months also own a Division-X (or the equivalent hereof).” (Deloitte)
  • The survey found that the need to innovate is driving penetration of the bimodal construct – having two modes of IT, and ultimately of the entire business. Bimodal captures the platform characteristic of continuously building and refactoring capabilities for the future, and seems to have captured the global business mood, with leading companies increasingly separating the more exploratory parts of their businesses from those that exploit the well-established business (e.g. Google’s Alphabet).” (Gartner)

From these findings it becomes clear: While there may be no “One-size-fits-all” approach to innovation, it becomes obvious that the increasing relevance of Dual Innovation has been widely recognised.

Haydn’s post also raises the importance of Process Model Innovation, a major component of business model and operating model innovation. Process Model Innovation is deemed a critical ingredient to building up platform innovations that capitalise on horizontal technologies, rather than being confined within a specific industry vertical.

Prior to commenting on some of Haydn’s central thoughts, here’s my view boiled down to an essence:

When it comes to Dual Innovation and Process Model Innovation it’s not an Either/Or decision. Modern Dual Innovation approaches encompass two complementary directions of impact:

  • Transforming the Core (by largely changing or disrupting the existing operating model)
  • Creating the New (by largely changing or disrupting the existing business model)

Both directions involve Process Model Innovation as a vital part – in different contexts though: either to change an existing operating model or to build a new business model. The former seems underrated to me in recent discussions on innovation, mostly zeroing in on the latter – though by no means being less critical in regard to innovation capabilities of incumbents.

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This goes with what Haydn has delineated recently:

Process model innovation is a neglected topic. Strange. Just about every major company is where it is today because it managed substantial process model innovation in the past twenty years. That would be introducing supply chain management or switching from physical locality to the Web. The game now is to become the platform. […]

Companies like Netflix have succeeded, in their case in creating a globally distributed, cost cutting video content company, by constantly innovating how they do business not by innovating what business they are in.

In the following, some of Haydn’s critical and thought-provoking cornerstones will be extracted and commented on. Please read his entire post to grasp the complete context:

In traditional discussions of innovation there was always a divide between execution and innovation. Or put another way, process model innovation (changing the core) has been something of a taboo. A belief grew up that execution, the process, has to be protected from change.

That belief persists but may not be true or always helpful. At the very least it needs to be challenged.

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Haydn makes an important point here which I agree on. Traditional views of Dual Innovation don’t suffice any longer. They fail to factor in the opportunity to transform the core business and its operating model without significantly changing the underlying value proposition. What’s more, strict separation of execution/exploitation and innovation/exploration applies to specific innovation conditions only – with disruptive business model innovation leading the way. However, Christensen et al. get an important issue straight:

Determining whether an opportunity aligns to a business’s existing priorities is not an exact science, but there are questions that managers should ask to gauge how closely an opportunity aligns to the existing priorities. The greater the degree of alignment, the better it is to pursue the opportunity through the existing business; conversely, the greater the difference, the more necessary it will be to pursue the opportunity through a separate, dedicated business unit that has the autonomy to develop a unique business model to fulfill those objectives.

In brief: The worst place to develop a novel business model – let alone a self-disrupting one – is inside an existing business model. I would argue this applies for disruptive platform business models accordingly.

Ergo, modern innovation approaches are required that manage to balance innovation ventures in terms of two types of tension:

A company’s individual balance involves its specific context, such as strategy, industry environment, culture, capabilities.

[Dual concepts] don’t give many clues as to how a new initiative outside the core can scale.

When it comes to scaling innovation, we need to distinguish two aspects: 1) Scale in the sense of market/customer reach and 2) ability to grow non-core innovation in established organisations. It mostly seems straightforward to extend market/customer reach, once the innovation has been integrated with and supported by core business and its processes, systems and structures. This can be amplified by extending existing operating models towards platform models. The second point, however, proves to be the hard part: connecting initially separated ventures with the core along a “Scaling Up” transition. Tapping the full potential of dual approaches therefore requires companies to build up those capabilities.  

I think there is something missing in these different ways of formulating a dual nature of the firm. In particular it misses what I called elsewhere the new opportunities for process model innovation.

As indicated above, a critical point I agree on. Modern dual innovation management systems have to involve opportunities targeting the transformation of the core by making use of operating/process model innovation. As outlined elsewhere, comprehensive organisational agility encompasses agilisation of the core as well as creating entirely new businesses – not just either of them.

Yet, it’s important to consider that implementing new operating or process models, including platforms, also seem to require sufficient separation from the operating business in most cases. Depending on (digital) maturity of the organisation and alignment among its executives, dedicated units may prove to be adequate as preparatory or intermediate steps towards a full-scale roll-out of (post-) agile setups and overarching, collaborative operating models, such as platforms.

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These different developments – internal cross-silo platforms; platforms that help externalise some forms of highly-scaled innovation; and the emergence of a post-agile work method, all point to process model innovation being the new area where companies are finding competitive advantage.

Certainly, with more and more established companies facing disruptive threats and opportunities, deliberate process and operating model innovation proves to be a major source of competitive advantage.  It resides side by side with business model innovation, i.e. creating novel value propositions, as a complementary – and often underrated – contender.

Disrupting deployed operating models, rather than business models, in particular helps established players to adapt to disruptive conditions by playing defence, i.e. defending their existing business (vs. playing offence by disrupting other industries or themselves).

To sum it up, innovating process models and agilisation of operating models towards platforms is to be put higher on the agenda. Those innovations tap into the potential of digitalisation and overarching internal collaboration, as also leveraging external ecosystems.

While not being the only lever for companies to stay ahead, they make up a vital part of modern Dual Innovation approaches: Alongside “creation of outstanding value” it’s “outstanding delivery of this proposed value” that fuels outperforming customer experience and thus makes a difference.