The Link Between #Strategy and #Innovation
I recently finished “The Lords of Strategy” by Walter Kiechel III, and it is an interesting read for anyone wanting to understand how we got to the current understanding of the role of strategy in building a business. It also paints an interesting picture of the key individuals and firms involved in creating the strategic consulting industry. The origins of BCG, Bain, and McKinsey are explored, along with the academics from key universities who contributed to the growth of the field. While this is more of a historic view than a tutorial on strategy, it does clarify the link between the different thought leaders in strategy.
One topic that gets brief mention in the book, is the link between Strategy and Innovation. Too often these are seen as separate disciplines, when in fact the two must exist together for a business to be successful over a long period of time. At CCG we believe that Strategy and Innovation are inseparable if a company intends to succeed for the long term:
You will find many definitions of strategy, but a combination of several of them may be necessary to encompass the full scope of what strategy really means to a business. In one sense it includes the goals of a business, action plans to achieve the goals, and resource allocation to support the goals (1). In another sense it defines the value proposition a company brings to its customers and specifies the value chain used to be used to create this value (2). It is also the answer to a list of questions that include: What are the goals? How do we get there? Who is the customer? What must we do? What are we not going to do? Who is the competition? What must we do to deliver better value to the customer than they do?
A good strategy is able to address all of these areas, to allow a leadership team to rally a company around a common direction. However, these definitions all are relevant to a point in time. Businesses don’t have the luxury of focusing on winning only in the context of the status quo, they must also maintain their relevance as markets evolve, new competitors appear, and the needs of customers change. This is where Innovation becomes critical as a piece of strategy itself.
The definition Chanute Consulting Group uses for innovation is the combination of three required elements:
1) The generation of new ideas…
2) that add value for the customer…
3) leading to profitable business results.
A company that succeeds at these three things, can be considered to be innovative. Including innovation at the highest level in a corporate strategy is critical because the business environment is a moving target. The best products of today may be only average a few years from now. Your customers may have very different needs next year than they do now. Your current competitors (and the new ones that may not even exist yet), will be working hard to innovate in their own ways, to leap ahead of your products or services.
This is where the role of innovation in a corporate strategy becomes vital. A good strategy will include the role innovation plays in keeping the strategy relevant as the world changes around a company, to all of the employees (not just the R&D organization) around a common direction:
- What will our market(s) look like in the future?
- Where do we have to add more value for our customers to remain competitive in the future?
- How will we occupy a unique value proposition to differentiate ourselves from the competition?
- Are the competitors of tomorrow different than the ones today?
- What do we have to learn to do differently/better to remain relevant?
- Where will the new ideas come from and what will we do with them?
- What resources are available for innovation, both internally and externally?
- What dimensions of our business must we focus on for innovation? (everywhere? core product lines? new markets? cost competitiveness? performance? efficiency? speed? flexibility?)
- Where are we deliberately choosing not to focus?
- How will we profit from our innovation?
- Will the business model need to change as much as the products do?
If all of these elements are not clearly defined in a corporate strategy, then there is a risk that the strategy is too focused on the current environment around a company, with too little consideration of the changes that are inevitable. Some companies have great strategies that work for a period of time, but only until the next innovator appears. Obvious examples of both businesses and industries that have seen leaders come and go are:
Movie Rental: Blockbuster -> Netflix -> Redbox -> ?
Transportation: Railroad travel -> Major Airlines -> Low Cost Airlines -> ?
However, some companies have demonstrated skill in staying ahead of changes in their markets, to remain relevant even as the markets, customers, and competition are evolving significantly. Examples include: P&G and IBM.
The inclusion of Innovation as a major element of a corporate Strategy is the difference between a strategy that wins at a point in time, and one that can be more robust for the long term. While it is difficult for any organization to lead forever (it is more likely than not that Apple and Google will eventually be surpassed) it should be the goal of every CEO and executive team to weave innovation throughout their strategic plans, to proactively address the inevitable changes that will occur over the lifetime of the strategy and the company.
(1) – Alfred Chandler Jr – Strategy & Structure 1962
(2) – Michael Porter