9. Strategic innovation

What is strategic innovation?

Strategic innovation means changing or renewing the organisation's business model to create sustainable competitive advantage. It is not only about technology but also about new combinations of resources, activities and processes that turn new ideas into products or services that attract new customers and serve existing ones better.

The problem of strategic renewal: four processes

• Creating / strategizing (strategic reasoning): managers work from a dominant logic, a dominant thinking pattern that shapes how opportunities and challenges are seen. Creativity is needed but is limited by existing assumptions, time, resources and budget: bounded creativity.
• Entrepreneuring (strategic visioning): entrepreneurs take risks and actively seek new markets; corporate entrepreneurs play this role inside organisations and can stimulate change within the firm and even whole industries.
• Changing: innovation requires changes not only in the business model but also in the organisational system (functions, departments, processes, norms, culture, tasks, responsibilities and coordination), because these are strongly interconnected.
• Investing: innovation needs money, time and managerial skills, since it involves long-term, risky investments.

Inhibitors of strategic innovation

• Innovation outcomes / path dependency: firms keep holding on to what worked before, forming routines that make new innovations less likely.
• Inertia and bias: focus on existing problems creates blind spots for new opportunities.
• Feedback: results of innovations take long to become visible, making learning and adjusting harder.

Where and how renewal happens

Managers must both improve existing products and develop new ones, and not only react to change but also initiate it. Renewal can target the product offering (new products or services), the value chain (for example better production or transport processes) and the resource base (renewing or better using competences). Three directions: outside-in (renewing the value position: better products, lower prices, new markets), value chain renewal (adapting processes to lower costs or raise efficiency) and inside-out (renewing resources and competences so new products can be developed).

The paradox of exploitation and exploration

Exploitation is improving existing products and processes; exploration is developing entirely new ideas or innovations. Combining them is hard because they require different methods and ways of working.

Managing the paradox:

• Parallel processing (ambidextrous organisation): exploitation and exploration at the same time in different units, internally or externally via partners (spatial separation).
• Navigating (temporal separation): first focus on exploitation, later switch to exploration, for example by founding a new unit for new ideas.
• Balancing (time horizon): exploration serves long-term innovation, exploitation short-term performance; managers combine both.

Reading 9.1: Six Sigma

Six Sigma is a management method that improves processes by reducing variation and defects, using a systematic approach. It follows DMAIC:

Characteristics: (1) a parallel-meso structure with roles: the Champion guides and trains Black and Green Belts, the Black Belt leads projects as project manager, the Green Belt collects data and supports projects, linking projects to strategic goals; (2) specialised teams, sometimes full-time specialists; (3) a structured method; (4) performance metrics focused on customer and financial results. The underlying theory assumes a mechanistic organisation (control, standardisation, hierarchy), effective for routine tasks; adding exploration elements makes an ambidextrous organisation. Compared to TQM, Six Sigma focuses more on financial results, has a stricter methodology, uses data and statistics more intensively and uses full-time specialists.

Reading 9.2: The Innovator's Dilemma (Christensen)

Successful firms often fail when disruptive technologies emerge, precisely because they follow good management practice (listening to customers, investing in their technologies). Findings: disruptive technologies usually arise at small or new firms and are initially cheaper, simpler and lower-performing; technology progresses faster than market demand, so it can eventually replace existing solutions; incumbents invest in what current customers want and ignore disruption. Five principles: firms depend on customers and investors; small markets do not interest large firms; non-existent markets cannot be analysed, so experimenting matters; organisational capabilities also define disabilities; technology supply need not equal market demand at first but can later become dominant.

Reading 9.3: Exploitation, exploration and process management

Process management (coordinated activities to improve processes and make them repeatable) fits efficiency, stability and incremental innovation but can limit radical innovation. It stabilises resource allocation and decision-making, links and shapes technological change and can directly support innovation such as design processes. Types of innovation: incremental (small improvements building on existing capabilities), radical (fundamental change of trajectory), modular (changes in subsystems or components) and architectural (changes in how subsystems are linked). Innovation often shifts from product to process innovation over time. The productivity dilemma: choosing between short-term efficiency and long-term adaptability.

Textbook deepening: De Wit, Ch. 9 (Strategic innovation)

The sections below add the theory from the textbook chapter on strategic innovation to the lecture notes above.

Why is renewal so hard? The corporate lifespan

A study initiated by Royal Dutch Shell (De Geus, 1997) found 40 large, dominant companies older than 100 years; the oldest was Stora (now Stora Enso), which began as a copper mine in Sweden over 700 years ago, followed by Sumitomo (1590). De Geus estimated the average life expectancy of Fortune 500 multinationals at only 40 to 50 years, while the natural lifespan of a corporation could be two or three centuries. So firms can live much longer than people but rarely do: the question is why renewal is so difficult. De Wit's answer: strategic innovation combines four demanding processes and faces three inhibitors, so mastering the ability to renew is the key issue for long-term success.

Four processes of strategic innovation (Figure 9.1) in more detail

Strategic innovation is also hard for scholars because it crosses organizational behaviour, technology management, marketing, finance and strategy.

Three inhibitors of strategic innovation in more detail

• Effects of innovation results: start-ups have a blank cognitive map; established firms collect successes and failures that shape how options are valued. They follow proven innovation routines and become ever more effective at them: path dependency (Nelson and Winter). Institutionalised practices increase inertia (Hannan and Freeman), and older organizations select routines that proved fruitful.
• Effects of inertia and bias: options outside the dominant logic are not appreciated, so competitors' innovations are missed. This works both ways: firms that continuously improve can miss breakthroughs (Kodak and digital imaging; Sears Roebuck and discount retailers), while firms chasing "the next big thing" become blind to rivals' continuous improvements (Japanese electronics firms came to dominate the US TV market by continuous improvement).
• Effects of feedback: satisfying results remove the pressure to explore; long lead-time innovations are evaluated in many intermediate states and are vulnerable to being discontinued (promising process improvements abandoned prematurely, Repenning and Sterman), so short projects with immediate pay-offs become dominant (Rahmandad). The more frequent the intermediate evaluation, the higher the chance of abandonment. Milestones with clear mid-term targets help, but the end state of long-term innovation is hard to define.

Business model renewal alternatives (Figure 9.3): examples

• Outside-in renewal (product offering renewal, marketing innovation): raising perceived value and lowering prices (Hyundai's reliable yet affordable cars) or creating new markets with existing products (Unilever offering instant soup to the corporate market and repositioning ice cream for adults).
• Inside-out renewal: renewing the resource base, often through new technologies (Philips, Merck, Toyota investing heavily in R&D), but also renewing brands through marketing campaigns or people through training.
• Value chain renewal: redesigning some or all value-adding activities (IKEA's end-to-end chain with standardised production, flat packs and low transport costs; Amazon).

Strategists do not only react to change: by innovating they can create an environmental misfit for competitors.

The paradox of exploitation and exploration in more detail

Rooted in March (1991): companies need both exploitation and exploration, but they are partly contradictory. Improving starts from asking customers how current products can be better and employees how processes can be streamlined; the business model improves incrementally. Radical rejuvenation starts from an imagined future of a different industry, a new technology or a radically new idea; customers are not asked, because they do not know what they need if it does not exist yet; customers must adapt to the firm's offering. The two require a different mindset, people, processes, time horizon and success criteria (realised client value vs creation of a new industry or new customer value).

• Demand for sustained renewal: permanently improving products and services, raising quality and efficiency (including people); based on facts (customer feedback, market research) and ideas from anyone inside and outside the firm; each higher level becomes the new standard. Without it the firm lags behind ("people do not want to read yesterday's newspaper"). Downside: it follows the dominant logic and becomes immune to signals that do not fit.
• Demand for disruptive renewal: challenging current competitive positions with new technologies and business models; requires leaps of imagination; disruptive innovations "are not analysed into existence, but need to be generated"; creativity abandons the rules of sound argumentation, and logic is often used afterwards to justify the idea.

Because both are needed but partly incompatible, De Wit, inspired by Christensen, also calls this the innovator's paradox. Example: 3M, famous for its 15 per cent rule and Post-it notes, swung between Six Sigma efficiency under McNerney, a restored innovation culture and technology platforms under Buckley, and a "microscope and telescope" balance under Thulin.

The two perspectives in more detail

Strategic improvement perspective: the starting point is the permanent battle between rivals for the same customers; the best, cheapest and most novel propositions win. Everyone should have constructive dissatisfaction with the status quo; leaders facilitate and coordinate renewal initiatives. Danger: the success trap, "sustained renewal often leads to early success, which in turn reinforces further renewal along the same trajectory" (Gupta et al.). Breakthroughs are acknowledged as valuable but risky with a moderate chance of success, absorbing the best resources while rivals move ahead (Imai; Schroeder et al.). Example: Weber-Stephen continuously improving its grills (kettle, Genesis gas line, Flavorizer bars, compact grills).

Radical rejuvenation perspective: focus on breakthroughs that change the rules; the more radical the departure, the harder to follow and the higher the benefits. This requires a sharp break with the past: Schumpeter's creative destruction, disruptive and intense, and rapid system-wide change. Strong leadership is essential (Leifer), also to protect long projects against intermediate feedback. Danger: the failure trap, "failure promotes the search for even newer ideas and thus more exploration". Improvement comes at the expense of game-changing innovation; well-managed firms fail precisely because they are well managed (Christensen). Example: Beyond Meat insisting on being sold in the meat aisle.

Managing the paradox: details from the book

• Parallel processing internally: a separate R&D unit develops technologies that are transferred to business units; differentiating is easy, but integrating often fails (researchers' patents do not match client demands). Organizations separating the two in different units are ambidextrous organizations (Benner and Tushman).
• Parallel processing with external partners: outsourcing exploitation (e.g. manufacturing and its improvement) to focus on exploration, or outsourcing exploration to specialists; combines contradicting core capabilities of two firms, but the partner's objectives may change and conflict.
• Navigating (temporal separation): start-ups first explore, then exploit. Inside established firms, corporate entrepreneurs create units meant to replace or improve existing businesses (Jack Welch's "Destroy your business dot com", 2000), kept at a distance so current managers cannot kill them: "skunk works" (Peters and Waterman).
• Balancing: combining short-term (exploitation) and long-term (exploration) projects in the same unit with a company-specific, dynamic balance; preferred by some because integration after separation is the hard part (Smith et al.). At the individual level knowledge workers do both, which requires paradoxical thinking (Smith and Tushman). Robertson (Always Change a Winning Team) links leadership team composition to the S-curve: early on mainly visionary feedforward thinkers who explore, in the mature phase mainly analytic feedback thinkers who exploit; the CEO as "chairperson" with high complexity maturity continuously rebalances the team in anticipation of the next phase.

Strategic innovation in international perspective

• National level: Imai: "Japanese companies generally favour the gradualist approach and Western companies the great-leap approach"; the US and Japan are extremes. Explanations: individualism correlates with (radical) innovation through internal competition (US, UK); high uncertainty avoidance (Hofstede) creates reluctance towards radical change; government support and regulation (EU transition from coal to oil and gas; China promoting solar batteries). Innovation is shifting: Japan, US, Korea and Germany received 73 per cent of patents (2000 to 2006), but Chinese and Korean patents grew fastest; China now files most patents per year and Korea the most per unit of GDP.
• Industry level: every industry follows an S-curve of exploration and exploitation; high-tech sectors focus more on disruption and need capital, making collaboration or co-opetition common; partners with complementary technologies innovate radically, partners with similar technologies incrementally. Military funding drove aviation (Fokker), helicopters, stealth technology, the internet (DARPA) and drones; MITI and the European Commission also support technology development.
• To the strategist: the innovator acts within teams, organizations and networks, must see the context as malleable, abandon outdated products and shift leadership styles between exploration and exploitation phases.

Readings in the book's framing

Reading 9.1 (Schroeder et al., Six Sigma) represents strategic improvement. Six Sigma evolved from scientific management, continuous improvement and TQM; sigma is a metric of the variation in a normal distribution that could result in defects, so causes of quality problems are removed before they become defects. Its objectives are maximising shareholder value and customer satisfaction. Two methodologies: DMAIC (define, measure, analyse, improve, control) for improving existing processes and DFSS (Design for Six Sigma: define, measure, analyse, design, verify) for designing new ones. What is new is not the philosophy or tools but the organizational implementation: a switching structure that lets the organization act organically when generating improvement ideas and mechanistically when implementing them, helping it become more ambidextrous. Reading 9.2 (Christensen) represents radical rejuvenation: excellent firms with an excessive customer focus lose leadership to disruptive technologies, because serving existing customers prevents creating new markets (echoing Burgelman: adaptation to existing demands may reduce the capacity to adapt to future changes). Reading 9.3 (Benner and Tushman) builds on March: process management activities help in stable contexts but are "fundamentally inconsistent with all but incremental innovation"; since dynamic capabilities rest on both exploitation and exploration, ambidextrous organizational forms are needed for the inconsistent processes to co-exist.