What do we NOT mean by an innovation system?

At the macro level, some countries and world regions have developed their own innovation systems and related standards. These systems define the roles of government, academia and private industry in driving innovation for their constituents. Sometimes these governments favor entities that comply with their systems and standards, awarding contracts or grant money over non-compliant entities. In this article, we are not interested in national or regional innovation systems. Nor will we address standardization for the sake of certifying compliance. We will leave that topic to the International Standards Organization and its members.

On the other end of the spectrum, you will at times hear the terms “innovation management system” and “idea management system” used interchangeably. We view an idea management system as a component of the larger innovation system at a firm level. This article will not address idea management systems. There are many such systems, and analysts such as Forrester and Gartner do a good job of reviewing their features.

What is an innovation system?

An innovation management system is simply a set of practices that are designed to repeatedly produce successful innovation. Numerous studies on innovation management systems across sectors surface the same handful of elements of an effective IM system. One can expand these major elements into greater detail, and cluster the ingredients in a myriad of ways. Beyond the core elements, one can go crazy and add “systems for measuring the system” and all of the ancillary supports one might eventually need, but we leave that to the standards gurus. Our focus here is the innovation practitioner who wants to develop a complete and rigorous — yet not ponderous — innovation management system that actually produces results.

Our methodology

How did we arrive at the core dimensions of an IM system for this article? We relied on three major sources:

• Meta study of innovation systems
  First, being nerds, we read copious articles on innovation management systems, in both business and academic journals. A meta study of research on innovation management systems turns up a common set of elements of IM systems. However, these elements may be described, named and organized in various ways.
• ISO for Innovation Management
  Second, the author represents the United States on the aforementioned ISO for Innovation Management, ISO 56,000. While ISO standards and guidance documents are copyrighted by ISO, we are able to refer to the overall concepts in the documents to ensure completeness.
• Silicon Valley Perspective
  Lastly, and perhaps uniquely for IM systems, we are influenced by our fifty years of living and working in Silicon Valley. Of course, the world admires Silicon Valley for its ground-breaking technology and market-leading valuations. But we have observed a set of disciplines here that govern the kinds of opportunities Silicon Valley companies pursue, how they go to market, and how they erect barriers to competition. These approaches seem to be missing in IM systems, and we suggest adding this concept to your IM system if it suits your ambitions. Not every company needs to compete with the FAANGs of the world (Facebook, Amazon, Apple, Neftflix, and Google, now known as Alphabet), but understanding their “secret sauce” is helpful to driving big innovation outcomes.

What are the six dimensions of a strong Innovation Management System?

Based on our meta research, our ISO experience, and our deep Silicon Valley experience, these are the questions any good IM system must answer:

• What is the role of the leadership in innovation?
  • What is leadership’s commitment level and operational involvement in innovation?
  • How satisfied is leadership with the status quo?
  • What is their innovation vision and strategy?
  • How well is the innovation vision aligned with the business strategy?
  • How well does leadership communicate the innovation vision and roadmap to the rest of the organization?

• What is the relationship between the organization and its external environment?
  • To what extent are outside stakeholders involved in innovation?
  • How are trends studied?
  • How quickly are they acted upon?
  • How well does the organization leverage external alliances?

• What resources are available for innovation and how are they allocated?
  • What financial, knowledge and people resources does the organization have, and what do they invest in innovation?
  • How are resources allocated across innovation horizons?
  • What competencies do its people possess?

• What are the recurrent processes used to generate innovation?
  • How does the organization systematically recognize opportunities?
  • How does it generate, refine and select solutions?
  • How does it test and adapt solutions?
  • How does it take solutions to market?
  • How does it adapt and learn from innovation outcomes?

• How are innovation decisions made?
  • At what level are decisions made?
  • Are decisions about innovation priorities and projects made based on data, or on gut?
  • Are the reasons for the decisions transparent?
  • Are decisions aligned with the organization’s stated vision and strategies?

• How are the organization’s people empowered to innovate?
  • How well does the organization support the desired innovation behaviors in its employees?
  • To what degree are the day-to-day mechanics of work aligned with its stated innovation objectives? e.g.:
    • Are employee incentives, job descriptions and time management designed to support innovation? Or must innovation be done outside the system?
    • Are teams formed with innovation competencies in mind?

Beyond these essential six dimensions of IM systems, you can find miscellaneous “bells and whistles,” such as knowledge management, IP management, and the various technologies for managing innovation. However, these six dimensions are the foundation of a strong, yet not burdensome, innovation management system.

Glossary of the 6 Innovation System Dimensions

You can answer the above questions in many different ways based on your organization’s ambitions and strategies. You can then design your own innovation system that suits your situation.

But if your goal is to become an innovation high-performer, we ought to answer these questions based on what innovation leaders do. Innovation leaders produce innovation with greater success than average. So here are our own definitions of these six dimensions, based on innovation leaders’ best practices:

• Innovation Leadership
  Innovation by its very nature requires deviation from the core, mature business. As such, it requires “air cover” from the very top in order to thrive. In the most successful companies, leadership is not just symbolically and intermittently involved in innovation as “side theater.” The C-suite is fundamentally dissatisfied with the status quo and communicates that the organization’s future well-being depends on successful innovation. Leadership not only shows up and gives speeches; they are involved operationally in guiding teams and pushing back against the auto-immune system that rejects innovation inside large organizations. Leadership sets the innovation vision and strategies and communicates them through the entire organization.
• Outside-in Orientation
  Innovation is being forced on many organizations from outside by the accelerating pace of change in their environments. These outside forces not only include rapid technology change, but also changing consumer expectations, political change and even climate change. Successful innovators form external alliances – whether with start-ups, trend services or universities, to mine for trends and make faster progress addressing change. They are structured to maximize the surface area of the organization so that every employee becomes a sensor for opportunities.
• Portfolio Approach
  Gone are the days when continuous improvement and incremental innovation can carry the day. While these core improvements may still deliver the lion’s share of revenue today, complacency can blind you to threats and larger opportunities that can eventually replace your core. Innovation leaders allocate their resources and bets across all four innovation horizons: continuous improvement, incremental innovation (H1), adjacent innovation (H2) and transformational innovation (H3). They know that many of these bets will fail, but the payoff from H2-H3 is much greater than for continuous improvement and incremental innovation.
• Empowering People
  Among innovation leaders, the innovation culture and innovation system are closely aligned to empower people to innovate. The goal of the innovation culture is to nurture your innovators by rewarding the desired innovation behaviors. And the role of the innovation system, the day-to-day mechanics of innovation work, must support, not frustrate, your people and send a consistent message. In these companies, everyone’s KPIs are tied to innovation results. People are given time and resources for innovation. Teams are designed with innovation competencies in mind. Their job descriptions expressly include support for change and innovation as a condition for continued employment. Leadership quickly deals with “blockers” who get in the way of innovation.
• Experimentation and Data
  Consistently innovative companies know that innovation expressly involves a lot of experimentation. Of course, there are industries where this is more difficult, e.g. aerospace and civil engineering. But the idea of rapidly testing components, materials or new approaches permeates the culture. Decisions are made based on data, not hunches. Annual or multi-year budgeting cycles are replaced by much more flexible methods. At the heart of their system is the expectation that not every experiment will lead to success. But as long as the innovators learn something useful, make decisions based on data, and don’t take down the entire ship, they are supported.
• Scale Thinking
  The last and least talked-about element of innovation leaders is the idea that Amazon sums up as, “Get big fast.” Silicon Valley companies not only target massive opportunities (vs fiddling with side notes). They go after large markets with the intent to dominate. That means allocating significant investment, building platforms vs. features, and taking a strategic, pre-emptive approach to intellectual property. They’ll build in defensive business models e.g. exclusive partnerships, network effects, communities (for stickiness), and most of all, they move fast. If they can’t build the crushingly best solution fast enough themselves, they’ll buy it, just as Facebook bought Instagram and WhatsApp, and Google bought the Android operating system. Whether you aim to compete with the FAANGs or not, you can benefit by incorporating Scale Thinking into your innovation system.

How to measure your innovation system

So with the above glossary, we hope you can sketch out the elements of your innovation system. But designing your innovation system is only the first step. As Peter Drucker, the renowned management consultant, once said, “What you don’t measure, you can’t change.” So we recommend that you take a baseline measure of your innovation system, set some goals for change, and then re-measure the system every 6-12 months. How clear is your system today? How well are you upholding the system to start with?

There are a number of innovation system assessments out there. Some are based on research, others more on observation and opinion. In your search for the right system assessment for your organization, be wary of instruments that mix up innovation culture (which is about supporting desired employee behaviors) and innovation system (which is about resource allocation and decision-making).

This is why Swarm measures the eight dimensions of Innovation Culture, and the six dimensions of Innovation System. While part of the same assessment, each is reported separately to help leaders hone in on the exact dimensions that need work. Read more about Innovation Culture here.

Figure 1: Swarm measures the innovation Culture and System separately

When assessing your innovation system, you need a sufficient sample size so the conclusions are credible. Here are some easy rules of thumb for sample size. For any organizational assessment, you need at least a 95 percent confidence level and no more than a +/- 3 percentage point margin of error for the results to be credible. Here are the minimum sample sizes for different workforce populations:

Recommended Sample Sizes
(95% Confidence level, +/- 3 percentage point margin of error)

You can calculate the sample size required for different population sizes here.

Keep in mind that for any “unit” you want to compare to another “unit” (say one business unit or location to another) you need to collect a sufficient sample from each unit for the findings to be reliable. So for example, if you want to compare IT in North America with IT in Europe and they each have 500 employees, you need to sample 341 IT employees in each of the two locations.

In the example below, to compare two locations or functions, each needs to have a stable sample size given the total workforce in the unit.

Figure 2: Swarm innovation system dashboard – Function & Region

Leaders need to reflect on the system assessment findings

Once you’ve measured the innovation system, the next step is for the leadership team to honestly reflect on the findings.

• To what degree is the company’s innovation system aligned with its business strategy?
  • For example, say your business strategy is to be an integrated hardware provider, and your innovation strategy is to be a technology leader. Then your innovation system must be able to quickly procure all of the components necessary to deliver the whole product.
• Are you investing across all four innovation horizons in keeping with your ambitions?
• Is your organization structured to enable an outside-in orientation?
• Why and how did this system evolve?
• What aspects of your innovation system are most developed vs those that are just emerging or nascent?

Figure 3: Swarm innovation system dashboard – Overview

Compare your innovation system to relevant benchmarks

So you assess your innovation system and get some scores. What should you compare your innovation system results to? A good innovation system instrument will provide some sort of rating system based on research. It will allow you to benchmark your organization at least against your sector, and ideally against innovation leaders. But choose your comparisons thoughtfully. If your whole sector is slow to respond to change, what good is it to be 3 percent better than your sector?

Figure 4: Swarm innovation system dashboard vs Benchmarks

Leaders must lead the innovation system change

Once leaders have reflected on the system assessment and applied the relevant benchmarks, they must lead the change. Simply put, change at a system level must come from the top. That is because to create or modify an innovation system across the company can involve decisions with major implications. For example, the company’s very structure may hinder its efforts to drive an outside-in orientation. Employees need to be in contact with outside stakeholders, sensing and exploring trends. Changing the company structure from a top-down organization to, say, a “network of networks” is a major undertaking. Yet it is one that may well pay off in greater agility.

Or, say the company has predominantly invested in continuous improvement in the past. In order to prevent being disrupted from the outside, leadership determines they need to shift some resources to Horizons 2 (adjacent) or Horizon 3 (transformational innovation). Top leadership has to make that call. There will be resistance to this change as it entails exploring adjacent or transformational opportunities where the “rules” are unfamiliar. Indeed, Horizon 3 innovation can pose a threat to the current business model and the company’s current “cash cow.” Consider Kodak, which had lots of intellectual property around digital imaging. But Kodak chose not to pursue digital photography because they feared a future without physical film, their cash cow.

Pay close attention to the employee experience of the system

It is understood that the C-suite can make multi-million dollar decisions and cut through red tape to get things done. But the rank and file usually has to follow a lot of rules and procedures designed to produce predictable results and avoid risk. Naturally, leadership tends to focus on the innovation system that they experience. Leaders may be exempt from some rules, or know how to work the rules. But the rank and file usually has a very different experience.

So be sure to gather feedback on the innovation system throughout the organization. If the innovation system is working, everyone down to the front desk receptionist should be able to innovate, not just the “powers that be.”

Figure 5: Swarm innovation system dashboard – Managers vs Employees

Drive the goals down to KPIs through all levels of the organization

Just because leadership announces a change initiative doesn’t mean the middle will instantly line up. In fact, many middle managers are experts at dodging the “initiative du jour” until it fades away, or a new leader steps in. (See more on blockers and resistors below). Unless a goal is on a manager or employee’s KPIs (or OKRs), don’t expect it to be taken seriously.

In order for change to happen, goals must be tangible and measurable. You must reward leaders, managers and employees alike for meeting the KPIs if you want the behavior change to continue. Carrot and stick can be combined to both encourage the change you want to see and make resistance to change more uncomfortable than the change itself.

Ensure leadership upholds the innovation system

Since the innovation system is driven from the top, leaders must uphold the innovation system in their day-to-day actions. Let’s say leadership has decided to encourage experimentation and data in decision-making around innovation. Then they can’t very well make an opaque decision to randomly kill an innovation that is getting market traction, simply based on a subjective hunch.

This can be inconvenient but the pay-off in employee trust and system effectiveness is incalculable. Now when you ask an employee to make a recommendation, they will know they must come prepared with data, not hunches.

Deal swiftly with resistors and blockers

In any change initiative, you will face resistance. As you launch an innovation initiative, those who repeatedly block, resist or undermine the desired innovation system must be put on notice. You can’t say on the one hand that you want to be an innovation leader while also tolerating these antibodies who actively or passively resist all change. In a study of transformation initiatives across many companies, one of the major errors was not dealing with blockers earlier.

Decisive action (or the failure to take it), says more about how serious you are about the innovation system than 10,000 words. After all, employees watch what we do, not what we say!

Change happens in small moments that can become legendary

As you take the above steps, be sure to celebrate even small successes and progress on the innovation system. Change tends to happen in small moments that can become quite symbolic. You’d be surprised how these stories are passed along among employees and become legendary.

For example, in a recent engagement with the federal government, an employee pursued an innovation on his own by liaising with some other federal agencies. Instead of punishing this action of reaching beyond his responsibilities, his direct boss rewarded the employee’s initiative. Not only did the other agencies support the initiative, but they brought additional resources to bear on it. The initiative advanced, the employee felt supported, and the agency increased its outside-in orientation.

Monitor the innovation system continuously

Famously, Drucker said “What you don’t measure you can’t improve,” spawning the data-fication of everything. It follows that you need to monitor the innovation system regularly. At minimum, you should measure the innovation system annually. How well is the system being upheld, and how well is it producing the kind of innovation you want? Once you have your baseline data, you can assess the organization on a rolling basis to avoid survey burnout.

Summary

To summarize the fifteen key points in this article:

• Innovation requires stewardship, but it should not be crushed under excessive bureaucracy. A strong innovation system should be rigorous, but not overwhelming.
• By “innovation system” we are neither referring to the country or regional level system nor to idea management systems.
• An innovation management system (or IMS) is a set of practices that govern resource allocation and decision-making for innovation. The system’s purpose is to produce more successful innovation than occurs without such a system.
• Numerous studies surface the same half dozen or so elements of an effective innovation management system.
• A strong IM system should answer six questions, and address six dimensions of the system.
• Leaders must lead the innovation system, as any systemic change can have major implications.
• After gathering a baseline system assessment, leaders need to reflect deeply on the system assessment findings and set goals.
• You should track your progress every 6-12 months with a representative sample of the organization.
• Only compare your innovation system to relevant benchmarks.
• Pay close attention to the employee experience of the innovation system.
• All levels of the organization should have KPIs to support the innovation system change.
• Ensure leadership upholds the innovation system in their day-to-day behavior.
• Leaders should deal swiftly with any resistors and blockers.
• Change happens in small moments that can become legendary.
• Monitor the innovation system continuously.

In conclusion, the payoff for a strong innovation system is a stream of high-value innovations reaching the market swiftly, and achieving impact – whether that is financial or societal. Not only will such innovations drive a wedge between you and your competitors in the market, but innovative companies also attract higher quality talent. And last but not least, for every dollar of revenue a company earns, the market valuation for innovative companies is significantly higher – which is why investment in a strong innovation system should be every leader’s priority.