Innovation requires deep alignment of executives and the board
Creating a sustainable innovation capability in an organisation is big endeavour that requires strong leadership vision, a vision truly understood and endorsed by the board.
Historically, directors have often been portrayed as blockers of innovation. In the execution of their fiduciary duties, their focus has been on governance and risk management, and that often led to a negative outlook towards any long-term initiative with high uncertainty. Innovation beyond incremental improvement of the core business has often been a hard or even impossible sale in the boardroom. That’s how directors are portrayed by executives in this McKinsey study, where leaders state that the main source of pressure towards short-termism was coming from… their board of directors.
But a more recent study by Linda A. Hill and George Davis observes that “a new contract between boards and management is emerging, making it possible, at last, for directors and CEOs to work together to support and facilitate innovation.”
In the last few years, I have developed an approach to enable that new partnership on innovation between executives and directors. An approach that helps executives and directors better understand disruption risks and strategic opportunities, requirements for exploration of those opportunities, and their respective roles to design and execute corporate innovation.
If often starts with a workshop for executives and continues with a separate one for directors. But for true alignment to occur, you’ll need to have executives and directors together in the same room at one point.
Those workshops are a key element of this approach because they allow enough time and create a safe space to understand:
the radical difference between exploration and exploitation,
the role of executives in designing and nurturing an innovation ecosystem,
the role of directors in supporting and challenging leaders to best leverage innovation as a driver for growth.
In “Are you leaders also ready to lead innovation?” I highlighted some of the most important questions we cover in those workshops from the perspective of leaders.
In this complementary blogpost, I will focus on key questions that usually best contribute to shifting directors’ perspective on risk management and innovation, and ultimately create enthusiasm to have innovation added to the agenda of the board:
What’s different about innovation?
What’s the risk of disruption of your business(es)?
What to do with insights from your assessment?
How to manage exploration of new strategic opportunity areas?
How to turn long-term risks into growth opportunities in a systematic way?
What’s different about innovation?
There are 3 fundamental ideas about innovation that directors should be aware of to guide leaders and organisations investing in innovation as a driver for growth.
The 3 ideas that unlock innovation in large organisations are:
1. Exploration is radically different than exploitation. It requires a mindset, funding approach, process and governance that are fit for the high uncertainty of new business ideas,
2. We should at least differentiate between 3 types of innovation - efficiency, sustaining and transformative innovation – to avoid confusion and have better conversations on innovation,
3. Transformative innovation is a volume game. You need to explore a lot of ideas with initial small bets to maximise the chances of finding the next breakthrough product, service or business model.
What’s the risk of disruption of your business(es)?
With market conditions changing so rapidly, it’s risky for leaders to get disconnected from the environment. Still, that’s what often happens. Leaders’ time and energy can be entirely focused inside the company.
Directors should ensure that leaders are tuned in to their business environment, and aware of emerging risks and opportunities.
The business model environment tool introduced in Business Model Generation by Alex Osterwalder & Yves Pigneur in 2010 and the corresponding workshop on How To Scan Your Business Model Environment For Disruptive Threats And Opportunities provides a simple framework for leadership teams to look outside of their business and tap into their collective awareness to assess the main opportunities and threats their business model is facing.
McKinsey reports that 80% of executives think their business model is at risk. Directors should also ensure that leaders are systematically measuring the risk of disruption of their business(es).
For that, leaders can use the disruption risk assessment tool we introduced in The Invincible Company. It uses close observation of current performance indicators and anticipation of future events in the business model environment, to help leaders assess the disruption risk of their business model(s).
What to do with insights from your assessment?
Once disruption risk is made explicit and visible, leaders can more easily align on the most appropriate course of actions, set the right priorities, and ultimately avoid the costly crises that a lack of anticipation leads to.
Actions in the Exploit portfolio such as launching projects to improve a business, preparing a divestiture or an acquisition come naturally to most leadership teams. But insights from the environment can also crystalise in a new vision and new strategic opportunity areas to explore.
Directors should support and challenge leaders to translate gathered insights from the assessment into an explicit strategy with actions in the Exploit portfolio AND clear guidance for the Explore portfolio.
How to manage exploration of new strategic opportunity areas?
Managing innovation with the mindset, toolkit and processes of the exploit world is one of the main reasons why so many leaders struggle to deliver the outcomes they expect from corporate innovation.
Directors should not let leaders fall into that common trap. To maximise chances to create value from the exploration of new strategic opportunity areas, Directors should challenge and support leaders to set up a process and governance specific to managing an innovation funnel, a governance fit for the high uncertainty of innovation projects.
How to turn long-term risks into growth opportunities in a systematic way?
Turning disruption risks into growth opportunities is not a one-off project, not even a one-off funnel of projects. This will require leaders to commit for the longer term as they develop and nurture an innovation ecosystem. An organisation’s innovation ecosystem is the unique combination of the organisation’s:
Explore portfolio balancing efficiency, sustaining and transformative innovation projects, and the framework used to manage them,
Innovation programs (an innovation lab, corporate venture capital, an intrapreneurship program, etc.)
Exploration culture.
Directors should support and challenge leaders to build an innovation ecosystem that can deliver innovation outcomes in a repeatable way. “Why you need an innovation ecosystem?” and “how to nurture it?” are often poorly understood at the outset and require ongoing alignment. This won’t be a quick fix, executives and directors should allow the required time. It will represent a significant investment of time and resources, yet an innovation ecosystem is still the best way to manage an organisation’s exposure to mid to long-term risks, like an insurance policy against disruption. When leaders and directors start looking at risks across multiple time horizons (short-term, mid-term, long-term) they realise that the riskiest scenario is almost always not having an innovation ecosystem. Unless of course they know for a fact that the current business will live forever.
Short-term performance and long-term resilience
To enable both short-term performance and long-term resilience, executives and directors should align on a dual mode of interaction with a new role for them when it comes to innovation. They should embrace a new partnership to grow and improve the core business(es) and at the same time be the custodians of a shared long-term vision. This requires a dual governance, explore vs. exploit. And a rebalanced risk management approach, where directors and executives look at mid to long-term disruption risks with open eyes and use corporate innovation as the vehicle to manage those risks and turn them into growth opportunities.
All this could start with a simple change that would create regular opportunities for those strategic conversations. If it’s not there already, how about adding a health check of your innovation ecosystem as a regular agenda item of the board?
