1. How Target built a world-class digital marketing team: Tips from CMO Jeff Jones

    May 7, 2016 by ahmed

     

    Originally posted on Linkedin by Kyle Wong

    Brands create elaborate marketing strategy plans in hopes of attaining that elusive goal: to deliver a great experience that reels customers in and keeps them coming back. Unfortunately, there’s a wide gulf between what brands want to do with digital and what they actually do — because they simply can’t hire enough top-tier digital marketing talent to execute on their visions.

    For example, brands know they should embrace social, visual storytelling, and experiential marketing to connect with Millennials, but they aren’t able to hire the talent who can execute on these emerging trends. Competition for superstar digital marketers is fierce, with companies such as Facebook and Google, as well as deep-pocketed startups, snatching up the best and brightest.

    So how can brands attract the kind of talent they need to stay relevant? Target is a prime example of an established retail brand that does digital marketing well. Target’s stock is trading near its record high and the company has strong revenue growth – and that’s in large part due to a talented marketing team. Target spends well over $1 billion a year on marketing and has over 1,000 team members on its global marketing team. I recently sat down with Target CMO Jeff Jones to find out how his company attracts – and keeps – the best digital marketing talent.

    What’s unique about Target?

    There are four main reasons top digital marketers choose to join Target, according to Jones. First, they know “marketing has a seat at the table.” In other words, marketers at Target feel their work is valuable and their voices will be heard. Second, they know Target is willing to try experimental digital marketing trends – from sponsoring Gwen Stefani’s performance of a live commercial video at the Grammy Awards to the company’s billion-dollar mobile coupon app business, Cartwheel, to the Target Media Network that lets brands connect with Target shoppers online, on mobile, and in-store via creative marketing content. All of these initiatives were conceived and built entirely in-house. Third, at Target, digital marketing isn’t just a cost center. Every program must meet specific revenue goals, making the digital marketing team a strategic part of company growth. Fourth, they know the work they do will reach millions of consumers; more than 30 million people visit Target stores, and 20 million make purchases online, each week.

    Of course, not every company has the pull of Target. So what can you do to attract top digital marketing talent if you aren’t already a multibillion-dollar brand beloved by hundreds of millions of consumers? Jeff has a few tips for any organization looking to snag great marketers.

    Tell your unique marketing story

    You can’t attract great marketing talent if you don’t have a great marketing story. Target is well-known for launching cool campaigns, trying cutting-edge techniques, and building a cohesive brand message. If you’re a small company, you’ll have to work harder to “tell your story” to potential candidates. First, get your CMO involved directly in hiring, sending him or her out on the road to meet potential candidates, give talks, and connect with aspiring marketers at top universities. Use every communications strategy possible to share your company’s passion for cutting-edge marketing – from articles and content, to speeches, videos, and more. Showcase your marketing wins, but also be honest about challenges. The best talent loves to tackle big challenges through new marketing methods. Most important, articulate your company’s vision for the future. Talented, ambitious people want to work at companies with a clear vision to change the world.

    Understand the barriers keeping talent away

    Sometimes, top talent isn’t interested in working for your company for an easy-to-fix reason. Target, for example, realized some go-getters weren’t willing to relocate to the company’s headquarters in Minneapolis, so they opened offices in San Francisco and New York. Other times, marketers stay away because of a deeper problem. For example, one common issue is that companies “silo” their marketing teams into groups such as social, video/TV, online, traditional, etc. But the best marketers don’t want to work in vacuums. They want to work on teams that cross-pollinate ideas, contributing directly to the company’s overall growth. If your marketing teams are fractured, consider bringing everyone together under one division, allowing team members to interact with one another on a daily basis. Jones is convinced Target’s “one big marketing team” is a fundamental reason the company has been so successful in telling a cohesive brand story.

    Think ahead to retention

    Attracting top talent is only the first step – retention is even more important, and far more difficult. Target deals with potential poaching of its top talent on a regular basis, so the company puts a focus on retention. Jones points out that retention can’t be tackled in broad strokes; leaders must take time to truly understand the individual aspirations of each person and help them achieve these goals over time. Always try to spot signs of discontent early, and then work with the individual to create a path forward that makes her feel appreciated, valued, and supported. Of course, what the best talent values is outlined above: a seat at the executive table, being part of a cross-pollinating team, and proof their work contributes directly to the bottom line. Make sure you don’t just promise these “golden tickets,” but actually deliver on them every day.

    Only brands that embrace the newest marketing methods will survive in the next decade. Thus, those companies unable to hire top digital talent will be the first to fail. Even the best digital strategy is moot unless you have digital talent to execute on your vision. Make sure your company is a fantastic place to work for digital marketers and you’ll have a good shot at building a successful marketing organization like Target.


  2. Five key points to consider when developing an innovation strategy

    May 5, 2016 by ahmed

     

    Originally posted on Innovation Management by Wouter Koetzier & Christopher Schorling

    From our talks with innovation management practitioners and business executives it seems that not many organizations have a well-defined and integrated innovation strategy. To find out more about how to go about creating and executing such a strategy, we spoke to Wouter Koetzier and Christopher Schorling at Acceture who encourage a very pragmatic and execution-oriented approach.

    1. When an organization realizes that they need an innovation strategy, what are the five key things they need to consider very carefully when starting to develop it?

    The innovation strategy defines the role of innovation and sets the direction for innovation execution. However, the role of innovation in helping organizations achieve growth targets is often unclear and the revenue growth from innovation is insufficient, unless managed with great rigor. While there is lots of theory about and many good (and not so good) books on innovation strategy, many companies fail to develop and execute an innovation strategy.We work with clients to help them take a very pragmatic and execution-oriented view on this.

    Once we start to work with a client to develop an innovation strategy, we seek to develop a common understanding of the definition of the innovation strategy’s purpose. When we speak about innovation at Accenture, we speak about successfully commercializing new ideas, i.e. inventions with market impact or in other words the notion of innovation = invention x scaling. However, ‘new’ can have different meanings, ranging from new on the world market to new in one specific industry, but already established in another industry, to new to a company or maybe even just new to some of us. The word ‘strategy’ implies that we are talking about something with a potentially large impact on the company, i.e. does not include just a series of incremental product line extensions.

    Based on this understanding, the following are five things that we believe make up a good innovation strategy:

    First, an innovation strategy needs to be truly inspiring and should describe a desirable future state for the company.
    This is a high bar as it rules out a single-minded focus on incremental add-ons to the business. Rather, it requires the organization to aim higher. You have probably often read in literature that the innovation strategy should be derived from the corporate strategy to clearly define how the organization sees opportunities for growth and makes explicit choices about the role of innovation, which is absolutely not wrong. Still, we think that to some extent it should be the other way around. Opportunities and possibilities formulated in an innovation strategy should actually provide input and shape the overall corporate strategy. Invention is done everywhere. In fact, the value that is derived for many large companies by scouting inventions, connecting the dots between many singular ideas and inventions into one big platform innovation and fully scaling it to maximize potential benefits.

    Second, the innovation strategy needs to be ambitious in terms of providing the basis to break away from the competition, beat the competition, and create new spaces.
    Too many innovation strategies that we have seen tend to be “me too” (and mostly incremental). Even if executed according to plan, they fail to deliver the truly sustainable competitive advantages that can only be derived by performing above the overall market growth level and exceeding average profit margins.

    Again, the innovation strategy should aim higher and help the company outpace anybody else in a contested space. If the so-called strategy does not seek to push those boundaries, the strategy in all practicality is probably just a product roadmap of business extensions, not an innovation strategy.

    Third, the process of developing the strategy needs to be open
    Open means bringing the outside in and working under the assumption that the other seven billion people on our planet may have insights that do not exist within a particular company’s boundaries. Even today this is something that many people find hard to accept. One client once joked: “We actually invented the not-invented-here-syndrome in our company.” Companies are settled into the way they innovate.

    The statement above gives you a good idea of how hard it is for companies to open up and avoid merely settling. At the same time, this should not be mistaken as an excuse for failing to come up with a great innovation strategy based on internal ideas and conviction. Being open is just a great way to raise the bar in terms of ambition and to more quickly get to more mature plans. By the way, as opening up the innovation pipeline is not just a matter of mindset, new technologies play an important role in making openness commercially feasible.

    Fourth, an innovation strategy must also be specific to the time in which it is developed
    As it is grounded in the reality of a company’s environment, and it reflects the available capabilities, technologies and gaps that may need to be filled. What do we mean by this? It is important to describe with great precision which specific innovation initiatives should be pursued, and where to invest and compete.
    The strategy should answer a number of questions like: What growth platforms represent the best chances for the company to win in the market? And, what is the rough business case per growth platform? This is the step where the overall risk related to the execution of the innovation strategy should be assessed in the context of the overall company situation. It is not by coincidence but due to the inherent uncertainty that venture capital funds place a portfolio of bets. Still, a corporation should carefully consider how many eggs to put in a single basket. But bear in mind – Mark Zuckerberg recently put it nicely: “The riskiest thing is to take no risks.” (Accompanying Letter to Investors to the United States Securities and Exchange Commission Registration Statement, 2012).

    The innovation strategy also needs to explore possible market developments and scenarios while defining the most attractive market opportunities.

    Finally, an innovation strategy needs to be adaptive and to evolve over time
    Incorporate learning, allow adjustments to the desired course and maybe even allow an organization to cut its losses if required. This typically does not fit with the classic annual corporate planning cycle. An innovation strategy and the respective execution should be capable of adapting the moment there are new insights, even if that requires moving in multiple directions to raise the aspiration you had at the beginning. After all, Rome was not built in a day. Likewise, innovation sometimes requires more time than originally estimated.

    2. How should organizations use an innovation strategy to avoid it just collecting dust on a shelf or simply filling memory on a computer? For example, what can you tell us about steps an organization can take to create the required momentum for executing on the innovation strategy?

    This question may actually imply an approach for developing an innovation strategy that we believe would not be very promising. Sorry for breaking this up, but to some extent it seems to indicate a sequential approach consisting of a strategy development phase decoupled from the execution of the strategy. The criteria associated with a strong innovation strategy as we outlined above consists of being inspirational, ambitious, grounded in reality and adaptive. We like to think of innovation strategy development and execution as a highly overlapping if not integrated process. So, if the innovation strategy meets the criteria above, we believe the strategy is not likely to collect dust on a shelf. But of course, it is not that simple. There are more steps a company should take to create the required momentum.

    The first one is about innovation leadership
    This may sound obvious, but in our experience it is the number one reason for success or failure. The leadership should come from the top – at the very least in the form of active top management sponsorship but better in form of active personal involvement, guidance and inspiration for the respective innovation teams. But, leadership, which can come in different shapes and forms, also is supposed to come from all key members of the innovation team. Not even the most brilliantly articulated innovation idea or plan can compensate the active involvement of a dedicated innovation team. Innovation strategy has to be more than just empty phrases of confession to innovation. It needs high-level commitment of someone who is obsessed with innovation.

    Second, the execution of an innovation strategy needs a home in or outside the organization
    Many believe that innovation is better done in a start-up environment, rather than in a corporation. Indeed, there are many reasons why innovation is not easily executed within a corporate environment, but entrepreneurs know that it is not easy in a start-up either. There are great success stories of corporate innovators (e.g. Apple and Proctor & Gamble) and for every successful startup there are probably five to ten that failed. So, we should not be too simplistic about this. Multiple considerations drive the decision about the optimal home. For example, proximity to the core business, availability of critical talent, and cost synergies should all be considered.

    We recommend following two simple rules: The higher the risk of conflict with the current core business, the more separated your innovation should be from the parent organization; and the more your innovation requires access to existing corporate assets, the less separated it should be from the parent organization. Also, corporations should face the reality that innovating in the context of running an important daily business is virtually impossible. In contrast, management is strongly focused on today’s sales targets and this quarter’s financial results. But, making innovation happen is a full-time job and mostly even a lifetime obsession.

    Corporations should face the reality that innovating in the context of running an important daily business is virtually impossible.

    The third step is about focus and being realistic about how many and which kind of innovation initiatives a company can drive simultaneously
    Even though we recommend paying particular attention to big ideas, we know that the success of disruptive innovations is highly uncertain and understand that it is important for companies, especially large organizations, to have a clear picture of predictable outcomes. No automotive supplier will develop a new product out-of-the-box without already having the demand of an automotive OEM. Overcoming this reality may be the most difficult step an organization must take to successfully execute the innovation strategy.

    Organizations should differentiate between innovations that are developed for existing products; those sold on existing channels to well-known customers with a highly-predictable payoff; and those (disruptive) innovations with an uncertain future and yet the potential for massive payoffs. When Apple developed the first iPhone, they were enthusiastic and obsessed with the idea of how they could transform the mobile phone market, even if they could not predict how successful the product could be. But, what they did is focus and put the effort on one project, the iPhone (‘Steve Jobs’ by Isaacson, 2011).

    We often see companies with too many projects that are too incremental in nature. Leading innovators run a focused portfolio of innovation projects with a conscious risk-growth potential trade-off decision. You need to find a way forward and determine how to avoid the Innovation Death Spiral.

    To do that, companies need to decide which innovation to follow, how to significantly increase their technology success rate and reduce their time to market. One way to achieve that is to open up the innovation process, i.e. embrace open innovation. The opportunity cost of closed innovation is low access to brain power, expertise, existing solutions and problem solving capacity. By contrast, a paradigm shift to open innovation, where companies invite external experts to participate in the innovation process, accelerates and de-risks innovation programs and creates innovation at much lower costs and with a higher probability of finding the right solution.

    Once the context for execution is set up, the focus should be on building the right team. The mix of people required strongly depends on the specifics of the strategy to be executed, but there are a few common requirements – next to the leadership profile already mentioned. The people involved need to find a certain level of excitement and thrill in taking a risk to achieve something big. When one of our clients tried to form a team to go after a substantial technology innovation opportunity in a separate organization the main concern among some of the internal researchers interviewed was, how would the newly created entity pay contributions to their retirement plan. It was easy to see that this mindset would not fit with a highly ambiguous environment. Another interesting question in this context is: How much experience should such a team have? Too much “relevant experience” sometimes stands in the way of approaching something in a new way. So it may be more advantageous to place more experienced people in advisory roles so that the innovation team can take what it believes it needs but is not slowed down in its zeal to explore new paths.

    To conclude, we do not want to create the impression that successfully executing an innovation strategy is deterministically plannable. However, adhering to the principles described above increases the odds of success, even if it does not guarantee success. Smart hard work needs to come together with a bit of luck. Steve Jobs, one of the most gifted innovators of our time, put it like this: “You have to trust in something. Your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life” (Stanford Commencement Speech, 2005). So, place your bets, tilt your odds, and make your luck.

    We often see companies with too many projects that are too incremental in nature.


  3. You need an innovation strategy

    May 3, 2016 by ahmed

    Originally posted on HBR by Gary P. Pisano

    Despite massive investments of management time and money, innovation remains a frustrating pursuit in many companies. Innovation initiatives frequently fail, and successful innovators have a hard time sustaining their performance—as Polaroid, Nokia, Sun Microsystems, Yahoo, Hewlett-Packard, and countless others have found. Why is it so hard to build and maintain the capacity to innovate? The reasons go much deeper than the commonly cited cause: a failure to execute. The problem with innovation improvement efforts is rooted in the lack of an innovation strategy.

    A strategy is nothing more than a commitment to a set of coherent, mutually reinforcing policies or behaviors aimed at achieving a specific competitive goal. Good strategies promote alignment among diverse groups within an organization, clarify objectives and priorities, and help focus efforts around them. Companies regularly define their overall business strategy (their scope and positioning) and specify how various functions—such as marketing, operations, finance, and R&D—will support it. But during my more than two decades studying and consulting for companies in a broad range of industries, I have found that firms rarely articulate strategies to align their innovation efforts with their business strategies.

    Without an innovation strategy, innovation improvement efforts can easily become a grab bag of much-touted best practices: dividing R&D into decentralized autonomous teams, spawning internal entrepreneurial ventures, setting up corporate venture-capital arms, pursuing external alliances, embracing open innovation and crowdsourcing, collaborating with customers, and implementing rapid prototyping, to name just a few. There is nothing wrong with any of those practices per se. The problem is that an organization’s capacity for innovation stems from an innovation system: a coherent set of interdependent processes and structures that dictates how the company searches for novel problems and solutions, synthesizes ideas into a business concept and product designs, and selects which projects get funded. Individual best practices involve trade-offs. And adopting a specific practice generally requires a host of complementary changes to the rest of the organization’s innovation system. A company without an innovation strategy won’t be able to make trade-off decisions and choose all the elements of the innovation system.

    Aping someone else’s system is not the answer. There is no one system that fits all companies equally well or works under all circumstances. There is nothing wrong, of course, with learning from others, but it is a mistake to believe that what works for, say, Apple (today’s favorite innovator) is going to work for your organization. An explicit innovation strategy helps you design a system to match your specific competitive needs.

    Finally, without an innovation strategy, different parts of an organization can easily wind up pursuing conflicting priorities—even if there’s a clear business strategy. Sales representatives hear daily about the pressing needs of the biggest customers. Marketing may see opportunities to leverage the brand through complementary products or to expand market share through new distribution channels. Business unit heads are focused on their target markets and their particular P&L pressures. R&D scientists and engineers tend to see opportunities in new technologies. Diverse perspectives are critical to successful innovation. But without a strategy to integrate and align those perspectives around common priorities, the power of diversity is blunted or, worse, becomes self-defeating.

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    A good example of how a tight connection between business strategy and innovation can drive long-term innovation leadership is found in Corning, a leading manufacturer of specialty components used in electronic displays, telecommunications systems, environmental products, and life sciences instruments. (Disclosure: I have consulted for Corning, but the information in this article comes from the 2008 HBS case study “Corning: 156 Years of Innovation,” by H. Kent Bowen and Courtney Purrington.) Over its more than 160 years Corning has repeatedly transformed its business and grown new markets through breakthrough innovations. When judged against current best practices, Corning’s approach seems out of date. The company is one of the few with a centralized R&D laboratory (Sullivan Park, in rural upstate New York). It invests a lot in basic research, a practice that many companies gave up long ago. And it invests heavily in manufacturing technology and plants and continues to maintain a significant manufacturing footprint in the United States, bucking the trend of wholesale outsourcing and offshoring of production.

    Yet when viewed through a strategic lens, Corning’s approach to innovation makes perfect sense. The company’s business strategy focuses on selling “keystone components” that significantly improve the performance of customers’ complex system products. Executing this strategy requires Corning to be at the leading edge of glass and materials science so that it can solve exceptionally challenging problems for customers and discover new applications for its technologies. That requires heavy investments in long-term research. By centralizing R&D, Corning ensures that researchers from the diverse disciplinary backgrounds underlying its core technologies can collaborate. Sullivan Park has become a repository of accumulated expertise in the application of materials science to industrial problems. Because novel materials often require complementary process innovations, heavy investments in manufacturing and technology are a must. And by keeping a domestic manufacturing footprint, the company is able to smooth the transfer of new technologies from R&D to manufacturing and scale up production.

    Corning’s strategy is not for everyone. Long-term investments in research are risky: The telecommunications bust in the late 1990s devastated Corning’s optical fiber business. But Corning shows the importance of a clearly articulated innovation strategy—one that’s closely linked to a company’s business strategy and core value proposition. Without such a strategy, most initiatives aimed at boosting a firm’s capacity to innovate are doomed to fail.

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    Connecting Innovation to Strategy

    About 10 years ago Bristol-Myers Squibb (BMS), as part of a broad strategic repositioning, decided to emphasize cancer as a key part of its pharmaceutical business. Recognizing that biotechnology-derived drugs such as monoclonal antibodies were likely to be a fruitful approach to combating cancer, BMS decided to shift its repertoire of technological capabilities from its traditional organic-chemistry base toward biotechnology. The new business strategy (emphasizing the cancer market) required a new innovation strategy (shifting technological capabilities toward biologics). (I have consulted for BMS, but the information in this example comes from public sources.)

    Like the creation of any good strategy, the process of developing an innovation strategy should start with a clear understanding and articulation of specific objectives related to helping the company achieve a sustainable competitive advantage. This requires going beyond all-too-common generalities, such as “We must innovate to grow,” “We innovate to create value,” or “We need to innovate to stay ahead of competitors.” Those are not strategies. They provide no sense of the types of innovation that might matter (and those that won’t). Rather, a robust innovation strategy should answer the following questions:

    How will innovation create value for potential customers?

    Unless innovation induces potential customers to pay more, saves them money, or provides some larger societal benefit like improved health or cleaner water, it is not creating value. Of course, innovation can create value in many ways. It might make a product perform better or make it easier or more convenient to use, more reliable, more durable, cheaper, and so on. Choosing what kind of value your innovation will create and then sticking to that is critical, because the capabilities required for each are quite different and take time to accumulate. For instance, Bell Labs created many diverse breakthrough innovations over a half century: the telephone exchange switcher, the photovoltaic cell, the transistor, satellite communications, the laser, mobile telephony, and the operating system Unix, to name just a few. But research at Bell Labs was guided by the strategy of improving and developing the capabilities and reliability of the phone network. The solid-state research program—which ultimately led to the invention of the transistor—was motivated by the need to lay the scientific foundation for developing newer, more reliable components for the communications system. Research on satellite communications was motivated in part by the limited bandwidth and the reliability risks of undersea cables. Apple consistently focuses its innovation efforts on making its products easier to use than competitors’ and providing a seamless experience across its expanding family of devices and services. Hence its emphasis on integrated hardware-software development, proprietary operating systems, and design makes total sense.

    How will the company capture a share of the value its innovations generate?

    Value-creating innovations attract imitators as quickly as they attract customers. Rarely is intellectual property alone sufficient to block these rivals. Consider how many tablet computers appeared after the success of Apple’s iPad. As imitators enter the market, they create price pressures that can reduce the value that the original innovator captures. Moreover, if the suppliers, distributors, and other companies required to deliver an innovation are dominant enough, they may have sufficient bargaining power to capture most of the value from an innovation. Think about how most personal computer manufacturers were largely at the mercy of Intel and Microsoft.

    Companies must think through what complementary assets, capabilities, products, or services could prevent customers from defecting to rivals and keep their own position in the ecosystem strong. Apple designs complementarities between its devices and services so that an iPhone owner finds it attractive to use an iPad rather than a rival’s tablet. And by controlling the operating system, Apple makes itself an indispensable player in the digital ecosystem. Corning’s customer-partnering strategy helps defend the company’s innovations against imitators: Once the keystone components are designed into a customer’s system, the customer will incur switching costs if it defects to another supplier.

    One of the best ways to preserve bargaining power in an ecosystem and blunt imitators is to continue to invest in innovation. I recently visited a furniture company in northern Italy that supplies several of the largest retailers in the world from its factories in its home region. Depending on a few global retailers for distribution is risky from a value-capture perspective. Because these megaretailers have access to dozens of other suppliers around the world, many of them in low-cost countries, and because furniture designs are not easily protected through patents, there is no guarantee of continued business. The company has managed to thrive, however, by investing both in new designs, which help it win business early in the product life cycle, and in sophisticated process technologies, which allow it to defend against rivals from low-cost countries as products mature.

    What types of innovations will allow the company to create and capture value, and what resources should each type receive?

    Certainly, technological innovation is a huge creator of economic value and a driver of competitive advantage. But some important innovations may have little to do with new technology. In the past couple of decades, we have seen a plethora of companies (Netflix, Amazon, LinkedIn, Uber) master the art of business model innovation. Thus, in thinking about innovation opportunities, companies have a choice about how much of their efforts to focus on technological innovation and how much to invest in business model innovation.

    Routine innovation is often called myopic or suicidal. That thinking is simplistic.

    A helpful way to think about this is depicted in the exhibit “The Innovation Landscape Map.” The map, based on my research and that of scholars such as William Abernathy, Kim Clark, Clayton Christensen, Rebecca Henderson, and Michael Tushman, characterizes innovation along two dimensions: the degree to which it involves a change in technology and the degree to which it involves a change in business model. Although each dimension exists on a continuum, together they suggest four quadrants, or categories, of innovation.

    Routine innovation builds on a company’s existing technological competences and fits with its existing business model—and hence its customer base. An example is Intel’s launching ever-more-powerful microprocessors, which has allowed the company to maintain high margins and has fueled growth for decades. Other examples include new versions of Microsoft Windows and the Apple iPhone.

    Disruptive innovation, a category named by my Harvard Business School colleague Clay Christensen, requires a new business model but not necessarily a technological breakthrough. For that reason, it also challenges, or disrupts, the business models of other companies. For example, Google’s Android operating system for mobile devices potentially disrupts companies like Apple and Microsoft, not because of any large technical difference but because of its business model: Android is given away free; the operating systems of Apple and Microsoft are not.

    Radical innovation is the polar opposite of disruptive innovation. The challenge here is purely technological. The emergence of genetic engineering and biotechnology in the 1970s and 1980s as an approach to drug discovery is an example. Established pharmaceutical companies with decades of experience in chemically synthesized drugs faced a major hurdle in building competences in molecular biology. But drugs derived from biotechnology were a good fit with the companies’ business models, which called for heavy investment in R&D, funded by a few high-margin products.

    Architectural innovation combines technological and business model disruptions. An example is digital photography. For companies such as Kodak and Polaroid, entering the digital world meant mastering completely new competences in solid-state electronics, camera design, software, and display technology. It also meant finding a way to earn profits from cameras rather than from “disposables” (film, paper, processing chemicals, and services). As one might imagine, architectural innovations are the most challenging for incumbents to pursue.

    A company’s innovation strategy should specify how the different types of innovation fit into the business strategy and the resources that should be allocated to each. In much of the writing on innovation today, radical, disruptive, and architectural innovations are viewed as the keys to growth, and routine innovation is denigrated as myopic at best and suicidal at worst. That line of thinking is simplistic.

    In fact, the vast majority of profits are created through routine innovation. Since Intel launched its last major disruptive innovation (the i386 chip), in 1985, it has earned more than $200 billion in operating income, most of which has come from next-generation microprocessors. Microsoft is often criticized for milking its existing technologies rather than introducing true disruptions. But this strategy has generated $303 billion in operating income since the introduction of Windows NT, in 1993 (and $258 billion since the introduction of the Xbox, in 2001). Apple’s last major breakthrough (as of this writing), the iPad, was launched in 2010. Since then Apple has launched a steady stream of upgrades to its core platforms (Mac, iPhone, and iPad), generating an eye-popping $190 billion in operating income.

    The point here is not that companies should focus solely on routine innovation. Rather, it is that there is not one preferred type. In fact, as the examples above suggest, different kinds of innovation can become complements, rather than substitutes, over time. Intel, Microsoft, and Apple would not have had the opportunity to garner massive profits from routine innovations had they not laid the foundations with various breakthroughs. Conversely, a company that introduces a disruptive innovation and cannot follow up with a stream of improvements will not hold new entrants at bay for long.

    Executives often ask me, “What proportion of resources should be directed to each type of innovation?” Unfortunately, there is no magic formula. As with any strategic question, the answer will be company specific and contingent on factors such as the rate of technological change, the magnitude of the technological opportunity, the intensity of competition, the rate of growth in core markets, the degree to which customer needs are being met, and the company’s strengths. Businesses in markets where the core technology is evolving rapidly (like pharmaceuticals, media, and communications) will have to be much more keenly oriented toward radical technological innovation—both its opportunities and its threats. A company whose core business is maturing may have to seek opportunities through business model innovations and radical technological breakthroughs. But a company whose platforms are growing rapidly would certainly want to focus most of its resources on building and extending them.

    In thinking strategically about the four types of innovation, then, the question is one of balance and mix. Google is certainly experiencing rapid growth through routine innovations in its advertising business, but it is also exploring opportunities for radical and architectural innovations, such as a driverless car, at its Google X facility. Apple is not resting on its iPhone laurels as it explores wearable devices and payment systems. And while incumbent automobile companies still make the vast majority of their revenue and profits from traditional fuel-powered vehicles, most have introduced alternative-energy vehicles (hybrid and all-electric) and have serious R&D efforts in advanced alternatives like hydrogen-fuel-cell motors.

    Overcoming the Prevailing Winds

    I liken routine innovation to a sports team’s home-field advantage: It’s where companies play to their strengths. Without an explicit strategy indicating otherwise, a number of organizational forces will tend to drive innovation toward the home field.

    Some years ago I worked with a contact lens company whose leaders decided that it needed to focus less on routine innovations, such as adding color tints and modifying lens design, and be more aggressive in pursuing new materials that could dramatically improve visual acuity and comfort. After a few years, however, little progress had been made. A review of the R&D portfolio at a senior management meeting revealed that most of the company’s R&D expenditures were going to incremental refinements of existing products (demanded by marketing to stave off mounting short-term losses in share) and to process improvements (demanded by manufacturing to reduce costs, which was, in turn, demanded by finance to preserve margins as prices fell). Even worse, when R&D finally created a high-performing lens based on a new material, manufacturing could not produce it consistently at high volume, because it had not invested in the requisite capabilities. Despite a strategic intent to venture into new territory, the company was trapped on its home field.

    The root of the problem was that business units and functions had continued to make resource allocation decisions, and each favored the projects it saw as the most pressing. Only after senior management created explicit targets for different types of innovations—and allocated a specific percentage of resources to radical innovation projects—did the firm begin to make progress in developing new offerings that supported its long-term strategy. As this company found, innovation strategy matters most when an organization needs to change its prevailing patterns.

    Managing Trade-Offs

    As I’ve noted, an explicit innovation strategy helps you understand which practices might be a good fit for your organization. It also helps you navigate the inherent trade-offs.

    Consider one popular practice: crowdsourcing. The idea is that rather than relying on a few experts (perhaps your own employees) to solve specific innovation problems, you open up the process to anyone (the crowd). One common example is when an organization posts a problem on a web platform (like InnoCentive) and invites solutions, perhaps offering a financial prize. Another example is open source software projects, in which volunteers contribute to developing a product or a system (think of Linux). Crowdsourcing has a lot of merits: By inviting a vast number of people, most of whom you probably could not have found on your own, to address your challenges, you increase the probability of developing a novel solution. Research by my Harvard Business School colleague Karim Lakhani and his collaborator Kevin Boudreau, of the London Business School, provides strong evidence that crowdsourcing can lead to faster, more-efficient, and more-creative problem solving.

    But crowdsourcing works better for some kinds of problems than for others. For instance, it requires fast and efficient ways to test a large number of potential solutions. If testing is very time-consuming and costly, you need some other approach, such as soliciting a handful of solutions from just a few experts or organizations. Similarly, crowdsourcing tends to work best for highly modular systems, in which different problem solvers can focus on specific components without worrying about others.

    Crowdsourcing is not universally good or bad. It is simply a tool whose strength (exploiting large numbers of diverse problem solvers) is a benefit in some contexts (highly diffused knowledge base, relatively inexpensive ways to test proposed solutions, modular system) but not in others (concentrated knowledge base, expensive testing, system with integral architectures).

    Another practice subject to trade-offs is customer involvement in the innovation process. Advocates of “co-creation” approaches argue that close collaboration with customers reveals insights that can lead to novel offerings. (See Venkat Ramaswamy and Francis Gouillart, “Building the Co-Creative Enterprise,” HBR, October 2010.) But others say that working too closely with customers will blind you to opportunities for truly disruptive innovation. Steve Jobs was adamant that customers do not always know what they want—the reason he cited for eschewing market research.

    Choosing a side in this debate requires the cold calculus of strategy. Corning’s customer-centered approach to innovation is appropriate for a company whose business strategy is focused on creating critical components of highly innovative systems. It would be virtually impossible to develop such components without tapping customers’ deep understanding of their system. In addition, close collaboration enables Corning and its customers to mutually adapt the component and the system. This is critical when subtle changes in the component technology can affect the system, and vice versa.

    But Corning’s demand-pull approach (finding customers’ highly challenging problems and then figuring out how the company’s cutting-edge technologies can solve them) is limited by customers’ imagination and willingness to take risks. It also hinges on picking the right customers; if Corning doesn’t, it can miss a market transformation.

    Crowdsourcing, like other innovation practices, involves trade-offs.

    A supply-push approach—developing technology and then finding or creating a market—can be more suitable when an identifiable market does not yet exist. A good example is the integrated circuit, invented in the late 1950s by Texas Instruments and Fairchild Semiconductor. Both came up with the idea of putting multiple transistors on a chip as a way to solve a reliability problem, not to spawn smaller computers. In fact, with the exception of the military, there was little demand for integrated circuits. Producers of computers, electronics equipment, and telecommunications systems preferred discrete transistors, which were cheaper and less risky. To help create demand, Texas Instruments invented and commercialized another device: the handheld calculator.

    Some pharmaceutical companies, including Novartis (for whom I’ve consulted), explicitly shield their research groups from market input when deciding which programs to pursue. They believe that given the long lead times of drug development and the complexities of the market, accurate forecasts are impossible. (See the 2008 HBS case study “Novartis AG: Science-Based Business,” by H. Kent Bowen and Courtney Purrington.)

    Again, the choice between a demand-pull and a supply-push approach involves weighing the trade-offs. If you choose the former, you risk missing out on technologies for which markets have not yet emerged. If you choose the latter, you may create technologies that never find a market.

    Similar trade-offs are inherent in choices about innovation processes. For instance, many companies have adopted fairly structured “phase-gate” models for managing their innovation processes. Advocates argue that those models inject a degree of predictability and discipline into what can be a messy endeavor. Opponents counter that they destroy creativity. Who is right? Both are—but for different kinds of projects. Highly structured phase-gate processes, which tend to focus on resolving as much technical and market uncertainty as possible early on, work well for innovations involving a known technology for a known market. But they generally do not allow for the considerable iteration required for combinations of new markets and new technologies. Those uncertain and complex projects require a different kind of process, one that involves rapid prototyping, early experimentation, parallel problem solving, and iteration.

    Clarity around which trade-offs are best for the company as a whole—something an innovation strategy provides—is extremely helpful in overcoming the barriers to the kind of organizational change innovation often requires. People don’t resist change because they are inherently stubborn or political but because they have different perspectives—including on how to weigh the trade-offs in innovation practices. Clarity around trade-offs and priorities is a critical first step in mobilizing the organization around an innovation initiative.

    The Leadership Challenge

    Creating a capacity to innovate starts with strategy. The question then arises, Whose job is it to set this strategy? The answer is simple: the most senior leaders of the organization. Innovation cuts across just about every function. Only senior leaders can orchestrate such a complex system. They must take prime responsibility for the processes, structures, talent, and behaviors that shape how an organization searches for innovation opportunities, synthesizes ideas into concepts and product designs, and selects what to do.

    There are four essential tasks in creating and implementing an innovation strategy. The first is to answer the question “How are we expecting innovation to create value for customers and for our company?” and then explain that to the organization. The second is to create a high-level plan for allocating resources to the different kinds of innovation. Ultimately, where you spend your money, time, and effort is your strategy, regardless of what you say. The third is to manage trade-offs. Because every function will naturally want to serve its own interests, only senior leaders can make the choices that are best for the whole company.

    The final challenge facing senior leadership is recognizing that innovation strategies must evolve. Any strategy represents a hypothesis that is tested against the unfolding realities of markets, technologies, regulations, and competitors. Just as product designs must evolve to stay competitive, so too must innovation strategies. Like the process of innovation itself, an innovation strategy involves continual experimentation, learning, and adaptation.