Steinbeis experts develop software for achieving the right balance in innovation projects
There are two approaches to innovation that – purely by themselves – are not really an option for innovation-centric companies: exploitation and exploration. For innovation to be viable in the long term, a healthy balance needs to be achieved between the two: innovations based on improvement and actual product innovations. Considerable innovations in the past, often based on close customer relationships and well-versed teams of innovators, typically lead to exploitative forms of innovation projects. These gradually entice companies into a “success trap” and pose a threat to their market standing. It is possible to address or even avoid such innovation imbalances, however, by fostering individual creativity among the members of innovation teams. Prof. Dr. habil. Achim Walter and Gerrit Jochims, two Steinbeis entrepreneurs from Kiel, have been working with two software specialists to develop a special software solution.
One question firms constantly have to deal with is whether the right way forward for them in safeguarding the future will be to engage in exploitative innovation or exploratory innovation. Both approaches have their merits and both forms of innovation can to a certain extent also run in parallel. The aim with exploitative innovation projects is to safeguard the company’s current chances of survival, usually by working on smaller innovation steps, so-called incremental innovation. For example, a firm can carry out ongoing improvements and optimizations to products and services it has already launched. The idea here is to exploit the development, production, and sales resources that exist within the enterprise, or in other words make gains through creative ideas derived from efficiency advantages. The idea with exploratory innovation is to safeguard future viability by entering new markets. To do this, products and services are needed which are capable of offering high levels of functional novelty. If an offering delivers significantly enhanced customer benefit and the knowledge used to achieve this is also highly novel, this is sometimes referred to as radical innovation.
Unilateral exploitation and exploration lead firms into certain skill traps from which they find it difficult to extricate themselves, putting the long-term existence of the business at risk [1]. Numerous empirical studies into innovation practices [2] confirm that the right recipe for the long-term success of an innovation-centric business is to strike the right balance between exploitation and exploration. That sounds like simple advice, but it does not go without saying that it’s always possible.
The task facing managers is to ensure they continually weigh up how much they want to engage in which type of innovation and when. The recommendation that Achim Walter and Gerrit Jochims give to companies is that they should already start thinking about the right balance between different types of innovation when developing original concepts. Innovation-centric companies should under no circumstances channel resources exclusively into exploitative projects, at least not in the medium to long term. Instead, between 40% and 60% of resources should be placed into exploratory development projects. Companies that are successful in the long term are in a position to replace their offering or top it up with innovations at a time they do not yet depend on the profits of recently developed products or services. Adding to or discontinuing products that used to be innovative – by offering new solutions to problems – frequently happens in niche markets, which are initially underestimated by the majority. Exploratory innovation should therefore be planned early and carefully. Investments in incremental product innovations (product adaptations, updates, and improvements) and corresponding innovations that save money in production must not negatively affect a company’s ability to come up with product innovations that are clearly distinguishable from those of the competition (through fundamental research and experimental development).
The most common skill trap companies are likely to fall into when they are innovation-centric is the success trap. Companies tend to introduce exploratory innovations as a follow-up to bigger innovations that were already successful. These are much less risky and can relatively quickly bring money back into the company and build robust relationships with clients. As a result, having already gone in the direction of exploitative innovation, firms discover further improvements and adaptations, and this results in a process whereby they slip into the success trap. If there is a predominance of exploitative innovation over exploratory innovation in a company over an extended period, this prevents a firm from acquiring new skills and identifying new selling opportunities. The company finds itself out of kilter in terms of skills development, a situation that often goes unrecognized – as do the long-term consequences for the business. In the majority of cases this imbalance is even consciously accepted (the Innovator’s Dilemma). Once a company finds itself out of kilter, this can be a particularly precarious situation, since the people who hold responsibility in key areas tend to keep doing things the same way they always have. Indeed, this was once successful.
Previous experience and knowledge from the past in the heads of developers and decision-makers usually define the direction of innovation within a company. Such knowledge forms the basis of things that are considered important and what should be learned further down the line. The more comprehensive the previous knowledge or the experience people have had with past innovation projects, the more likely a firm is to keep pursuing the approach to innovation it has already learned. Especially in the early phases of an innovation process, when people are generating ideas, companies are particularly prone to entering into selfreinforcing learning processes that keep them within traditional comfort zones. Afterwards, it’s not uncommon for them to find themselves in a success trap, or their business models start disintegrating.
The strategic focus of a business also dictates the dominant approach to learning and innovating. A business strategy that revolves closely around efficiency only rewards companies in a position to implement routines as specialists who really know the ropes. They are effective at drawing on existing knowledge and directly accessible resources when coming up with new and innovative ideas. The special ability to correctly assess new technological developments and knowledge held by external partners gradually trickles away. If a firm adheres rigidly to focusing on efficiency, it’s almost predestined to fall into a success trap. Older and larger companies in particular often become too rigid when it comes to their core competences, time and again going through a rehearsed repertoire to enjoy the benefits of their economies of scale. The approach obscures the outlook of employees and their perception of new developments beyond traditional markets.
Companies are most likely to engage in exploratory innovation if they access the individual creativity of employees and make full use of it. In practice, there’s a tendency for people working on new product developments to be thrown together to form innovation teams. Creative ideas are often then the result of a process of re-merging individual knowledge circulating within innovation teams, or sometimes around them. As the personal ties between people in an innovation team grow stronger and the pressure to conform mounts, this increasingly prevents team members from fully unleashing their individual potential to work creatively – which in turn stifles individual creativity [3]. The companies that are particularly prone to this happening have a manageable number of experts and decision-makers. The people at such companies are almost inevitably brought back to work in innovation teams on a regular basis. As a result, they get to know each other even better and develop close personal ties. When innovation teams work together over an extended period and can look back on earlier successes, a certain pressure develops to conform. In such teams, creative “deviators” are sometimes stigmatized (“We never do it that way”, “You’ll never get that signed on to”), or people sanction them through social isolation. If people want to make things happen with their innovative product developments, knowing the right people will be advantageous, because this helps to pull valuable resources on board and form groups when it comes to decision-making. However, close personal ties between team members are generally a drawback when it comes to coming up with novel and useful concepts. As a result, people develop tunnel vision because they accumulate redundant knowledge. Adopting new approaches to solving problems requires knowledge in different forms and varieties so that it can be combined in the right way. Peer pressure results in teams routinely agreeing to the same things, and people are less willing to take risks. This is reflected by general consensus, and completely novel ideas are often simply nipped in the bud. There is an interesting term for this phenomenon, confirmed by insights gained from research into innovation projects: groupthink [4].
So what can companies and management do to avoid or diminish the negative effects of people sliding into such close relationships? According to Achim Walters and Gerrit Jochims, one good way to get out of the success trap is to staff innovation teams in such a way that they reflect what’s called deep-level diversity. A team marked by plenty of diversity makes it much easier to keep knowledge circulating within the team without redundancy, even if team members do know each other well. In addition, such teams are much better at coming up with creative ideas and entering into constructive debate. To bridge the gap between the recommended approach and typical practice with innovation projects, Achim Walter and Gerrit Jochims draw on support from innovation software they developed with two software specialists. The solution of the two Steinbeis directors was based on scientific findings. Their concept management software makes relevant development processes and results measurable as early as the initial stages of an innovation project. Measurements can be compared with other concepts and this makes processes more tangible. It also makes it much easier for a company to strike the right balance between exploitation and exploration in the innovation portfolio and maintain this situation in the long term.
Sources:
[1] cf. Levinthal & March, 1993, The Myopia of Learning. In: Strategic Management Journal, 14, pp. 95-112
[2] e.g. He & Wong, 2004: Exploration vs. Exploitation: An Empirical Test of the Ambidexterity Hypothesis. In: Organization Science, 15, pp. 481-494
[3] cf. e.g. Perry-Smith, 2006, Social Yet Creative: The Role of Social Relationships in Facilitating Individual Creativity. In: Academy of Management Journal, 49, pp. 85-101
[4] cf. Janis, 1972. Victims of Groupthink. Houghton Mifflin, New York
Contact
Prof. Dr. habil. Achim Walter
Steinbeis Consulting Center COMMITT (Kiel)