Strategy and Innovation

The following is a paper I wrote on Strategy and Innovation. I only had 2000 words, which made it all the more difficult! I hope you enjoy and look forward to any feedback or criticism.

Strategy

There is much debate as to what strategy is and how to best perform the practical process of formation.  To frame the dichotomy, Mintzberg and Lampel (1999 ; 2005) dissect the various strategic ‘schools of thought’ and divide them into ‘prescriptive’ and ‘descriptive’ categories where the former has more militaristic, analytical and positional origins in the vein of Sun Tsu (2001), Liddell-Hart (1954) and Porter (1980).  The later is categorised into psychodynamics, culture and learning in the spirit of Bion (cited by Tyson 1998), Schein (2004) and Senge (2010).  To simplify, Kiechel (2010, L 257) states, “strategy has gone through three phases over the last sixty years, from position to process to people” (Appendix A; figure 1; 2).

Table 1: Definition of Strategy

    “The direction and scope of an organisation over the long term, which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations.”

Source: (Johnson et al. 2008, p 3)

De Wit and Meyer (2005) follow a similar logic, dividing the strategy into rational/planned versus generative/incremental, with Kim and Mauborgne (2009) defining two strategic approaches, ‘structuralist,’ assuming an uncontrollable environment and ‘reconstructionist,’ assuming a malleable environment.  This is further distilled through Kiechel’s (2010) analysis that the strategy paradox is defined as the struggle between positioning, attributed to Porter (1980, 1985) and organisational learning, attributed to Mintzberg (1994 ; 1985).

Figure 1: The Prescriptive Schools


Source: Mintzberg et al. (2005, p 353)

Figure 2: The Descriptive Schools

Source: Mintzberg et al. (2005, p 353)

The argument posed by theorists is whether strategy is deliberately, rationally planned or emergent, based in creative responses to changing stimuli (Mintzberg et al. 2005) with Kiechel (cited by Mintzberg et al. 2005, p 177) commenting, only 10% of formulated strategies get implemented. Figure 3.

Figure 3: Deliberate versus Emergent Strategies

Source: Mintzberg et al. (2005, p 12)

However there is agreement that strategy is about change, due to more volatility and competition (Kotter 2001), to best deliver a positive organisational future.  This dispute has ramifications on the process of implementing and managing innovation which Kiechel (2010, L 338) describes as the latest evolution of strategy.

Innovation
To contrast, innovation has similar tensions such as technology push or market pull (Johnson et al. 2008).  However there is agreement on innovation types, through more granular explanations of outcomes and strata.  Outcomes feature what could be coined as the five D’s of innovation, including, destruction (Schumpeter 1943), diffusion (Rogers 2003) (figure 4), disruption (Christensen 1997 ; Christensen & Raynor 2003) (figure 5), discontinuous (Skarzynski & Gibson 2008) and democratised (von Hippel 2005).  The strata includes innovation focused on product, process, position and paradigm (Tidd et al. 2005) all of which, the five D’s influence by successfully exploiting change through the social or economic system (Drucker 1985 ; Rogers 2003).

Figure 4: Demographic Based on Innovation Adoption – Diffusion

Source: Rogers (2003, L 5869)

Figure 5: The Disruptive Innovation Model

Source: Christensen & Raynor (2003, L 473)

Tidd et al. (2005, L 6136) describe, “innovation is about learning and change which is often disruptive, risky and costly.”  Whilst Skarzynksy and Gibson (2008, L 913) posit, innovation doesn’t come solely from individual brilliance but is driven by viewing the world through a different set of lenses “to see connections, spot opportunities and take advantage of them” with the aim of reshaping the status quo to create value for the customer (Tidd et al. 2005, L 165–199).  If the customers find value and adopt the innovation, the competition may imitate to neutralise the innovative organisation’s competitive advantage.  If this is the case it will be adopted and adapted to the point that it becomes commoditised and the norm (Christensen 1997, L 2266–2274).

The issue then becomes how does an organisation develop the capability of systematic innovation, purposefully searching for changes and opportunities that might offer social or economic benefit (Drucker 1985, p 34–35), which will be valued by the customer and beat competitors?

Strategy and Innovation Summary

In summary strategy and innovation share common elements (table 2).  An organisation wishing to implement a strategy for innovation has two very different difficulties to overcome.  Strategic formulation needs to cope with issues between the paradoxical natures of planned deliberate strategy versus, emergent generative strategy to allow for innovation.  Innovation management has the difficulty of what is to be managed, how do you manage it and align it to the strategy, what is the culture and how risk tolerant is the organisation?  The organisation needs to consider, what is strategic and what is operational and should they be mutually exclusive or reinforcing?  If innovation is about learning and change (Tidd et al. 2005) then the question to be answered is what comes first and how does the organisation implement an innovative strategy or a strategy for innovation?  Lastly should the organisation be an innovation leader or follower?

Table 2: Common elements shared between strategy and innovation

  • Both require the systematic analysis of the external and internal environments for signs of change in order that appropriate responses can be designed and implemented.
  • Both are forward looking to potentially change or alter a position in the marketplace or create a paradigm that becomes culturally accepted.
  • Both are backward looking to understand how the present and future are influenced
  • Both involve social structures that combine resources to answer a fundamental question, “how does one generate advantage to guarantee sufficient return?”
  • Both are fundamentally about change.
  • Both require social systems to execute change and influence culture
  • Both are about learning from success and failure
  • Both share paradoxical polar extreme challenges.
  • Both share a need for a degree of foresight and extrapolation of future expectations
  • Both can be radical or incremental

The importance of strategy formation to innovation

The old adages of “fail to plan, plan to fail” (Fahey & Randall 1997) and “innovate or die” (Jagersma 2003) are both related to business survival.  Therefore if one were to subscribe to the planning school having importance in strategic formulation, then both strategy and innovation are equally important.

Strategy needs to be the driving force behind innovation practice with Lafley and Charan (2008, p 29) postulating, to implement an innovation culture, strategy comes first followed by ideation and appropriate organisational structures.  De Wit and Myer (2005, p 67) state, strategy formation is an innovation process, which is subversive, rebellious and challenging those who are wedded to the present paradigm.  Strategy without innovation becomes a zero sum game; a strategy of do nothing in the current competitive environment (Kotter 2001) ultimately means a loss of competitive advantage or results in a possible Icarus Paradox (Miller 1992) through missing the inflection/tripping point (Grove 2010 ; Brown 2005 cited by Johnson et al. 2008, p 334). Figure 6.

Figure 6: Strategic Inflection Point

Source: Grove (2010, L 478)

For established businesses continuous strategic and technological renewal is imperative to insure against irrelevance (Hamel 2006) whilst, for new businesses a staircase process of future expectations vital (Berkery 2008 ; Swingler 2010).  Figure 7 and 8 illustrate how both concepts are similar.  Both types of business lifecycle indicate a possible approach to strategy formation and innovation management explored in the next sections.

Figure 7: Funding Strategy in Staircase/Stepping Stone Form

Source: Berkery (2008, L 518)

Figure 8: Technological S Curve

Source: Christensen (1997, L 640)

Differing business views and current issues

Indicated previously, there are many differing views.  However the stage of the business could indicate how strategy formation can influence innovation management.  If the business is new, a predication for first mover advantage (Johnson et al. 2008) is driven by the entrepreneur/innovator(s) who sees the requisite changes, need and timing (Skarzynski & Gibson 2008) to bring their product to market.  Whilst in established businesses, strategy could be based on following or be driven by the concept of intrapreneuring (Pinchot III 2000) to explore the possibilities of entrepreneurial leading to establish something new.

A new business or an intrapreneurial business unit might focus on the product first, then, as the product is diffused and accepted, focus on incrementally improving the process through trial, experimentation and learning (Johnson et al. 2008).  However for established businesses trying to establish innovation, Govindarajan and Trimble (2004, 70) suggest, “conventional planning approaches create barriers to learning.”  This indicates bureaucratic mechanisms such as formal, rote, isolated planning crush innovation (De Wit & Meyer 2005, p 55) and intra/entrepreneurs, the very people who link the opportunity to the market (Drucker 1985) who continually learn about needs, demand and improvement.

An organisation cannot just state that it wants to be innovative with Mintzberg (1994, p 299–300, italics added) linking creativity, a building block of innovation to strategy, “creativity… cannot happen in isolation or on schedule, let alone on demand (any more than can strategy formation, the best of it being just a form of creativity in any event).“  With the establishment that innovation is a component of strategy, a social process for both would be more suitable than an isolated analytical activity where the ideation process is closed (Chesborough 2003).  Barsh et al. (2008) cite, new ideas spur more new ideas with social networks generating a cross-fertilized cycle of innovation.  Their contention is, by utilising existing resources, management might avoid radical in preference for incremental change, which is preferential for stability. Figure 9.

Figure 9: The role of leadership in collaborative environments


Source: Barsh, Capozzi & Davidson (2008)

Skarzynski & Gibson (2008, L 1061) create their own paradox through challenging foresight, by stating that radical innovators are not people who try to predict or imagine the future (i.e. scenario planners) but are people who are aware of things changing in the present but then quote futurist Naisbitt, “the future is embedded in the present.”  The place for traditional analysis (i.e. present) is in areas where innovations sustain a market position.  However this changes when a disruptive innovation defines a potentially new market (Christensen 1997, L 191).  Similarly, at the stage of discontinuity, traditional strategy formulation tools cannot be used because there is no history with which to inform (Lindgren 2009).  This indicates that foresight tools are applicable (figure 10, 11) to develop scenarios that “are not predictions, extrapolations, good or bad futures, or science fiction.  Instead, they are purposeful stories about how the contextual environment could unfold over time” (Burt et al. 2006, p 60).  The main aim of a scenario is to provide contextual and causal data to help the decision making process.

Figure 10: Scenario planning and non-linear, disruptive change


Source: Lindgren (2009, p 29)

Figure 11: Levels of Proactivity

Source: Lindgren (2009, p 15)

The issues facing strategy formation and innovation management are based in the paradoxical nature and similarities between the fields.  The issues are also based in attitude to risk, which is firmly embedded in culture, due to both fields being about change.  Lastly, humankind isn’t infallible.  Some things occur that cannot be predicted with ‘Black Swans’ interrupting a company’s strategy due to the resultant plans failing because of “tunnelling, the neglect of sources of uncertainty outside the plan itself” (Taleb 2008, L 3346).

Strategic management considerations and recommendations

This is a complex area of management, with the hope that this analysis spurs the reader to question their assumptions by incorporating innovation into strategy formation processes to deliver resultant innovation.  The following proposes considerations and recommendations:

  • The organisation must know it’s core competencies (Hamel & Prahalad 1994) in order to develop strategic innovation as a core capability.
  • There must be balance towards the ‘strategy paradox’ (De Wit & Meyer 2005 ; Mintzberg & Lampel 1999 ; Stonehouse et al. 2004 ; Tidd et al. 2005) with each ‘school’ having its place.  Figure 12.  Mintzberg and Lampel (1999) suggest that balance is due to the prescriptive schools being clear and consistent whilst the descriptive schools allowing for experimentation and innovation.  All of the necessary ingredients, refashioned as strategy formation processes delivering needed ambidexterity (Birkinshaw & Gibson 2004).

Figure 12: Strategy Formation as a Single Process

Source: Mintzberg & Lampel (1999, p 27)

  • Strategy focusing on cultural and social elements to deliver innovation is key to long-term success.  Drucker (1985, p 33) cites, technology can be imported at low cost, with minimum cultural risk.  Institutions, by contrast, need cultural roots to grow and prosper.  This suggests, strategy formation should not be the purview of one person or an isolated team but benefit from social structures bringing the outside/operational in, to deliver open, innovative (Chesborough 2003) strategy.
  • Hammer (2004) outlines the concept of iterative or evolutionary innovation similar to Agile software development (Ambler 2005).  For operational innovations that may be championed by members of the lower organizational ranks, a process of evaluation to assess strategic alignment may be necessary (Hammer 2004).  Thus providing the loop and feedback necessary to create learning, so strategy feeds innovation and innovation informs strategy. Figure 13.

Figure 13: Strategic Process – Definition and Implementation for Innovation


Source: Christensen & Raynor (2003, L 2612)

  • Due to the commoditisation of innovation (Christensen 1997) a strategy of creating a portfolio of innovation projects (Skarzynski & Gibson 2008) to ensure, when one reaches tipping point, the overall enterprise maintains its relative position should be implemented.
  • Scenario development should be utilised within the strategy and innovation social structures, due to their value “when it comes to paradigmatic/non-linear change” (Lindgren 2009, p 28)

These recommendations are demonstrable in Apple Inc. deciding on software driven strategy in 2001.  Their hardware is complimentary to the free iTunes software and both are iterated continuously, as they work to lower their prices and offer better performance and features (The-Age 2010).

This strategy has elements of the prescriptive schools and descriptive strategic schools including all of the five D’s and four P’s of innovation.  Simply put, they were first mover in 1993 with Newton, it failed, they learned, they studied pirated software/music distribution, introduced iTunes and the iPod (follower), acquired innovative companies and developed a portfolio of products, including hobbies, waiting for the right time (Ireland et al. 2008).  Lastly, they incorporated taking the long view (Schwartz 1996) and scenario planning in order to shape the future (Lindgren 2009).

Conclusion

The contention is if properly executed, strategy and innovation should be intrinsically linked and self-perpetuating.  Innovation can be symbiotic to strategy at all levels of the formulation process.  The informative nature of both constructs should alert one of threat/opportunity and therefore the other a response.  If this ideal can be realised then continual advantage over ones competition may be attained regardless if one is an innovation leader or follower.

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Appendix A: Mintzberg’s classification of the 10 schools or Strategy

Mintzberg et al. (2005, p 5) single adjective to capture each view of the strategy process:

  • “The Design School: strategy formation as a process of conception
  • The Planning School: strategy formation as a formal process
  • The Positioning School: strategy formation as an analytical process
  • The Entrepreneurial School: strategy formation as a visionary process
  • The Cognitive School: strategy formation as a mental process
  • The Learning School: strategy formation as an emergent process
  • The Power School: strategy formation as a process of negotiation
  • The Cultural School: strategy formation as a collective process
  • The Environmental School: strategy formation as a reactive process
  • The Configuration School: strategy formation as a process of transformation” (Mintzberg et al. 2005, p 5)

Source: Mintzberg & Lampel (1999)

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