“Innovation: Imagine the future and fill in the gaps.” — Brain Halligan
You can master innovation better if you know what innovation is.
I’ve learned a lot about innovation over 25 years of Microsoft and as head coach for Satya Nadella’s innovation team.
One of the most important things I did was to create a process for business innovation at Microsoft.
I think of innovation as applied creativity to create new value.
Innovation is a skill to use your creativity to create meaningful impact.
You can also think of innovation simply the introduction of something new.
In a business context, innovation is the adoption and realization of new ideas in the market.
What I Learned at Microsoft About Innovation
During my time at Microsoft, I had the incredible opportunity to lead innovation at the highest levels. Here are the key lessons and contributions I made as head coach for Satya Nadella’s innovation team:
- Created the Book of Dreams:
- A framework to drive business innovation globally across industries.
- Helped leaders reimagine how to create and capture value while aligning teams around a shared vision for the future.
- Taught “Imagine If” Statements:
- Empowered teams to envision better future states and define aspirational outcomes.
- Simplified the process of ideation and planning by focusing on creativity and possibilities.
- Introduced Agile Innovation:
- Combined creativity with rapid iteration to accelerate innovation cycles.
- Helped teams quickly test, learn, and scale ideas while staying customer-focused.
- Shared Trends, Stories, and Insights:
- Regularly provided Satya Nadella and Microsoft leaders with actionable insights to stay ahead of industry changes.
- Enabled better decision-making by connecting emerging trends to business opportunities.
- Inspired Business Innovation Across Industries:
- Worked with leaders to anticipate future challenges and turn them into opportunities.
- Helped teams design strategies to bring innovative ideas to life and make a lasting impact.
These experiences taught me that innovation is not just about creating something new—it’s about creating something meaningful that redefines the game.
What is Innovation?
Innovation is the process of creating new ideas, methods, or products to solve problem or improve existing things. It can also involve approaching existing ideas in new ways.
One way I define innovation is like this:
“Innovation is the creation of new value through applied creativity.”
What I like about defining innovation in this way is that it reminds us that innovation is a skill and it’s a way to apply creativity to create new value.
A simpler and broader way I define innovation goes like this:
“Innovation is the introduction of something new.”
In a business context, I tend to define innovation more like this:
“Innovation is the adoption of new ideas” or “Innovation is bringing new ideas to life in the market.”
Whether it’s a new approach, a new process, a new product, a new idea, a new way of doing something, the key to me is that innovation is applying creativity to create new value.
And of course, some innovations are accidental discoveries (like when 3M created Post-Its / sticky notes, while trying to create a better, stronger, tougher adhesive).
What Does Innovation Involve?
- Idea generation: Coming up with new ideas and concepts.
- Creativity: Thinking creatively and brainstorming ideas.
- Transformation: Turning creative ideas into tangible outcomes.
- Implementation: Putting new ideas into practice.
Innovation Definitions
Here are a few more ways to define innovation:
- “An innovation is often a new product, but it can also be a new way of doing something or even a new way of thinking.” — Dictionary.com
- “Innovation, for its part, can refer to something new or to a change made to an existing product, idea, or field.” — Merriam-Webster
- “A new idea or method, or the use of new ideas and methods.” — Cambridge English
- “The introduction of new things, ideas or ways of doing something.” — Oxford Dictionary
- “A new or changed entity realizing or redistributing value.” — ISO TC 279 in the standard ISO 56000:2020
I also like how Robyn Bolton, founder of MileZero, defines innovation in a simple way:
“Innovation is something different that creates value.”
How McKinsey Defines Innovation
McKinsey has a few pragmatic definitions of innovation for a business context:
“Innovation is the systematic practice of developing and marketing breakthrough products and services for adoption by customers.”
McKinsey’s longer version of what is innovation goes like this:
“In a business context, innovation is the ability to conceive, develop, deliver, and scale new products, services, processes, and business models for customers.”
Sustaining Innovation and Disruptive Innovation
In the world of business innovation, we can simplify things into two main categories: sustaining and disruptive innovation.
- Sustaining Innovation: Think of this as the “improve and stay competitive” type of innovation. Established companies use sustaining innovation to make their products or services better for their current customers. It’s like a continuous upgrade to keep their top position in the market.
- Disruptive Innovation: Now, this is where smaller players challenge the big dogs. There are two flavors here:
- Low-End Disruption: This is when companies dive into an existing market and grab a piece of the action at the lower end. They’re not aiming for the premium customers but focusing on a more budget-friendly segment.
- New-Market Disruption: Here, companies create entirely new markets. They’re serving customers that the current market hasn’t reached. It’s like opening up a new frontier.
The smartest companies out there don’t pick one or the other; they blend both sustaining and disruptive innovation.
Why?
Because while keeping your existing market strong is vital, you also need to grow and protect your turf from newcomers.
It’s the winning combo for staying competitive and ahead of the game.
3 Types of Innovation: Incremental, Radical, and Revolutionary
To keep it simple, there are 3 types of innovation.
The 3 types of innovation are incremental, radical, and revolutionary:
- Incremental Innovation – It refers to small, gradual improvements made to existing products, services, or processes.
- Radical Innovation – This type of innovation involves a more significant change, a departure from the existing norms and can result in the creation of new markets and industries.
- Revolutionary Innovation – This type of innovation involves a complete overhaul of existing systems and can lead to significant disruption and transformation of entire industries and markets.
While the three types of innovation provide a nuanced view of innovation within an organization, they can be mapped to the broader concepts of sustaining and disruptive innovation.
Sustaining innovation focuses on improving existing offerings, while disruptive innovation encompasses radical and revolutionary changes that can reshape industries and markets.
The classification of innovation types can vary based on perspective and context, but the core distinction lies in the degree of impact and change they bring to the market.
10 Types of Innovation
The “Ten Types of Innovation” framework was developed by Doblin, a global innovation firm.
This framework categorizes innovation into ten distinct types, each focusing on different aspects of a business or organization.
Here are the ten types of innovation:
- Profit Model: This type of innovation focuses on how the company makes money. It involves changes in pricing, revenue streams, or cost structures.
- Network: Network innovation is about creating and maintaining connections with others. This includes partnerships, alliances, and collaborations that enhance your business ecosystem.
- Structure: Structural innovation relates to the organization’s internal setup. It involves changes in roles, responsibilities, and workflows to improve efficiency and effectiveness.
- Process: Process innovation targets how work is done. It seeks to streamline operations, eliminate inefficiencies, and enhance productivity.
- Product Performance: This type involves improving the core features and functions of a product or service to meet customer needs more effectively.
- Product System: Product system innovation looks at how complementary products and services can enhance the customer experience. It involves bundling or integrating offerings.
- Service: Service innovation focuses on enhancing the customer experience. It may involve improvements in customer support, service delivery, or other aspects of customer interaction.
- Channel: Channel innovation looks at how you deliver your products or services to customers. It explores changes in distribution, sales, and delivery channels.
- Brand: Brand innovation is about shaping perceptions and building a strong brand identity. It involves changes in messaging, storytelling, and brand image.
- Customer Engagement: Customer engagement innovation focuses on creating deeper connections with customers. It seeks to improve customer loyalty and satisfaction through various means.
This framework helps organizations think systematically about innovation and identify opportunities for growth and differentiation across these ten dimensions.
Business Model Innovation
Business model innovation refers to the process of fundamentally changing and improving the way a company creates, delivers, and captures value.
Unlike product or service innovation, which focuses on enhancing specific offerings, business model innovation reimagines the entire structure and approach of an organization to achieve competitive advantage, sustainability, and growth.
Business model innovation can lead to disruptive changes in industries and markets, as seen in examples like Uber’s ride-sharing platform, Netflix’s shift from DVD rentals to streaming, and Airbnb’s transformation of the hospitality industry.
It requires organizations to challenge traditional assumptions, embrace experimentation, and be open to redefining their core strategies for sustained success.
Managed vs. Unmanaged Innovation
Managed innovation refers to the process of deliberately and systematically planning and implementing new ideas and improvements within an organization.
This approach is characterized by a top-down management style, where senior leaders make decisions about what areas of the business should be targeted for innovation and set the overall strategy for innovation.
The process of managed innovation is often structured, with defined roles and responsibilities, budget, and timeline for completion.
On the other hand, unmanaged innovation is a bottom-up approach, where employees are encouraged to come up with their own ideas and initiatives.
This type of innovation is less structured and may not have a clear plan or timeline. It can emerge from employees’ day-to-day work, spontaneous brainstorming sessions, or through internal innovation challenges and hackathons.
The focus is on creating an environment where employees feel free to share their ideas and collaborate with others, leading to the emergence of new and innovative solutions.
Both managed and unmanaged innovation can play an important role in driving growth and competitiveness for organizations, and many companies adopt a combination of both approaches to achieve their innovation goals.
Innovation is a Top Priority for Executives
Innovation is often a top priority. Executives often report it in the top 3 or top 5 initiatives, especially when their organization is struggling with big challenges or growth.
The most common drivers for innovation are:
- New technologies
- New customer expectations
- The need for cost efficiency
- The emergence of new business models
You Need Innovation to Future-Ready Your Business
You need innovation to future-ready your existing businesses while designing and launching new ones.
In order to secure a strong future, it’s crucial to both protect existing businesses and bring new, innovative ones to life.
This is where the power of innovation comes into play.
By embracing change and continuously pushing the boundaries, businesses can not only withstand the test of time, but also create a brighter, more exciting future for themselves and their customers.
Leaders Struggle with Innovation
Innovation is the key to success in today’s fast-paced world, but it’s not always easy to get it right.
Many business leaders believe in the power of innovation but struggle to get their innovative efforts right.
Many companies are good operators, but not good innovators.
Established businesses are great at running their day-to-day operations, but not so great at thinking outside the box and coming up with the next big thing.
Instead, they stick to what they know best and focus on improving their core business.
But imagine the possibilities if you could change this!
The opportunity is to create a future where innovation is a way of life.
How Can Leaders Decide What Innovations to Prioritize?
Leaders can prioritize innovations by considering several factors:
- Strategic Synergy: To lead with innovation, align it with your strategic compass. Every innovation should resonate with your organization’s overarching strategy, mission, and objectives. This ensures that your efforts contribute to your greater purpose.
- Market Magic: Don’t innovate in a vacuum. Keep your finger on the pulse of market demand. Your innovation should squarely address a genuine challenge or opportunity that matters to your target audience. It’s about solving real-world problems and meeting the needs of your customers.
- Financial Fortitude: Innovation isn’t just about bright ideas; it’s about the bottom line. Assess the financial impact of your innovation. It should contribute positively, either by opening new revenue streams, cutting costs, or ideally, both. Sustainable innovation pays dividends.
Innovation isn’t an end in itself but a means to gain a competitive edge, driven by your organization’s unique strengths.
It should be technically feasible, well-timed to market dynamics, and assessed for risks.
When all these factors align, you’re poised for transformation.
How Do Organizations Get Better at Innovation?
McKinsey outlined attributes and behaviors that drive exceptional innovation performance, conducting extensive research and validating their findings through real-life case studies at hundreds of companies.
The result of their efforts was the identification of eight crucial elements of innovation that organizations must master to excel in innovation.
Here’s what they found:
- Aspire: Do you regard innovation-led growth as critical, and have you put in place cascaded targets that reflect this?
- Choose: Do you invest in a coherent, time- and risk-balanced portfolio of initiatives, and do you devote sufficient resources to it?
- Discover: Are your business, market, and technology R&D efforts actionable and capable of being translated into winning value propositions?
- Evolve: Do you create new business models that provide defensible, robust, and scalable profit sources?
- Accelerate: Do you develop and launch innovations quickly and effectively?
- Scale: Do you launch innovations at the right scale in the relevant markets and segments?
- Extend: Do you create and capitalize on external networks?
- Mobilize: Are your people motivated, rewarded, and organized to innovate repeatedly?
In another perspective, Dr. Marc Sniukas, a strategy advisor, outlines 4 steps you can take to close these innovation gaps.
The key points are:
- Define your ambitions and set your innovation strategy.
- Accelerate innovation projects and initiatives.
- Build your innovation operating system.
- Activate innovation capabilities throughout your organization.
Let’s step into building an innovation operating system…
How Can You Improve the Volume, Value and Velocity of New Ideas?
Here are some strategies that your organization can implement to improve the volume, velocity, and value of new ideas:
- Promote a Culture of Fearless Innovation: Cultivate an environment where employees are not only encouraged to share their unique ideas but also feel safe doing so, fostering a culture of creativity and innovation.
- Foster Cross-Pollination: Encourage collaboration between diverse teams, bridging departmental gaps, and fostering the exchange of ideas. This diversity can lead to fresh perspectives and groundbreaking solutions.
- Empower and Support Idea Development: Provide the necessary tools, training, and resources to support employees in transforming their innovative ideas into tangible outcomes, while also recognizing and rewarding both successful innovations and the lessons learned from failures.
What is an Innovation Portfolio?
An innovation portfolio refers to a collection of the different innovation initiatives and projects that an organization is pursuing or plans to pursue.
It can include a wide range of projects, from incremental improvements to existing products and services, to new and disruptive innovations.
The purpose of an innovation portfolio is to help organizations prioritize their innovation efforts and allocate resources effectively.
By having a clear view of all their innovation initiatives, organizations can make informed decisions about which projects to pursue, how to allocate resources, and how to measure progress.
Additionally, an innovation portfolio helps organizations ensure that they have a balanced mix of projects, including both short-term and long-term initiatives, as well as initiatives that address both current and future needs.
3 Levels of Innovation Investment (Innovation Ambition Matrix)
How do you think about the broad strokes of your innovation investment?
In the article, Managing Your Innovation Portfolio, Bansi Nagji and Geoff Tuff share The Innovation Ambition Matrix.
The Innovation Ambition Matrix specifies 3 levels of innovation investment:
- Core: Optimizing existing products for existing customers.
- Adjacent: Expanding from existing business into “new to the company” business.
- Transformational: Developing breakthroughs and inventing things for markets that don’t exist yet.
The Innovation Ambition Matrix is a valuable tool for managers as it provides a framework to survey all ongoing innovation initiatives and determine the company’s overall ambition for its innovation portfolio.
How To Use the Innovation Ambition Matrix
The two primary use cases of the Innovation Ambition Matrix are:
- Provides a framework to survey all ongoing innovation initiatives. How many innovation initiatives are being pursued in each realm? How much investment is going into each? The Innovation Ambition Matrix allows managers to assess the number of initiatives being pursued in different realms and the amount of investment being allocated to each type of innovation.
- Determine the company’s optimal level of innovation. What should the overall innovation investment ambition be? The Innovation Ambition Matrix provides overall a way to frame the discussion around the company’s ambition for its innovation portfolio and optimal level of innovation. For instance, a consumer goods producer may prioritize small extensions to existing product lines, while a high-tech company may focus on bold innovations with the potential for greater rewards.
The matrix’s true strength lies in its ability to facilitate important discussions and guide decision making, as few organizations take the time to consider the best level of innovation for their specific needs, let alone achieve it.
10% Growth for Sustainable Innovation, 70% Growth for Disruptive innovation
The return ratio from innovation investment is usually inversely proportional to the ideal allocation, with transformational efforts contributing 70% of the long-term cumulative return, adjacent initiatives contributing 20%, and core innovation efforts contributing only 10%.
In the HBR article, Managing Your Innovation Portfolio, Bansi Nagji and Geoff Tuff write:
“Management knows it and so does Wall Street: The year-to-year viability of a company depends on its ability to innovate. Given today’s market expectations, global competitive pressures, and the extent and pace of structural change, this is truer than ever…
We’re finding consistently that the return ratio is roughly the inverse of that ideal allocation described above: Core innovation efforts typically contribute 10% of the long-term, cumulative return on innovation investment; adjacent initiatives contribute 20%; and transformational efforts contribute 70%.”
What is a Portfolio of Initiatives?
The McKinsey portfolio-of-initiatives framework is an enduring idea that provides a flexible and adaptive approach to strategy development in an ever-changing and uncertain environment.
Traditional business strategy techniques are based on the assumption of a predictable future and rely on making informed projections about market trends, technological advancements, and regulatory changes.
However, in a rapidly evolving and uncertain world, this approach becomes inadequate.
The portfolio-of-initiatives framework, introduced by Lowell Bryan of McKinsey in the early 2000s, offers a dynamic solution for strategy development in a fluid and unpredictable environment.
The framework incorporates concepts such as the three horizons of growth and the levels of uncertainty proposed by Hugh Courtney.
In his article, “Just-in-time strategy for a turbulent world,” Bryan likens the portfolio to a convoy of ships during wartime, where the diversity and number of ships increase the survival chances of each individual ship.
The portfolio-of-initiatives framework considers two key factors:
- familiarity
- time.
Initiatives that leverage a company’s unique knowledge base and offer a competitive advantage in terms of familiarity deserve the greatest investment of resources.
These initiatives offer the potential for superior rewards with a given level of risk.
Subsequently, initiatives that necessitate acquiring new knowledge should also be pursued.
How To Implement a Portfolio of Initiatives
In order to maximize current returns and establish a foundation for future growth, it is crucial to have a balanced portfolio of initiatives over time.
To implement the portfolio-of-initiatives approach, you would follow these three steps:
- Conduct a thorough search for initiatives that offer a favorable balance between risks and rewards.
- Continuously monitor and evaluate the portfolio, reinvesting in successful initiatives and terminating those that are not delivering results.
- Adopt a flexible and adaptive approach, allowing for adjustments along the way.
This strategy operates like a form of natural selection, by identifying the most promising initiatives and discarding the rest.
With the increasing uncertainty in today’s business landscape, the importance of balancing risk and reward makes the portfolio-of-initiatives framework more vital than ever.
How To Measure Innovation?
Measuring innovation can be a complex and challenging task, as it often involves evaluating intangible assets and intangible outcomes.
Here are some of the ways companies can measure innovation more effectively:
- Financial metrics: Companies can measure innovation by evaluating its financial impact, such as increased sales, reduced costs, and improved profits.
- Market impact: Measuring the market share and customer satisfaction can give an indication of how well an innovation has been received by the market.
- Employee engagement: Employee engagement in innovation initiatives and their willingness to embrace change can be a good indicator of the company’s overall innovation culture.
- Intellectual property: Tracking the number of patents and licenses generated can provide a tangible measure of a company’s innovative capacity.
- Process metrics: Measuring the time it takes to bring a product or service to market, the number of ideas generated, and the success rate of innovation projects can provide insight into the efficiency and effectiveness of the innovation process.
- Customer feedback: Measuring customer feedback through surveys, focus groups, or other methods can give valuable insights into the impact of innovation on customers.
It’s important to remember that innovation measurement is a continuous process and it is advisable to track multiple metrics to get a more comprehensive view of a company’s innovation performance.
Measuring Innovation-Driven “Net New Growth”
An interesting way to measure innovation is what McKinsey calls the “green box”.
The “green box” measure of innovation-driven net new growth helps clarify the aspirations and choices of the innovation journey by quantifying growth in revenue or earnings within a defined timeframe.
As McKinsey puts its:
“It’s one thing to frame innovation as a catalyst for growth, and another to act upon it by refocusing people, assets, and management attention on the organization’s best ideas.”
This solidifies a tangible commitment to innovation and defines its value.
The green box only considers growth from innovation and excludes other sources, allowing for the creation of objectives and metrics for the company’s various operating units to incorporate into their innovation portfolios.
Innovation is the Path to a Better Future
Innovation is a vital ingredient for success in today’s rapidly changing world.
Whether you’re an entrepreneur, a corporate executive, or simply someone who wants to make a difference, the ability to innovate is a key skill that can help you achieve your goals and create a better future.
By understanding the fundamental principles of innovation, taking calculated risks, and embracing change, you can become a catalyst for positive transformation and drive progress in your community and beyond.
So, embrace your creativity, challenge the status quo, and never stop innovating – the world is waiting for you to make your mark!
Best Innovation Articles to Help You Master Innovation
Here is a portfolio of powerful innovation articles to help you become a better innovator, master innovation and master innovation management:
Become an Innovator
- How I Learned the Skill of Innovation
- How To Be Creative at Any Age
- Innovate Like Einstein
- What I Learned About the Triad of User, Tech and Business
Communicating Your Ideas
- 3 Ways to Share Your Big Ideas Better
- How To Create a Vision Memo to Inspire and Drive Change
- How To Share Your Big Ideas Better with Email Memos
- How To Share Your Big Ideas Better with Narrative Memos
- The Power of Naming Beyond Words
Creating a Culture of Innovation
- Creating a Culture of Innovation: Nurturing Growth Mindsets
- Embrace the Digital Culture: Thrive in the Digital Era
- Innovation Killers: Overcoming Obstacles to Progress
Creativity Techniques
- How To Brainstorm Better with Method 6-3-5
- How To Create the Future with Scenario Narratives
- How To Innovate Better with “How Might We”
- How To Innovate Better with “Imagine If”
- How To Innovate Better with Journey Maps
- How To Innovate Better with Mock Press Releases
- How To Innovate Better with the Double Diamond
- How To Reframe Problems as Creative Questions
- How To Think Up More Ideas Faster, Easier
- How To Use Brainwriting to Generate More Ideas
- How To Use Information Models to Brainstorm Better
- How To Warm Up Your Innovative Thinking
- You Don’t Need Goofy Techniques to Innovate
Innovation Management
- 3 Parts of Business Development
- 3 Ways to Unleash Innovation in Your Organization
- 10 High Leverage Strategies for Innovation
- How MBAs vs. Innovators Think Differently
- Innovation Lifecycle
- Management Innovation is the Highest Form of Innovation
- Success Over Failure: Making Innovation Flourish
- The Innovative Team: Book Summary and Insights
- We Can Innovate Our Way Through Radical Transformation
- Why Cloud: Agility, Economics, and Innovation
- Why So Many Good Ideas Die
Foresight, the Future, and Trends
- Foresight is the Front End of Strategy
- How I Learned to Anticipate the Future
- How the Future Shuts Your Brain Down
Measuring Innovation
Startups
- How To Launch a Startup Within a Big Company
- How To Think Like a Startup
- The Myths of Business Model Innovation
- Why Startups Fail
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