Innovation is the lifeblood of every organization. An innovative culture is what sustains reinvention and even the organization itself. In the digital age, executive management and the board have an important role to play in strengthening and nurturing this culture. Jim DeLoach discusses how.
Digital transformation is disrupting entrenched incumbents and even entire industries as the pace of change impacts the performance of traditional business models for creating value.
To illustrate, one of the top risks for 2019 relates to the ability of the organization — relative to its competitors — to adjust existing operations to meet performance expectations. This concern may be a composite of several significant uncertainties: the company’s digital readiness, its lack of resiliency and agility in staying ahead of or keeping pace with changing market realities, the restrictive burden of significant technical debt, the lack of out-of-the-box thinking about the business model and fundamental assumptions underlying the strategy and the existence or threat of more nimble competitors.
Hyperscalability of digital business models and lack of entry barriers enable new competitors to emerge and scale very quickly in redefining the customer experience, making it difficult for incumbents to see it coming at all, much less react in a timely manner to preserve customer loyalty. In this environment, established incumbents are leery of “born digital” players that can alter the game by operating more efficiently, digitizing new products and services, enhancing the customer experience and/or transforming the business model.
It’s all about innovation. As the combination of high speed, ever-connected networks and maturing digital technologies enhances ties between organizations and their various stakeholders, opportunities to innovate processes, products and services emerge that were unthinkable just a few years ago. With the stakes so high, executive management and the board of directors have an important role in exercising the leadership to ensure that the organization is not missing out on opportunities to innovate and, as a result, is not running the risk of getting swept aside by the forces of disruptive change. In this context, the oft-referenced adage, “disrupt or be disrupted,” gives way to the harsher specter of “innovate or die.”
Not Yesterday’s Innovation Process!
For those organizations that have made innovation a priority, it has traditionally been about designating responsible individuals, setting performance expectations linked to entity objectives, allowing them to operate in a risk-free environment, monitoring their progress using appropriate metrics and holding them accountable for results. However, for most organizations, innovation has been opportunistic and ad hoc. For innovation to reach its full potential in the digital age, a truly innovative culture must give increased emphasis to diversity, team performance, collaboration, empowerment, continuous learning, ingenuity and change enablement.
To achieve sustained innovation excellence, everyone across the organization must recognize that it is an integral part of their job to innovate. To that end, innovation must be measured and rewarded so that it becomes a core competency that drives priority-setting, resource allocation, talent acquisition and development of influential leaders. In essence, the entire workforce must share a commitment to innovation.
As creative people are assigned to specific innovation initiatives, they must be grounded in the company’s strategy, objectives and commitments to customers to set appropriate parameters for their work. At the same time, there must be confidence that the right people are focused on the right opportunities and everyone understands that the primary objective of innovation is to bring forth practical processes, products and services to market that can enhance the customer experience, critical decision-making processes and operational excellence. Executive management must “get it” – it is important to fail fast, learn from failure and quickly engage with customers to test new ideas through trial and error.
Customer engagement is vital to innovation in the digital age. Attempting to perfect a concept before trialing it with customers ignores the reality that customer response to innovation is notoriously difficult to predict.
Text messaging, or texting, is a prime example of something that on paper may have made little sense for mass use commercially, particularly because of the ubiquity of email. But once phones and networks adapted to accommodate the technology better, it clearly transformed the way people communicate through its mobility, immediacy and brevity. The point is that users often do not use products in the way inventors expect. That is why obtaining input from end users should be an integral part of informing the innovation process. Companies cannot afford to waste time and resources trying to improve things customers do not want or will not use.
Decide Desired Digital Maturity
In the digital age, leaders are very good at innovation and disruption. Accordingly, it is contextually important to the board’s oversight of the innovative culture to learn from what they do, even if the organization has little appetite for positioning itself as a leader. Given that every organization is different, executive management and the board should consider whether the organization is a digital follower, digitally advanced or a digital leader:
- Digital follower – The organization has developed a digital strategy and has a proven track record of delivering on digital initiatives, which are typically focused on discrete aspects of the customer journey. While it knows where it’s going, it has a lot to do to execute on its strategy and become digitally advanced.
- Digitally advanced – The organization has a proven track record of adopting emerging technologies and has achieved high levels of process automation, a low cost base and hyperscalable business models that are less dependent on people in ramping up or down to meet demand. It has a digital mindset at its core and manages digital aspects of its strategy quantitatively enterprisewide.
- Digital leader – The organization has a proven track record of disrupting traditional business models. Digital aspects of strategic plans are continually improved based on lessons learned and predictive indicators.
Leaders disrupt, whereas the digitally advanced aspire to be leaders. While advanced companies have digitized and are using the latest technology everywhere, they are not yet disruptors. Many companies are content to be an agile follower, meaning they frequently reassess and adapt their digital strategy as the market changes. Most are not where they want to be. Many that desire to be followers are, in fact, digital beginners, meaning they have multiple digital initiatives underway with objectives that are well-understood; however, digital plans are not fully developed. Many that want to be leaders are, in fact, followers. The approach taken to innovation is very different for these distinct classes of organizations.
The challenge for management and the board is to decide what level of digital maturity they desire for the organization. In this context, the digital follower can be a relatively high-performing business. Effective followers play the waiting game, monitor the competitive landscape and are agile in reacting when necessary to defend market share by enhancing the customer experience. To succeed, followers must be agile enough to respond quickly as an early mover, even if they aren’t first movers.
Focus on Competencies
Regarding the assessment of digital maturity, Protiviti’s original research has identified 36 empirically supported competencies arrayed across six core disciplines at which digital leaders excel. These competencies consist of capabilities and structural characteristics that can be used to benchmark the organization to identify its strengths and weaknesses. They can be used to assess an entity’s resilience and likely innovation performance in creating new markets and eventually disrupting existing markets and displacing established incumbents, products, services and alliances. These are the real stakes of the innovation game in the digital world. Everything else is small ball.
Competencies that have a direct impact on stimulating and rewarding innovation performance include those related to vision, leadership and culture. In the digital age, an organization’s ability to convert its ideas into practical applications is crucial to sustaining an innovative culture. Competencies related to technology innovation development and big data analytics automation play an important role.
Some competencies indirectly impact innovation performance. For example, the way digital leaders approach financial planning can be very different than digital followers or beginners. Too much of a focus on individual performance, current-year results, immediate return on investment and other traditional measures can get in the way of unleashing innovative behavior. Innovation does not usually deliver immediate results.
Another indirect impact comes from governance and compliance. When teams responsible for innovation actively seek input from risk and compliance professionals, the input they receive must help them manage risk or overcome regulatory challenges in creative, but appropriate ways that advance the entity’s digital initiatives.
One of the core disciplines of Protiviti’s digital maturity assessment framework is “organization, structure and processes.” Within that discipline is the innovation and research competency, which is useful in distinguishing between digital leaders and followers.
- Highly innovation-driven digital leaders align all products and services with relevant digital trends and business models. Responsible executives within the company understand the importance of continuous reinvention to long-term success and are fully engaged in nurturing an innovative culture; accordingly, their respective contributions are measured and rewarded in performance appraisals. Research is conducted to determine market potential for digital products, services and solutions and provide a clear focus on customer demand. Integrated throughout the company, innovation applies processes that follow predefined innovation rules (e.g., idea generation, idea screening, experimentation, commercialization and diffusion). Partnerships are established with technical partners, universities and others to foster creativity. Leaders and employees are encouraged to attend conferences, seminars and events that focus on ideas relevant to the business.
- By contrast, even though they, too, are innovation driven, digital followers tend to orient digitization to a technical or general innovation path with product and service innovations limited by various internal constraints and a company-centric view. Innovation is often the responsibility of the enterprise’s R&D and innovation team, which may not be connected to the rest of the organization; therefore, employees across the entity do not necessarily feel responsible for innovation. This disconnect with the business may lead to innovation projects lasting too long without any meaningful progress or developments before they are stopped. More often than not, the organizational structure is not suitable for an agile and continuous innovation process.
The point is clear: Understanding whether the company desires to be a leader or a follower – or someplace in between – is important, as it provides executives and directors with the context they need to focus their oversight of the innovation process. If the enterprise is a digital skeptic or beginner, directors may need to strongly encourage management to assess the organization’s digital readiness and review the results with the board. When changes to the corporate culture are needed, the required investments should be made to forge an environment that empowers and rewards employees to test new ideas and take the appropriate risks to make those ideas a reality without encumbering them with the fear of repercussions if they are not successful.
Companies committed to innovation are confident in facing the future because they know they are playing the right game (the one that views innovation as a continuous process, rather than a dramatic event). With innovation being a strategic imperative, it is an integral part of the confident organization’s DNA and is evidenced by setting accountability for results with innovation-related metrics at the organizational, process and individual levels to encourage and reward creativity.
Questions for Senior Executives and Boards of Directors
Following are some suggested questions that senior executives and their boards may consider, based on the risks inherent in the entity’s operations:
- Do we understand where the organization stands on the digital maturity continuum? Are we a follower? Or digitally advanced? Or a Leader? If the company is a beginner or skeptic, are we taking steps to advance its digital maturity?
- Do the board and C-suite agendas allocate time for discussing the company’s innovation strategy and culture, encouraging open discussion on direction and progress? Is this dialogue supported with appropriate innovation-related metrics that tell the full story regarding the results the strategy is delivering, return on investment and the effectiveness of the company’s innovation culture and capabilities?
- Is the organization capable of challenging conventional thinking and disrupting recognized ways of working? Is it agile and adaptive enough to recognize market opportunities and emerging risks over time and capitalize on, endure or overcome them with timely adjustments to its strategy and infrastructure?
- Are there barriers to innovation and digital transformation that exist within the organization that require the board’s attention? For example:
- Lack of effective processes for (a) identifying and understanding maturing technologies that are expected to have a disruptive impact on the business and (b) capturing external ideas and best practices that can invigorate innovation;
- Inability to apply knowledge of maturing technologies to drive relevant digital innovation initiatives;
- Lack of a strategy or roadmap outlining steps the company should take to advance its innovation journey;
- Innovation left in the hands of a few (e.g., the R&D department) rather than emphasized across all aspects of the business, including third-party partnerships;
- Lack of transparency and knowledge sharing that constrains the organization’s ability to learn from successes and failures;
- Inadequate staffing and resources assigned to innovation projects, leading to insufficient progress; or
- Preoccupation over budgets and deadlines and other behaviors that starve good ideas before they get a fair trial.
Are steps being taken to eliminate these and any other barriers?
 Executive Perspectives on 2019 Top Risks, Protiviti and NC State University ERM Initiative, December 2018, available at www.protiviti.com/toprisks.
 “Are You Ready for Disruptive Innovation?” See Protiviti’s Digital Assessment Tool, available at no cost for companies to ascertain where they are on the digital maturity continuum, at www.protiviti.com/digital.