Pulse of Innovation: Finding Success with H2 and H3 Innovation

December 15, 2021

Every so often we ask our community to sound off on popular topics in innovation and share their best tips, tricks, and advice in hopes that their answers may inspire others in the field. We’ve gathered these insights by email, over phone calls, at events and roundtables, and catching up with clients and colleagues.

With the popularity of innovation models like McKinsey’s 3 Horizons framework, among others, many leaders acknowledge the necessity of both exploitative and exploratory innovation. But understanding these frameworks doesn’t guarantee proper follow-through.

There are plenty of reasons why H2 and H3 innovation programs often languish despite leaders’ best intentions. Some innovation teams may be juggling unmanageable workloads. Others may face skepticism (if not direct resistance) from the rest of the organization. Even when a non-incremental pipeline takes root, companies often choose projects and measure results based on core-business logic that doesn’t compute well to more speculative endeavors.

In this Pulse of Innovation, we’ve asked: how do you create the right conditions to pursue H2 & H3 innovation opportunities? Here’s what we learned:

  • Put the User First – Personas have long been used in other disciplines like Marketing and Sales to understand the needs, preferences, habits, and beliefs of customers. In Horizon 1, “Innovation Personas” can represent known consumers and existing demand(s). For Horizons 2 and 3, creating personas can be helpful in identifying potential customers and unmet needs. Using a customer-centric approach to building new products or solutions can validate and de-risk strategic pursuits. Once the core need has been validated, it’s easier (and more appropriate) to approach questions such as the minimum viable solution, the viability of producing that solution, and the relative cost/benefit calculus for the company.

  • Combine Investment Logic with the “Garage Mindset” - There is a prevalent belief that to innovate, teams need to adopt a startup mentality. But for established organizations, that alone is insufficient. Equally important is for leadership to embrace a VC mindset in which the company can think shrewdly about maximizing the strategic returns from a portfolio of speculative investments. When executives start thinking like investors, while allowing the innovation project teams to act as the leaders of internal “startups”, the organization gets the best of both worlds. By framing strategic ventures as an investment, rather than a business cost, executives also create a shift in mentality that helps everyone develop a higher tolerance for risk-taking.

  • De-Risk Through Iterative Testing – Innovation teams can still be agile even when pursuing disruptive opportunities. The key is to form, test, and validate smaller hypotheses along the way. Although rigorous ROI analyses are meaningless until very late in the H2/H3 pipeline, projects can still be stress-tested very early in the process - by accumulating evidence of whether there is a real-world need, whether there is potential for a market to serve that need, and whether the company is positioned to play in that space. In developing and validating what is effectively the various components of a Business Model Canvas, the team can turn to established methodologies for collecting empirical evidence and making calculated projections of the innovation’s level of desirability and feasibility. Innovation teams should wait to invest significant resources into a project until it has passed the early stress tests and its core assumptions have been reasonably well-validated.

  • Build Innovation Ecosystems – One way organizations can lower the risk and cost of exploratory innovation is by leveraging an ecosystem of external relationships. Cross-sector partners and/or potential clients can bring complementary capabilities, industry knowledge, technological expertise, or access to specific customers and use cases. Sharing the load with willing partners also allows the project budgets to stay lean in the early stages of the pipeline. More generally, maintaining a diverse network of partners helps the innovation team manage the overall portfolio more efficiently - rather than perpetually scrambling to find the right partner on cue. Continuous monitoring of innovation activity in the form of patent applications, research grants, university licenses, and VC investments can identify promising candidates for both one-off and ongoing relationships - while surfacing new ideas for emerging technologies and keeping an eye on potential threats or competitors.

  • Find the Right Leaders – Exploring H2 and H3 innovation is a very different experience than managing incremental innovation. It is often necessary to consult with multiple stakeholders to leverage their diverse backgrounds and perspectives. Some organizations implement growth boards or enlist the help of co-managers, but to be effective, strategic innovations also require strong hands-on program managers who can coax exploratory bets toward greater shape and clarity. These innovation leaders must be comfortable with intellectual breadth and able to navigate significant up-front ambiguity. On the technical side, it is imperative to have someone focused on the viability and application(s) of a solution. It is equally important to have a leader that can pitch - and sell – opportunities to executives and the rest of the organization. Project leads must be responsible for making introductions, facilitating handoffs, and navigating the relationship with downstream scaling functions such as sales and marketing.

  • Provide Scaffolding - Depending on the maturity of the organization, some innovators may face resistance when it comes to implementing radical ideas. If the larger organization understands the value of adjacent and near-term opportunities, build off of this understanding to explain the strategic value of exploratory, long-term projects. It’s also important to keep project wins visible through active promotion – those successes will lend credibility for pursuing early-stage and/or stealth projects that are still too unpredictable for the mainline organization to tolerate without reassurance. Over time, innovation behaviors and the associated processes of graduating promising opportunities must be normalized and eventually codified into an organizational culture that embraces institutional learning opportunities rather than fearing collective failure.

  • Build Confidence Around Initiatives – It’s easy to underestimate the value of building innovation’s brand around the organization. There is a lot of uncertainty around “newness”, whether that’s a new business unit or novel technology, so many prefer to fly under the radar. Innovators instinctively want to protect their projects, but some exposure to the rest of the organization is necessary for long-term success. A little bit of internal marketing - and measured transparency - goes a long way in building trust and gaining credibility. If possible (and as needed), share the H1-H2-H3 landscape with other departments and functions. By seeing the whole picture, it might be easier for them to understand innovation’s short- and long-term plans and how they relate to each other and can drive greater success across the company. Building this trust can progressively ease tensions between business units and make everyone more comfortable leaning into the innovation mission.

  • Introduce Adjusted KPIs and Qualitative Metrics – Exploratory projects and opportunities are difficult to manage, track, and understand – but that doesn’t mean they are exempt from evaluation. All opportunities should meet some universal criteria (like relevance to the strategic goals of the organization) but can be assessed through different lenses based on their horizon and pipeline stage. Familiar KPIs and metrics traditionally used for incremental activity can be modified for adjacent innovation or retrospective measurements (like the number of projects transferred from H2/H3 into the downstream “predictable” innovation pipeline). For projects with more uncertainty or longer timelines, success can be measured via qualitative means, like experiment velocity, learning ratios, and degree of readiness.

Did we miss anything? Let us know in the comments below. For more tips, check out our growing collection of Pulse of Innovation posts!

Image by OpenClipart-Vectors from Pixabay



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