Why Innovation Operations Are Critical

June 13, 2022

This article was originally published on Chemical Engineering.

The future of the CPI depends on sound innovation. The guidance provided here will help organizations to shape an effective innovation strategy that can give them a competitive edge.

You would be hard-pressed to find a company in the chemical process industries (CPI) that isn’t proud of its history of innovation. And for good reason, as responsible chemical innovation has done wonders for agriculture, home goods and many other industrial categories — not to mention countless everyday products. Yet for all of the good work being done, too many chemical companies are missing promising opportunities for future success when it comes to their critical innovation practices.

It’s not that the existing innovation processes are broken — but they’re no longer sufficient. From bioplastics to alternative fuels, the chemicals industry is moving steadily into uncharted waters. Without the proper innovation strategies and infrastructure in place, traditional CPI companies will increasingly struggle to keep pace with promising (and well-funded) upstarts. Although it may be tempting to treat the pandemic-induced business shock as a one-time occurrence, a growing number of experts are pointing to the 2020s as an ‘exponential age,’ where such dislocations will be much more frequent. Therefore, even if these prognostications are incorrect, now is the time for organizations to learn how they can innovate more effectively.

The good news is that CPI companies still have vast resources and internal knowledge that, when channeled correctly, can snowball into tangible innovation gains. They just need the strategies and tools to help them do so.

This article provides practical guidance on how CPI companies can revamp their innovation operations, outpace competitors and surpass existing boundaries.

Build a Strategic Portfolio

Most companies devote the vast majority of innovation resources to incremental opportunities, driving key improvements into current products, technologies and markets. This occurs for two reasons. First, the corresponding innovation practices are well-understood — as an example, every chemical company knows how to run a new product development (NPD) process. At both the team and executive level, there is comfort in repeating what is familiar. Second, incremental innovation is predictable. By focusing on well-defined opportunities in well-understood markets, the organization can calculate both the likelihood and magnitude of success. It is much easier for financial officers to invest in innovation projects where the expected returns can be modeled with relative precision.

Unfortunately, as has been observed, there are looming challenges facing the CPI that are decidedly non-incremental. That means that CPI companies must learn how to invest and manage their innovation portfolio at a strategic level. The good news is that this is not as difficult as it may seem at first glance.

The first step is to separate your organization’s innovation strategy out from its corporate growth plan. Most companies focus their planning efforts on business and market conditions as they exist today: known competitors, current products or existing customer segments. Although a good innovation strategy does address these incremental opportunities, it must also account for exploratory activities — those that anticipate the advent of technologies, markets and competitors that do not yet exist. Therefore, innovation strategies need to be much broader than typical short- to medium-term corporate growth, and they also need to be assessed and measured differently as well.

From there, it is imperative to put the right person in charge of the innovation strategy-setting effort. Most companies tend to opt for the CEO or other high-level leadership personnel to set strategic prerogatives. The problem with this approach is that most organizations don’t have a CEO that has the bandwidth or research and development (R&D) experience to drive non-incremental innovation. This is why the creation of the chief innovation officer (CINO) title (or an analogous role) is the next logical step. Dedicated solely to pushing non-incremental innovation forward, CINOs can serve as not just a qualified head of a company’s innovation apparatus, but also as the key link between innovation and other corporate functions so that everything is moving forward in a cohesive manner.

The next requirement for building a robust innovation portfolio is finding a way to make innovation strategy both a top-down and bottom-up operation. Being top-down has obvious benefits, because senior leaders are in the best position to assimilate all relevant information into a comprehensive view of where disruptive threats and opportunities are most likely to emerge. But being bottom-up is equally important, as collecting new information is a never-ending quest, and the most vital innovation insights often originate on the front lines. Moreover, the strategy needs to be iterative as well, given that the impact on innovation strategy can be sizable as new information streams in. Imagine, for example, that a company has placed an innovation bet on cold fusion becoming a mainstream energy source. If the technological paths to implementation dry up, perhaps because research on an enabling component doesn’t pan out, then the innovation strategy must pivot.

Nonetheless, allowing for pivots does not mean the innovation strategy should be flimsy — indeed, far from it. The goal is to set long-term priorities and then stick with them over the mid- to long-term. That means it is critical to correctly size the design and scoping of innovation priorities. At an exploratory stage, companies must avoid “too big to fail” initiatives, but they should also make sure that the guardrails for a given objective are broad enough to allow for a range of possible end-state outcomes. If managed well, it is unlikely that any piece of the innovation portfolio would suddenly shift from all-in to full-stop. The best practice is to incubate speculative bets somewhere in between those extremes, by tweaking and pruning resource allocation, depending on the evolving likelihood that a certain technology, societal trend or asset class will find a path to real-world impact.

A Metrics-Driven Approach

Businesses today are smarter than they have ever been. Yet for as much as we talk about innovation, many companies do not have the proper measurement tools in place to evaluate whether innovation projects are moving in the right direction, need to be tweaked or should be abandoned altogether.

When setting measurements, it is important that innovation’s key performance indicators (KPIs) don’t blindly follow the same methodologies used elsewhere in the business. For example, although net present value (NPV) is a fabulous tool for assessing expected value from capital investments, it is not built to predict the return from long-term innovation projects. And the same shortcomings apply to nearly every other traditional metric in corporate finance because they all assume a fixed and knowable world that can be calculated through direct observation, while, when it comes to innovation, the exact opposite is true.

Measuring innovation properly requires embracing its inherent uncertainty. In making investment decisions, instead of expecting precise calculations for return on investment (ROI), leaders must grow accustomed to thinking in terms of strategic options.

On a project-by-project basis, it is helpful to measure intermediate success based not only on the strategic beneficial gains to be realized, but also on directional progress relative to time and effort. Innovation’s job is to incubate exploratory bets until they have been de-risked and can be evaluated more like conventional capital investments. If the end game for a given innovation bet remains impossible to define, then innovation efforts have not (yet) progressed very far. As exploratory efforts gain structure and definition, the possible risk-return curve begins to materialize. In this way, the exclusion of non-viable options can be just as valuable to the company as the creation of actual new-to-world innovations.

Interestingly, one of the most common issues with innovation metrics used by companies is about measuring the outputs. Unlike the expected-value planning measures discussed above, here we are talking about actual, tangible results. Companies may think this is easy and straightforward for innovation. However, there remains one large problem — innovation efforts, especially exploratory innovations, typically pass through many teams on their way to final launch or implementation.

In a globally diversified company, there may be dozens of different R&D and engineering teams that might decide to implement an artificial-intelligence (AI)-driven design capability, for example, either in whole or in part. Perhaps the AI piece is one component of a broader effort to improve their team’s efficiency. If they make a raft of changes and productivity improves by 32% — how much of that success is attributable to the AI-derived capability in particular? Such questions are answerable, but since the team that benefits is more interested in the end-result of boosting efficiency, they may not be overly interested in tracking back to figure out the answers about how.

To overcome these hurdles, the key is to drive the company’s innovation portfolio with strategic purpose from the outset. If leadership knows that AI-driven design is a strategic option the company plans to create or protect, then the organization will be primed not only to adopt it if and when the innovation bears fruit, but also to help measure the value it has driven throughout the organization, thus making measurement a priority, not an afterthought. The good news is that while this may seem like a far cry from the way organizations currently handle their innovation work, it is fundamentally no different than how every department participates in the annual budget season, or other traditional business-reporting functions.

Governance is Key

One of the foremost reasons why companies fall short in their innovation aims is that the executive suite is often detached from their on-the-ground innovation workforces. This simply is not a blueprint for innovation success. Modern innovation operations practices bear fruit when there’s a hands-on approach to innovation governance.

The reason is simple: the more promising the innovation, the more cross-functional the effort. Delivering game-changers requires the input and assistance of various teams across the organization. If it is a new product technology, for example, then the engineering team must learn to incorporate it into the product design, and the manufacturing unit must learn to make it at scale, while the sales team must learn to sell it to customers, and the services group must learn to support its use. If any of these functions is too distracted or isn’t fully bought in, the effort will fail. The problem is that many innovations — especially the most valuable ones — tend to “break the frame” of prevailing incentive structures, pricing schemes, supply chains and other established processes a company may have in place. Therefore, without executive intervention from the top, the organization will miss out on such opportunities. Unfortunately, this is all too commonplace at many companies today.

That said, this does not mean that everyone across the company needs to have a “drop everything and innovate” mentality in their daily work. However, when game-changing innovations do traverse the pipeline stages all the way from exploratory work and into production, organizations need to be ready for them. Companies can help their teams get ready to “catch” the biggest, most promising innovations by first learning to accept smaller opportunities, of the kind that are more common and that also tend to get held up due to disorganization or mismatched incentives.

If the company treats each innovation project like a special case, then portfolio governance quickly becomes a massive challenge. But not every initiative needs constant scrutiny. Most of an innovation team’s work happens in the background, as they incubate early-stage opportunities and try to turn them into value-creation engines. Beyond the strategy-setting described above, a critical piece of the CINO’s job is to determine when burgeoning successes are ready to appear before the executive committee.

Companies that do this well tend to have some type of innovation steering group that meets on a regular cadence, perhaps quarterly or biannually. It must be composed of senior executives who can make organization-wide decisions and thus “clear the path” when necessary. Its members must be aligned on the broad strokes of the innovation strategy, and beyond that, they must be able to trust innovation teams to incubate the right options as they explore the strategic priorities.

The New Growth Imperative

Formalized corporate-innovation programs often get a bad reputation. Some people view them as nothing but theater. Others view them as redundant with R&D or strategy or information technology efforts. And others take the cynical view that, although focusing on innovation is a good idea in concept, it can never work in practice because corporations are too slow and bureaucratic to innovate as effectively as startups.

Of course, there may be a kernel of truth in each of these viewpoints at each organization, but that does not mean full-scale corporate innovation is necessarily “dead-on-arrival.” Indeed, it can’t be that way — at least not if today’s CPI companies want to retain their status as industry incumbents. Furthermore, research data and hands-on experience show that some large companies already know how to succeed in driving strategic innovation at scale.

Thankfully, the barriers to action come down to focus, persistence and leadership. Driving a world-class innovation-operation practice does not need to break the bank, it just needs to better coordinate many of the efforts that are already underway within a given company. Furthermore, it doesn’t need to sidetrack the company from any of its shorter-term objectives — at least not if managed with the right strategy, the proper metrics and sound portfolio governance.

Despite all the change and uncertainty swirling in the CPI today, the future is very bright indeed, especially for those firms that are prepared to innovate with purpose.

Image by Mohamed Hassan from Pixabay



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