Author: Marc Butterfield, SVP, Innovation & Disruption
Innovation is the backbone of any organization and the only way business entities can adapt and thrive in the face of continuously evolving conditions. When it comes to developing an innovation strategy, however, too many companies remain locked in the present, failing to look ahead and prepare for long-term disruption.
Developing an adaptive and future-ready approach to innovation requires organizations to focus on three separate innovation horizons and to appropriately allocate their resources and budget.
Understanding the Three Innovation Horizons
According to a recent McKinsey & Company survey, three out of four businesses believe the current COVID-19 crisis will open doors to tremendous growth. However, there is a difference between identifying potential opportunities and seizing on the promise. In the McKinsey survey, only 30 percent of responding businesses felt equipped to seize new market openings.
The agility to profit from changes in market conditions comes from a continuous focus on innovation. Innovation is a way of future proofing the organization by looking ahead at emerging trends and proactively creating the products and services that will sustain growth. However, most organizations remain fixed on near-term innovation or within the first horizon.
The first horizon of innovation focuses on making necessary adaptations to core products to serve existing customers and markets. For example, a consumer goods company may make changes to its packaging in response to negative feedback about a current product.
The second horizon of innovation, often referred to as adjacent innovation, seeks to move the needle on growth. A company may seek new geographical locations to market existing products or launch new products related to an existing lineup. For example, a dog food manufacturer may develop a new canine treat, utilizing some of its staple ingredients.
Since the first and second horizons of innovation are critical to operations and current competitiveness, this is where many businesses will spend their time. However, innovation at this phase does little to future-proof the organization, focusing only on the short term.
To gain the adaptability to face future challenges, organizations need to incorporate the third horizon of innovation into their strategy. The third innovation horizon focuses on adding transformational and potentially disruptive products and services to entirely new markets. This phase is driven by free-thinking and may not always realize an immediate return on investment. For example, an organization may test hundreds of concepts but ultimately use only one.
While third horizon innovation can be seen as risky, a lack of innovation at this level can result in failed competitiveness. Blockbuster, for instance, once ruled the market in video rentals and sales, but failed to recognize and innovate toward the streaming trend. As a result, thousands of Blockbuster stores were forced out of business as consumer preferences changed.
Planning for Innovation Success
BCG has been tracking business innovation for nearly fifteen years. Their findings reveal that the average revenue for a typical small business ranked on the 2020 list of 50 most innovative companies is $30 billion. However, historical review of the study indicates a startling finding. Only 8 companies since 2005 have made the list every year.
Successful innovation requires a careful balancing of resources, as well as time and budget, across each horizon. Ignoring the need for long-term innovation will short-change your organization, leaving it unable to pivot in response to future market changes. On the other hand, failing to invest strongly enough in short-term needs could easily derail immediate growth.
Given their critical importance to near-term success, horizons one and two require approximately 80 percent and 10 percent, respectively, of innovation resources. The remaining 10 percent of budget, time and talent can easily support the long-term goals of third horizon innovation initiatives.
Another critical factor in success is leadership buy in. The most successful innovation strategies have executive support. However, too often, innovation teams are held to unrealistic expressions of value.
Business leaders need to understand that innovation is unpredictable. As such, innovation teams need the freedom to rapidly switch gears and kill even seemingly promising initiatives when the winds shift and new trends emerge.
Instead of looking for immediate ROI, business leaders should learn to respect the value of learning and how early identification of trends and their related impacts could save a business, not today, but years down the road. After all, if Blockbuster had identified the streaming trend as a threat and innovated relevant products and services, we might see a different line-up of service providers today.
About the Author
Marc Butterfield is responsible for leading the Bank’s Innovation & Disruption team and the Bank’s digital transformation initiatives. He is accountable for accelerating innovation throughout the enterprise, identifying disruptive business model threats to financial services, establishment & creation of new business models and fintech engagement. He also leads change management and strategic thought leadership to drive process and cultural evolution necessary for effective innovation practices.
In his tenure at FNBO, Marc has served in leadership positions in Digital Banking, Marketing, Consumer Lending, Credit Risk and Product Development. Marc began his career at FNBO in 2001, joining First National from Nexterna, a wireless technology company owned by Union Pacific Railroad.
Marc completed his Bachelor’s degree in Business Administration with a Marketing specialization from the University of Nebraska at Omaha.