Definition: what is an innovation strategy?
An innovation strategy is the set of choices through which an organization decides where, how and at what pace it will create new value. It flows from the overall corporate plan, but makes it more precise on three key points: the vision of what it wants to become in the future, the measurable objectives it sets itself, and the allocation of resources between improving what already exists and exploring new ground. In short, the innovation plan is the part of the strategic plan that deals with the future, project by project.
This has a practical consequence: the concept goes far beyond the research and development budget. It concerns a product as much as a service, a manufacturing process, a sales channel or a business model. It involves marketing, operations, human resources and finance. Gary Pisano, at Harvard Business School, sums it up well: without an innovation strategy, improvement efforts become a random collection of initiatives, and organizations cannot make the trade-offs that every strategy requires.
The different types of innovation strategies
There is no single path, but several possible positions. The economist Christopher Freeman proposed a typology of innovation strategies that has become a classic: offensive, defensive, imitative, dependent, traditional or opportunist. In practice, the choices can be read along three axes, which define the main types of innovation strategy.
Incremental or disruptive innovation
Incremental innovation improves a product already on sale: more reliable, cheaper, easier to use. Disruptive innovation changes the rules of the game and often targets users that incumbents had ignored. Most organizations need both, in proportions they have to choose.
Technology push or market pull
Some new offers are born from a technology that the firm then tries to apply; others start from a need expressed by the customer. User-centred approaches such as design thinking belong to the second family: you observe people in their daily activities before designing the product or service.
Closed or open innovation
A firm can develop everything in-house, or work with partners: suppliers, start-ups, universities, experts, pilot customers. Henry Chesbrough called the second approach open innovation. The choice depends on the skills available, the speed needed and what the firm wants to keep for itself.
These options are not mutually exclusive. The same group can be offensive in one activity and cautious in another, as long as it is a deliberate choice and not the result of chance.
The three horizons and the 70/20/10 split
Two frameworks, each answering a different question, help senior leadership balance the innovation portfolio over time.
The three horizons framework, described by Mehrdad Baghai, Stephen Coley and David White in The Alchemy of Growth (1999), separates three periods. Horizon 1 covers the core business that generates today's profits and must be defended and improved. Horizon 2 covers emerging activities, already taking shape, that will drive growth in the coming years. Horizon 3 covers options on the future: research, experiments, small bets on a trend that may or may not materialize. A healthy group works on each horizon at the same moment; a firm that only manages horizon 1 is preparing its own decline, and one that only dreams of horizon 3 will run out of cash.
A second framework, the 70/20/10 split, comes from the work of Bansi Nagji and Geoff Tuff published in the Harvard Business Review in 2012, and translates this into a portfolio allocation: about 70 % of the innovation budget for core innovation, 20 % for adjacent innovation and 10 % for transformational bets. The figures are a benchmark, not a rule. A technology group will often put more into horizon 3; an industrial firm in a stable market will keep a larger split for the core. What matters is that the split is chosen, written down and reviewed, horizon by horizon. Both frameworks are simple enough to be shared with everyone involved in projects, and that is precisely their value: they change the conversation from a list of proposals to a choice of direction.
Examples of innovation strategies
A few well-documented examples show how different innovation strategies can be.
- Dyson. A clear technology push strategy: James Dyson built over 5,000 prototypes before launching his bagless vacuum cleaner, then reinvested heavily in research to move into fans, hair care and lighting. The innovation portfolio is driven by engineering and patents.
- LEGO. Close to bankruptcy in 2003, the group refocused on its core bricks before opening up again, with a much stricter portfolio. Its LEGO Ideas platform, where fans propose sets that the community votes on, is a well-known example of open innovation with customers.
- Netflix. The company moved from DVD rental by post to streaming, then to producing its own content. Each step started as a horizon 3 bet while the previous model still paid the bills, a textbook case of a portfolio managed across horizons.
Innovative companies such as these did not follow a recipe, and none of these examples is a model to copy. Each strategy fits a market, a competitive position and a culture, and its success depends on conditions that change; what they share is a clear choice, held over several years.
The steps to build an innovation strategy
Here is the method we follow with leadership teams. It has six steps and takes from a few weeks to a few months depending on the size of the organization.
- Make the diagnosis. Where does the company stand? Which new products has it succeeded or failed with, which practices encourage or hold back creativity, what place does innovation have in decisions? The diagnosis is based on interviews, an analysis of past launches and listening to people on the ground.
- Define the ambition. Senior leadership states what it expects: defend its positions, gain market share, enter new activities. The innovation ambition is then expressed as a target split between the three horizons.
- Choose the territories. In which segments, which product lines, which technologies should the effort be concentrated? Three or four well-chosen territories are worth more than ten announced priorities.
- Build the portfolio. Every current project, like every new idea, is sorted against these territories. Some are accelerated, others stopped to free up budget for the key priorities.
- Organize governance. Who proposes, who decides, how often? Portfolio management relies on a stage-gate process and a committee that makes regular decisions on the innovation portfolio and its budget.
- Monitor and adjust. The plan lives through its indicators: time to market, share of revenue from recent products, projects stopped early enough. It is reviewed every year, as competitors and each trend evolve.
The most common mistake is to jump straight to step 4: launching one initiative after another before saying where the firm wants to go.
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What is at stake for the business
A clear roadmap first brings growth: organizations that innovate with method renew their products and launch new services before their competitors. It also brings consistency: everyone knows which ideas have a chance of success, and stops defending projects with no prospects. Finally, it protects scarce resources by avoiding dispersion. In a competitive environment that moves fast, this controlled growth often makes the difference between following and leading. Studies of innovative companies regularly show that success depends less on the size of the R&D budget than on the quality of these choices.
It also has a less visible effect on culture. When senior leadership explains its choices, employees understand why an idea is kept or stopped. Trust grows, and with it the willingness to propose. This is one of the drivers of a genuine culture of innovation in the workplace: a strategy shared openly will change the culture faster than any poster campaign.
The sources of ideas to draw on
A good strategy does not live on committee meetings alone: new ideas often come from elsewhere. It feeds on varied sources: feedback from sales teams and customer service, analysis of how people use the products, technology watch, each emerging trend in the industry, discussions with suppliers, observation of users in their daily lives. Creativity tools, design thinking or product development workshops then turn this material into concrete proposals. Marketing plays a key role here: it translates market trends and signals from the field into precise customer needs.
Not every trend deserves a response, and following all trends is a recipe for dispersion. Part of the strategic work is to sort the trends that will change the industry from the fashions that will pass, and to decide which ones the company wants to lead, follow or ignore. Industry associations, trade fairs and conversations with customers who left, or with customers of competitors, are often the best sources.
An approach scaled for small businesses
Small and medium-sized businesses often live from a single product or a unique know-how. They have neither a research department nor a dedicated innovation team, but they have real strengths: closeness to the customer, speed of decision and versatile employees. Their innovation strategy will gain from staying simple: two or three priorities, a monthly portfolio review, targeted partnerships to access a technology or a network. In the UK, public support such as Innovate UK grants or R&D tax relief can complement this effort, as long as it does not dictate choices in place of the managing director.
Common mistakes
- Confusing strategy with a list of projects. A list does not say what the company refuses to do.
- Ignoring risk. Every one of the initiatives carries a risk; a strategy that hides it leads to bad surprises, one that names it allows better decisions.
- Copying the leaders of the sector. What works for a digital giant is not necessarily better for a mid-sized industrial firm.
- Neglecting execution. Without governance or indicators, the finest plan stays in a drawer.
- Forgetting the core business. Transformation must not make anyone forget the customer base that keeps it alive today.
How we support your strategy
We support chief executives and leadership teams at every step: diagnosis, workshops to build the strategy, organization of portfolio management and coaching of the people who lead it. Our approach adapts to the size of your organization and helps your team make better decisions. Our consulting role is not to think in your place, but to bring methods, tools, an outside view and the experience of a former international business leader. If you are looking for lasting outside support, discover our innovation consulting and coaching services: we work in Paris, Lyon, Geneva and across Europe.
FAQ
What is the definition of an innovation strategy?
It is a simple concept: the set of choices through which an organization decides where, how and at what pace it will innovate, with its vision, its objectives, its priority territories and the allocation of its resources between the core and exploration.
What are the main types of innovation strategies?
The usual distinctions are incremental versus disruptive innovation, technology push versus market pull, and closed versus open innovation. Christopher Freeman's typology adds offensive, defensive, imitative and opportunist positions. Most innovative organizations combine several of them across their portfolio, and the key is to make the combination explicit.
How long does it take to define one?
For a small business, a few weeks are often enough: a diagnosis, two or three workshops with senior leadership and an action plan. For a group, allow two to four months, because several activities and countries need to be involved. Implementation, on the other hand, is measured in years.
Which tools help to manage the innovation portfolio?
The simplest set: a portfolio matrix built on the three horizons to balance projects, a stage-gate review to decide whether to continue them, and a few indicators followed in committee. Creativity methods such as design thinking or Creative Problem Solving help to generate ideas, but they come after the choice of territories and of the products to develop.
Do you need outside consultants or experts?
It is not compulsory, but an outside view helps to break habits, to ask uncomfortable questions and to run workshops without any power stakes. Good consultants leave the decision to senior leadership and pass their methods on to the team.
This article was written by Marc Prager.