In our series of articles “Innovation Capsules”, we will share best practices around innovation management as a key business process. This article will provide a comprehensive guide for firms on how to establish a solid and effective innovation unit.
Introduction
Imagine a near future where regulatory bodies not only scrutinise your firm’s financial health and ESG (Environmental, Social, and Governance) compliance but also rigorously assess your innovation capabilities and adherence to the ISO 56000 standard. In this scenario, your firm’s ability to thrive, attract talent, and adopt the latest technologies hinges on showcasing sustainable innovation.
Establishing a robust innovation unit, therefore, becomes not just a strategic advantage but a necessity for survival.
But where should you begin? At first glance, understanding it might seem difficult. However, at Exponential, PwC Luxembourg’s innovation department, we’ve researched on successful innovation units. By answering three simple questions, you can more easily chart your course:
- Are you a small, medium, or large organisation?
- Does your strategy aim for disruptive or incremental innovation?
- How centralised should your innovation unit be?
These three factors—size, innovation strategy, and level of centralisation—combine to form a matrix, the innovation dartboard, revealing three distinct archetypes of innovation units.
This tool provides clear, methodological guidance to help you determine which innovation archetype to aim for, ensuring your innovation unit is both effective and aligned with your business vision.
The first question is straightforward: your organisation’s size determines the basic structure of your innovation unit. But the next question delves deeper: What is your innovation strategy? Is it disruptive or incremental?
Your innovation strategy highly impacts how your innovation unit is structured and operates. Disruptive innovation aims to create new markets or value networks, often displacing existing ones. Incremental innovation, in contrast, focuses on making continuous improvements to existing products, services, or processes.
Why choose disruptive? If your goal is to revolutionise the market, create new customer segments, or leverage emerging technologies, disruptive innovation is the way forward. This approach requires significant investment in R&D and a willingness to take risks. It involves creating game-changing products, entering new markets with breakthrough solutions, or partnering with startups.
Why choose incremental? If your objective is to enhance current offerings, optimise processes, or gradually integrate new technologies, incremental innovation is more suitable. This strategy is less risky and focuses on steady, continuous improvement, like upgrading existing products, or improving processes and customer service for enhanced performance and user experience.
Once you’ve assessed your innovation strategy, the next step is to determine if your innovation unit should be centralised or decentralised:
- Centralised innovation unit: Centralisation provides tighter control, consistency in strategy execution, and efficient resource allocation. This model is ideal for companies with strong central leadership and a need for uniformity. Key benefits include enhanced coordination with top management, consistency across innovation initiatives, and a unified approach.
- Decentralised innovation unit: Decentralisation, on the other hand, offers flexibility, faster decision-making at local levels, and better alignment with regional market needs. This approach is well-suited for companies operating in diverse markets. It supports local responsiveness, fosters innovation close to customer bases, and encourages collaboration across regions.
There is no one-size-fits-all answer here. Ultimately, the key is to experiment, learn from failures, and adapt. Make informed assumptions, present them to top leadership, and be prepared to test, fail, and refine your strategy. The process of innovation often involves navigating uncertainty to lead to the most effective outcomes.
The innovation dartboard
Once you have clarified your strategy and centralisation levels, the next step is to identify the right innovation archetype for your organisation. While hybrid models are possible, here are the three key ones we have identified:
1. Distributed innovation network
In this model, a core team at the corporate level serves as a centre of excellence, orchestrating a scalable network of innovation experts within business units. These experts, who are formally trained and certified in innovation methods and tools, either coach others or lead innovation projects. This approach integrates innovation across various business units, encouraging broad engagement.
2. Innovation hub
This model centres around a flagship architectural building at the corporate headquarters, dedicated to idea generation, acceleration, and incubation of innovation projects. The innovation hub often provides training and consulting support to business units. It is ideal for corporations with multiple autonomous business units and a strong legacy culture.
3. Global innovation model
Here, a central hub coordinates a network of innovation centres and outposts in global hotspots. This model suits companies that focus on exploring external ecosystems, staying close to innovation hotspots, and incubating startups.
- Small organisations (fewer than 100 employees)
Small organisations typically benefit from a global innovation network because it uses external resources for a broad reach with minimal internal investment. However, if they want to pursue disruptive innovation and prefer centralisation, a distributed innovation network might be better. This model allows small organisations to focus their efforts and manage resources effectively while integrating disruptive ideas.
- Medium organisations (100-999 employees)
Medium-sized organisations need a balanced approach:
If the innovation unit is centralised and the strategy is incremental, or if decentralised with a disruptive strategy, the distributed innovation network is ideal. It balances flexibility and central oversight for various innovation projects.
For a centralised unit focusing on disruptive innovation, an innovation hub is better. It provides a dedicated space and resources to drive impactful projects.
When the innovation unit is decentralised with an incremental strategy, a global innovation network is suitable. It helps gather diverse ideas and drive gradual improvements from different regions.
- Large organisations (1,000+ employees)
Large organisations require tailored approaches: A centralised innovation unit benefits most from an innovation hub. It offers a unified approach and leverages substantial resources for cohesive innovation. A decentralised innovation unit should use a distributed innovation network. It provides flexibility and coordination, enabling various parts of the organisation to innovate independently while staying aligned with central strategy. This approach helps large organisations remain agile and responsive to diverse market needs.
Asking the right questions and understanding your archetype is essential for setting up a successful innovation unit.
Curious about the difference between incremental and disruptive innovation, and how to embrace disruptive innovation in a more conservative organisation with rigid governance? The answer lies in design-driven innovation. We’ll explore this topic in our next article, but feel free to reach out to us if you’d like a preview or wish to discuss it further.
Guest contributors:
Giordana Di Biagio, Innovation / AI Designer – Exponential Team of PWC Luxembourg
Eraldo Federico Acchiappati, Lead Venture Architect & Innovation Manager at PwC Luxembourg
For more information, please visit our webpage: https://www.pwc.lu/en/about-us/pwc-luxembourg-annual-review-2022/prosperity/innovating.html
