In the previous article in this series (Issue

How to get paid twice for
everything you do, part 3:
Innovation management
Individuals with good ideas tend to be creative, but not innovative. Innovation is a group process that needs to
be managed like any other business process. To become a high-achieving performer in the field, you need
a best-practice innovation management system in place.
▶ In the previous article in this series (Issue
no. , ), we looked at innovation activities that drive value creation and value
appropriation. Here, in this follow-up article, we address issues that surround the
management of these types of integrated
innovation activities.
Successful innovation management is primarily about recognizing and understanding effective routines and facilitating their
emergence across the organization. Unfortunately, such routines are not easy to establish since they represent lessons learned over
time, through a process of trial and error,
and hence tend to be very company-specific.
Each company has to develop its own particular routines. The good news, though, is
that we can identify some general rules about
how to manage innovations well
Creativity is a process undertaken by the
individual, and nearly everyone is capable of
coming up with good ideas. But individuals
do not innovate. Innovation is a group process for a simple reason: individuals may have
part of the solution to a problem, but they
rarely have the whole answer. To be creative,
they require domain knowledge expertise,
which takes an average of  years to develop, whatever the domain. If this knowledge
is lacking, most ideas will either be reinventions of others that already exist, or impossible to implement. In addition, many of today’s
product-service systems, for example, are so
complex that no single individual can have
knowledge of all their critical components.
Innovation is therefore a group process.
Creativity also requires imagination, and
the ability to fantasize – to allow the mind
to wander, free from the constraints of logical patterns. Other characteristics of creativity include the ability to see the things that
others miss, or to ask the questions that others do not. It is also the ability to complete-
ly redefine an existing problem. Creativity
requires interaction with people who have
knowledge expertise in domains other than
one’s own. This generates cross-fertilization
and the ability to combine ideas from different fields. Creativity also involves rational
analysis based on having a good feel for the
target audience. And all of this takes time.
Innovation is ultimately about the conversion
of knowledge into money. High-performing
organisations in value-creating innovation
have several things in common. They have
clear value-creating innovation strategies,
and their employees know what these innovation strategies mean for them in their jobs.
They incorporate demanding customers and/
or true consumer insights into the valuecreating innovation process already at the
idea stage. They know what they are good at
and they identify, maintain and leverage core
competencies. They also know what they are
not good at, and ensure that activities requiring skills outside the organisation’s core competence are avoided or outsourced.
Other characteristics shared by high performers in value-creating innovation are that
they put best-practice innovation management systems in place, and they ensure that
value-creating innovation activities and outcomes are constantly evaluated and measured.
Research shows that there is a strong causality link between innovation management
and performance in value-creating innovation. An example of findings in this domain
is shown (in simplified form) in Figure .
Best-practice value-creating innovation
management systems are used to keep track
of all projects for the current budget year,
both planned and ongoing, including evaluations and suggestions for corrective actions.
Projects are also evaluated annually,
EBR #1 2012 • 45
Management Understanding innovation
Value-creating innovation is a business
process like any other and needs to be
managed accordingly.
and their financial outcomes are documented.
Best-practice value-creating innovation
management systems have the following organizational features:
3 a top-down element that determines and
approves the value-creating innovation
strategy for the next product-service system life cycles, as drafted by the value-creating innovation management group. The
top-down element also decides on and approves the strategy document, outlining
the different projects as provided by the
value-creating innovation prioritization
meeting and documented by the valuecreating innovation management group.
The top-down element is responsible for
decisions on strategic investments, as well
as for initiating and responding to stakeholder relationships that follow as a consequence of the value-creating innovation
strategy that is chosen. This occurs in
alignment with the corporate strategy and
includes initiating cooperation agreements, negotiating joint efforts with stake-
holders that require peer-to-peer interaction, and articulating corporate interests
when involving key stakeholders in
projects. The top-down element further
initiates key projects to ensure that the
strategy decided is delivered upon.
3 a value-creating innovation management
group, which is the permanent staff function that oversees and runs the value-creating innovation management system.
This group is responsible for organizing
and leading the work and preparing the
strategy and the plans, as well as preparing and documenting the value-creating
innovation prioritization meeting. It comprises senior people with relevant backgrounds. It is important to note that the
management group’s responsibility is to
oversee and coordinate, though it does not
have the authority to make any project- or
strategy-related decisions.
3 a series of value-creating innovation prioritization meetings. Together with the
value-creating innovation strategy, these
meetings are the key component of the val-
Figure 1: Impact of innovation management on value-creating innovation performance
36% of the
Stimulus factors
of innovation
70% of the
capacity for
Explains 17% of
the variance
23% of the
69% of the
Explains 37%
of the variance
Explains 26%
of the variance
Sales increase
18% of the
Explains 18%
of the variance
(Extracted, adapted and simplified, based on Prajogo et al.1, and on Moser2, respectively)
46 • EBR #1 2012
Understanding innovation Management
ue-creating innovation management system, ensuring transparency and adherence
to the innovation strategy. The frequency
of prioritization meetings depends on the
industry in which the company operates
and the strategy that it pursues. One of the
meetings is dedicated to developing the
upcoming year’s budget and plans, while
the others address re-prioritization as a
consequence of emerging issues. At the
former meeting, both the bottom-up element (defined below) and the top-down
element are represented, together with the
management group. The prioritizationmeeting attendees discuss priorities
against the background of the innovation
strategy. Based on this discussion, the
chairman of the prioritization meeting decides which projects and programs should
be launched within the existing budget.
The prioritization meeting delivers its output to the management group for processing into the plans. The management group
then forwards this to the top-down element for a formal decision and sign-off.
3 a bottom-up element, which is responsible for generating ideas, evaluating these
against the innovation strategy, and
executing the projects and evaluating the
results. The bottom-up element includes
representatives of both the providers of
the value-creating innovation and its users, and is frequently linked into a semiopen value-creating innovation network.
Best-practice value-creating innovation
management systems should also have processes that outline how these elements work
and interact, as outlined in Figure .
The rise of open innovation changes nothing in the above system, which is inherently
an open-innovation system, though it does
place even higher demands on the value-creating innovation strategy.
Value-creating innovation is a business
process like any other and needs to be managed accordingly. This entails the articulation
of a clear value-creating innovation strategy
against the backdrop of which the management system operates. This manage-
Figure 2: The value-creating innovation management system operating against the backdrop
of the innovation strategy
Corporate head of innovation
Innovation office
Innovation groups
Suggestions from all parts of the organization
membership from all parts of the organization
EBR #1 2012 • 47
Management Understanding innovation
Business-model innovation timing differs according
to whether the company is in proactive or reactive
ment system ensures that all major
value-creating innovation activities are executed using the integrated approach of value-creating innovation – utilizing valuecreating innovation that is based on technology, design, art, hermeneutics and efficiency
One of theese tools, the living lab, is an embodied research methodology for sensing,
prototyping, validating and refining complex
solutions in multiple and evolving real-life
contexts. In essence it applies a methodological approach to design within a semi-open
innovation framework. Such frameworks
build on the principal of crowd sourcing,
meaning that tasks traditionally performed
by individuals are outsourced to a group or
community through an open call. In this
case, the crowd is defined and delimited by
the originator of the problem, to enhance
fast prototyping co-creation thinking when
it comes to products, services and solutions
that are either systemic in nature or part of
a greater systemic/holistic setting. The aim
is to achieve behavioral change in the user
which is: desirable from the user’s point of
view (in other words, they are better off in
their own opinion after the change); beneficial to the supplier and has a positive impact
on other stakeholders. One of the best known
living labs is the Aalto Design Factory.
The stage is a delimited and controlled domain in which the customer or consumer interacts with the product-service-system offering and experiences the value (for example, authenticity, beauty, delight) that the artists have added through using their individual understanding to question reality and express insights in the form of a holistic but
abstract attribute of the offering. One such
stage could be “fashionable-people’s” expressions of opinions on the esthetics of mobile
phones in online fashion media, such as
blogs and magazines (for more on this, see
Juhlin et al.)
Getting inside the consumer’s mind is
about being able to, through the use of the
senses or information, create a predictable
feeling in the consumer. For example they
can feel hunger if the smell of newly baked
bread is released into a shop, fear or excitement can be generated through the use of
music and visual techniques in movies, and
relaxation can be encouraged through the
tactile experience of bedding materials.
Classical productivity tools include all the
well known efficiency improving tech-
Figure 3: Strategies for managing dual business models
Nature of conflicts
between the established
business and the innovation
Separation strategy
Phased integration
Phased separation
Low strategic relatedness High strategic relatedness
(different markets)
(similar markets)
Similarity between the established business and
the innovation
(Markides et al)6
48 • EBR #1 2012
Understanding innovation Management
niques like lean manufacturing, Six Sigma, and
so on.
The company needs to master the tools
that are appropriate for the various knowledge domains that are to be deployed for
value-creating innovation purposes.
Successful innovation involves the appropriation of the highest possible share of the value created. High performers in innovation
have several things in common. They have a
clear strategy for when and how to increase
the relevance of the product-service system
offering and when and how to innovate aspects of the existing business model. At the
idea stage, they have already incorporated
insights into the structure and dynamics of
the business ecosystem, as well as the developments in the knowledge domains that underpin their value-appropriation innovation
process. High performers also constantly
evaluate and measure the value appropriation achieved.
Business-model innovation timing differs
according to whether the company is in proactive or reactive mode. In proactive mode,
there appear to be three main situations in
which business-model innovation is potentially required:
3 when scaling up new product-service systems
3 when entering a market that includes
entrenched competitors and requires a
“breaking the rules” approach
3 when facing a near-death experience in
which the continued use of the existing
business model would likely lead to the
company’s demise.
In reactive mode, a company must respond
to an entrant that is using a new business model. The appropriate response could be to:
3 abandon the existing business model and
develop a new one through innovation or
imitation of the entrant’s business model.
Both of these approaches are highly risky
and very difficult to achieve, so they are
rarely used. The longer the incumbent has
been in the industry and the longer the life
cycle of the product-service system in the
industry, the less likely it is that these strategies will succeed.
3 maintain the existing business model while
developing a new one through innovation
or imitation of the entrant’s business model.
This has been seen in several industries
(for example, the establishment of lowcost carriers by incumbent airlines), with
varying success. Charitou et al.)5 identify
four strategies for managing dual business
models. These are outlined in Figure 3.
Using a separation strategy entails keeping the two business models separate and
minimizing any interaction between them.
As the opportunity for achieving synergies
between the two business models decreases
and the conflict between them increases, the
appropriateness of the separation strategy
Markides et al. found that companies
which adopt the separation strategy will do
better if they:
3 give operational and financial autonomy
to their units, but still maintain a close
watch over each unit’s strategy and encourage cooperation between the unit and
the parent through common incentive and
reward systems
3 allow the units to develop their own cultures and budgetary systems
3 allow each unit to have its own ceo, who
is transferred from inside the organization
(rather than being hired from outside the
The use of a phased integration strategy
entails initial separation between the two
business models for a period of time, followed by a slow merger between them with
a focus on minimizing any disruptions from
the conflicts that initially exist between the
two. As both the opportunity for achieving
synergies between the two business models
and the conflict between them increases, so
does the appropriateness of the phased
integration strategy.
When a phased separation strategy is
used, the first step is to establish the new
business model inside the company’s existing organizational infrastructure, to leverage
the firm’s existing resources and resourcedeployment system. This results in a faster
learning curve. When the learning is deemed
sufficient, the new business model is separated into an independent organizational
unit. As both the opportunity for achieving
synergies between the two business models
and the conflict between them decreases, the
EBR #1 2012 • 49
Management Understanding innovation
Daniel I. Prajogo and Pervaiz K. Ahmed. . “Relationships between
innovation stimulus, innovation capacity, and innovation performance.”
R&D Management (): -.
Roger Moser. . Strategic Purchasing and Supply Management: A
Strategy-Based Selection of Suppliers. Dissertation. European Business
School Oestrich-Winkel. Deutscher Universitäts-Verlag.
Roos, G., Innovation Management – A Success Factor for Competitiveness, VTT Intelligence Forum ; Tuottavuus ja T&K-strategia murroksessa; Miten vastata haasteeseen?, VTT SYMPOSIUM , VTT ,
pp -
Juhlin, O. and Zhang, Y., , Unpacking social interaction that make
us adore: on the aesthetics of mobile phones as fashion items, in Proceedings of the th International Conference on Human Computer Interaction with Mobile Devices and Services (MobileHCI ‘), ACM, New
York, NY, USA, pp. -
Charitou, C. D. and Markides, C. C., , Responses to Disruptive Strategic Innovation, MIT Sloan Management Review, Vol. , Nº , pp. 
Constantinos Markides and Constantinos D. Charitou. . “Competing with dual business models: A contingency approach.” Academy of
appropriateness of the phased separation strategy increases.
The integration strategy entails embracing the new business model through the
company’s existing organizational infrastructure. As the opportunity for achieving
synergies between the two business models
increases and the conflict between them decreases, the appropriateness of the integration strategy increases.
Markides et al. found that companies
which adopt the integration strategy will do
better if they:
3 treat the new business model as an opportunity to grow the business (rather than
see it as a threat)
3 leverage the strengths of the traditional
business to find ways to differentiate
themselves (rather than imitating the
strategies of their attackers)
3 approach the task in a proactive, strategic
manner rather than as a hasty knee-jerk
reaction to a problem
3 take extreme care not to suffocate the new
business through the firm’s existing policies.
Incremental business-model improvements should be a continuous process
(Mitchell et al.), whereas discontinuous business-model innovation should not be a continuous process due to its disruptive effect
and high associated risk (Markides). Succeeding through business model innovation
is normally better than competing on the
same business model as competition since
successful new business models offer more
value to customers, and as a consequence,
sets the standards for the next generation of
entrepreneurs. Furthermore, they normally
create new, incremental demand, they fail
neither the narrative nor the numbers test,
and they are difficult to replicate (Magretta).
Management Executive (): -.
Markides et al. .
Markides et al. .
Donald Mitchell and Carol Coles. . “The ultimate competitive ad-
Achieving the objective of being paid twice
for everything you do – or, in more practical terms, having the profit of your activities
exceed the gross revenues from your primary revenue stream – requires the ability to
simultaneously manage value-creating innovation and value-appropriating innovation.
To succeed in this, the following sequence
of steps is suggested:
confirm that the company has access to
the right resources
ensure that these resources are deployed in
vantage of continuing business model innovation.” Journal of Business
Strategy (): -.
Constantinos Markides. . “Disruptive innovation: in need of better
theory.” Journal of Product Innovation Management : -.
Joan Magretta. . “Why business models matter.” Harvard Business
Review (May): -.
Magretta. .
A complete list of references can be found
in the PDF-version of this article at
50 • EBR #1 2012
an effective resource-deployment system
make sure that knowledge relating to as
many of the science, technology, engineering, design, art, hermeneutics and efficiency domains as are relevant exists within the company, and deploy this combined
domain knowledge in an integrated way
with the aim of maximizing the value that
can be created and embodied in a product-service system
see to it that domain knowledge relating
to effectiveness and business models exists within the company, and deploy this
combined domain knowledge in an integrated way with the aim of maximizing the
value that can be appropriated from the
newly innovated product-service system
design the innovation process to enable
the necessary dynamic interaction and
feedback loops between steps 3 and 4
develop an appropriate set of systems,
structures and processes to manage the
complete integrated-innovation approach
in a scalable, efficient and effective way
make sure that all this fits in with the company culture and strategy typology
continuously measure and evaluate progress made toward the objective. ●
Chairman of VTT Technical
Research Centre of Finland,
Honorary Professor at
Warwick Business School in
Coventry, UK, Visiting
Professor of Intangible Asset Management and
Performance Measurement at the Centre for
Business Performance at Cranfield University, UK,
part-time Professor in Strategic Design in the Faculty
of Design at Swinburne University of Technology in
Melbourne, Australia, and Senior Advisor, Asia Pacific,
at Aalto Executive Education Academy. Presently the
Managing Director for Intellectual Capital Services
Ltd in London, he has founded or co-founded several
companies, worked as a consultant in 50 countries
and held management positions in several corporations. He presently sits on several corporate advisory
([email protected])