Business Knowledge

Innovation Strategy: Applied Frameworks for Sustained Growth

Kieran F. Noonan
Innovation Strategy Business Strategy Product Development Disruption

Summary

Innovation strategy is a critical component of long-term business success, involving the deliberate planning and execution of efforts to create new value. It guides a company’s investment in research, development, new products, and business models to stay competitive and relevant. Applied frameworks provide structured approaches to organize and manage innovation initiatives, helping businesses balance short-term performance with future growth. This guide introduces powerful frameworks such as the Three Horizons of Growth and the Business Model Canvas (adapted for innovation), equipping managers with tools to foster a culture of continuous innovation and effectively navigate disruptive change.

The Concept in Plain English

Imagine you own a successful restaurant. You’re making great money from your current menu. But you know that tastes change, new restaurants open, and food trends come and go. How do you plan for the future?

  • Three Horizons of Growth: This framework helps you balance making money today (Horizon 1), improving your current business (Horizon 2), and inventing the restaurant of the future (Horizon 3). You can’t just focus on one; you need a strategy for all three.
  • Business Model Canvas (for Innovation): This is like a blueprint for a new restaurant idea. It forces you to think through every part of your new idea: who are the customers, what unique food will you offer, how will you make money, what new skills do you need? It helps you quickly sketch and test new ideas.

These frameworks help you systematically think about creating new value, rather than just randomly trying new things or sticking to old ways until it’s too late.

Key Applied Frameworks for Innovation Strategy

1. The Three Horizons of Growth (McKinsey)

This framework helps companies manage innovation across different timeframes, balancing core business activities with future growth initiatives.

  • Horizon 1: Defend & Extend Core Business (Now - 1 Year)
    • Focus: Optimizing and extending the current profitable business. Incremental improvements to existing products/services.
    • Goal: Maximize profitability and cash flow.
    • Example: Improving the efficiency of your existing restaurant’s operations, adding a popular new dish to the current menu.
  • Horizon 2: Nurture Emerging Opportunities (1 - 3 Years)
    • Focus: Building new capabilities and growing emerging businesses that have the potential to be the next engine of growth.
    • Goal: Achieve significant new revenue.
    • Example: Developing a new catering service, experimenting with meal kit deliveries from your restaurant.
  • Horizon 3: Create Viable Options (3+ Years)
    • Focus: Investing in research, experiments, and small bets to explore breakthrough ideas and future business models. High uncertainty, long payoff.
    • Goal: Create future options, learn.
    • Example: Researching drone delivery for food, exploring a fully AI-powered kitchen concept.

2. The Business Model Canvas (Adapted for Innovation)

While primarily a tool for describing business models, the Business Model Canvas (Digital Business Models: Applied Frameworks) is incredibly powerful for designing and testing new innovative business models. It forces innovators to think holistically about how a new product or service will create, deliver, and capture value.

  • Key Innovation Focus: When innovating, each of the nine blocks can represent a hypothesis to be tested:
    • Customer Segments: Are we targeting the right customers?
    • Value Propositions: Are we truly solving a key customer problem?
    • Revenue Streams: How will this new offering make money in an innovative way?
    • Key Resources/Activities/Partners: What new capabilities do we need to build or acquire?
  • Benefits: Helps clarify complex ideas, identify assumptions, and communicate new business models effectively.

How to Apply These Frameworks

  1. Assess Your Innovation Portfolio: Map your current innovation projects onto the Three Horizons. Do you have a healthy balance across all three? Too much H1 means you’re not planning for the future; too much H3 means you might not have enough cash flow today.
  2. Define Innovation Challenges: Use insights from market analysis (e.g., Industrial Organization: Applied Frameworks) to define key areas where innovation is needed.
  3. Design New Business Models: For Horizon 2 and 3 initiatives, use the Business Model Canvas to articulate the new value proposition, customer segments, revenue streams, and necessary resources/partners.
  4. Validate Hypotheses: Employ Customer Discovery Process and Lean Startup methodologies to test the riskiest assumptions in your new business models.
  5. Allocate Resources Strategically: Assign budget, talent, and leadership to each horizon based on its strategic importance and time horizon.
  6. Foster an Innovation Culture: Create an environment that encourages experimentation, learning from failure, and cross-functional collaboration.

Worked Example: A Traditional Publishing House

A traditional book publisher faces disruption from e-books and self-publishing.

  1. H1 (Core): Optimize current print book sales, improve distribution, reduce costs.
  2. H2 (Emerging): Invest in interactive e-book formats, develop an audiobook production division, explore direct-to-consumer sales channels.
  3. H3 (Future): Experiment with AI-generated content, explore personalized learning platforms, invest in virtual reality storytelling.

They use the Business Model Canvas to design the new audiobook division, focusing on a subscription revenue model and new key partnerships with voice actors and audio engineers.

Risks and Limitations

  • Neglecting Horizons: Companies often over-invest in Horizon 1 (safe bets) and under-invest in Horizon 3 (future growth), leading to long-term decline.
  • Organizational Silos: Different horizons often require different organizational structures, funding models, and cultures. Managing these can be challenging.
  • Measurement Difficulties: Measuring ROI for Horizon 3 initiatives is difficult due to high uncertainty and long time horizons.
  • Resistance to Change: Established organizations may struggle with the ambiguity and potential disruption of H2 and H3 innovations.
  • “Blind Spots”: Frameworks can’t predict completely new, unforeseen technologies or market shifts.