White Paper

Innovation as a Strategy
How Canadian Businesses Can Adopt Innovation as a Strategy

Andrew Reif

Helping SMEs Grow and Compete

 i

Executive Summary

Canadas future economic strength and prosperity is not guaranteed as the global economic
picture is undergoing significant change. Recent studies have drawn a connection between our
lagging productivity and the lack of commitment to innovation suggesting that Canadian
businesses must learn to build innovation into their business strategy.

This white paper explores innovation as a strategy in the context of Canadian business strategy
by asking several important questions:

What are the underlying issues with Canadian business competitiveness and how does
this relate to innovation as a strategy?

What is innovation in a strategic context?

How should management formulate innovation as a strategy?

What are the main innovation strategies and which strategy is appropriate for the firm?

How should firms implement innovation as a strategy?

How can firms establish a culture of innovation?

How can Canadian business leaders justify innovation as a strategy in choosing to trade-
off exploitation versus exploration?

The final decision of adopting innovation as a strategy rests with business leaders and stake
holders based on the unique needs of their firm. The goal of this white paper therefore is to
understand alternatives and considerations for innovation as a strategy and means to gain
competitive advantage in a changing global marketplace.

2013 Alopex Management Consulting, Inc. All Rights Reserved

 ii

Contents

Introduction .................................................................................................................................................. 1
Firm Assumptions ......................................................................................................................................... 2
Canadian Business Competitive Weaknesses ............................................................................................... 2
Innovation in a Strategic Context ................................................................................................................. 4
Innovation Strategy Formulation .................................................................................................................. 5
Innovation Strategies .................................................................................................................................... 6
Strategic Implementation ............................................................................................................................. 8
Strategy Mapping Tools ................................................................................................................................ 8
Innovation Management Processes & Decision Making .............................................................................. 9
Idea Generation .......................................................................................................................................... 10
Culture of Innovation .................................................................................................................................. 11
Exploitation versus Exploration: Implications For Canadian Firms ............................................................. 12
Conclusion ................................................................................................................................................... 13
Exhibits ........................................................................................................................................................ 15
Bibliography ................................................................................................................................................ 22

2013 Alopex Management Consulting, Inc. All Rights Reserved

 1

Introduction
Canadas future economic strength and prosperity is not guaranteed as the global economic
picture is undergoing significant change. The economies of traditional G7 and G20 countries
are slowly growing while those of Brazil, China, India, Russia, and others are growing fast.
Canada is an export country with 70% of GDP generated by trade. (Wilson & etal, 2008) Our
trade with the United States and resource endowments are key drivers for Canadas economic
strength but increasingly Canadas competitiveness is coming into question. (Wilson & etal,
2008) A central reason for Canadas weak competitiveness is our lagging productivity. (OECD,
2006) (Brown, 2009) (MPI, 2009) As new economic powers grow Canada will increasingly need
to compete to sustain its diverse economic strength and national prosperity.

The alarm bells have been sounding over the last decade regarding Canadas falling
productivity, however, the financial crisis and heightened awareness of the changing global
economic picture has increased the urgency to address this problem. (MPI, 2009) A report
prepared by the Council of Academies (CoA) drew a connection between the lack of
commitment to innovation and productivity suggesting that Canadian businesses must learn to
build innovation into their business strategy. (Brown, 2009) The CoA concluded that Canadas
long-standing productivity growth problem needs to be reframed to focus on the factors that
influence businesses to choose innovation as a key competitive strategy. (Brown, 2009) Thus
there is an urgent need for Canadian business leaders to examine their traditional strategies
and determine how they can leverage innovation in the face of growing global competition.

This white paper explores innovation as a strategy in the context of Canadian business strategy
by asking several important questions. What are the underlying issues with Canadian business
competitiveness and how does this relate to innovation as a strategy? What is innovation in a
strategic context? How should management formulate innovation as a strategy? What are the
main innovation strategies and which strategy is appropriate for the firm? How should firms
implement innovation as a strategy? What strategy mapping tools are available for innovation
as a strategy? What management processes & decision making mechanisms are appropriate to
implement innovation a strategy? Where do new ideas come from to fuel the innovation
process? How can firms establish a culture of innovation? How can Canadian business leaders
justify innovation as a strategy? The final decision of adopting innovation as a strategy rests
though with business leaders and stake holders based on the unique needs of their firm. The
goal of this white paper therefore is to understand alternatives and considerations for adopting
innovation as a strategy and means to gain competitive advantage in a changing global
marketplace.

2013 Alopex Management Consulting, Inc. All Rights Reserved

 2

Firm Assumptions
Several assumptions regarding the nature of the firm and innovation as a strategy need to be
stated for the Canadian business context. First, the firm must have the freedom to make
strategy. This freedom is important because there are many firms that are Canadian divisions
of foreign firms where strategy decisions are made at a foreign head office. The Canadian
division may only have a single functional capability such as operations or sales functions.
Innovation is possible but is highly constrained in this context (ie. process improvements or
specific equipment and tools). Second, for the purposes of this paper the firm structure is
assumed to include a Canadian board and headquarters (ie. C-suite management team) with
functional organizations that have responsibility for any or all of product development, R&D,
supply chain management, production, regulatory approvals, quality management, and
business support functions (ie. accounting, finance, HR, IT, legal etc) as applicable.

Canadian Business Competitive Weaknesses

What are the underlying issues with Canadian business competitiveness and how does this
relate to innovation as a strategy? Canadas relatively poor competitiveness is related to our
declining productivity performance which in turn is attributed to our poor innovation
performance. (Wilson & etal, 2008) Canada is reported to suffer from poor innovation
performance in most of the categories of innovation measured in terms of: poor knowledge
creation; poor diffusion of knowledge; poor transformation of knowledge; and poor use of
knowledge through commercialization. (Wilson & etal, 2008) Canadas ability to innovate has
been repeatedly awarded a grade of D over the last several years. (Lafleur, 2008) (The
Conference Board of Canada, 2013) The CoA report has ascribed a direct link of Canadas falling
productivity to the lack of strategic mindset on innovation. The CoA report describes a new
paradigm for linking productivity to innovation as illustrated in Exhibit 1. The CoA identified a
number of systemic problems in Canada that has contributed to our weak competitiveness:

Upstream Role In North American Value Chains. Canadian firms have tended to be
commodity suppliers, with little contact with the end customer, foreign control in many high-
tech intensive sectors, and are positioned in a comfortable and profitable niche in North
America. (Brown, 2009)

Small and Fragmented Domestic Market. Canada is a small market in global terms with less
reward for innovation risk, less attraction for competitors from the outside with less pressure
on Canadian firms to innovate. (Brown, 2009) The competitive intensity is therefore much
lower in Canada and competition drives innovation. (Brown, 2009) The presence of strong
regulations that protect many sectors (eg. Dairy, banking, wheat, forestry, fishery) within
Canada also drives down competitive intensity. (Mandel-Campbell, 2007)

2013 Alopex Management Consulting, Inc. All Rights Reserved

 3

Structural Characteristics of Canadian R&D. The sector mix for R&D expenditures in Canada
relative to the US is such that Canadian manufacturing R&D expenditures gap is closing but
growing for services. (Brown, 2009) The gap in R&D expenditures with the US is explained with
a lower R&D sector intensity. (Brown, 2009) R&D intensity gap in Canada is concentrated in
the largest companies (>100 employees) compared with the US. (Brown, 2009)

Climate For New Ventures. The climate for new ventures in Canada is weak because there is a
lack of early-stage financing, university research is difficult to commercialize, and the
population density and distribution are working against geographic cluster formation. (Brown,
2009)

Public Policies. There are a wide range of problems with government policies that pertain to
competitiveness and innovation that are slowly being addressed in recent federal budgets.
(Wilson & etal, 2008) Canada is reported to be an outlier in terms of reliance on tax based
incentives for R&D rather than direct government funding of business R&D. (Brown, 2009)
Canada has implemented most productivity-enhancing measures recommended by OECD
analysis of innovation and productivity. (Brown, 2009) Business taxes, especially on capital,
have been high but are reported to be competitive now and declining. (Brown, 2009) Canadas
diverse and regionally-oriented political economy works against concerted action to build
clusters of winners and drop losers. (Brown, 2009) In general, it is reported that Canadas
innovation policies have relied mainly on market forces. (Brown, 2009)

Business Ambition. The lack of business ambition, given our comfortable and profitable niche
in North America is weak in Canada. (Brown, 2009) Reasons for this lack of ambition have been
ascribed to: Canadas historical dependence on foreign initiative; less competition in Canadas
domestic market; and Canadas priorities and values are less commercially focused. (Brown,
2009) The CoA report highlights the success that countries with small and fragmented
domestic markets, such as Finland and Sweden, with innovation-driven export focus.

The CoA report has not been the first time that the lack of strategic mindset was reported for
Canadian business. This poor attention to innovation performance issue was reported
previously by Porter through two studies of Canadian competitiveness in 1991 and then again
in 2000. (Porter, 1991) (Martin & Porter, 2000) In 2000, Porter suggested that within in the
context of improving international competitiveness Canadian firms should undertake to
improve their strategy with the goals and behaviours summarized in Exhibit 2. Martin & Porter
makes the point that strategy is made by making choices of its aspirations & goals, which sets
the context for where to play, which then sets the context of how to win. (Martin & Porter,
2000) Exhibit 2 illustrates that Canadian firms have been competing on the left set of choices
which is incompatible with international competitiveness and should adopt the right set of
choices. (Martin & Porter, 2000) The point is made that in commodity industries that

2013 Alopex Management Consulting, Inc. All Rights Reserved

 4

Canadian firms must compete on developing unique processes or evolving their positions to
differentiated segments, export their technological and managerial expertise rather than just
commodities, and recognize they will not win by just buying low cost raw material and profit
from rising commodity prices. (Martin & Porter, 2000) The non-commodity sector must
leverage uniqueness in both products and process and grow in relative size and importance in
the Canadian economy. (Martin & Porter, 2000) Martin and Porter emphasize that Canadian
firms must compete on more sophisticated basis of advantage rather than low cost materials
and labour. (Martin & Porter, 2000)

These observations on Canadian business environment set the context for innovation as a
strategy. The link between innovation and improved productivity is made in Exhibit 3. Exhibit
3 suggests that innovation as a strategy will enable Canadian firms to compete on a more
sophisticated basis. The shortfall in Canadian business strategic planning suggests that Canadian
business leaders need to develop a better understanding of how to implement innovation as a
strategy.

Innovation in a Strategic Context

What is innovation in a strategic context? A firm should want to innovate for the purpose of
improving firm performance. (OECD, 2005) Improvements could take the form of productivity-
enhancing process innovations to gain a cost advantage over its competitors or a product
innovation where the firm gains a competitive advantage by introducing a new product to
increase demand. (OECD, 2005) Either of these can be patent protected that provide a
monopoly on the improvement and a sustainable competitive advantage that offers significant
profit protection. Innovations can also be introduced through product differentiation from
entering new markets and influencing demand for existing products, through changes in
organizational methods (ie. innovative business models) to improve efficiency and quality, or
through improving the firms ability to innovate. (OECD, 2005) Firms may take a reactive
approach to innovation to avoid losing market share to an innovative competitor or a proactive
approach to innovation to gain a strategic market position on a competitor. (OECD, 2005) The
economic view of innovation is therefore based on asset creation and market experiments.
(OECD, 2005)

Innovation as a strategy can also be viewed from the perspective of value creation. The most
important measure of a good strategy is the creation of value by satisfying the needs of
customers better than any other firm. (de Kluyver & Pearce, 2009) Value is also created for
shareholders, partners, suppliers, employees, and the community. (de Kluyver & Pearce, 2009)
In todays world, customer needs are changing very quickly and global competitive intensity is
increasing. (de Kluyver & Pearce, 2009) The crucial implication for the firm is that the value of

2013 Alopex Management Consulting, Inc. All Rights Reserved

 5

their products or services can erode quickly with time and thus requires continual renewal. (de
Kluyver & Pearce, 2009) The time dimension for competitive advantage was captured by Day
and Reibstein in their Competitive Advantage Cycle. (de Kluyver & Pearce, 2009) The renewal
of products or services is achieved through innovation. Thus innovation is crucial for value
creation and best directed at satisfying customer needs.

Innovation Strategy Formulation

How should management formulate innovation as a strategy? The intangibility of knowledge
and innovation introduces difficulties in the strategic formulation process. Firms with a well-
developed existing strategy based on traditional product/market positioning and competitive
advantage strategic approaches need a method to integrate knowledge and innovation. The
traditional strategic formulation process can be used which answers the three key questions:
where are we now?; where do we go; and how do we get there?. (de Kluyver & Pearce,
2009) The main steps that evaluate current performance, environmental analysis, industry
analysis, company analysis, strategy options, and evaluation remain as the strategy formulation
process. (de Kluyver & Pearce, 2009)

The industry analysis to arrive at the competitive analysis can be adjusted to integrate
innovation as a strategy. Strategic positioning can be viewed in terms of three components:
product/market position; knowledge position; and innovation position that must also be
aligned and mutually reinforcing as illustrated in Exhibit 4. (McDonough & etal, 2008) The
product/market position is the traditional view. The product/market position represents the tip
of the firms strategic positioning iceberg with knowledge and innovation positioning
components hidden below the surface. (McDonough & etal, 2008) The innovation position
specifies how much a firm will focus on developing external innovations for customers
reflecting the extent of innovation (incremental to radical) and degree of newness.
(McDonough & etal, 2008) The knowledge position specifies the core knowledge required to
support the strategic goals. In formulating strategy the link between the three positions can be
revealed by answering two key questions: (McDonough & etal, 2008)

What does the organization need to know in order to innovate in a way that supports the
product/market position? and

How does the organizations knowledge limit the kinds of innovation it can successfully
execute?

The firms strategic goals can therefore be defined in terms of unique or superior
product/market position, knowledge position, and innovation position. (McDonough & etal,

2013 Alopex Management Consulting, Inc. All Rights Reserved

 6

2008) Exhibit 4 can be used in the strategy formulation process to answer the questions
Where are we now? and Where do we go?. (de Kluyver & Pearce, 2009) These questions are
answered by mapping knowledge positions and innovation positions to describe gaps in the
market place to produce an enhanced positioning view more than provided by the
product/market position map. The position mapping can reveal product substitutes,
strategically develop capabilities where gaps are identified, and identify blind spots in the firms
strategy. (McDonough & etal, 2008)

Innovation Strategies
What are the key innovation strategies and which strategy is appropriate for the firm? The
choice of innovation strategies answers the question How do we get there? in the strategy
formulation process.

Innovation strategy can be described as the degree and method that a firm uses innovation to
improve its performance. (Gilbert, 1994) The degree of innovation ranges from radical to
incremental. (Gilbert, 1994) The stimulus for innovation ranges from first to late movers.
(Gilbert, 1994) The originality of innovation ranges from inventive to imitative. (Gilbert, 1994)
In these terms two forms of innovation strategy have been proposed: proactive innovation
strategy that is radical, inventive, and first mover; and reactive innovation strategy is
incremental, imitative, and late. (Gilbert, 1994) Innovation strategies fall between these two
extremes. (Gilbert, 1994)

Innovation strategies can be viewed in terms of increasing sophistication and intensity, cost,
and risk. The main innovation strategies include: adapt/adopt strategy; incremental
innovation strategy; and breakthrough innovation strategy. (Curry & Clayton, 1992)

Adapt/Adopt Innovation Strategy. The adapt/adopt strategy is viewed as the simplest, lowest
cost, and lowest risk innovation strategy that involves the acquisition of technology developed
elsewhere either through purchase of equipment with embedded technology or licensing.
(Curry & Clayton, 1992)

Incremental Innovation Strategy. The incremental innovation strategy involves the

identification of elements of technology that have resulted in past success and building on
them aggressively to do even better. (Curry & Clayton, 1992) Incremental innovation strategy is
a moderate intensity, with additional cost for exploration of new methods, and moderate risk
of failure. Firms implementing incremental innovation focus on improvements to traditional
ways of doing things to strengthen their sources of competitive advantages. Incremental

2013 Alopex Management Consulting, Inc. All Rights Reserved

 7

innovation is also referred to as sustaining innovations for improvements. (de Kluyver &
Pearce, 2009)

Breakthrough Innovation Strategy. The breakthrough strategy is one where a discontinuity

discovery is made that renders the competition obsolete. (Curry & Clayton, 1992) Breakthrough
innovation strategy is high intensity, high cost, and high risk. Firms that excel at innovation as a
central strategy focus on finding breakthrough technologies, processes or methods that offer
the potential to transform their industry. (de Kluyver & Pearce, 2009) Breakthrough
innovations are also referred to as disruptive innovations. (de Kluyver & Pearce, 2009) Viewed
in the dimension of time, disruptive innovations are highly uncertain thus in practice, focus on
sustaining innovation is more common in the competitive advantage cycle.

The evaluation of strategic options is the final step in the strategic formulation process.
Decisions of strategic options take place under great uncertainty making future firm
performance improvement outcomes unpredictable causing hesitation or causing difficulty to
obtain external financing. (OECD, 2005) The choice of innovation strategy is based on: industry;
past and present strategy of the firm; and firm resources (ie. core competencies). (Gilbert,
1994) Incumbent industry leaders and competitors tend to focus more on sustaining
innovation while new entrants and challengers tend to focus more on disruptive innovation. (de
Kluyver & Pearce, 2009) Firm structure, culture, processes, and size can hinder incumbent
industry leaders from exploiting disruptive innovation whereas new ventures and spin-offs are
better positioned to exploit disruptive innovations. (Christensen & Overdorf, 2000) Canadian
firms have traditionally followed an adapt/adopt strategy of innovation in the upstream
location in the value chain where products are largely undifferentiated. (Curry & Clayton, 1992)

A recent study viewed innovation strategy formulation as being driven in one of two ways: from
a clear strategic vision with a clear blue print plan for innovation; or adaptive messy, or
vague plan that evolves in an environment of continual adaptation in response to an
emotionally involving goal. (Wood, 2007) A recent adaptive method to initiate strategic
innovation in the face of a competitive crisis was proposed based on five steps: recognize the
crisis and the need for radical transformation; create inspiring but necessarily vague goals; start
to innovate without clear principles; learn from initial innovations; and encourage emergent
innovation routines. (Wood, 2007) The adaptive method is similar in approach to Mintzbergs
emergent strategy. (Mintzberg, 1987) Although the traditional strategy formulation process
provides a good framework, the adaptive method of innovation strategy formulation provides
greater flexibility and is perhaps more suited to Canadian firms who do not have significant
experience with innovation in a strategic context.

2013 Alopex Management Consulting, Inc. All Rights Reserved

 8

Strategic Implementation
How should firms implement innovation as a strategy? History reveals that innovation as a
strategy has not been implemented well. Innovation strategy implementation in the US has
been highly susceptible to cyclical interest driven by disruptive changes in the marketplace. The
main cycles coincided with the: dawn of the global information age in the late 70s; restructuring
drive of the late 80s; internet and dot.com wave of the late 90s; and organic growth drive for
innovation after the dot-com crash. (Kanter, 2006) In this cyclical environment the level of
interest in innovation as a growth enabler fluctuated with innovation strategy outcomes
suffering from mediocre execution, anaemic results, and elimination of innovation efforts in
cost-cutting drives. (Kanter, 2006) As a result innovation investments are viewed in
competition with revenue streams from traditional strategies. The innovation strategies were
observed to be stifled by: bad strategic decision making where hurdles that set are too high and
scope that is too narrow; process mistakes where controls are too tight; structural mistakes
where connections are too loose and separations too sharp; and skill mistakes such as
leadership that is too weak and communication that is poor. (Kanter, 2006)

Several steps should be considered when implementing innovation as a strategy. Innovation

strategy should be based on an innovation pyramid with a few big bets at the top that receive
most of investment funds, a portfolio of midrange ideas with designated teams, and a broad
base of early stage ideas or incremental ideas. (Kanter, 2006) Innovation planning and control
can be improved by reserving pools of special funds for unexpected opportunities. (Kanter,
2006) Structural problems can be improved by loosening formal controls and tighten human
connections between innovation teams and the whole business. (Kanter, 2006) To improve
outcomes leaders should be selected who exhibit the proper behaviours, staff should be hired
with innovation skills, and a culture of innovation should be established which is based on a
supportive culture of collaboration. (Kanter, 2006)

To implement innovation as a strategy properly the strategic formulation process should

therefore be accompanied by solid execution. Key elements just suggested will be reviewed in
more detail including: strategy mapping tools; innovation investment management processes
and decision making; idea generation; and building a culture of innovation.

Strategy Mapping Tools

What strategy mapping tools are available for innovation as a strategy? Strategy mapping
tools enable management to communicate strategic goals and help explain why and how
innovation as a strategy will result in improved performance outcomes.

2013 Alopex Management Consulting, Inc. All Rights Reserved

 9

Innovation as a strategy is about the creation of value as previously described. Perhaps the
most recognized methodology for identifying the key business value parameters, linked with
strategy, then mapped for visual clarity is the value curve, balanced scorecard, and strategy
map tools illustrate in Exhibit 5. (Kim & Mauborgne, 1997) (Kaplan & Norton, 2007) (Kaplan &
Norton, 2000)

A slightly different holistic view of innovation as a strategy can be developed by defining

business strategy as the creation of substantial new value for customers and the firm by
creatively changing one or more of 12 dimensions of the business system as defined by Exhibit
6. (Sawhney, Wolcott, & Arroniz, 2006) Exhibit 6 is referred to in this model as the innovation
radar. (Sawhney, Wolcott, & Arroniz, 2006) Each dimension can be thought of as an innovation
strategy. Exhibit 6 also provides a means to benchmark against competitors, identify
opportunities, focus strategic positioning initiatives, and high light neglected dimensions.
(Sawhney, Wolcott, & Arroniz, 2006)

Innovation Management Processes & Decision Making

What management processes & decision making mechanisms are appropriate to implement
innovation a strategy? Innovation is about ideas and knowledge. Improved performance
requires a process that efficiently and effectively transforms these ideas into tangible business
success measured for the specific firm. The innovation process can be considered an
innovation pipeline that stretches from ideas to results. (Tucker, 2003) As already observed
knowledge and innovation are intangible so various process models have been defined to
provide structure for an information management system.

The traditional process model for new product introduction is the stage-gate process
illustrated in Exhibit 7. A more general model for an innovation process to institutionalize
innovation is illustrated in Exhibit 8. (Anthony & etal, 2008) Exhibit 8 is based on the need for
an innovation management process that any firm can adopt. The demand for innovation is
continuous and institutionalizing innovation is reportedly difficult but successful models exist
based on several key pillars including: build a blueprint for growth in asking what the firm
wants to be; create an innovation engine based on screening and development processes; and
support the new growth engine. (Anthony & etal, 2008)

How should innovation investment decisions be made to select from amongst competing ideas
in the innovation process? The innovation investment decision making process is key element
of the innovation management process. Stage gate processes require decision gates to select
from a range of new ideas in an environment of constrained resources. (Cooper, 1998)

2013 Alopex Management Consulting, Inc. All Rights Reserved

 10

An innovation readiness level framework was proposed for improved decision making under
conditions of uncertainty that integrates the traditional stage-gate process (Cooper, 1998),
technology chasm concept made famous in Moores Crossing The Chasm (Moore, 2006), and
market maturity perspectives as illustrated in Exhibit 9. (Tao & etal, 2010) The innovation
readiness level framework was devised to assist managers to make decisions based on risk
assessment. (Tao & etal, 2010) Marketing and technical data are central to these gates but
ultimately decisions are made on a financial basis by most firms and their stake holders.
Traditional financial investment decision tools, such as discounted cash flow (DCF), net present
value (NPV), fixed/sunk costs, and emphasis on earnings per share, all create a systematic bias
against innovation. (Christensen & etal, 2008) These metrics sabotage innovation decisions
through stage-gate innovation processes. (Christensen & etal, 2008) To avoid numbers
inflation in innovation initiative decision making, a discovery driven planning process is
proposed that is based on determining the set of assumptions that must be proven true to
meet a minimally acceptable financial numbers (ie. revenue, income, and cash flow) for that
initiative. (Christensen & etal, 2008) The assumptions are then used at each stage gate decision
point, instead of the traditional financial metrics, in a check list form that indicates if the
assumptions can be met and if not the project is killed. (Christensen & etal, 2008)

Benchmarking can be used to measure the effectiveness and efficiency of the innovation
management process and question how the process can be improved. (Tucker, 2003) Few
companies are happy though with the manner in which performance of their innovation system
is measured. (Andrew, Sirkin, Haanaes, & Michael, 2007) The most common innovation
metrics are: total funds invested; profitability; time-to-market; and percentage idea generation
to selection. (Andrew, Sirkin, Haanaes, & Michael, 2007)

Idea Generation
Where do new ideas come from to fuel the innovation process? Firms that have not
implemented innovation as a strategy likely do not have a clear system for idea generation.
The capability to generate ideas is central to supporting innovation strategies and building
competitive advantage. Innovations arise sporadically often because individuals or small
groups work on new ideas in a free-lance fashion rather than from an established idea-
management system. (Tucker, 2003) The process of innovation is observed to be ad hoc,
unsystematic, piecemeal, seat of the pants, and highly dependent on luck in most firms.
(Tucker, 2003)

Three quarters of organizations report poor on-demand innovation system performance but
certain vanguard organizations have demonstrated improved innovation process
performance by creating conditions where happy accidents are more likely to occur. (Tucker,

2013 Alopex Management Consulting, Inc. All Rights Reserved

 11

2003) The fuzzy front end is reportedly where new ideas are identified and is the key step in
an innovation process. (Tucker, 2003) New ideas can never be commanded from the top
rather management has a key role in establishing the environment and process to move ideas
to innovations on which the business can act. (Tucker, 2003) Seven strategies that improve
the environment for new ideas include: (Tucker, 2003)

Invite everyone in the quest for new ideas;

Involve customers in the process of generating ideas;
Involve customers in new ways;
Focus on the needs that customers dont express;
Seek ideas from new customer groups;
Involve suppliers in product innovation; and
Benchmark idea creation methods.

We tend to think that ideas arise from within the firm but increasingly firms are going outside
the firm for new ideas by adopting what is called an open business model. The open business
model of innovation refers to a firm that actively searches for and exploits outside ideas and by
allowing unused internal technologies to be used by other firms in order to create value.
(Chesbrough, 2007) Benefits of an open business model are reduced innovation costs, shorter
time to market, and lower risks. The external marketplace for new ideas, products, and
technologies for firms selecting an adopt/adapt innovation strategy is referred to as the
innovation bazaar. (Nambisan & Sawhney, 2007) The external sourcing continuum for
external marketplace is defined by four variables: reach of companies to source ideas; cost of
acquiring and developing ideas; risk of turning the ideas into marketable products; and speed of
bringing ideas to market. (Nambisan & Sawhney, 2007) The external sourcing continuum is
illustrated in Exhibit 10 that shows where firms can source innovation from outside the firm to
support their innovation strategies and the various intermediaries that can assist.

Culture of Innovation
How can firms establish a culture of innovation? The success of innovation as a strategy
depends on people within the firm working in a culture supportive of innovation. In a time of
crisis such as the recent financial crisis, innovation moves organizations from defensive and
catch-up posture to an offensive and ahead posture. (Daniels, 2010) Strategists must therefore
establish a culture of innovation based on the appropriate leadership, environment, and
behaviours. Leaders are often categorized as innovators who employ innovation for
competitive advantage or juice squeezers who focus almost entirely on cost cutting. (Clawson,
2009) Canadian business leaders tend to be juice squeezers which suggest the need for
significant changes in leadership attitudes. Some insight into the innovator-leader suggests

2013 Alopex Management Consulting, Inc. All Rights Reserved

 12

there are five key discovery skills including: ability to associate unrelated ideas from different
fields; finding the right questions to ask (ie. Drucker); observing common phenomena
particularly the behaviour of potential customers; experimenting through prototypes and
pilots; and networking with diverse individuals to provide a radical different perspective. (Dyer,
Gregersen, & Christensen, 2009)

The culture of the organization can support or stifle innovation. Leaders need to develop the
culture of innovation based on six key characteristics: rich context with free flowing
communications; ensure the organization is close to the customer with deep connection to
needs and wants of the customer; leadership that builds and instil confidence (ie. people who
are not fearful, tentative, or waiting for confirmation); encourage curious behaviours (ie. asking
why?, why not? and what if?); challenging while not resting on past success; and collaborative
encouraging team work with informal networks. (Daniels, 2010)

A tool recently proposed can assist leaders in establishing a culture of innovation which is
referred to as the innovation blueprint, Exhibit 11, that describes the environment and
behaviours necessary for continuous innovation. (Dobni, 2006) The innovation blueprint
provides a tool for managers to assess their current level of innovativeness and develop a plan
to improve. (Dobni, 2006)

Exploitation versus Exploration: Implications For Canadian Firms

How can Canadian business leaders justify innovation as a strategy? The added intensity, cost,
and risk of innovation as a strategy forces a debate to justify the value over the traditional
business strategy. This debate is framed as one of exploitation versus exploration where
innovation is viewed as an exploration cost with uncertain returns. Innovation as a strategy
often results in losses in the short term with long term gain. Nowhere is this debate more
intense than in public firms. The pressure on public firms to deliver earnings, so called
quarteritis, and profitability has been observed to impede the full adoption of innovation as a
strategy. (de Kluyver & Pearce, 2009) Investors and industry analysts expect increased earnings
from profitability. (de Kluyver & Pearce, 2009) Executives expect increased earnings from
growth. (de Kluyver & Pearce, 2009) Private firms, who tend to be more long term focussed,
have a better opportunity to invest for the long term and pursue innovation. (de Kluyver &
Pearce, 2009)

Prior to the 2008 financial crisis the strategic emphasis was in general on exploitation over
exploration. Canadian firms were no different having found a comfortable and profitable niche
in North America with few firms competing globally. This also appears to have been the case
over the long term as Canada has reportedly allowed prosperity to gradually decline except
during times of peak commodity demand. (Martin & Porter, 2000) The pressure to perform

2013 Alopex Management Consulting, Inc. All Rights Reserved

 13

also best explains why given the choice that firms choose to not innovate and why Canadian
governments must invest in R&D at universities.

Has the emphasis on exploitation changed since the 2008 financial crisis? The strengthened
Canadian dollar, thickening of the US border, and increasing global competition suggests that
exploration must be considered in the strategic context of Canadian firms. The Canadian dollar
is on par with the US dollar because of high commodity prices and strong financial
fundamentals. The US market access is vulnerable from protectionism and national security.
(Brown, 2009) Emerging global markets are where the big growth will be but Canadian firms
will meet increasingly sophisticated competitors across a broad spectrum of opportunities.
(Brown, 2009)

How can firms determine the best balance between exploration and exploitation? One study
explored the notion of how to achieve the right strategic balance between the simultaneously
competing tensions of: profitability versus growth; short term versus long term; and synergy
versus individual part. (Dodd & Favaro, 2006) The best companies chose factors that united
the tensions: customer benefit (profitability vs growth); sustained earnings (short vs long term);
and diagonal assets (synergy vs individual). (Dodd & Favaro, 2006) This approach could be
used to find the right balance between exploitation and exploration.

Strategic entrepreneurship is another concept proposed to balance exploitation of todays

competitive advantages and exploration for tomorrows competitive advantages as illustrated
in Exhibit 12. (Ireland & Webb, 2007) The importance of strategic entrepreneurship is viewed
in the context of significant environmental change. (Ireland & Webb, 2007) Continuous
innovation is the goal of finding the right balance between exploration and exploitation.
(Ireland & Webb, 2007) Balance is achieved through operational (internal development, M&A,
strategic alliances, corporate venture capital), structural (decentralized authority, semi-
formalized processes), and cultural mechanisms (goals, focus, experimentation, willingness to
face risk, motivation to overlook failure). (Ireland & Webb, 2007)

Conclusion
This white paper explores how Canadian business leaders can use innovation as a strategy and
means to gain competitive advantage in a changing global marketplace. The strengthened
Canadian dollar, thickening of the US border, and increasing global competition suggests that
Canadian business leaders must strengthen their competitiveness. The case is made for
Canadas long-standing productivity growth problem to be reframed to focus on the factors
that influence businesses to choose innovation as a key competitive strategy. Innovation was
presented in the context of competitive advantage and value creation. The traditional strategy
formulation process was adjusted to incorporate innovation. Innovation strategic options were

2013 Alopex Management Consulting, Inc. All Rights Reserved

 14

presented and evaluation criteria were presented to enable management to select the
appropriate strategy. Implementation of innovation as a strategy was described in terms of
key elements such as strategy mapping tools; innovation investment management processes
and decision making; idea generation; and building a culture of innovation. Several tools were
presented to enable the strategist to justify innovation and define an appropriate balance
between exploration and exploitation.

Andrew Reif is the president of Alopex Management Consulting, Inc. with over 25 years
competing in global, rapidly changing markets. You can reach him at andrew@alopex-mc.com.

2013 Alopex Management Consulting, Inc. All Rights Reserved

 15

Exhibits

Exhibit 1. Council of Academies Paradigm Linking Innovation to Productivity. (Brown, 2009)

Exhibit 2. Strategic Choices For Canadian Firms To Improve Their International

Competitiveness. (Martin & Porter, 2000)

2013 Alopex Management Consulting, Inc. All Rights Reserved

 16

Exhibit 3. Model for Innovation as a Strategy In The Context Of National Competitiveness.

(Brown, 2009)

Exhibit 4. Strategic Positioning Defined By The Alignment of Product/Market Position,

Knowledge Position, and Innovation Position. (McDonough & etal, 2008)

2013 Alopex Management Consulting, Inc. All Rights Reserved

 17

Exhibit 5. Value Curve, Balanced Scorecard, and Strategy Map. (Kim & Mauborgne, 1997)
(Kaplan & Norton, 2007) (Kaplan & Norton, 2000)

2013 Alopex Management Consulting, Inc. All Rights Reserved

 18

Exhibit 6. Business Innovation Viewed As An Innovation Radar Mapping 12 Key Dimensions.

(Sawhney, Wolcott, & Arroniz, 2006)

2013 Alopex Management Consulting, Inc. All Rights Reserved

 19

Exhibit 7. New Product Development Stage-Gate Process. (Cooper, 1998)

Exhibit 8. Innovation Process. (Anthony & etal, 2008)

2013 Alopex Management Consulting, Inc. All Rights Reserved

 20

Exhibit 9. Innovation Readiness Level Framework. (Tao & etal, 2010)

Exhibit 10. External Sourcing Continuum. (Nambisan & Sawhney, 2007)

Exhibit11. The Innovation Blueprint For Continuous Innovation. (Dobni, 2006)

2013 Alopex Management Consulting, Inc. All Rights Reserved

 21

Exhibit 12. Strategic Entrepreneurship And The Balance Between Exploration and
Exploitation. (Ireland & Webb, 2007)

2013 Alopex Management Consulting, Inc. All Rights Reserved

 22

Bibliography
Andrew, J., Sirkin, H., Haanaes, K., & Michael, D. (2007). Measuring Innovation 2007: A BCG Senior
Management Survey. Boston: Boston Consulting Group.

Anthony, S., & etal. (2008). Institutionalizing Innovation. MIT Sloan Management Review, 45-55.

Brown, R. (2009). Innovation and Business Strategy: Why Canada Falls Short - The Expert Panel on
Business Innovation. Ottawa: Council of Canadian Academies.

Chesbrough, H. (2007). Why Companies Should Have Open Business Models. MIT Sloan Management
Review, 22-30.

Christensen, C., & etal. (2008). Innovation Killers: How Financial Tools Destroy Your Capacity to Do New
Things. Harvard Business Review, 98-107.

Christensen, C., & Overdorf, M. (2000). Meeting the Challenge of Disruptive Change. Harvard Business
Review, 67-76.

Clawson, J. (2009). Level Three Leadership: Getting Below the Surface, 4th Edition. Upper Saddle River:
Pearson Prentice Hall.

Cooper, R. (1998). Product Leadership: Creating and Launching Superior New Products. New York:
Perseus Books.

Curry, S., & Clayton, R. (1992). Business Innovation Strategies. Business Quarterly, 121-127.

Daniels, S. (2010). Innovative Culture. Leadership Excellence, 15.

de Kluyver, C., & Pearce, J. (2009). Strategy: A View from the Top, 3rd Edition. Upper Saddle River:
Pearson Prentice Hall.

Dobni, C. (2006). The innovation blueprint. Business Horizons, 329-339.

Dodd, D., & Favaro, K. (2006). Managing the Right Tension. Harvard Business Review, 62-75.

Dyer, J., Gregersen, H., & Christensen, C. (2009). Innovator's DNA. Harvard Business Review, 61-70.

Gilbert, J. (1994). Choosing an Innovation Strategy: Theory and Practice. Business Horizons, 16-22.

Ireland, R., & Webb, J. (2007). Strategic entrepreneurship: Creating competitive advantage through
streams of innovation. Business Horizons, 49-59.

Kanter, R. (2006). Innovation: The Classic Traps. Harvard Business Review, 73-85.

Kaplan, R., & Norton, D. (2000, September - October). Having Trouble With Your Strategy? Then Map It.
Harvard Business Review.

2013 Alopex Management Consulting, Inc. All Rights Reserved

 23

Kaplan, R., & Norton, D. (2007). Using the Balanced Scorecard as a Strategic Management System.
Harvard Business Review, 150-161.

Kim, C., & Mauborgne, R. (1997). Value Innovation: The Strategic Logic of High Growth. Harvard Business
Review, 172-180.

Lafleur, B. (2008). How Canada Performs: A Report Card on Canada. Ottawa: The Conference Board of
Canada.

Mandel-Campbell. (2007). Why Mexicans Don't Drink Molson. Vancouver: Douglas & McIntyre Ltd.

Martin, R., & Porter, M. (2000). Canadian Competitiveness: Nine Years after the Crossroads. Toronto:
Rotman School of Management.

McDonough, E., & etal. (2008). Integrating Innovation Style and Knowledge Into Strategy. MIT Sloan
Management Review, 53-61.

Mintzberg, H. (1987, July-August). Crafting Strategy. Harvard Business Review. Harvard Business Press.

Moore, G. (2006). Crossing The Chasm: Marketing and Selling Disruptive Products to Mainstream
Customers. Collins Business.

MPI. (2009). Opportunity in the turmoil. Toronto: Institute for Competitiveness & Prosperity.

Nambisan, S., & Sawhney, M. (2007). Innovation Bazaar. Harvard Business Review, 109-118.

OECD. (2005). Oslo Manual: Guidelines For Collecting and Interpreting Innovation Data, 3rd Edition.
Paris: OECD Publishing.

OECD. (2006). Economic Survey of Canada. Paris: OECD.

Porter, M. (1991). Canada at the Crossroads. Ottawa: Business Council on National Issues.

Sawhney, M., Wolcott, R., & Arroniz, I. (2006). The 12 Different Ways for Companies to Innovate. MIT
Sloan Management Review, 75-82.

Tao, L., & etal. (2010). Towards and integrated framework for managing the process of innovation. R&D
Management, 19-30.

The Conference Board of Canada. (2013). How Canada Performs. The Conference Board of Canada.

Tucker, R. (2003). 7 Strategies for generating ideas. The Futurist, 20-26.

Wilson, L., & etal. (2008). Compete to Win. Ottawa: Government of Canada.

Wood, R. (2007). How strategic innovation really gets started. Strategy & Leadership, 21-29.

2013 Alopex Management Consulting, Inc. All Rights Reserved