In the previous chapter, which discussed the factors of corporate excellence and success, we repeatedly mentioned the role of innovation as a strategic factor, which in everyday language encompasses developments of widely varying significance. For professionals involved in process development, even short-term, low-budget projects can be considered innovative activities, and new market segments can be conquered with a new type of packaging. That is why it is important to clarify what level of innovation a company can achieve in order to develop dual-capability organisations – in other words, the ambidextrous organisations that are the subject of this book. Our aim is not to present various academic definitions to corporate professionals, so we provide definitions related to corporate practice. In addition, in 2018, the definition of the concept was simplified at the international level, and based on this clarification, we distinguish between the following two basic types of innovation (NKFIH, 2020, p. 19.):

 

An important feature of innovation is that it is available on the market or used in practice, which clearly distinguishes it from the results of various research activities, inventions or prototypes, whose primary function is to gather customer feedback (Deák, 2021).

 

 

Another global innovation expert, Alexander Osterwalder and his co-authors, draw attention to the portfolio approach in their book The Invincible Company, based on their analysis of the innovation processes of a number of large companies. Collaborating with several multinational companies, such as Hilti and Nestlé, they found that in order to develop and maintain a competitive innovation project portfolio, management or owners must provide clear direction. This is called strategic guidance, which consists of management declaring in which market(s) it wants the company to expand, what financial performance it expects from the innovation project, and over what time frame. Strategic guidance actually determines what kind of company management/owners want to build, taking into account corporate identity (who are we?), organisational culture (what are our values?) and brand image (what do we say about what we do?). Based on the innovation projects they have managed over the past decade, they report a similar success rate to that of the aforementioned Stevens–Burley research duo. The example of Nestlé's innovation portfolio conveys a very clear and important message to corporate innovation managers and executives, which has led, among other things, to the global success of the capsule coffee machine. The group invests an average of USD 100,000 in 250 innovation projects over a given period. Of these, 162 fail in the first development phase, 87 generate some financial results, and finally one (!!) product can become a real "blockbuster". In fact, this one outstanding success is what gives meaning to the entire process and innovation portfolio philosophy, as it is capable of putting the entire company on a new growth trajectory (Osterwalder et al., 2020).

 

Leaders who believe they can pick winning ideas at a glance, or even immediately, are actually killing ideas before they are tested. They will ask for detailed implementation schedules and business plans, and if the proposer or the team that initiated the idea does not have a convincing argument or plan, they will kill the idea immediately. In contrast, effective innovation leaders invest in evidence-based ideas. This also means that ideas are killed based on evidence, facts, and research and testing results. The initial small investment, which may be a few days of work time or a few tens or hundreds of thousands of dollars in material costs, already allows development teams to start testing their ideas. In innovative companies, decisions are made based on the test results and evidence generated by the teams. So, when an idea is killed, i.e. not pursued, the reasons for the decision are clearly documented, which builds trust among employees and increases transparency within the company and trust in the developers.

 

 

Further characteristics of the three types of innovation distinguished on the basis of the degree of value creation:

 

Incremental innovation

This covers minor but significant improvements to a company's products, services and business processes. These are usually the "new and improved" innovations that consumers are bombarded with on a daily basis: new flavours, a switch to better or all-natural ingredients, improved packaging, faster/slower operation, just-in-time supply chain improvements, smaller/larger size, cost reduction and lighter weight. We constantly encounter these types of innovations, which help to extend the life cycle of products and services and improve their profitability by increasing production efficiency. They are easy and quick to communicate and have novel content that can attract consumers' attention and differentiate the company's products and services in an increasingly competitive market.

 

Breakthrough innovation

This is when a business brings something original and unique to the world, developing something that no one else has done before. It introduces the business to new markets or changes the interaction between customers and the market or industry. Changes in the external environment and trends are important precursors to breakthrough innovation, which offers consumers a demonstrable novelty, much more than incremental, or "new and improved" innovation. Disruptive innovation creates a significant competitive advantage for a period of time, although the time developers can maintain this advantage is getting shorter. One of the most cited examples is the first iPhone. By leveraging new technology, Apple was able to launch a fundamentally new product that created new demand. Another example is James Dyson's world-first bagless vacuum cleaner, which, although based on an existing business model, used new technology, known as cyclones, i.e. bladeless fans, to significantly expand the market offering with its elegant appearance and outstanding suction power.

 

Transformational innovation

Generally, it is the introduction of a technology that creates a new industry and transforms living and working conditions. This type of innovation often eliminates existing industries, or at least completely transforms them. For this reason, transformative innovations are usually supported by those who are not tied to existing infrastructure. Transformative innovation is extremely rare in terms of quantity. Just think about it: how many truly new ideas are born in a year? In the life cycle of a business? Not many! An important feature of transformative innovation is that it is driven by curiosity, resulting in revolutionary new developments that bring about profound changes in society and our way of life. Typical examples of transformational innovation include the internet, electric cars, Uber and Airbnb.

 

No business can survive in the long term without implementing some kind of development. On the one hand, this is because competitors will sooner or later come up with something new, and if the company does not want to wait for its customers to switch to the competition, it has to come up with something that can give them more value. The other pressure and incentive for innovation comes from the ideas and demands of employees, suppliers and customers, which must be used to further develop the portfolio or supplement it in line with their expectations. A common example is the difference between traditional and artisan bakeries. While ten to twenty years ago, customers were satisfied with a few types of bread and baked goods, the portfolio of trendy bakeries today consists of 35-40 types of baked goods. New wave bakers are even more experimental, developing new baked goods to meet customer demand and preparing them on a daily basis.

 

 

Another finding of the study is also thought-provoking. The rate of return is roughly the inverse of the ideal distribution described above. Innovation efforts related to core activities generally account for 10% of the long-term cumulative return on innovation investments. Initiatives that complement core activities contribute 20% to the return on innovation expenditure, while radical, transformational efforts contribute 70% (see Figure 8). This is not to say that a 70-20-10 split in innovation investment is ideal for all companies, but it can be considered a rule of thumb that provides guidance for companies operating in different sectors and at different stages of their life cycle. For example, for companies producing market-leading consumer goods, it is sufficient to allocate 2% of innovation expenditure to transformation initiatives, 18% to innovation efforts that complement core activities, and 80% to the further development of the core activity itself. For growing startups, the ratio is different again (45–40–15), as these companies are interested in finding products and services that will generate really high growth (Nagji–Tuff, 2012).