How to set up corporate innovation unit

‍Innovation is more than just a mix of process optimization and R&D investments. ‍

It is an ongoing and multi-level process that changes the way businesses are run. Even companies with a long and successful history, like the German Mittelstand, have to utilize and create completely new business models in order to ensure that they stay relevant in the future. 

Many corporations set up digital innovation units (DIUs) with the mission to come up with those new business models. Those DIUs often get a large budget, a fancy office, and top talent. Yet, in the end they rarely meet the high expectations put upon them. According to a study by strategy&, only 8% of DIUs in the DACH-area are successful in bringing their ideas to the market.   

In the following whitepaper, we want to share how we, as wattx, approach business innovation within the Viessmann Group. Our goal is to contribute to the ongoing discussion on best practices for corporate innovation units by highlighting key factors and decision criteria regarding the organizational structure and operating model of innovation units. Furthermore, we are going to share some insights on how wattx is organized and why we have been performing well in the past.

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‍The Need for a New Innovation Structure 

It slowly becomes clear for most companies that successful innovation is not only about a mix of process improvements and R&D investments, but rather about the utilization and creation of new business models. This does not mean that R&D investments and process improvements are obsolete. Successful companies have to do both: explore new opportunities (re-inventing parts of their businesses) while exploiting current opportunities (getting better at what made them successful in the past). In business theory, such companies are known as ambidextrous organizations.

Business leaders should not ask the question “Do I put my innovation budget in classical ‘product’ R&D or in some new business?”, but instead think about how to do both. Still, it remains critical to understand the differences between exploring and exploiting and - more importantly - to know how to approach both ways of innovation organizationally and methodologically. 

Exploring new opportunities describes innovation beyond the core business. This kind of innovation can be seen as reinventing oneself. A well-known example for this is a traditional car manufacturer who starts offering a car-sharing model as consumer behavior changes. In order to execute this innovation, it is usually appropriate to set up a dedicated DIU, acting as a satellite next to the core organization. Employees involved in the daily operations probably will not re-invent parts of the business as they are focused on creating a competitive advantage by process optimization. An independent DIU in contrast has the freedom to iterate faster, work at a different speed, and use a completely different technology-stack if required. 

Exploiting current opportunities describes innovation close to the core business. This could be for instance a company switching their customer service from a traditional call center to an AI-chatbot in order to improve the customer experience and reduce costs. Or an automotive manufacturer switching from gas to electrical engines. For these innovation initiatives to become successful, the teams working on them often require access to existing skills and knowledge from the core organization. Thus, it is recommendable to integrate the respective team within the current business or technology units, instead of setting up a dedicated DIU as a satellite. This way, it is possible to leverage every existing resource most directly.