The Golden Circle of Innovation: what companies can learn from NGOs when it comes to innovation

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Published on March 14, 2014

Author: janspruijt


The Golden Circle of Innovation What companies can learn from NGOs when it comes to innovation Jan SPRUIJTa,b,1 , Tom SPANJAARDa , Koen DEMOUGEa a Academy of Marketing, Avans University of Applied Sciences, The Netherlands b Professorship of Innovative Entrepreneurship, Avans University of Applied Sciences, The Netherlands White paper Relevance During the last two decades, the landscape for entrepreneurism has changed rapidly. Important trends are the transition from domestic and static economies towards global and dynamic economies, from homogenous, experienced and permanent workforces towards diverse, educated and flexible workforces, from the use routine technologies and mass production towards complex and knowledge-driven technologies and customization and from bureaucratic, efficiency-driven organizations towards organic and innovation-driven organizations (Greiner & Cummings, 2004). Recent number show make clear that the landscape for doing business is changing and a playground for social entrepreneurs has opened. Stated by Bill Drayton, “social entrepreneurs are not content just to give a fish or teach how to fish. They will not rest until they have revolutionized the fishing industry.” This form of entrepreneurship has been introduced by Prahalad who wrote that two third of the world population is living at “the bottom of the pyramid” and that this group is large enough to be able to gain the attention of entrepreneurs that also value social impact besides economic growth (Prahalad, 2006). More specifically, NGOs and not-for-profit organizations are often included in the definition of social entrepreneurship: NGOs deliver services in a participatory nature, engaging in communities – its stakeholders – and pioneering leading towards social cohesion and NGOs strive for social inclusion through workforce integration of marginalized people eg. long term unemployed, disabled, homeless and/or minorities (OECD, 2012). It seems more than interesting to look into NGOs, the way they are doing business, and – as innovation becomes more and more important – into the way they successfully seem to be able to implement innovation. 1 Corresponding author: Jan Spruijt, Avans University of Applied Sciences, Onderwijsboulevard 215, 5223 DE ‘s-Hertogenbosch, The Netherlands; E-mail:

Introduction “Innovation is an innovation onto itself. At one point innovation didn’t exist. Someone had to create some kind of a word that created the feeling that it feels like to hear the word that we hear when we hear the word innovation,” as said by Reggie Watts, an American comedian. Obviously not seriously meant, it undeniably supports the fact that innovation has received not only wide interest during many decades for now, but it also has been studied from several different views and perspectives (Crossan & Apaydin, 2009). To name a few: innovation as ‘doing things differently’, technological innovation (Markard & Truffer, 2008; M.A. Schilling, 2005), process innovation (Davenport, 1992), organizational innovation (H. Chesbrough, 2010; Crossan & Apaydin, 2009; Johnson, Christensen, & Kagermann, 2008) and its successful implementation. The first section of this paper is structured around the most fundamental elements that – when combined – should construct to building a theoretical concept: why, what, how and who (also involving when and where) (Whetten, 1989). This approach has gained serious attention recently, because Simon Sinek explained a theory around “start with why” in a presentation (Sinek, 2009), his so-called ‘golden circle’, provided in the following figure: In his work he explains why everything starts with answering the why-question. And that also means innovation, as he states it: “Knowing your why is not the only way to be successful, but it is the only way to maintain a lasting success and have a greater blend of innovation and flexibility. When a why goes fuzzy, it becomes much more difficult to maintain growth, loyalty and inspiration that helped drive the original success” (Sinek, 2009). The why is followed by the how and lastly the what. Hows are “the actions you take to realize the why” and what are “the results of those actions”. The how in innovation therefore reflects to the process of innovation and the what reflects to the innovation itself. Though not focusing on the why, how and what, Crossan and Apaydin have generated an overview of all relevant theories on innovation, resulting in a framework for innovation, as depicted below. Figure 1: Golden Circle

The mention two ‘dimensions of innovation’, both focusing on innovation itself and they mention several ‘determinants of innovation’, focusing on the way that innovation is accelerated and managed within organizations. In attempt to combine both models with each other, we created a new framework: the golden circle for innovation: Figure 2: Crossan & Apaydin

The why of innovation The why of innovation not only consists of leadership aspects; it also consists of embracing a mission that fulfills a more general need and therefore rectifies the necessity of innovation. As Einstein once stated “If you always do what you always did, you will always get what you always got”, change is a prime economic driver. "It is practically impossible to do things identically" (Hansen & Wakonen, 1997) which “makes any change an innovation per definition” (Crossan & Apaydin, 2009). But to what extend? Innovation drives economic growth and economic growth is a necessity because of the grand challenges that this world is facing, such as keeping up with international competition in a globalizing world – which in turn increases the need for higher productivity rates through both product innovation and process innovation (Parisi, Schiantarelli, & Sembenelli, 2006) – and megatrends such as climate change, social problems and the experience economy (Brainport, 2007; Sistermans, Maas, & Figure 3: Golden Circle of Innovation

Soete, 2005). On a more regional level, a large amount of local economies strongly depend on innovation. According to the European Union Scoreboard - although the actual implications of these scoreboard(s) on for international comparisons and the formulation of policies should be seriously doubted (Nasierowski & Arcelus, 2012) – it is clear that there are regional differences in the dependence of local economies on innovation. Assuming that both ‘innovation leaders’ and ‘innovation followers’ are driven by innovation-driven regions (in contrary to ‘moderate innovators’ and ‘modest innovators’), the European Union consists for 46% of innovation-driven regions (Hollanders, Léon, & Roman, 2012). Put simply: innovation is vital for every country in the European Union. Although large corporations are explicitly encouraging innovation in those regions, it is mainly small- and medium-sized enterprises that – more implicitly – drive local innovation. Tidd & Bessant (2011) state that within SMEs innovation seems to be factor that is most positively related to success, that innovation-oriented SMEs generally grow faster and have more success than their non-innovative counterparts and that innovation-oriented SMEs generally have larger market shares and more profitable margins. During the first decade of this decennium the percentage of entrepreneurs actively involved in innovative processes was between 35% and 40%. Across the last two years this number has increased significantly towards an average of about 50% of the entrepreneurs stating they brought to market innovative products or services (Acs & Szerb, 2012; Bosma, Wennekers, & Amorós, 2012). So how are great leaders capable of embracing this necessity for innovation and embed it into their vision for the company? Dyer, Christensen and Gregerson (Dyer, Gregersen, & Christensen, 2009) undertook “a six-year study into the origins of creative – and often disruptive – business strategies in innovative companies”. They found evidence that these leaders are visionary and much more facilitating the innovation process than actually coming up with innovations themselves. They are drivers of the process. Their study results in five ‘discovery skills’ that these inspirational leaders do 50% better than their non-creative counterparts:  Associating  Questioning  Observing  Experimenting  Networking Concluding this paragraph, we can state that an effective answer the why of innovation consists of both a motivational mission statement that embraces one or more grand challenges that is functioning as the beating heart of the organization and inspirational leaders that are effective in the five before-mentioned discovery skills. The how of innovation Innovation has a basis in the product life cycle. Literature on this topic goes back centuries, but was first scientifically mentioned by Levitt (Levitt, 1965). In several revising studies, Perreault has elaborated on this model (Perreault, McCarthy, Parkinson, & Stewart, 2000). The model consists of the four phases a product or service are subject to: market introduction, market growth, market stability and decline. From an innovation perspective, Rogers has created a model that characterized final

consumers to the extend in which they adopt to new technologies: The Diffusion of Innovation and Adopter Categories (Rogers, 2002). Typically, managing processes, like the process of innovation, are cyclical. This cyclical approach generates space for reflection and therewith dynamical growth. The first scientist adapting this approach was Francis Bacon, who stated that every scientific process should consist of hypotheses, experiments and evaluations (Bacon, 1990). In 1982 Deming developed the famous Plan-Do-Check-Act cycle (Deming & Edwards, 1982). The first cycle of innovation (and using the exact term: “innovation cycle”) was Cole in 2002: Probe-Test-Evaluate-Learn (Cole, 2002). In recent decades, a lot of research has been performed into innovation processes and the steps that regularly seem to reoccur in these processes. Literature reviews show there is little consensus about the number of phases and types of phases that should be part of a regular innovation cycle (Adams, Bessant, & Phelps, 2006; Gopalakrishnan & Damanpour, 1997). For instance, we found models that consist of five phases, such as idea generation, project definition, problem solving, design and development and marketing and commercialization (Gopalakrishnan & Damanpour, 1997) , Inputs, knowledge management, Strategy, project management and commercialization (Adams et al., 2006), creativity, human resources, innovation strategy, portfolio management and project management (Goffin & Pfeiffer, 1999), idea generation, technology acquisition, networking, development and commercialization (Verhaeghe & Kfir, 2002) and that consist of four phases, such as idea generation, developing, prototyping & manufacturing and marketing and sales (Rothwell, 1992). From a perspective of creativity – an important aspect in the why of innovation and one of the core elements in most of before-mentioned innovation cycles – there are basically two phases that can be distinguished when opening up the innovation process (Gassmann, 2006; Von Zedtwitz, 2005):  A diverging, often vague, phase in which creative and diverging processes are or seem to be generally chaotic and where next to the generation of ideas innovation seems to be rather arbitrary.  A converging, disciplined, phase in which creative ideas are critically addressed, edited and selected and further developed into commercial business cases and successful innovations. De Brentani and Reid further elaborate on this model (Reid & De Brentani, 2004). They state that incremental, structured innovations are mostly the result of explicit and structured innovation processes and organizational processes. On the other hand, unstructured innovation processes (especially in the first one or two phases) often lead to disruptive or radical innovations. This is also called the ‘fuzzy front end’ of innovation (Brentani & Reid, 2012). Structure and organisation in later phases of innovation processes is always a pro for the success rate of innovation. In what way does the fuzzy front end of innovation differ with structured innovation?  There is continuous unstructured problem identification and unstructured opportunity recognition, whereas more structured innovation processes mostly use problem structuring and opportunity structuring and the early phases of the process (Hauser, Urban, & Weinberg, 1993; Leifer, O'Connor, & Rice, 2001).  Information collection and information exploration is generally outside-in oriented, whereas these steps are often inside-out oriented in structured processes.

This theory is further elaborated on by Mance, Murdock and Puccio, who have generated the following model (Puccio, Mance, & Murdock, 2010): At this point, we have tried to deduce a model that comprises all before-mentioned models and consequently consists of four phases that each have the form of diverging- converging, but also as a total has to form of diverging-converging: Figure 4: Diverging and Converging Figure 5: Innovation Cycle

The art of cyclic innovation – innovation as a process and the continuous management of innovation – is called innovation management. It is defined as the acceleration of the generation of innovative ideas by using effective mechanisms of management and organization and taking into account the fact that it has to be implemented successfully (M.A. Schilling, 2005). Innovation management, or new business development, aims to enhance the chance of technical and commercial success (Melissa A Schilling & Hill, 1998). Similar like organizations growth models, the area of innovation management has been undergoing several improvements over the years. Rothwell has stated that market changes have contributed to these improvements and he distinguishes five different generations of innovation:  1st generation: technology push.  2nd generation: market pull  3rd generation: coupled innovation  4th generation: integrated innovation  5th generation: open innovation Concluding this paragraph, we can state that as part of the how of innovation the processes should be oriented at following a pragmatic approach – such as problem finding, ideation, concepting and implementation – and should consist of both a structured inside-out approach and a more chaotic outside-in approach and that the management should be oriented at successful implementation and embedding new approaches to innovation management, such as open innovation. The what of innovation There are various definitions of innovation. In an earlier article, we have used the following, fairly narrow defined, definition of Schilling: “Innovation is the act of introducing a new device, method or material for application to commercial or practical objectives” (M.A. Schilling, 2005; Spruijt, 2012). Crossan & Apaydin recently published a literature review on innovation literature, stating: “An unrestricted search of academic publications using the keyword innovation produces tens of thousands of articles, yet reviews and meta-analyses are rare and narrowly focused, either around the level of analysis (individual, group, firm, industry, consumer group, region, and nation) or the type of innovation (product, process, and business model)” (Crossan & Apaydin, 2009). To be specific, a current2 search on the keyword “innovation” results in 2.5 million articles on Google Scholar and thousands of articles using the keyword combination “definition of innovation”. Clearly, there isn’t a specific definition that is correct and many perspectives should be taken into account when defining innovation. Crossan and Apaydin (2009) have identified different forms of innovation and grouped them around certain dimensions, some of them related to innovation as a process, some of them to innovation as an outcome. These dimensions are: Innovation as a process: 2 Febuary 24, 2013.

 drivers of innovation: the driver or rationale behind innovation. This could be internal drivers (such as available knowledge and resources) or external drivers (such as a market opportunity);  levels of innovation: indicates who is involved (or responsible) for the innovation. For instance, innovation is leveled individually, by groups or by the firm as a whole;  direction of innovation: defines how the innovation starts, could be bottom-up or top-down;  source of innovation: the initial source of the innovation, possibly internally initiated (such as ideation) or externally initiated (such as adoption of innovation or licensed innovation). The theory of the fuzzy front end, further explains the way that innovation could be initiated: through structural (inside-out) ways or through (outside-in) ways (H. Chesbrough, Vanhaverbeke, & West, 2008; Reid & De Brentani, 2004);  locus of innovation: this dimensions explains the (geographical) extension of innovation. Possible options: closed or open, such as networks (Simard & West, 2006). Innovation as an outcome:  forms of innovation: is the innovation a product, service, process of new business model? Products and services are novelties that are meaningful to the market (Wang & Ahmed, 2004). Processes are methods or management models that contribute to the improvement of (external) processes. Business model innovation involves the improvement of business models in general (Henry Chesbrough, 2007).  magnitude of innovation: the magnitude refers to the potential impact of the innovation. Is it incremental, radical or even disruptive?  referent of innovation: to whom is the innovation relevant and new? Is that the firm itself, the industry or the market as a whole?  type of innovation: there are technical innovations and administrative innovations.

This leads to a more detailed model of the one we presented earlier: Research questions and methodology Most literature regarding both the why, the how and the what of innovation focuses on examples of start-ups, small- and medium-sized companies and larger corporations. And there are many successful examples of companies who embedded innovation starting from the why and were able to improve their how and clearly identify the what. However, literature on NGO’s or socially-oriented companies in combination with Sinek’s model or Crossan & Apaydin’s model is basically non- existent. This has led to our research question: “On which aspects of the why, what and how are NGO’s more successful than companies and why?” In other words, what can NGOs learn from larger corporations and what can larger corporations learn from NGOs when it comes to the successful adoption of innovation? For the aim of this research we have analyzed two cases, one within a company named Fair2, a small NGO in The Netherlands, and the other one in the Lilian Foundation, a large NGO, also based in The Netherlands. We have conducted several interviews and accompanied them in some of their ‘innovation’ projects. Figure 6: Golden Circle of Innovation

Results The most important findings of the cases have been depicted and ordered in the why, how and what, below. The why of innovation Having a clear mission statement, and therefore starting their businesses from the why much more than starting their businesses from the how or what, is something that NGOs – or social organizations – seem to be more embedded than organizations in general. In the case of Fair2, for instance, the founder Caroline de Greeff states: “it is our aim to reduce the need for intervention of NGOs in third world countries and to create awareness amongst people that development is not something that is solely about gifts and subsidies. People can actually contribute to development, they can empower people in third world countries to become accountable for their own future.” Moreover, the director of the Liliane Foundation puts it slightly differently, framing that their business model is organized around the idea that developing countries should be able to address problems themselves. An organization such as the Liliane Foundation is supporting organizations within developing countries to find and implement solutions to medical care to children with a handicap themselves. Clearly, both organizations are strongly driven by their mission. NGO’s in general have a mission to do good. Literature states that social organizations are able to combine the passion of a social mission with an image of business-like discipline (Dees, 1998). They are not bound by sector norms or traditions and they are more likely to develop effective strategies for their mission. Social leaders are better at taking calculated risks and managing the downside of risks in order to reduce the harm caused by possible failure. They are more proficient in taking into account opinions and drivers of their stakeholders (Dees, 1998). Their mission statements are explicit and central, resulting in the fact that mission-related impact becomes the central criterion, not wealth creation. They are personally responsible for (Dees, 1998): - Adopting a ‘grand challenge’ and creating a sustainable mission statement; - Recognizing and relentlessly pursuing new opportunities to serve that mission; - Engaging in a process of continuous innovation, adaption and learning. Some drawbacks of social leadership and social mission statements are the fact that they are facing challenges in increasing financial security without sacrificing their mission, being able to execute the core activities and implementation strategies that are most appropriate to their mission, finding the goodwill of the public to devote its time and energy on its mission and dealing with the harsh realities of the market that could conflict with the NGOs compassionate mission and values (Viravaidya & Hayssen, 2001). As Van Greeff states: “I actually didn’t think of a way how to generate a business model around the idea of co-creation. […] But I like thinking about business concepts and business models. How to finance future organizations, products and

services? I’m currently in the middle of the operations. I will start thinking about business models when it’s more stable.” The how of innovation During the studies we followed the Liliane Foundation in an innovation project aiming to create more awareness amongst high school students about the problems in third world countries. They collaborated with a group of students from Avans University in order to identify the problems. These students are high school dropouts and were able to address the problem very efficiently. In a next step, the Liliane Foundation gathered a group of high school teachers to further develop ideas and alternative programs for awareness. In a third step, they collaborated with high school executives and university executives in order to create a platform for the implementation of the alternative programs and to find financial contribution. In the last phase, the implementation, they collaborated with all parties and included some external partners, mostly sponsors, in the roll out. The whole project was successfully launched within a year. So what did they do? They used their why to find partners that were willing to help them executing the how. They found a way of ‘open innovation’ that is rarely seen in the corporate world, as depicted in the following figure:

Conclusions and Discussion The results lead to the preliminary conclusions that NGOs perform better than companies on the why of innovation and the how of innovation. There is no indication that they score better – or worse – on the what of innovation. For the purpose of further investigation, we are trying the formulate some hypotheses for a more elaborate (quantitative) study: The why of innovation: - H+ 1: NGOs and social organizations are more successful in translating grand challenges and trends into their mission than companies are. - H+ 2:NGOs and social organizations are driven by more passionate, motivational and inspirational leadership than companies are. Figure 7: Open Innovation Cycle

The how of innovation: - H+ 3: NGOs and social organizations are more creative and efficient in the management of processes they adopt in order to be innovative than companies are. - H- 4: NGOs and social organizations are less effective in the execution of processes and procedures than companies are. The what of innovation: - H- 4: NGOs and social organizations are less able to identify the innovativeness of their outcomes and their processes than companies are. In other words: preliminary results show that NGOs and social organization are better able to organize innovation from the why and how, rather than starting from the what than companies are. They therefore seem to perform better in initializing, launching and enabling innovation, but are still out of balance on the ‘commercialization’ side and therefore less able to successfully implement their innovations.

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