Picked up “Creative construction, the DNA of sustained innovation”.
- Larger enterprises have massive financial resources to explore new opportunities.
- They can hedge highly risky technology bets through parallel experimentation in ways that start-ups can only dream of.
- They can build vast networks of external collaborators to explore a broad array of emerging technologies.
- They have incredibly deep reservoirs of technical talent and operational skills critical to bringing innovations to the market.
- They have a global distribution and a strong brand.
- They have the infrastructure, know-how, and processes to get an innovative new product into the hands of millions of customers around the world almost instantly.
- They have decades of experience working with regulatory and government authorities.
- Large organisations have the resources to hire a broader portfolio of talent.
- Larger organisations can invest in multidisciplinary capabilities in a way that is simply outside the reach of smaller companies.
However, by some estimates, about 70% of organisational change efforts fail. Because building a capacity to innovate involves overcoming several specific obstacles. The first is the required time horizon. The second vexing problem is that difficult trade-offs are demanded by innovation. Any company with existing lines of profitable businesses faces a fundamental strategic dilemma: How much should it invest in existing businesses and existing capabilities versus new (uncertain) businesses and capabilities? Finally, building innovation capabilities involves profound cultural changes.
What type of innovation do you need?
Beyond the vague notion that the company “needed to become innovative,” there was, unfortunately, little agreement about what kinds of innovation might help the company regain its advantage and what capabilities the company needed to build. Too often, innovation initiatives become a grab bag of widely touted “best practices” such as open innovation, design thinking, rapid prototyping, autonomous decentralised teams, and internal venturing.
Make innovation specific
To navigate tough choices and trade-offs, you need an innovation strategy. That is always true of course but especially so for larger enterprises. Surprisingly, though, leaders rarely articulate strategies to align innovation with their business strategy. They grapple with the fundamental question, “Why exactly do we want to innovate?” You can also see why statements like “We want to be a leading innovator” are not particularly helpful.
You need a strategy
A robust innovation strategy specifies the kinds of innovation that are important for the company to pursue. Good innovation strategy is about finding the right mix of projects across routine, radical, disruptive, and architectural categories.
- Without an explicit innovation strategy, no one actually knows what kinds of innovation are important to the organisation.
- When everything is potentially important, nothing is particularly important.
- Without clarity around the questions of how innovation is supposed to create value and lead to value capture, different parts of the organisation can easily wind up pursuing conflicting priorities.
- Strategies define patterns of behaviour and priorities.
- They are not exhaustive to-do lists.
- Company strategies do not need to be complicated.
- Strategies should be simple and clear.
- Good strategies promote alignment among diverse groups within an organisation, clarify objectives and priorities, and help focus efforts around them.
- They act as a map and compass.
- They provide direction.
- They also speed up decision making.
- Without a strategy, every decision has to be debated.
- A strategy should be clear enough to take certain options off the table and to make others no-brainers.
- Strategy is where you spend your money and time.
- Strategy is not about intent or vision or aspiration.
- Strategy is about resources, value creation, value capture, and value distribution.
- The right way to judge the merits of any innovation (and an innovation strategy) is value created and captured.
You have 3 basic options:
- Option 1: Build Complementary Technological Capabilities That Are Hard to Imitate
- Option 2: Focus on Business Model Innovation
- Option 3: Crank Up the Treadmill Through Rapid Routine Innovation
Making a choice is difficult
Making innovation predictions is hard. There is a tendency to emphasise how quickly things are changing and how different the future will be from the present (a predictable bias of people who, after all, call themselves futurists). Supposedly obsolete technologies can be surprisingly tenacious:
- Internet-based banking has surged in the past twenty years, leading many to expect the end of the branch. Yet, the number of branches in the United States continued to grow steadily until 2009.
- We all know about the decline of print newspapers as digital channels have ascended. While it is true that print circulation has been declining for years, print still made up 78% of daily circulation and 86% of Sunday circulation in 2016.
Speed of change
It is also just as easy to underestimate how quickly things do change. Consider what happened in the smartphone market.
- In 2008, a year after Apple introduced the iPhone, Nokia’s proprietary operating system for smartphones, Symbian, still commanded a 48.8% share of the market
- Video on demand displaced the market for rental DVDs within about three years of introduction.
- Within eight years of its founding, Amazon was selling more books online than Barnes and Noble was selling through its stores.
- In 2004, about 90% of US households had a wired landline for telephone service.
Everything is part of a system
Few technologies exist in isolation. They are part of more complex systems. That means that the economic viability of any given technology depends on the interaction of multiple complementary technologies and economic forces, each subject to its own uncertainty. Read “The wide lens“.
Inflexion points are extremely hard to anticipate because their timing is influenced by the interaction of multiple factors.
For instance, if you want to predict the market penetration of electric vehicles in the next ten years, you have to get your arms around trends in battery technology (in itself a highly complex space), advances in electric motors, materials that affect vehicle weight, potential advances in internal combustion technology, advances in fuel technology, the cost of gasoline, the cost of electricity, future government policies, and future customer preferences, to name just a few factors.
Another impediment to technology and business model predictions is what I call “endogenous customer preferences.” Customer needs and preferences are neither static nor given.
Whether and how fast a new technology triumphs depends not just on its own (uncertain) rate of progress, but also on the (uncertain) rate of progress of the technologies it seeks to replace. Particularly when you know that old technologies often continue to progress and improve quite dramatically in the face of potentially disruptive innovations, a phenomenon he called “last gasps.”
In determining how aggressively you should embrace a new technology or business model, you need to focus not just on revenue but on profitability. How certain are you that the threat will destroy your current business, and over what time horizon might this happen? What is the impact on your profitability: If you do adopt the new technology or business model, can you still achieve reasonable profits?
Uncertainty is time-dependent
Start by picking a time horizon for your analysis that matches your window of response. That is, figure out how long it will take you to respond to the threat, and then use that as your window to analyse what might happen. If you have long product development cycles (like, say, Boeing or a pharmaceutical company), you need to be looking far out on the time horizon to assess technologies because you have to act now to be capable of responding to a threat in ten years. Once you have a reasonable time horizon, you can then conduct all the usual types of technological and economic analyses to assess various scenarios. Ask the following questions:
- Are there complementary technologies that need to be developed for the threat to be realised?
- What can we really glean about customer behaviour and tastes?
- How much improvement potential is left in existing technologies?
Assess whether you can earn reasonable profits by adopting the disruption in question. To find this answer, you will need to examine how the technology or business model change will influence fundamental industry drivers of profit potential: What impact will it have on structural market factors like barriers to entry, intellectual property protection, ability to differentiate, supplier and buyer bargaining power, availability of substitutes, scale economies, network externalities, fundamental cost drivers, and the like? You need to assess realistically your capabilities to compete effectively in the new technology. If the threat in question appears relatively likely to impact your business and the profits from it are at least as good as your current business, then aggressively moving into the new technology or business model makes sense.
In the worst-case scenario, your core business or core technology not only looks likely to become obsolete, but you do not even have a viable path to profit under the new regime. What should you do if you are faced with such terrible alternatives? There are two basic strategic plays.
One is to compete in a market where you have little chance of profiting, find new markets where you can deploy your existing capabilities. Kodak might have pivoted to markets where its existing and unique speciality chemical and materials capabilities could be deployed.
Defend and extend
The second possible strategy is to defend and extend. In this strategy, you try to prolong the decline as much as possible by improving your technology, finding attractive sub-segments of the market where your technology still has an advantage and reducing costs.
The best strategy when facing high degrees of uncertainty is to hedge and build options for the future. However, it is prudent to experiment with alternatives well in advance as insurance against a potential disruption you may not be able to respond to.
How can you build the capabilities you require to execute your innovation strategy? Innovation writers and consultants will urge companies to imitate the practices of companies like Apple or Google. However, there are no universal “best practices.” The same principles apply to the design of innovation systems. Innovation systems need to perform three basic tasks:
- search for novel and valuable problems and solutions
- synthesis of diverse streams of ideas into a coherent business concept
- selection among opportunities.
Also realise that discovering markets can be just as hard as discovering technologies, and just as important for innovation.
Lack of awareness
The problem is that many senior leaders are not aware of how their organisations search for new innovative ideas and markets. They do not design their search processes to purposely expose the organisation to ideas that might be transformative. Exploratory search outside a company’s home court does not happen automatically. The problem for most companies is not where they look for ideas; rather, it is where they do not look for them. The customers, suppliers, partners, and experts you do not talk to are the ones whose problems you are not hearing. What we see, what we experience, whom we listen to, whom we speak to, and whom we observe all shape our perceptions about problems worth solving and solutions worth pursuing. Therefore:
1. Create forcing mechanisms
2. Move people physically outside their (geographic) home courts
3. Mix the “gene pool” of your workforce
4. Learn through analogies
5. Challenge sacred assumptions
6. Experiment and iterate:
7. Open things up
Innovation is combination
Quite often, innovation involves combining existing ideas and existing components in new ways. Innovation through combination is all around us. Think about music. With just twelve notes, we can compose every genre of music at every level of sophistication, from Mozart’s symphonies to “Chopsticks” and from opera to rap. To spawn transformative innovations requires an organisation to blend multiple strands of seemingly disparate ideas into coherent concepts. The author calls this process “synthesis.” Even the seemingly most radically “new” innovations have roots deeply embedded in the past. Transformative business model innovations likewise often result from combinations of old and new concepts. Synthesis is an act of creating something new out of the integration or combination of existing components.
Find the synthesisers
There is nothing easy about synthesis or being a synthesiser. Synthesisers have to be incredibly capable people. They need intellectual firepower across multiple domains and a habit of mind that can entertain complexity, contradictions, and ambiguity. They need the capacity to both learn from, and communicate to, specialists from diverse fields. This type of work requires people with the right backgrounds and temperament. It also requires recognition. The synthesisers in your organisation should be among the most-coveted (and best-rewarded) positions.
Unpredictable and fluid
The act of combining diverse streams of knowledge and experience is inherently unpredictable. The more diverse the contributing streams get, the more unpredictable the outcome of the process becomes. Because the right combination of “ingredients”—whether they are component technologies, capabilities, engineering methods and principles, or business concepts—can not be predicted in advance, creative synthesis demands a fluid innovation process rather than the more structured processes that have become popular over the past decade. Because integrating diverse streams of knowledge is inherently uncertain, it requires a fluid process designed around rapid experimentation, iteration, and learning.
Innovation is organisational design
What is ironic, of course, is that larger organisations may have more of the pieces for transformational innovation available to them, either within their broad portfolio of businesses or through their external networks. However, companies often squash iteration through processes that essentially require you to “meet your plan. There is a theory in the innovation literature that the design of a product mirrors the design of the organisation that created. An organisation can find itself laden with an obsolete structure. How can you prevent this at your organisation?
One approach is to use “soft structures” like project teams or temporary organisations focused around specific innovation opportunities. Amazon used small, nimble teams that were given a high degree of autonomy (and resources) to explore and integrate ideas from different sources and to develop and test concepts. Input and talent came from various parts of Amazon. Boundaries were fluid. An extreme example of using soft (but powerful) structures to drive transformative innovation through synthesis is how the Defense Applied Research Projects Agency (DARPA) organises research. It organises all its programs around temporary project teams composed of networks of external collaborators from both industry and academia.
Which approach is right for your company? Structure your organisation to integrate the right mix of skills, capabilities, and experience like Bell Labs? Or opt for more fluid, soft structures like project teams like Amazon and DARPA? About your current organisational structure, you should ask; does it impedes the kinds of cross-disciplinary or cross-market collaborations that are critical to our future success?
Innovation is selection
Picking the wrong projects could lead to financial ruin—picking the right ones could be worth billions of dollars. There were many possible criteria along which to evaluate the projects (e.g., potential market size, return on investment, the likelihood of technical success, fit with the company’s mission). Xerox, AT&T, and Polaroid didn’t fail from lack of ability to discover a problem (search) or bring together diverse ideas into a novel solution (synthesis). They failed from an inability to make good project-selection decisions.
Uncertainty and ambiguity
In principle, picking innovation projects is no different from any other resource allocation decision. Selection sounds simple. Innovation projects, though, have characteristics that make choosing among them anything but a simple exercise. The first problem is uncertainty. Ambiguity is the second challenge for selecting innovation projects. As should be evident, uncertainty and ambiguity make innovation project selection a risky proposition. When it comes to allocating resources, ignorance is not bliss—it is downright scary. If you raise the bar for the level of certainty you require before committing to a project, you will reduce your chances of committing to bad projects; but, at the same time, you will increase the likelihood of mistakenly culling some projects that would have turned out to be winners. And, obviously, the opposite is true. Being very lax on project selection criteria will reduce your chance of killing off a great project too soon, but it also means you waste a lot of resources on loser projects.
Questions like “How big is the market?” and “What is the return on investment?” are unanswerable up front. A good way to orient the process around learning is to frame proposals as a set of working hypotheses about the technology, markets, customers, value streams, and business model and strategic choices.
What to do
- Use analytics to drive questions rather than to provide answers. Analyses would be conducted and presented, but, rather than triggering a decision, they triggered questions about assumptions and alternatives.
- Foster vigorous debate. Debate is a form of conflict (intellectual), and conflict makes some of us uncomfortable. If properly managed, debate and the associated conflict can be very productive. It can serve as a critical tool of inquiry and learning.
- Be transparent. A characteristic of healthy debate is transparency. Debates should be held in forums that enable the relevant parties to hear the others’ arguments and perspectives and to respond.
- Keep your mind open as long as possible.
Innovation is culture
Culture consists of the shared values and social behaviours of members of an organisation. Are they willing to speak up? Are they willing to challenge each other’s ideas? Are they willing to take chances? If not, then the formal system simply will not matter. Culture can be thought of as a “shadow” organisational system. You cannot always see it, but you feel its effects all the time.
The cultural attributes most people associate with innovation, though, do not seem so tough to swallow. What is so painful about:
- Tolerance for failure but no tolerance for incompetence
- Willingness to experiment but highly disciplined
- Psychologically safe but brutally candid
- Collaborative but individually accountable
- Flat but with strong leadership
How could a set of organisational practices that everyone seems to love, be so hard to implement?
Reengineering the cultural DNA
The theme of leaders owning culture shows up time and time again in companies that have striven to preserve innovative cultures or have had to become innovative again. Amazon’s Jeff Bezos talks to both employees and shareholders about the importance of keeping Amazon’s “Day 1” culture. Satya Nadella, CEO of Microsoft, has written, “The CEO is the curator of an organisation’s culture.
Engineering an innovative culture at scale
It is much easier to get 10 people to agree on a set of values and norms than 100,000 people. This is why start-ups are generally considered to have more innovative cultures than established companies. The founders of a start-up get to, by definition, start from scratch. There is nothing to be “undone.” The original founders can have a powerful “imprinting effect” on the culture of an organisation over a long time. Culture is a bit like DNA—it replicates, but sometimes imperfectly. Changing long-held norms is challenging enough; now consider the need to change the thinking and behaviour of a few hundred thousand employees!
Take direct ownership
Cultural change or preservation demands direct intervention from the top. When you look at organisations (of all sizes) that have highly innovative cultures, you tend to find leaders like Ed Catmull, David Kelley, Jeff Bezos, Larry Page, and Sergey Brin, who have an almost maniacal focus on culture.
Model the behaviour you want
At its roots, an organisation’s culture is a system of shared values defining expectations and norms of behaviour. Cultures not only define what is important in an organisation, but they also define who is important in that organisation, and specifically who has influence.
Many larger companies today utilise some form of internal venturing to nurture outside the home court innovations. But these internal quasi-independent ventures can also be used as “safe spaces” to incubate new cultures. That is, internal ventures should have two goals: create a transformation innovation and create a template for a new culture Leaders should be prepared to intervene directly on behalf of new ventures to protect pay scales, processes, systems, work environment, and other perceived privileges. This is substantially important both to protect the emergent culture from threats but also to send a very powerful signal about leadership’s intentions. In larger organisations, the new culture requires a network of champions who will act as protective “godfathers.”
The right people
Because cultures are ultimately embodied in people and expressed through their behaviours, cultural transformation cannot happen without the right people. Cultural transformation is ultimately a competitive process yielding winners and losers. Hard decisions will have to be made regarding people, particularly people on the senior team. The wrong person in a position of power or the departure of a champion can stop a cultural transformation in its tracks. Read “Powerful”
Create a start-up culture
There are often very good reasons to create such organizationally autonomous units. Recognise first that start-ups represent a very diverse set of cultures. And that the vast majority of start-ups fail. Just saying you want to create a “start-up” culture inside your organisation, then, is probably not particularly helpful. Instead, it is better to focus on the specific characteristics of start-up cultures that you seek to emulate and then try to understand whether it is possible to achieve those in an established enterprise. There are three cultural traits of healthy start-up cultures worth emulating:
- The first is an obsession with speed. You face a tough decision; you get the right people in the room to resolve it today.
The clocks inside start-ups seem to run faster.
- A second significant difference is the level of individual accountability around companywide objectives. In start-ups, critical tasks are assigned to small teams or to individuals. There is no place to hide.
- The third trait of start-ups cultures is comfort with extreme risk-reward outcomes. Many start-ups pursue audacious goals.
The question, though, is whether these traits can be replicated inside larger corporations. Urgency, accountability, and risk tolerance in start-ups are mindsets. An enterprise with 25,000 employees does not have to practice individual accountability to survive; a start-up with 25 people has no choice but to practice it. Given the structural differences between a start-up and an established enterprise, it is easy to understand why most efforts to “re-create” a start-up culture by organising into smaller units inside a big company fail. The problem with most of these efforts is that they conflate size and culture.
To re-create the speed and agility of a start-up inside a large enterprise, leaders should take away the luxury of time. Set aggressive time goals for projects, hold project teams accountable for reaching those goals and provide project teams with the autonomy and flexibility to execute in ways that enable them to move quickly. It is remarkable how fast large organisations have been able to move when they have found themselves in desperate straits
Like speed, accountability is a mindset created by expectations and policies. High-accountability cultures establish clear expectations about performance and provide individuals with the power (and support) to make decisions in the best interest of the organisation. There is nothing about enterprise scale that prevents this. This starts by appointing people with the necessary leadership skills (not just pure technical skills) and with a deep sense of commitment to the vision of the program.
Many of the entrepreneurs I meet are motivated by having an impact more than making a ton of money. The same is true for many of the scientists and engineers I meet inside larger companies. Refocus your purpose and align that with your reward system.
Use your toolset
Culture is not superficial, and cultural changes require more than tweaking symbols (like dress codes or physical surroundings). You do not create an innovative culture by putting lava lamps in the lobby or wearing a hoodie. Effecting lasting changes in patterns of behaviour—the essence of cultural transformation—requires using a broad arsenal of management tools. Leaders need to manipulate systems, reporting relationships, structures, policies, decision-making processes, and incentives. Finally, cultural transformation is not episodic.
The culture of your organisation is shaped every day by every action, every decision, and every behaviour you model. Lead by example.