Strategy is undergoing a sea change. For many years, the ultimate goal of strategizing has been to create a ‘sustainable’ competitive advantage. Economists and practitioners alike developed tools and processes that worked well – as long as things were relatively stable. However, in increasingly larger parts of our economy, it is starting to become obvious that competitive advantages and business models are transient. Even in industries that we used to think of as relatively long-cycle and slow moving, unexpected competition and dramatic changes in the operating environment are causing those who develop strategy to challenge their fundamental assumptions. For example, within 48 hours last week I had calls from strategy people at a mining company and an energy utility, both of which reported that within the last year unexpected challenges had emerged for which they felt their leaders were woefully ill-equipped. These industries have been thought of as relatively slow moving, yet they are experiencing the sting of competitive advantage that was temporary and had become unsuitable for the times.
When competitive advantages are short-lived, one needs to think in terms of developing and managing an entire pipeline of advantages in order to survive. This suggests, among other things, that a robust process for generating new business models through innovation is essential. And yet, when one looks at what is actually going on in many organizations, it is clear that the innovation function, in most companies the starting point for creating new advantages, is broken or even dysfunctional. This situation persists despite a truly vast amount of talk about innovation. In many organizations, the basic building blocks of an effective innovation process are simply not in place.
I group the warning signs that the innovation process doesn’t work well into six categories. In this article, I will describe each of these categories and offer suggestions for what managers can do to fix what is wrong in each case.
Innovation is episodic
The first indicator that the innovation function in an organization has become dysfunctional is that it has become an on-again, off-again process, dependent on the whims of senior people or small groups.
Innovation can be said to begin when the innovation impulse begins to percolate in an organization. This could be because company leaders recognize that the existing business has started to become commoditized, or worse, that it is in full-scale competitive retreat. Only very occasionally it means that far-sighted leaders have recognized that they can’t simply continue to exploit their existing advantages and that they need to refresh them.
The innovation thrust can take a number of forms. It might be a small group or team who gleefully go behind the typical organizational rules to explore new opportunities. It might take the form of a skunkworks, or even a whole New Ventures Division. For a while, things seem to be going along just fine, as the people engaged in the innovation process make interesting discoveries, find new places where the company’s capabilities might be relevant, and come up with new ways to serve customers.
Unfortunately, the efforts, all too often, end badly. This could be because the parent company faces some kind of cash, profit or numbers squeeze, and the folks with budget scalpels go looking for something to cut. It’s easy to ax innovation, as in the early stages these ideas have few real constituencies – after all, a potential customer can’t scream about never getting a product they didn’t know they would love. More tragically, the group has actually come up with something powerful and novel, but – whoa – someone senior in the organization suddenly realizes that this could have a disruptive or cannibalizing effect on existing cash cows. The innovators get squashed, the idea is shelved and the old battle-axes live to fight another day [see “Civil War Inside Sony,” Rose, F. (2003). The Civil War Inside Sony: Sony Music wants to entertain you. Sony Electronics wants to equip you; Wired Magazine. Issue 11.02]
The innovation team, dispirited, disbands and its members move back to the established businesses, or frequently end up leaving the company. Innovation, after all, is uncertain and many things will not work out as planned. In fact, most things will not work out as planned. But this, of course, has not solved the company’s fundamental problem – the lack of a sustained commitment to innovation –which is eroding competitiveness in the core business. So, new ventures re-appear after some months or years when someone else gets the innovation urge (see Kodak ventures, Xerox PARC, the Nokia New Ventures Organization and Lucent Ventures).
On-again, off-again innovation is worse than doing nothing. It sends the signal to good people that these are not the kind of projects they should bet their careers on, and it wastes resources. If you want to get it right, innovation needs to be continuous, ongoing and systematic. Set aside a regular budget for it. Make it part of good people’s career paths. Actively manage a portfolio in which innovations are balanced with support for the core business. And build it into the organizational processes that sustain anything else that is important in the company.
The innovation process is invented from scratch
The reality is that it’s difficult work to bring innovations through the processes of ideation, incubation, scaling up and then give them their rightful place in the core business of a company. It is work, however, that a lot of smart people have studied and for which there is good knowledge about which practices are effective and which are not. And yet, for some reason, when it comes to innovation, people in companies feel compelled to invent the process from scratch, making it up as they go.
So someone gets plucked from the management ranks to be the innovation leader, and then he or she assembles a team of enthusiastic volunteers and sets off to pursue glorious new things. Often, the management practices that they use are ad-hoc. This almost never works.
It’s important to realize that innovation, like any other important organizational process, such as quality management or workplace safety, can be managed to some extent. So before people blunder about reinventing the process every time, it makes sense to step back and understand what works and what doesn’t.
Fortunately, there are a lot of resources that you can use to become better informed about what an innovation will require, and which can be put into action right away. There are many books on the corporate venturing and entrepreneurial process, as well as courses and opportunities for people to get mentoring and coaching. Why so many companies don’t read these books or enroll in the programs remains a profound mystery to me!
The payoff to learning for doing innovation right can be tremendous. At General Electric, for instance, Prescott Logan, the brand-new leader of the firm’s fledgling battery business, realized that he wasn’t dealing with an initiative in the company’s core business, but rather with a totally new kind of opportunity. Rather than pursue the project with standard GE methodology, he determined, as he put it, to “get smarter” about what would be required to launch something that would be entirely new to the company. He could have invested millions in plants and equipment and gone to market immediately. Instead, he lobbied for and got time to figure out what the true business would be, what customers it would serve and what the business model could yield, using “lean startup” ideas from entrepreneurship educator Steve Blank. Today, the business is quite different from the original concept, but it is showing extremely positive growth potential.Resources are held hostage by incumbent businesses
In most companies, power and control over resources are tightly linked. Those individuals running great big, profitable businesses get to make a lot of decisions, and people elsewhere in the organization aspire to be one of those individuals. But here’s the dilemma: If one or more of those businesses is beginning to decline, the people in charge have zero incentive to re-allocate resources away from what gave them their power base to fund something new.
Here’s the problem: Today’s successful business may not be tomorrow’s. While this sounds utterly obvious, many companies don’t allocate resources in a way that recognizes this problem. For most managers, shrinking their business or redeploying assets and capabilities to somebody else’s business is not in their own best interest. So, resources are used to shore up the position of businesses that are starting to fade, thus eking out a little more time for the managers in charge, until the declining fortunes of a once-powerful business are obvious to everybody. This creates two problems: Firstly, valuable assets are being tied up in a business that doesn’t have a future. Secondly, the resources that might be used to fund growth are held hostage by a business that represents the status quo.
In 1994, I remember holding a Nokia product that looked like today’s iPad. It connected to the Internet, could access web pages and even had a rudimentary version of an app constellation. Why didn’t Nokia capitalize on this groundbreaking innovation? Because the company’s emphasis was on mass-market phones; resource-allocation decisions had been made accordingly. There was no mechanism or process for getting the resources to where they were needed.
To fund innovation systematically, the resource-allocation process needs to be designed to divert or extract resources from established businesses and re-purpose them to fund growth. This is not easy stuff. IBM had to re-invent its entire innovation process to tackle the problem, coming up with what they called the “Emerging Business Opportunity” model, in which a senior-level executive watched people and assets allocated to innovation like a hawk, to make sure they didn’t get sucked back into the existing business. Ivan Seidenberg of Verizon was criticized by many – even his own people – for re-purposing the cash coming out of businesses like land-lines and phone books – to support Verizon’s moves into wireless and entertainment businesses more broadly. At Lego, the CEO pulled resources from all the sister businesses and forced his team to agree on which innovations would be supported by the freed-up funds. The core lesson is this: If you allow the existing businesses to determine where people and funds will be allocated, you’re not going to enable and support innovation. Rather, you’re going to get more of the existing businesses. Innovations are force-fitted into existing structures
When I ask companies about the difficulties they have with innovation, I often hear, “Well, these things fall between the cracks of our organizational structure.” At DuPont, in the 2000’s for instance, I was involved in a project to move the company more into services and solutions. The project was called the “knowledge intensive growth” initiative. What the senior leaders eventually realized was that DuPont’s strategic business unit (SBU) structure at the time was incompatible with this initiative, which required aligning its activities with a customer’s experience with the company. The solution ended up being a reorganization – into structures DuPont called ‘growth platforms,’ in order to create the connections to pursue and realize these ideas.
However, the reorganization created a dilemma, namely that the growth platforms were soon found to be trying to solve a problem that existed in the past. So then, today we have functional structures that are fantastic at making sure that each function – you know, every piece of the value chain – operates with maximum efficiency. But that way of organizing is internally focused and doesn’t really allow each manager to control his or her own fate. So then, companies discover the ‘strategic business unit’ or SBU, which allows each business to run its own operations with each function subordinate to the needs of a particular business. But….oh, no, the SBU logic doesn’t really capture or leverage core competencies. Then we find out that a focus on core competencies leaves a firm vulnerable to disruptive innovation, and …well, you get the idea.
The main lesson here is that an innovation, by definition, is highly unlikely to be well served by the organizational structure that worked well for the business that existed. Instead, you want to give a new business its best possible shot by assembling a combination of people, assets and other resources that suits its own particular needs.
At Infosys, for instance, the company goes through a major reorganization on a regular basis. Interestingly, even though it does take people’s time and utilizes resources, the company firmly believes, as head of Planning, Sanjay Purohit, said, “…that the cost is nothing as compared to the powerful innovations it can release.” It is worth noting as well that once people become comfortable with changing the structures of the organization on a regular basis, the entire process becomes a good deal easier. I might even go so far as to say that when you have enough stability and “change management” is required to shift things, innovation is in trouble.Applying the same criteria to evaluate an innovation and the core business
Innovations, by definition, are new. They are uncertain. They are small, to start with. In other words, they are significantly different propositions from the predictable and stable core business. And yet, companies frequently use the same planning, budgeting and measurement approaches to small ventures as they do for businesses that have been around for decades. But with new ventures, a different logic needs to apply.
For instance, consider the process of applying for funds. I’ve seen companies in which a small request to get a little analytical support to gauge the potential attractiveness of a market segment requires the same approvals as a major capital budgeting effort! Instead, it would make a lot more sense for the level of scrutiny and permission to reflect the actual cost and risk of a particular initiative.
Or consider the very definition of failure. In an established business area, the rate of failure really matters because missing targets can mean damage to one’s brand, thus disappointing customers and leading analysts to view one’s activities with alarm and a host of other ills. In a new venture, it is normal to have things not go as planned. Indeed, absent the ability to test hypotheses and gather new information by trying and failing, ventures are highly unlikely to make much progress. With a new venture, product or service, the goal should be to test as many hypotheses as possible in rapid succession and to learn as quickly as possible what the true opportunities are.
A related issue is the fact that a lot of companies believe that the more assets and people you manage, the better. However, this creates a problem. Internal entrepreneurs should be encouraged to learn as much as they can as inexpensively as they can, in order to keep the cost of failing low. Assuming that the incentives in the new business will be the same as those in the existing ones will create entirely the wrong behaviors. It will encourage people to seek senior roles in a bureaucratic system and create barriers to making decisions, which could result in fewer people under management and embed rigidity in structures and decision making. In one very well managed firm I work with, achieving a role in the “Executive Committee” or equivalent is taken for granted as the appropriate aspiration for up and coming young people. When I challenged this assumption, I was looked at as though I were speaking in an alien language.
A particularly deadly practice in large organizations is to require managers to have excessively ambitious objectives before a project can be approved. The dilemma is that in the early months or years of a new venture, it is highly unlikely to become a large and substantial new business. That will take some time. And yet, hungry for substantial growth, executives require leaders of the new business to project unrealistically large numbers for revenues and profits. Even when, in an objective sense, a venture is making good progress, those projections can lead to ventures being seen as failures.
So I worry when I see the same planning, budgeting and control processes used for things that are pretty predictable also used for things that aren’t. I worry when managers of innovation are rewarded for being “right,” when the easiest way to be right is to take very few risks. I worry when venture leaders over-promise in order to obtain support. Indeed, if you take a quick trip through the file in my office in which I document the brief and often costly histories of major corporate innovation flops, you’ll find a common thread, one of treating assumptions as facts and failing to provide adequate tests prior to making major financial commitments. Iridium phones? Of course business-people would be prepared to stand outside buildings to make phone calls. WebVan? Of course people hated grocery shopping enough that they would reschedule their lives to accommodate the delivery schedule. Bebo? Of course AOL had to get into social networking in a major way or be left behind…and so it goes. Insisting on the venture meeting plan
Never, in my entire career of studying innovation, has a project, initiative or idea worked out as initially planned. Moreover, the great ideas that really did work often started as something entirely different. And yet, ironically, when many companies start to try to do something innovative, they expect the same reliable, predictable results that you might get if you were tweaking something minor in the core business. The consequence, unfortunately, is that many innovation leaders find themselves, through no fault of their own, stuck with defending certain guesses and assumptions they made at one point, even though those assumptions failed to consider how the real world worked. Even worse, because budget and planning processes place a premium on being “right,” there is often no incentive for an innovation team to fess up to having made a guess that was wrong – at least not until substantial expense has been incurred and angst has been generated.
It is far better to recognize that in an early-stage venture, you are working with what are mostly guesses. Some will be right on. Some will be wrong, but they will be helpful for having generated a valuable understanding of what won’t work. Some will just be revealed, with the wisdom of experience, to be in the “I should have thought of that” category. No matter. They too are valuable.
Today, we know a great deal about what allows a venturing program to succeed, and conversely how to recognize the signs that it is doomed. I believe that more companies will recognize that a functional, organized innovation process is no longer optional in the long-run pursuit of their strategies.
Reprint from Ivey Business Journal
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Reprint from Ivey Business Journal
[© Reprinted and used by permission of the Ivey Business School]