Companies have money and resources, so why is it so hard for them to excel in groundbreaking, disruptive innovation?
Just before the iPhone was announced in 2007, BlackBerry phones were the most popular on the market. However, the iPhone with its revolutionary touch screen, turned the BlackBerry into an archaic device. Instead of turning to disruptive innovation, BlackBerry believed that their keyboard phone would remain appealing to business people and professionals. They were wrong, and with that, the company lost momentum. In 2013, they were down 50 percent in their quarter earnings, and were cutting 4,500 workers.
Other big corporations — Nokia, Yahoo and Hewlett-Packard to name a few — also felt the frustration of accelerating performance.
Why is it so difficult for big companies to establish (and maintain) the ability to innovate, while all of them have innovation programs, innovation departments, and/or innovation officers?
The Innovator’s Dilemma
One reason why corporations may have a hard time setting up successful innovation strategy is because of the innovator’s dilemma. This dilemma arises when companies are dominant and have a need to protect their market. Their focus moves from disruptive innovation to sustaining innovation.
At some point however, a competitor will emerge that will threaten their business with a better alternative. These companies are thus faced with a dilemma: sustain the market where they are excelling (BlackBerry example) but lose some great opportunities, or focus on these (“crazy”) opportunities that might only bear fruits in the longer run (if at all)?
Gary P. Pisano, Professor of Business Administration at Harvard Business School, notes that the problem is not with failure to execute, but is rooted in the lack of innovation strategy. What’s important about building good innovation strategies, he adds, is that they help align diverse groups within an organisation (a problem that startups rarely face), define objectives and help focus efforts on them.
The thing about innovation strategy is that you can learn from that of another organisation, but you cannot copy. There is no one system that fits all companies equally well or works under all circumstances.
It is a mistake to believe that what works for, say, Apple (today’s favourite innovator) is going to work for your organisation. You can’t copy culture.
Nokia, once the world’s leading mobile producer, sold to Microsoft for €5.4 billion with only three percent of the global smartphone market share in 2013. Technology didn’t kill Nokia, neither did ideas or the people. Nokia had the technology to build an iPhone but didn’t. It was the lack of a burning platform and innovation culture. The company was massively underestimating competition just because they believed Nokia was the untouchable market leader – wrong.
As we can see, corporations can make wrong assumptions and what’s more, they are great at killing “bad” ideas.
The problem is that disruptive ideas at first seem bad. Renting out an airbed does not sound like a great idea, but today AirBnB overshadows some of the world’s largest hotel groups.
There’s no culture of supporting bad ideas, but there’s a culture of killing them. This creates a situation in which employees don’t want to share ideas anymore. Additionally, corporates often lack the right innovation strategy and structure particularly for disruptive ideas.
So going back to the innovator’s dilemma, it seems that companies face this question (even if they don’t explicitly ask it): “should we sustain the market where the sailing (seems) clear, or should we rock our boat and explore uncharted waters?”
In many cases, such as in life, staying in the clear is more comfortable, but at some point this comfort can turn into grief.
The good news is that this dilemma is not a Catch-22, and there are ways for corporations to keep their comfort, and still explore new territories.
Steve Blank discusses the way to bridge the Lean Startup methodology with corporate innovation. He incorporates two strategic principles. The first proposes that companies who want to be innovative need to execute their core business parallel to focusing on innovation. The second proposes that a company should distribute its innovation to three horizons:
- Mature businesses
- Rapidly growing business
- Emerging businesses
Activities in horizon 1 support existing business models (where the sailing seems clear). Horizon 2 is focused on extending existing businesses with partially known business models (the boat starts rocking) and horizon 3 is focused on unknown business models (the storm is near).
Most corporates are not that active in Horizon 3, but remain in the (partial) comfort of horizon 1 and 2. Horizon 3 is long-term and risky. It doesn’t pay-off till the next CEO is in place, so there is little incentive for the current CEO to invest in it, leading this horizon to be the first to suffer from budget-cuts.
Interacting with four zones
Geoffrey Moore provides an interesting way to deal with this situation by proposing four zones that interact with the three horizons. These zones help companies separate the resources that go into sustaining innovation and disruptive innovation.
In the Performance zone (horizon 1) operation of established business models happen. It is about making the numbers. This zone is supposed to make up about 90% of the company’s revenue. One mistake is to believe that shareholders only care about this zone and focus all the resources here.
The Productivity Zone (also horizon 1) has no direct accountability for the revenue of the company. It is the space for shared services such as: marketing, manufacturing, customer service, finance, etc. These enable the company to perform. The zone’s task is to target efficiencies, improve operations, and direct resources to core activities.
The Incubation Zone (horizon 3) acts as a host to fast-growing offers in emerging categories/markets that did not yet materialise. Here nest the next-generation teams, who will hatch up a number of projects. The funding needs to flow to projects with a potential to scale.
The next zone is in charge of scaling up such projects. The Transformation Zone (horizon 2) is supposed to materialise and scale up disruptive innovation. The goal is to create new business that makes up 10% (or more) of the revenues. Success in this zone would affect how investors value the company, and attract new partners. However, failure here could pull the company down the pecking order.
It is important to keep these zones separated (similar to the first strategic principle from Steve Blank) because each zone requires a different kind of management with a different set of objectives. However, they must work alongside each other. How though?
- By providing a structure that keeps them apart, and prevents methods and metrics getting mixed up between the zones.
- Apply best practices for each zone, separately.
- Have (lightweight) governance that keeps an overview of the all the zones, and helps with planning and resource allocation.
Ideally, there is a balance between the four zones, so that your organisation is able to promote and embrace disruptive innovation, but such balance is what they frequently lack. Often, they miss the knowledge and people to build it. Executives have never (or rarely) learned about this type of business, but are now confronted with the swift reality of the Information Age.
How can we be both a corporation and a startup?
Innovation is another kind of business, which requires a unique structure, KPI’s and management. Companies, that want to remain in the game, need to find ways to transcend the innovator’s dilemma. They need to employ a strategy of innovation — one that can contain parallel operations. They need to ask themselves: how best can we allocate our resources to both sustain and innovate? How can we think inside and outside the box simultaneously? How can we be both a corporation and a startup?
Although corporates are becoming more and more aware of this situation and are raising these important questions, reforming their strategies is not easy and cannot happen overnight. Changing/building/shaping the culture of the organisation takes time. Implementing changes, especially in regulation-congested organisations, takes time; finding out what works and what doesn’t work takes time too. Nevertheless, there is also no time to not do it. The transformation is real and it is happening, and although it’s scary, exploring uncharted waters can lead to real treasure.
By Nitzan Merguei and thanks to Rob Aalders (Startup Spirit) for his contribution to this article.