Closing Corporate Innovation Gap
The stereotype for successful modern corporations is that they flawlessly execute operational performance improvement and incremental innovation. Large companies are good at upgrading existing products or services. They also do a decent job streamlining operations and cutting costs. We have a strong belief that they only get into difficulty when faced with more radical innovation that has a more uncertain hit rate. Is that a good assumption?
Consider this: of 11,000 consumer product launches in North America between 2008 and 2010, only six (0.05%) maintained at least 90% percent of their sales volume the following year. It is perhaps an exaggeration to say, as some do, that corporate innovation is broken. However, the problem is deeper than not being able to lead disruption.
Successful firms, large and small, get successful by learning to repeat the same formulas that got them to where they are today. They perfect application of capabilities to a particular set of processes and routines that drive operational performance; capturing data on variance to plan; detecting and correcting errors.
This culture of predictability isolates variants to the system and eliminates them. Innovation is always about variation. The more diverse the inputs, the more you are confronted with information that challenges existing norms and conventions. This is why disruptive innovation, with its high rates of uncertainty and failure, often struggles to take root in corporate soil. It is also why innovation of all kinds struggle.
Large firms lose the capacity to experiment; to learn about what works by testing, measuring, and iterating. One recommended approach is to apply the principles of “Lean Startup,” which has become a use-or-die mode of operation for brazen startups. Calls are often heard that large firms should also adopt this methodology. Lean Startup techniques - rapid experimentation, iterative testing-learning cycles, and rapid failure – are the right new processes to learn. On its own, it's not enough, and does not make any company “invincible.”
Adopting the startup mentality does not come naturally to many corporations. Despite widespread adoption, results are at best uneven, and at worse, think GE Digital, disastrous. There are lots of explanations for this. The most popular is that corporations struggle to accept a learn through failure model. They talk a good game about “rapid failure”, but it is still an anathema to many. It feels logically inconsistent to advocate discipline in one part of the business and experimentation in another. Innovation projects get stopped too quickly or, more likely, live on as zombie projects with little funding.
Another counterintuitive explanation is that corporations spend too much on innovation. Lean Startup methodology was largely created to help startups overcome a paucity of assets. They do not spend time looking for elegant premises, appointing the best consulting firms, and hiring the best talent. Startups operate in scarcity. They scrape together funds, constantly having to prove value to leery investors. Large corporates spend time and money on issues that would never even hit the radar of the average startup. The mentality is one of plenty and, often, there is nothing at stake individually. You just roll-on to the next project if this one doesn’t work out. Entrepreneurs put their lives on the line.
The fix is to separate out innovation from core business operations. This is what Change Logic founders, professors Michael Tushman and Charles O’Reilly have called an ambidextrous organization. Instead of expecting the core business to learn how to do Lean Startup, break out innovation into a separate team. Although this approach is considered a path to radical innovation, it also works equally for extensions to the core business.
Boston-based tech giant Analog Devices created its Analog Garage in 2013. It is a playground for testing and early prototyping of technology, business models, and capabilities. They do not try to imitate startups, instead they work with them, collaborating with some, acquiring others, and building some from scratch. This approach creates an innovation ecosystem with startups and corporations working together.
Another approach is to give each business unit its own innovation accelerator. Japanese chemicals and material science company AGC has created a series of ‘Business Development Divisions’. These teams incubate new ideas for each line of business – Automotive, Electronics, Chemicals, and Buildings – and then a corporate level group looks at markets beyond.
Global consulting and accounting giant Deloitte created a central “office of innovation” to incubate new capabilities. One of its key successes is Deloitte Pixel, a crowdsourced talent agency that brings expertise to supplement those of its consulting teams.
These firms are using quasi-independent units to add explore capabilities to the existing core business. This allows the units to adopt practices like Lean Startup and Business Model canvas, without the overhead of the core business, stability oriented culture.
The hit rate for corporate innovators may be low, but the opportunity is huge. Startups generally do a great job generating and incubating novel ideas. It is tough to scale without assets. On the other hand, corporates do have the assets, they just need to work out how to use them. The ambidextrous approach can help corporates liberate that advantage. All they need is a separate team (however small) well aligned to its task, with separate capabilities, incentives, and budgets, that can still reach in to take what it needs from the mothership.
There is a growing list of ambidextrous firms. Our recent publication describes some of the most successful and what practices set them apart.