Creative Construction
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Throughout my career, I have had a chance to observe many such initiatives unfold. They follow an all too familiar pattern. They are launched with great fanfare and enthusiasm. Senior leadership gives encouraging speeches about how important innovation is to the future of the company. Company communications are laced with talk about innovation. Promises are made about big changes to come. The culture will be more tolerant of failure, less hierarchical, and more open to out of the box thinking. Everyone will be encouraged to contribute innovative ideas. Teams of managers tour exemplar innovators (at least those who are willing to let them visit) and come back intoxicated with ideas about how to make the company more “Silicon Valley–like.” Structures—like innovation groups or chief innovation officers—are installed to drive the effort. Optimism reigns. But, after a year or two, things begin to bog down. People start noticing that not much has changed. There are few, if any, new innovative programs under way. The few that do get proposed have a hard time gaining traction. There have also been some costly failures. The CFO is asking about the return on investment. Business unit leaders begin to complain that they are being starved of critical resources needed to upgrade product lines and to fend off intensifying competition. Budgets are tight and tough calls have to be made. The company is feeling earnings pressures, and the once-supportive board is concerned about the lack of progress to date. Senior management is feeling the pressure to deliver an innovation win. Throughout the organization, many of the old behaviors are still alive and well. There is little appetite for risk, and the perception that senior management does not really tolerate failures is pervasive. There are complaints that the company’s bureaucracy is stifling innovation. Communications about innovation come fewer and further between. Senior leaders who happily associated themselves with the innovation initiative now look nervously for other assignments. As time passes, managers further down the ranks adopt a “this too shall pass” attitude.
Why do so many innovation initiatives follow such a depressing path? Why do so many fail? We first have to acknowledge that any major organizational change—whether focused on innovation, quality, customer service, or something else—is extremely difficult. By some estimates, about 70 percent of organizational change efforts fail.23 The usual reasons for such failures, such as lack of senior management commitment, middle management resistance, and inability to execute, certainly play their part in stifling innovation initiatives. However, the problems go much deeper. In fact, I have observed a number of cases in my career where senior leadership was deeply committed to innovation, where the middle managers were enthusiastic about the change, and where extensive attention was devoted to execution, and, despite all this, the effort still failed.
Why? Because building a capacity to innovate involves overcoming several specific obstacles. The first is the required time horizon. Building innovation capabilities is a multiyear voyage. It cannot be this year’s goal. Even once the capabilities are built, it takes at least one product development cycle to see any impact from your efforts. Depending on the industry, this can range from a couple of years to more than a decade. This is a long time to sustain the requisite management focus and energy. This is particularly true given that you can expect some degree of management turnover during this period.
A second vexing problem is that inherent 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? How much should it invest in incrementally improving existing products and services versus exploring new technology spaces and new business models? Every dollar that goes into exploring a new space means one less dollar for making an important refinement to an existing product. Too often in the writing on innovation, there is a bias that companies should always be investing in the new wave of “disruptive” innovation, and that investments in existing businesses are myopic at best and suicidal at worst. Such thinking grossly oversimplifies the problem. There is often no simple “right” answer to these choices, just complex trade-offs.
Trade-offs are also inherent in choices made about innovation management practices, and a failure to come to grips with such trade-offs is another reason innovative initiatives fail. Too often, innovation initiatives become a grab bag of widely touted “best practices” such as open innovation, design thinking, rapid prototyping, autonomous decentralized teams, and internal venturing. There is nothing wrong with any of these practices per se, but as I discuss throughout this book, there are no universally “best” innovation practices. Every innovation practice has its strengths and weaknesses. There are no magic bullets. As a result, building a capacity to innovate requires making some very difficult organizational and process design choices.
Finally, building innovation capabilities involves profound cultural changes. Just about every behavioral norm that enables a company to succeed with existing products and services—reliability, predictability, disciplined execution of well-defined plans—runs counter to the behaviors required to foster innovation—risk taking, creative exploration, rapid learning and experimentation, comfort with ambiguity, and so on. Going back to the great organizational theorist James March, organizations that tend to be good at “exploiting” existing business tend to struggle with “exploring” new terrain.24 This is partly due to organizational systems and processes, but more important are the cultural differences between what is required to explore versus what is required to exploit. It’s not as easy as saying “banish” the old culture, because that culture is critical to driving performance in the existing businesses (which are, after all, paying the bills). A new culture more oriented toward innovation has to be created while also preserving the culture that supports the existing businesses. Innovation initiatives have to confront this conflict.25
The Challenge Is the Opportunity
At this point you might be wondering, Why on earth take on such a challenge? Why should I as a leader take on such a risky organizational transformation? (And, by analogy, why should I continue reading the rest of the book?) The odds surely seem heavily stacked against me. Maybe I should heed the advice of so many others to give up on the idea of building an innovative capacity inside a large organization and instead buy up small companies that are good at innovation. This must be easier, faster, and certainly less risky.
But here’s the problem with that strategy: If innovation were easy, everyone could do it, and then innovation could no longer be a source of advantage. Competitive advantage rests on possessing unique and difficult to imitate skills and capabilities. Apple has done well because there are not many Apples out there. The capability to innovate is a potent source of competitive advantage precisely because it is such a difficult one to foster and sustain.
And this is why acquisitions are no shortcut to innovation nirvana. If you can buy something, so can your competitors. The market for corporate assets is pretty efficient. This means that, on average, you get what you pay for. If a great innovative company that everyone wants to buy is on the market, you are going to pay handsomely for that privilege. In many cases, all you end up doing is transferring some of your shareholders’ wealth to the acquired firm’s shareholders. There is generally no net gain in shareholder wealth created, and, in fact, large acquisitions tend to destroy value for the acquiring firm.26 Everyone thinks they can “beat the average” because they believe they are smarter than the average. You do not have to have been a math major to see the fallacy of this logic.
Furthermore, if you acquire an innovative firm (for which you have paid dearly), you will still face the task of trying to keep it an innovative organization. The problem is that enterprises that are not especially innovative have a terrible time managing innovative organizations (almost by definition!). All those obstacles we described above—like competing priorities with existing businesses and different cultures—do not go away just because you a
cquire an innovative company. Suddenly, that company (now a subsidiary) has to flourish inside an enterprise whose systems and culture are not geared toward innovation. This leads to the common outcome where the acquisition itself destroys the acquired firm’s unique innovative capabilities and culture. It does not happen all the time. Some firms are able to protect their new acquisitions from the processes, culture, and strategies that have been suppressing innovation all along. But it’s rare. It is much more common for the acquirer to “kill the goose that lays the golden eggs.” This does not mean acquisitions cannot be part of your tool kit of innovation tactics. Selective M&A can be extremely valuable, especially if there are unique complementarities between your capabilities and the target firm. We will discuss them later in the book. But M&A alone cannot be your innovation strategy.
Throughout this book, I offer no illusions about how difficult it is to innovate at scale. There are many forces that make it hard to build and maintain a capability to innovate. The journey is fraught with many traps. As a leader, you have to be great at strategy, execution, and culture. You will encounter resistance along the way. I am hoping the frameworks, tools, principles, and examples I provide will make the journey easier for you and your organization. But the journey is not easy. Even with the best equipment, the best guides, the best training, and the best strategy, summiting Mount Everest is no cakewalk. But, imagine trying to take on Everest without these resources! Innovation is a capability that must be built, not bought. It is incredibly hard and very risky. But it creates real value and sustainable advantage, leveraging the strengths of a large company in a way that no small start-up can match. That’s exactly why you should be trying to do it. My hope is that this book provides you with motivation and the tools to make this difficult task easier for you to accomplish. Building an organization’s capacity to innovate involves three essential leadership tasks: (1) creating an innovation strategy, (2) designing an innovation system, and (3) building an innovation culture. It is around these three tasks that Creative Construction is organized.
PART I
CREATING AN INNOVATION STRATEGY
An innovation strategy specifies how the company intends to use innovation to create and capture value and clarifies priorities among different types of innovation opportunities. A good innovation strategy serves two critical purposes. First, it helps clarify the trade-offs the company is willing to make between short-term exploitation of existing markets and longer-term exploration of new opportunities.1 Such clarity is critical because, without it, the temptation in most organizations is to focus on exploitation. It always seems more profitable to invest in improving the existing product line than to search for something completely new. In clarifying these trade-offs, a clear innovation strategy sets the stage for effective execution. Second, a good innovation strategy helps to align diverse parts of an organization around common priorities. Such alignment is particularly critical in complex organizations with many moving parts. By driving alignment, a good innovation strategy makes a large organization a less complex place for innovation.
Part I of this book provides frameworks and principles needed to create an effective innovation strategy. It examines the different types of innovations a company might pursue, the trade-offs among them, and how different types of innovation (including business model innovation) can be used as part of a company’s overall innovation strategy. Part I also provides insights about how to respond to potentially transformative new technologies that may actually threaten your business.
1
BEGINNING THE JOURNEY
The Discipline and Focus of an Innovation Strategy
In Lewis Carroll’s Alice’s Adventures in Wonderland, a lost Alice runs into the Cheshire Cat and asks him, “Where should I go?” The grinning Cheshire Cat responds, “That depends on where you want to end up.” We do not normally think of children’s books written in the mid-nineteenth century as teaching strategy theory, but in essence the Cheshire Cat was invoking the first principle of strategy: strategy starts with clear understanding of objectives. Many organizations start their innovation journeys much like Alice. They lack a clear sense of their innovation objectives. They do not know where they want to go on their innovation journey. Others have clear objectives but do not put in place the strategy to achieve them. Imagine you were going to take a long and difficult trek through the wilderness to reach the summit of a mountain (your goal is clear). The terrain will shift constantly. Huge rocks, fallen timber, and other obstacles will litter the trails. The trails will not be well marked and will often fork unexpectedly. And your expedition consists of a big group of people, not all of whom share your enthusiasm for the wilderness. You would not even think about setting out on such a journey without a reasonable plan, a good map, and a compass. And yet this is essentially what many leaders do when they try to tackle innovation.
Getting Lost on the Innovation Journey
Earlier in my career, I consulted for a company who had once been a leader in the contact lens market. The company’s competitive position was being destroyed by a competitor (a J&J subsidiary, it turns out) that had introduced the world’s first disposable contact lens. Because they were thrown away every week (and eventually every day), disposable lenses needed less care and cleaning than conventional lenses, which were generally kept for a year or more. The convenience and cost savings was a highly attractive value proposition to patients. Disposable lenses were eating into not only my client’s sales of conventional lenses but also its highly lucrative market for the solutions used to care for and clean lenses. The CEO and other members of the senior team recognized that the company would need to make dramatic changes to its product portfolio and position in order to thrive. The company had not been very innovative for the past decade. Its base technology for lenses was more than twenty years old and could not currently produce a competitive disposable lens. Much of the company’s innovation in recent years had focused on incremental process improvements, line extensions, and cosmetic changes (e.g., tinting of lenses). To compete, it needed to innovate—but, to innovate, it needed to transform itself. And this is where the company got lost.
The company faced many complex choices. It had to decide how much to invest in improving its existing base technology (which was still supporting almost 100 percent of the current product portfolio) versus exploring completely new lens technologies. Some within the company’s manufacturing and R&D organizations argued that the current process technology—with sufficient investment—could be made quite competitive. The head of marketing wanted see a dramatic attempt to leapfrog the competition with breakthrough technologies that had been percolating in one of the company’s smaller European R&D sites. And, even among those who advocated a more aggressive R&D posture, there were big differences in whether the focus should be on disposability or visual acuity and comfort. There were also hard choices to be made about lens-care solutions. Sure, that market was slowly declining but it was still quite lucrative (it generated the vast majority of the company’s profits), and there was a view within the business unit that easier-to-use solutions could actually help stave off the decline of the conventional lens market. There was no right decision. Each of these positions—investing more in the existing process, exploring breakthrough lens materials, spending more to support the lens-care products—could be justified on its own. But the company did not have unlimited resources. It needed to figure out where to “place its chips.” Each path had broader consequences for the organization. For instance, a decision to go after breakthrough lens technology would require an almost complete overhaul of the company’s R&D organization (which lacked expertise in new materials and alternative process technologies). It would also have implications for the company’s lens-care business and its marketing strategy. If the company went after breakthrough technologies, it still needed to figure out a way to keep its current product lines competitive in the short term.
Beyond the vague notion that the compan
y “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. Everyone had his or her own view on this topic. The futility of this approach became apparent at a senior management retreat held on a hot summer day in Switzerland. The meeting started with the CEO addressing the group about the importance of innovation and his absolute determination to see the company become a leader once again. He spoke clearly about the need for the company to take big risks and move out of its comfort zone. The next presentation, by the head of R&D, laid out the current portfolio of R&D projects. After the CEO’s speech, I expected to see some big bets on the board. What was presented, however, was a very long list of projects, almost all of which were incremental improvements in the current process, technical troubleshooting fixes, line extensions, and smaller clinical studies designed to support regulatory filings in a variety of geographic markets. Each of these projects could be fully justified on the basis of return on investment and business need. And, as the head of R&D pointed out, there were many other projects the business units clamored for but that he simply did not have the budget to take on. The disconnect between the CEO’s idea of “innovative” and the head of R&D’s idea of “innovative” could not have been starker. At this stage, I was not sure whether the uncomfortable feeling in the room was due to the lack of air conditioning or the realization among many in the room that the company had lost its way.