The best strategy when facing high degrees of uncertainty is to hedge and build options for the future. This might involve, for instance, making some small investments in companies developing potentially threatening new technologies. Or it could mean experimenting with a novel business model to understand its challenges and its economics. If the disruption could come to fruition and put you in the “party’s over” category, then it’s particularly important to start, early on, exploring alternative strategic options, such as entering new markets where your existing capabilities provide an advantage. Again, given uncertainty, I am not advising you to abandon your core market. But it is prudent to experiment with alternatives well in advance as insurance against a potential disruption you may not be able to respond to.
Conclusion
One of the great puzzles scholars of innovation have grappled with is why companies often fail to respond to disruptive threats. Why are there so many cases like Baldwin Locomotive where senior leaders just do not seem to “see” the future? Scholars and consultants generally ascribe such behavior to inertia. The senior leaders are too wedded to their existing technology or business model, or simply too narrow minded to accept change. Certainly, such leadership failures happen. One reason why I think thoughtful leaders have trouble with these transitions is that they are framing the alternatives too narrowly. They can either stand pat in their market (and hope for the best) or they can eat their own lunch by embracing the new. I think many senior leaders have legitimate concerns with eating their own lunch. Intuitively, they recognize that a commitment to a new technology or new business model is very risky, given uncertainty. They also often realize that eating their own lunch may not be very palatable financially for the firm. But they feel stuck. Because they also know that standing pat on their home turf may ultimately lead to the extinction of the company.
What I hope is that this chapter has helped you see that you have more choices than to stand pat and pray versus eat your own lunch. The chapter has highlighted the conditions when eating your own lunch really is your best strategy. But it has also focused on conditions when standing pat and fighting (extend and defend) may be best. Hopefully, though, it has broadened your strategic palette to recognize that, even in dire disruptions, if you act early enough, you may be able to reposition your enterprise in a way that ensures its continued prosperity. Finally, hedging and exploration are essential features of a robust innovation strategy under many circumstances. Too often, innovation leadership is posed as a test of “guts”—are you willing to make the big bets? Such “all-in” bets make for great business headlines, but they are actually pretty foolish if you face high levels of uncertainty. Making smaller bets, experimenting, learning, and adapting are survival-enhancing behaviors in highly uncertain environments.
As I have pointed out, there are going to be circumstances where you have to transform your organization and innovate outside your home court. You will have to seek disruptive business model innovations, radical technological innovation, or architectural innovations. Having a clear strategy to undertake these kinds of innovations is indeed helpful. But they require different kinds of capabilities than your organization may have been using. To execute your innovation strategy, you need to develop a matching set of innovation capabilities. You need to develop an innovation system. This is the topic of Part II.
PART II
DESIGNING THE INNOVATION SYSTEM
In Part I, we learned about the different types of innovation (routine, radical, disruptive, and architectural) and that a good innovation strategy specifies the balance and mix of resource allocated to each type. To execute your innovation strategy, though, requires more than allocating resources—it requires that your organization have appropriate organizational capabilities. The capabilities deployed for routine innovation, for instance, are different from those required for outside-the-home-court innovation. Tight alignment between an innovation strategy and the organization’s capabilities is essential for effective execution.
How can you build the capabilities you require to execute your innovation strategy? Many companies look to emulate so-called best practices. Today, for instance, they might hear about the power of such practices as crowdsourcing and open innovation, decentralization of R&D, co-development with customers, big data analytics, and so forth. Innovation writers and consultants will urge companies to imitate the practices of companies like Apple or Google. The problem with this approach is that every innovation practice involves trade-offs. There are no universal “best practices.” What is best for Apple or Google is not necessarily going to be best for your company given its strategy and its circumstances. Creating capabilities for innovation is more like bespoke tailoring than buying off the rack. The leadership challenge is to design the particular approach to innovation that will work for your company and support its particular innovation strategy. This is the focus of Part II.
An organization’s capacity for innovation is rooted in a system of choices and practices about people, processes, structures, and behaviors. Building appropriate capabilities for innovation is a systems design problem. As a leader, you are taking on the role of an organizational engineer. Good system engineers make it their business to understand the components of the system, the way components interact, and the desired performance trade-offs. The same principles apply to designing innovation systems. Innovation systems need to perform three basic tasks: (1) search for novel and valuable problems and solutions, (2) synthesis of diverse streams of ideas into coherent business concept, and (3) selection among opportunities. The three following chapters of Part II focus on each of these tasks.
5
VENTURING OUTSIDE YOUR HOME COURT
Search: Discovering Novel Problems and Solutions
On December 28, 2015, Michimasa Fujino stood before a gleaming white private jet at the Greensboro, North Carolina, airport. He was ready to deliver a new plane to a business owner from Cedar City, Utah, who had placed his order more than ten years before. This delivery was remarkable in two respects. First, this was the initial jet delivery of Honda Aircraft Company—a subsidiary of a corporation best known for automobiles and motorcycles. The HondaJet was the culmination of nearly three decades of work by Honda to innovate outside its home court. Second, with its two engines mounted above the wings, the HondaJet looked like no other airplane on the market. But this design was not about aesthetics at all—it was critical to solving a big problem for small jets—space. Normally, small jets mount engines on the rear of the plane body (the fuselage). But because this design requires putting structural supports through the fuselage, it devours interior space, leading to cramped cabins. And, with the engines right next to the passengers’ heads, the noise can be uncomfortable. By putting the engines over the wings, Honda was able to create a light jet with a much roomier and quieter interior.
The HondaJet is creative construction in action—a very large and successful corporation not only venturing outside the safety of its home court but also creating a transformative product concept in the process.1 The over-the-wing-engine design was so revolutionary that, prior to the HondaJet, most aeronautical engineers thought it violated basic principles of aerodynamics. When Fujino first proposed this design in 1997, his supervisor called it “the worst piece of engineering” he had ever seen. Boeing engineers were so skeptical of the design that they almost refused to let Honda test a prototype in their wind tunnel, fearing a catastrophic failure would damage their multimillion-dollar facility. Few could see then that, by the first half of 2017, the HondaJet would become the top-selling airplane in the light business jet market.2 The biggest challenge for Michimasa Fujino, now Honda Aircraft’s CEO, is ramping up production to meet growing demand.
How Honda accomplished this feat illustrates a central theme of this chapter: innovating outside the home court requires an organization to be willing and capable of searching in novel and unknown terrain. Search, the process by which people identify salient proble
ms and explore plausible solutions, shapes the kinds of innovations an organization is capable of creating. Search generates hypotheses about problems that may be valuable to solve and solutions that might be worth exploring. Search shapes which problems and which potential solutions get on the organization’s radar screen. Being willing to at least entertain the controversial hypothesis that an over-the-wing configuration might work is an example of how broad search is a prerequisite to transformative innovation.
When organizations search narrowly, really interesting problems and novel solutions usually don’t get a chance to enter the discussion. Blinders, however, are not put on a search process by design. No senior leader says, “Let’s close our eyes to really interesting ideas. Let’s just focus on the same old things we have always done.” I have never come across an organization with an explicit policy that stopped employees from using their imaginations. The problem is that many senior leaders are not really aware of how their organizations search for new innovation ideas. They do not design their search processes to purposely expose the organization to ideas that might be transformative. Exploratory search outside a company’s home court does not happen automatically. Like most processes, search tends to become routinized over time, focused on the same familiar terrain. That is fine for routine innovation, but if your organization wants to innovate outside its home court, it may need to challenge its search process to venture into new and less certain places. How to design your organization’s search processes to explore new terrain is the topic of this chapter.
Innovation as a Hunt for Problems and Solutions
Solving some “problem” of value is at the heart of every successful innovation. Some innovations tackle technical or functional problems. Statin drugs reduced serum cholesterol, a major contributor to heart disease; semiconductors enabled us to create a whole new array of computing and communications devices. Some innovations solve problems of convenience. Google’s search engine, for instance, made it much easier to find information on the web. Some innovations address purely economic problems. New aircraft engine designs reduce airlines’ operating costs per available seat mile. Some innovations address aesthetic issues. The iPhone is more than just a functional device—enabling mobile web browsing, communications, and a host of applications—it is also aesthetically pleasing to use and look at. Some innovations tackle social problems. Innovations leading to clean drinking water and better sanitation did more to improve health than most new pharmaceuticals over the past century.
Taking a problem-solving perspective on innovation highlights two key challenges: finding valuable problems to solve and then coming up with solutions to address them. In some instances, finding the right problem is not the hard part. Terrible diseases like cancer or Alzheimer’s or big social challenges like clean water or the environment are well-defined problems. We know that solving such problems would reap large financial or societal dividends. The challenge is that good solutions to these problems have been really hard to find. In other instances, though, innovations address what economists call “latent demand”—they create demand for things we never knew we really needed or wanted until we saw or used them. That is, the innovation itself changes our perceived needs. We are surrounded by many of these. While experiencing the existential panic that comes from misplacing my mobile phone, I usually forget that I survived just fine without one for the first thirty-five years of my life.
There is a temptation to think about innovation as a one-way process flowing from problem identification to solution identification. After all, it is hard to imagine finding a solution for a problem without knowing the problem. However, despite its apparent infallible logic, innovation processes often do not follow this path. That is, they sometimes generate solutions in search of problems. Let’s take a look at one classic example.
Beware the Hidden Customer: The Case of DuPont Kevlar
Kevlar, a lighter-than-steel, super-strong, heat-resistant material with a wide range of uses, from bulletproof vests to surfboards to wind turbines was invented more than fifty years ago by DuPont scientist Stephanie Kwoleck.3 It now seems everywhere. Everywhere, that is, except the one application for which DuPont originally targeted Kevlar. Kwoleck’s group in DuPont’s research laboratories was searching for strong, lightweight fibers that could be used to make more fuel-efficient automotive tires. At the time, DuPont was the largest supplier of polyester used in bias-ply tires. The problem, DuPont foresaw correctly, was that this market was under threat as more tire makers converted to more fuel-efficient steel-belted radials (which were already dominating the European market). DuPont was highly prescient in anticipating the potential of serious gasoline shortages, increases in demand for fuel-efficient cars, and the conversion of the tire market to steel-belted radials. Kevlar itself was invented somewhat by accident. Polymers are typically synthesized in clear, highly viscous solutions that can be spun into fibers. While working with a particular polymer, Kwoleck got a cloudy, thin solution, which would normally be thrown out (under the assumption that such a solution could not be spun into a fiber). Initially, a technician refused to try Kwoleck’s solution on the spinneret (a device that spins liquid polymer solutions into fibers) because he was worried it would damage the machine. But, ultimately, he went along. The result was a surprise. The solution yielded not only a fiber but one much stronger than any they had tested previously. This fiber was a precursor to Kevlar.
At first, it appeared that Kevlar had solved DuPont’s strategic problem in the tire market. DuPont manufactured small samples for tire companies to test. Initially, feedback was promising. Tire companies liked its strength and performance, but there was a caveat: because tires are a low-margin business, costs of Kevlar tire cord had to be competitive with those made of steel (which was very cheap). DuPont invested heavily for several years in improving the processes and scaling the manufacturing facilities to drive costs lower. In 1980, based on forecasts for Kevlar use in automobile tires, the company committed $500 million (approximately $1.5 billion in today’s dollars) to building a plant capable of producing 45 million pounds per year. It was right about this time, however, that auto tire producers decided to bet on steel, rather than Kevlar. Steel continued to be significantly cheaper, and, unless you drove a race car 200 mph, the performance difference was unlikely to be noticeable. Had the story ended there, Kevlar would be one of the greatest failures in innovation history.
But it did not end. Right about the time the tire industry was turning away from Kevlar, DuPont sent a proposal and samples to the US Army just as it was evaluating new materials for reinforcing soldiers’ flak jackets. During the army’s evaluation, DuPont reweaved Kevlar a number of times in search of a lighter and cooler material. In laboratory tests, Kevlar demonstrated that it could essentially stop a 38-caliber bullet. It was also about this time that Lester Shuman from the National Institute of Justice heard about Kevlar and began a campaign to sell Kevlar vests to police forces around the country. The vests became widely adopted, and eventually federal police agencies, including the Secret Service began using Kevlar-reinforced vests.
The success of Kevlar as protective clothing—never really considered one of the core markets for the product—sparked an idea at DuPont. Perhaps there were other applications where Kevlar might be attractive? DuPont decided to establish a dedicated applications development and market research group to systematically explore and test potential new applications and markets for Kevlar. This group’s charter was wide ranging. It had no specific industry focus. Its sole job was to find markets for Kevlar. Nothing was ruled out (even some ideas that sounded crazy, like Kevlar-reinforced socks that resist wear in the toes). It is out of this effort that, over thirty years, Kevlar began to diffuse into the broad range of applications we are most familiar with today. By 2011, demand for Kevlar was increasing so rapidly that DuPont invested an additional $500 million to expand production capacity.4 Today, Kevlar is everywhere. Everywhere, that is, except automobile tir
es.
The two acts—the first a failure and the second a success—of the Kevlar story offer insights into how search behavior impacts innovation. Act 1 was the story of Kevlar as a replacement tire cord. At some level, DuPont did many things right during this project. Its R&D effort was guided by a clear strategic objective: find a material to replace polyester in one of DuPont’s most important markets. DuPont demonstrated great foresight in predicting that auto fuel efficiency would become critical in the face of fuel shortages. It foresaw disruptive competition from steel-belted radials and proactively launched a research program to find alternatives. This was no blue-sky research program. And DuPont did not just imagine what it thought was important. It talked to its big tire customers and even got early prototypes into their hands for testing. DuPont learned early on that while its customers liked the properties of Kevlar, they needed a lower-cost solution. And, in response, DuPont put extensive efforts behind cost reduction. So far, the initial DuPont Kevlar program looks like a textbook example of how you are taught to pursue innovation. Its failure, in some ways, seems baffling.
Yet, let us examine more closely DuPont’s search behavior: The search effort was tightly focused on a very specific problem (i.e., find a new material to replace polyester as a tire cord). This effort generated a potential solution (Kevlar). Kevlar, it turns out, is a great solution to many problems, just not the particular problem DuPont was focused on solving. Kevlar was the wrong solution for the tire cord replacement problem, and tire cord replacement was the wrong problem for the Kevlar solution. But notice how DuPont searched. Its problem space was predetermined (tire cord). And this meant that it was never hearing from a whole bunch of other potential customers—like companies interested in making bulletproof vests or protective industrial equipment or consumer electronics—who did have problems that Kevlar could solve. Notice, though, that someone at DuPont must have been aware of at least some other potential uses of Kevlar outside of tires, because DuPont submitted it to the army for testing for use in bulletproof flak jackets.
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