by Rita McGrath
They can lead to some attributes becoming more or less valued than others.
They can change the kinds of capabilities embedded in a value chain that are relevant.
They can change every element of the arena.
Over time, all the elements of an arena are baked into the fabric of how an organization operates, as incumbents learn to optimize for competing within that arena. The organization’s measurement and reporting structures, reward systems, patterns of communication, informal networks, brand, assumptions, and so on, are all informed by the cause-and-effect relationships that its members believe operate in the arena as it is.
These relationships fundamentally shape what members of the organization pay attention to. They shape what members think is the “right” thing to do. They shape how members expect to be rewarded, how relationships among team members are defined, and who gets ahead. In short, questioning what you have inherited from a pre–inflection point system is nothing short of heresy.
When an inflection point changes the critical constraints that an organization operates within, those painstakingly built-up systems of relationships that kept the organization running smoothly also need to change. This is an enormously challenging organizational reality. The question is how an inflection inside the organization can be orchestrated to create a better fit with the inflections happening outside it. The process of making this happen is what I call “managing the mother ship.”
That process can entail orchestrating a major shift in the core business (as Netflix had to do when it moved from selling DVDs to selling streaming subscriptions). It often involves shifting resources to support the next-generation core business even as formerly important businesses are downsized (as Apple has done in its move from desktop devices to tablet and mobile devices). And, in many cases, it can mean discovering an entirely new growth vector (as Netflix and others are doing with creating original content). Scott Anthony, Clark Gilbert, and Mark Johnson have described the challenges of shifting your core business even as you build a future business in their book Dual Transformation, which offers a wealth of useful tools and perspectives.
As we saw with Klöckner, imminent failure, or actual failure, can coax an otherwise unwilling organization to make the changes needed for its own self-preservation. For example, Walmart engaged in a ten-year struggle to become relevant in e-commerce. Despite hundreds of millions of dollars and a lot of executive exhortation, the incumbent organization pretty much hated the idea that some of its sales might go through that channel. It wasn’t until a new CEO determined that the company probably had one last chance to get this right that they finally discovered a workable e-commerce model.
Building it required some highly controversial decisions. The first, in 2016, was to spend $3.3 billion on Jet.com, an unproven startup with little to validate its business model. The second was to take the CEO of that startup, Marc Lore, and put him in charge of all of Walmart’s digital efforts. The third was to give that operation the resources needed to acquire companies serving upscale customers—the kind who would never set foot in a Walmart store. The men’s clothier Bonobos is an example. Today, Walmart’s e-commerce initiatives are picking up steam, and the company’s assessment in the public markets is more as a growth player than simply an operating entity.
Building innovation proficiency can help your company overcome the resistant forces that can bring it to ruin in the wake of an inflection point.
Klöckner in Context: Building Innovation Proficiency
What Klöckner faced—and what an endless number of companies I’ve worked with over the years have faced—are organizational barriers to innovation-fueled growth. Just last week, I was leading a seminar with a group of senior executives at a major multinational. I asked them to list the blockers to innovation in their organization. Here’s what they said:
A lack of incentives.
The existing business is too powerful.
Management wants near-term success.
Too many silos.
Lack of customer focus.
Fear of failure.
It’s “no one’s job.”
Innovations are small, relative to the “mother ship.”
Innovations don’t get big enough fast enough for us.
We are focused on our quarterly earnings.
We are afraid of cannibalizing our successful businesses.
We have no tolerance for unpredictable results.
There is no career incentive to work on innovation/growth projects.
“What,” I asked them, “does every single one of these barriers to innovation have in common?” After a few halting remarks, the penny dropped. Every one is an internally imposed constraint. They are all there to protect and defend the orderly operation of the existing business and to keep it from being disrupted. More precisely, they are there to stop the kind of disruption that innovations can represent. And yet, if we collectively and consciously decide that these constraints can be addressed, we can move them out of the way. After all, God did not come down from heaven and declare, “There shalt be silos!”
As we saw in the case of Klöckner, there was little appetite for change among the old-timers, despite the reality that the existing business model was clearly eroding and the company’s future was looking grim. Even though reinvention was the only positive path forward, even though the signals of being past an inflection point were so loud as to sound like sirens, the organizational “antibodies” swarmed. This is one reason that the initial effort to do something new—with the same people working at headquarters—failed. That effort was trying to tackle innovation challenges with people totally imbued with innovation blockers. It wasn’t until the organization started to recruit and hire new employees with new skill sets working in a new location that new possibilities could even be seen.
The Klöckner case study illustrates one of the most profound journeys an organization can undertake: moving up what I call the innovation proficiency scale.
Innovation proficiency is a metric that I’ve developed (together with some colleagues) that can help identify where an organization is with respect to being able to innovate—in other words, to change—in pursuit of, or in response to, an emergent inflection point. The point is that just seeing an inflection point and getting the organization moving is, as has been discussed earlier, not enough. The organization has to be able to change. Recall that the reason inflection points can be so difficult to cope with is that they change something about the taken-for-granted assumptions in the business. The metrics and operations that used to work well to deliver performance no longer do. As the inflection washes over the organization, these metrics and operations need to change, typically through some kind of innovation process.
My scale has eight levels, corresponding to an organization’s ability to make innovation an ongoing proficiency, not an on-again, off-again process that depends on key champions or senior people taking an interest.
The Innovation Proficiency Scale
Level 1: Extreme Bias Toward Exploitation
Level 1 organizations are those in which the status quo is taken for granted as being the right (even the only) way to do things. There is a strong emphasis on sustaining and exploiting existing advantages. These companies often enjoy a long history of success and are usually in very stable markets. There may well be a high level of asset intensity and long competitive cycles, which makes innovation appear risky and unattractive. Companies in highly regulated markets, many NGOs and government agencies, and other bureaucracies are routinely found in this situation—but not for long.
Level 2: Innovation Theater
This stage represents the very earliest efforts to introduce some innovative thinking to an otherwise conservative organization. There is usually a desire to improve and innovate that exists in islands, but there is little general support across the organization. There may be some initial workshops, boot camps, and visits to Silicon Valley, but there is no sustained eff
ort. The symptoms of this level are that there is a lot of talk and some activity, but things snap back to business as usual very quickly.
Level 3: Localized Innovation
What we see at this level is more—and more sustained—innovative activity, typically in fits and starts in various places in the organization. There is little organization-wide recognition of innovation as a discipline. One or two groups within the company will initiate local efforts to innovate. At this stage, innovation efforts are typically dependent on a key sponsor and are often episodic. They are also fragile: a change of a key executive, a setback, a challenge in the core business, and they simply disappear.
Level 4: Opportunistic Innovation
As some of the innovation efforts launched by the level 3 processes start to show some preliminary results, senior leaders start to recognize that building innovative capability is important. While innovative practices are still not a central part of the corporate agenda, they are used to go after ideas for growth that present themselves in an opportunistic way. Then more attention is paid to the process, and some resources are allocated, sometimes across business units. But the bulk of the organization still prioritizes the “day job.”
Level 5: Emergent Proficiency
Here, sustained executive sponsorship includes dedicated resources of both time and money. We begin to see the first signs of innovation-related metrics being used (though they may not be regularly tracked). There is some early-stage governance, with funding and processes for innovation as separate activities from business as usual.
Level 6: Maturing Proficiency
Now we start to see strong, multi-executive commitment and resourcing. Teams have a set of repeatable, scaled best practices to guide their activities. Innovation becomes an important part of executive compensation and promotion discussion. Upper management monitors innovation metrics. Increased utilization of tools and connections across organizational silos, even extending to external sources of ideas, begins to sprout.
Level 7: Strategic Innovation
At this stage, the CEO and executive team articulate publicly that innovation is being integrated into the company’s central defining mission. Each step in the product development life cycle benefits from innovation practices. These efforts are supported by and connected to robust governance, measurement, funding, and cultural practices. A critical mass of employees recognize their role in supporting the innovation process and feel empowered to innovate.
Level 8: Innovation Mastery
Corporate commitment to innovation at all levels creates a portfolio of wins, as well as cadres of highly skilled practitioners. The organization is heralded as an example for others and is often cited as a “best practices” entity. Shareholders (for public companies) reward the potential for growth represented by institutionalized innovation practices.
Moving Level to Level in Coping with Inflection Points
Although in my experience every organization approaches its innovation challenges slightly differently, there is a pattern of factors that need to be in place in order for it to move up through the levels of innovation proficiency. As with other forms of organizational maturity, it is unusual for an organization to leap suddenly from, say, level 1 to level 6 or 7; it is usually a cumulative process that takes time. Of course, the more resources that are available and the higher the sense of urgency, the faster a transformation can proceed.
Each of the practices in this section can apply at any stage. However, I’ve tried to locate them roughly where I usually see them come up.
It is a good idea to start training people in innovation methodologies so that they can become comfortable with the ideas. At the very least, you might start a book club in which people from across the organization learn from thinkers like Steve Blank and Bob Dorf, Alexander Osterwalder and Yves Pigneur, Ian MacMillan and Zenas Block, Clay Christensen and the Innosight folks, Cindy Alvarez, Curtis Carlson, and me. This would also be a good opportunity to start building a simple community of practice—perhaps organizing “lunch and learns” or similar events with people across the hierarchy, not confined within organizational silos.
Level 1 Challenge: Creating an Appetite for Innovation
Organizations at level 1 are either genuinely absent the need for innovation (relatively rare) or, more typically, just in denial about inflection points that are about to substantially change the context in which they do business. The challenge for an innovation champion in a level 1 organization is getting people to acknowledge that there may be real value and importance in becoming more proficient.
The emphasis at this stage is likely to be highly diagnostic, because the key here is for a critical mass of decision-makers to come to the conclusion that things cannot stay as they are. Finding out that your strategy is not going to be delivered by your current portfolio of efforts (something I call “growth gap analysis”) can be a call to action. So, too, can investor enthusiasm for your future. By calculating your Imagination Premium, you can get a sense of how well investors think you are doing at seeing around corners.
The Imagination Premium is a metric that allows you to calculate how much of a public company’s value stems from cash flow from operations (today’s business) versus expectations for future growth (tomorrow’s business). You start the calculation by obtaining your company’s beta, which is a measure of the volatility of your stock relative to the market. The more volatile it is, the higher the beta will be. Based on the capital asset pricing model, a more volatile stock is riskier and thus should have a higher cost of capital. You then create a cost of capital estimate. By comparing that number with the organization’s cash flow from operations, you can effectively price how much of its market capitalization comes from operations. If the market cap exceeds that value, we call it the value of growth. Dividing the value of growth by the value of operations (the percentage of market capitalization attributable to the existing business) yields the Imagination Premium. A low Imagination Premium indicates that investors don’t believe you are going to be on the right side of an inflection point.
Take Buffalo Wild Wings, for example, a food franchise that lost its luster in 2017. Its Imagination Premium was a really depressing –.66, meaning investors not only didn’t expect growth, they expected shrinkage! What happened next, however, happens with regularity to low–Imagination Premium companies: an activist investor swooped in, demanded seats on the board, pushed the CEO to step down, and eventually ushered the company into the arms of an acquirer. So, a low Imagination Premium can also create an incentive for action.
Another analysis we often do is to look at investments across a portfolio of opportunities arrayed by level of uncertainty. This is called an opportunity portfolio analysis. Most relevant to seeing around corners is the presence of multiple options that are far less certain than the core business, such as Microsoft’s apps in its software “garage” (see Chapter 6).
We also consider the arena in which the firm is competing in what is called a context analysis. Just as Rühl did for Klöckner, the question we ask is how well the existing arena is doing in addressing the jobs to be done for relevant stakeholders. If the answer is “not well” and there are potential profits to be made by another firm entering that space, the context analysis should begin to trigger alarm bells, just as it did for Rühl. “Disrupt rather than be disrupted” then becomes the mantra.
All of these analyses are useful, no matter where on the innovation proficiency scale an organization stands. But we have found them to be especially helpful for creating a sense of urgency to move forward on an innovation agenda in firms that have not previously had to think about this much.
Level 2 Challenge: Getting Started and Clearing the Way
The movement from level 1 to level 2 is often prompted by some kind of actual or imagined crisis. In the case of Klöckner, the crisis was the combination of terrible business conditions that went on for years and the imminent threat of new digital platforms knocking incu
mbents off their perches without their ever having seen the threat coming. At Whirlpool, it was CEO David Whitwam’s despair in 2000 when looking at the state of the sector the company was competing in and seeing only a “sea of white”—row after row of virtually indistinguishable, commoditized appliances that no consumer found exciting.
As a company moves into level 2, there is actually something to be said for “innovation theater” in the sense that it has to start somewhere. And if it takes sending the senior people to Silicon Valley, bringing in consultants to run boot camps, having an idea day, or doing something else to get people excited and on board with the innovation agenda, so be it.
At Klöckner, for instance, the initial attempt to create innovative ideas among people from the existing business didn’t work out. That failure, however, created the impetus for the decision-makers to find a different way, which turned out to be setting up a brand-new operation on a small scale in Berlin, right in the heart of Germany’s startup scene.
As we saw in Chapter 1, the Adobe Kickbox program has been a smart approach to getting a broad group of people involved in the innovation process without requiring big, heavy corporate processes.
Level 3 Challenge: Local Proof of Concept
Level 3 can be tricky. People are convinced that innovation is important. They’ve had enough exposure now to think that they understand something about how it works. The temptation is to declare wildly ambitious goals to “own” some space or another. The problem is that at low levels of innovation proficiency, such efforts often end up as big, expensive disasters. Some examples include Revlon’s Vital Radiance line of cosmetics; the Quirky manufacturing platform, which was supposed to be an open source platform for building other people’s products but failed; and Google’s misadventures into radio.