How to know when the old models don't work any more

As Malcolm Gladwell and other business writers have found, it is entirely possible to write a compelling article around a rather obvious point, and still hold the reader's attention.  As a case in point I draw your attention to this article - entitled Why Corporate Innovation is so Hard.  This article was clearly written by a communications master, because it has an attractive title that seems to address an intractable problem (and suggest an answer) and is based on a premise that seems inescapable:  too many companies fail to innovate because they trust their existing understanding and the existing perceptions of the way the world and the market work, while missing key signals that a disrupter finds, interprets and implements.

The article quotes a book (The Disruption Dilemma) writing:

Disruption describes what happens when firms fail because they keep making the kinds of choices that made them successful.

This is both extremely insightful - because it is true, and extremely obvious - because it happens all the time.  Senior executives trust their understanding of the market and prefer to fail based on models of the present and recent past, where they were successful, rather than risk anything on models that aren't proven.  This is, also, true of all recorded human history.

But when do the existing models fail?

I've written previously about Tower Records, which was the largest distributor of music on physical formats for decades.  As the physical format shifted from records and 8 track to cassette and then CDs, Tower made the shift, and stayed in the lead.  However, when Napster and others started distributing digital music, and then Apple pioneered the iTunes model, Tower collapsed almost overnight.  Notice that the core business - distributing music to consumers - didn't really change.  What changed was the media and the business model.

What I was hoping the original article would address itself to is:  when should executives know that their existing models may not work any more?  What are some key trip wires, canaries in the coal mine, and so on that signal that the old models are failing, and the time to take a significant risk on a new model is nigh?  Answer that one and you'll have an army of CEOs knocking on your door.

Trip wires and canaries

The old trusted models are old and trusted for a reason.  They work, right up until they don't work any more.  It will take a significant amount of evidence for any established company to adopt a new way of working that isn't aligned to their old trusted models.  What they will need are really clear signals that the old model is failing, and cannot be restored.  For this to happen you need clear signals or trip wires and people who can act decisively when they encounter those dead canaries.

We actually have two case studies playing out right now where we can observe some moderate success and some reasonable failure from two blue chip companies: IBM and GE.  IBM saw the canaries and had a relatively decisive leader who made the shift from hardware to services.  GE read its own press and failed to see dramatic shifts in its business model and are now paying the price.

IBM's canaries - IBM's leadership recognized that hardware was becoming a commodity, which placed a lot of IBM's revenue at risk.  IBM wasn't a big player in software, where there are significant margins, so it had a few choices - double down on hardware (the trusted model) to squeeze out earnings or take a risk on services.  IBM went with services, selling most of its hardware division and making a transition to much more services revenue.  The canaries in their coal mine were 1) rapid declines in margins for hardware 2) the increasing "as a service" model for computing power 3) the cost of entry into software.  This is a very high level analysis - I'm sure there were other canaries.

Sensitivity Analysis

Perhaps the best canaries to watch in your specific business are those that have the greatest sensitivity to change.  IBM was highly dependent on hardware sales, and the sales as well as the margins were falling and not coming back.  Given how sensitive IBM was to those changes, it made sense to shift.

Which areas of your business are most susceptible to change?  What criteria, if it changes suddenly, dramatically and perhaps permanently, would create the most difficulty for your business?  If you understand these, and track them, you'll know when the old model starts to fail, and when it's time for truly disruptive innovation.

Scanning for trends / understanding potential scenarios

What Apple did well with iTunes and digital music is to understand the trends.  Just because Napster was illegal didn't mean what it was trying to do wouldn't work.  The trends pointed to a shift from physical media to digital media.  Whoever understood that shift and the implications would win.

Doing trend spotting and scenario planning is the innovation version of free money.  Having a better understanding of how the future might unfold, and the potential outcomes and scenarios will help you spot the dying canaries while the actual canaries are still relatively healthy.  Why every company in companies with a significant amount of change doesn't have an active trend spotting and scenario planning team is simply beyond my understanding.  It takes very little work to get a lot of very valuable insight.

As one of my colleagues used to say, it's not the fall that kills you, it's the sudden stop.  In much the same way many corporations spend time examining factors that are changing slowly and with predictable pace, and neglect to consider the factors that could change suddenly and drastically.  I made this point recently at a speaking engagement.  What factor changed the healthcare market suddenly and drastically?  Not technology, not the availability of doctors, not different service models.  What changed suddenly was a political phenomenon.  The point here is to understand what could change suddenly and have dramatic impact on your business.

The Timing Trap

There is a timing trap, however, much like timing the market.  You will never be able to predict exactly when or if a specific feature or characteristic of the market changes.  Since you cannot know with any degree of certainty when the market will change, and since it is more volatile and subject to VUCA than ever before, it's clear that your team should be experimenting with disruptive innovation all the time.  Otherwise you'll wait until conditions are proven to have changed before you start innovating, which will be too late.

Change is happening, and its happening faster than ever, with more dramatic results.  In the past companies would wither slowly, but today entire industries are shifting.  Companies with the greatest exposure - those in highly competitive and mostly unregulated markets - would seem to have the most risk, but here too is an unexpected twist:  so much power now sits in the executive branch, with regulators and administrators, that what seems highly regulated and protected could easily change very quickly.

For all of these reasons there is a good argument to have a constant disruptive innovation activity underway, fueled by trend spotting and scenario planning, framed by the aspects of your business that are most sensitive to sudden, unexpected change.
 

The interplay between digital transformation and innovation

I've found that concepts like digital transformation are like eating honey.  The stuff just kind of sticks to you long after you think the experience is over.  As a person who has spent more than 15 years focused on corporate innovation, I find the rapid emergence of digital transformation interesting, and sometimes a bit troubling, as you may recall from a previous post.

Today, however, I find myself returning to two themes - digital transformation and innovation - because I'm 1) starting to teach a course on these two concepts for SKEMA USA and 2) our Innovate Carolina conference April 5th in Charlotte is also focused on these two concepts.  These are two of the most important initiatives facing management today, and I have to believe one of just a handful of opportunities will emerge:

• These two initiatives will compete for time, attention and resources, and digital transformation will win
• These two initiatives will find ways to cooperate, as one improves efficiency and the other focuses on growth
• These two initiatives become more sequential, as innovation builds on what digital transformation delivers

The honest truth is probably situational - that each one of these is true to some extent in any company.  Let's hope the truth lies more with bullets two and three than with bullet one.

Competition

This, frankly, continues to be the outcome I think is most likely, and would be the most unfortunate outcome.  Management time and attention is often limited, so the latest philosophy gets the most attention.  Digital Transformation could be more tangible to executives, because hardware is being implemented and new data sources and new services will be created.  Digital Transformation can be much more tangible and seem less risky than innovation, and Digital Transformation feels like a "must do" while innovation often feels like a nice to have.  I'm going to suggest that at least 50% of companies will end up with a much larger focus on Digital Transformation than on innovation.

Co-operation

Probably the best outcome, as Digital Transformation, for all its promise, is more likely to improve efficiency, cut costs and increase speed in the next few years, and all that investment will take time to validate and demonstrate results.  Most new technologies gain traction first by cutting costs or improving efficiency, and I think Digital Transformation will do the same.  What we need to do is harvest expected savings and benefits from Digital Transformation and invest expected or anticipating savings into innovation that drives disruptive growth.  Using Digital Transformation to focus on efficiency while innovation focuses on horizon 2 and 3 growth makes tremendous sense - but may require companies to follow a bifurcated strategy that is difficult to accomplish.  Probably 15-20% of companies will have the fortitude and bandwidth to attempt this alternative.

 Sequential Implementation

There's always been a tendency to wait for innovation.  Next quarter will be better, or the next challenge will be more appropriate for innovation.  Now, with digital transformation on the horizon, companies may argue that innovation should wait until digital transformation is fully implemented.  I can't say that that's a terrible argument, except that digital transformation will 1) always be a journey and 2) will take 3-5 years to get the basics in place.  Doing these sequentially does make sense, because there will be a lot of leverage from new insights and greater efficiencies, but waiting that long will mean missing a number of market windows and allowing new entrants free access to your markets.

It's a both/and world

Digital Transformation and innovation aren't mutually exclusive, and both promise significant benefits.  Innovation can drive greater efficiencies or more growth and differentiation, and as Digital Transformation grows in capability it will drive even greater efficiencies. That is why digital transformation should focus on efficiency and automation gains, while innovation should focus on horizon 2 and 3 disruptive innovation.  It's not an either/or decision.  The best decision is "both/and", ensuring that each concept has a clear focus and scope.

Conclusion

Over the next few years we'll see far more commentary about digital transformation, because as far as management philosophies go, it's the new kid on the block, and a bright, shiny object as well.  We innovators will have to work to keep enough focus on innovation and its potential for growth to keep innovation top of mind, otherwise we'll fall into the "competition" trap (bullet one) or less worse but still not so great the "sequential" trap (bullet three).  Digital Transformation and innovation aren't enemies but they may end up occupying the same space in executive's minds, so we need to help create clarity about the value propositions and the differences.

It's past time to reintroduce risk into corporations

I was on a conference call recently, discussing an upcoming keynote that I'll deliver to a academic-federal government program meant to accelerate new technologies from basic research into the market.  We were talking about the "ecosystem" of contributors that can help move basic research from academia and research labs to market.  One participant talked about the role that large corporations could play, and sometimes do play, in commercializing new technologies.  At this comment one of my colleagues chuckled.  He said to me, after placing our phone on mute, that few corporations are willing to do much with technologies coming out of academic research.  They are simply too early in their development, with too little consideration for use in the real world.

We rejoined the call and encouraged the speaker to include the role that entrepreneurs play in moving ideas from academia to the market, rather than focus so much on corporations.  The coordinator wanted to know why we were encouraging more emphasis on entrepreneurs rather than corporations.  It's simple, I said.  Corporations are not longer willing to take any risks.  And there, my friends, is one of the major reasons that we see so little innovation from established companies, and so much disruption from unexpected sources.  Risk has been eliminated from corporations.  And we need it back.

Certainty and Risk Reduction

Corporations don't like risk or uncertainty.  In fact their bureaucracy, structures and pace are in place to ensure that any new project is carefully reviewed, carefully inspected and carefully scoped to either eliminate risk or mitigate risk to the greatest extent possible.  This means that most new products or services are so carefully managed and monitored that they can only be incremental change at best.  Nothing earth shattering or revolutionary will come from larger corporations given their structures and processes. 

Everything these companies have done over the last 30 years was focused on reducing risk and uncertainty.  Paychecks are based on being predictable, hitting quarterly targets as suggested in whispers to stock analysts months before.  A large and unexpected increase in revenue from a new product might be viewed negatively since it would be a surprise!

Could I get that with a side order of risk?

Risk avoidance leads to complacency and then to blinders.  Recent advances from asset-less companies like AirBnb or Uber demonstrate that easily accessible adjacent opportunities to large corporations were available, out in the open, ready for the taking, but none did.  There was too much risk associated with going into the room rental business for Marriott, Hilton or Sheraton. 

We need to increase the amount of risk we are willing to tolerate within larger corporations, or more will lose market share and the creative edge to others who are willing to take the risks.  When markets were stable and steady, the basis for success is to stay the course and not distract from a good thing.  When markets become more frothy, endure more change and more sudden change, when products and services can be rolled out much more quickly, companies must adapt to these changes by incorporating more risk into more projects.  Otherwise the risk isn't in product development, it will be found in revenue, profits and even viability.

Thank you, next!

Of course talking about incorporating more risk in new projects is like deciding to scale a sheer cliff when your previous experience in mountaineering has been limited to practice runs in the gym.  Compensation schemes, cultural phenomenon and other factors will constantly work to limit the amount of risk that is allowed in any project, so wholesale change must be the order of the day.

That means strategy and planning must incorporate more risk, and communication from the top down must encourage more risk in key innovation projects.  Corporations may need to create new measures and metrics, because existing ROI models simply won't countenance newer, riskier projects based on older ROI models.  Corporations can create new projects that incorporate more risk, but if these changes aren't made, the response when it comes time to fund these activities or staff them will be:  thank you, next!

When your industry is safe and secure, change is moderate and predictable, threats are low, you can operate in a very predictable manner and keep risk in check.  Given the state of the market, political turmoil, international trade tensions and the rapid evolution of new technologies through digital transformation, your level of operating risk and product risk just went up.  Are you able to dial up your level of new product development risk to help create the next generation of products? Or will you outsource risk to a new generation of entrepreneurs, thinking that you'll acquire their companies or products as they reach scale, only to watch them scale so rapidly that they eclipse you?

What 2019 holds for innovation

I wrote my obligatory look back at 2018 article on innovation recently, so it is natural that we should turn our attention to where innovation will take us in 2019.  In the 2018 review I made some disparaging remarks about Apple, which may or may not have caused it to lose a tremendous amount of market capitalization.  Or perhaps the stock was overvalued and Apple has become more interested in margin than in innovation.  I'll let you, gentle reader, be the judge.

What we want to do in this blog post is to speculate on the coming year.  What do we know about the state of innovation?  What do we think will happen in 2019?  What innovation methods or approaches will gain ground?  Which activities or approaches will lose steam?  Will innovation finally cross the chasm, leave the hype cycle "trough of disillusionment" to take its rightful place in the "slope of enlightenment"?  We'll explore.

Looking ahead to 2019

As with any evolving or unfolding management philosophy, there are factors that can accelerate innovation or change it dramatically in 2019, and factors that will rise to create barriers to innovation.  More importantly though I think we'll see a reframing and repurposing of innovation, as many corporations decide they can't do innovation effectively enough internally and become distracted by digital transformation.

Old avatars lose their luster

We've referred to Apple as an example of innovativeness for a while, but that adulation and praise may be increasingly undeserved.  Apple did some amazing things with the iPod, iTunes, and the rest of the i series, but lately it has rested on its laurels.  Other innovators have also fallen on difficult times.  Facebook is increasingly exposed as a data supermarket, and illustrates another challenge for innovation in 2019, worries from consumers about who, exactly, is benefiting from innovation.  We need some new avatars, and we need the old avatars to return to their previous luster.

Mastering the basics

It's really time for some of the larger firms that have been experimenting with innovation to simply decide to master the basics.  Innovation doesn't need to be an unplanned, ad hoc experiment with few tools or milestones.  Large corporations have made significant commitments to efficiency, quality, Six Sigma and other philosophies.  Is it too much to expect at least some equivalent level of investment and proficiency?  If not, then why bother?

What innovation and who is it for?

Many corporations, especially those managing or collecting data or acting as a platform are using innovation to enrich themselves rather than their customers.  There will be a backlash to all of this unannounced or under-publicized data harvesting.  Customers want companies to innovate, but customers expect to benefit from the innovation, rather than being taken advantage of.

Can big business really innovate?

Many larger corporations are asking themselves this question, and increasing arriving at a bifurcated strategy for innovation.  They will do more incremental innovation internally, and will trust that entrepreneurs or third parties will do the horizon 2 and horizon 3 work for them.  In this regard we see evidence of this shift in the increase in accelerators and corporate venture capabilities of larger corporations, who are finding it difficult to do interesting and disruptive innovation internally.  An entire market opportunity will arise to conduct interesting horizon 2 and 3 innovation for or as a proxy to large corporations, which can then be acquired by the large corporations once proven in the marketplace.

 Product is Passe

Product innovation is so yesterday.  Product innovation is relatively easy to do, and relatively easy to copy, so companies are realizing that product innovation is the entry point in the game, and the real stakes are increasingly around business models, channels, experiences and services.  Yet many companies don't have experience or capabilities to constantly rework their channels and business models.  Something will have to give.  Many winners will follow the Uber and AirBnb model - changing business models, services and experiences using models that rely on physical assets as little as possible.

The risk in platforms

A few years ago, every company wanted to create a platform.  Platform innovation is still a hot topic but as industry executives watch Facebook and Apple testify on Capitol Hill, there is a growing awareness of the platform as a dual edged sword.  If consumers feel threatened or get angry about the use of their data or the access to the platform, Congress may step in and do something that these innovators don't want - regulate.  Unless of course the regulation codifies their lead.  Congress could play an interesting role in innovation in the next year or two, trying to 'protect' consumers but having the opposite effect, locking in larger firms who have abused privacy rights and forestalling new innovators.

Ecosystem

It used to be we'd delineate "closed' and "open" innovation activities.  Increasingly we just talk about innovation, recognizing that more and more, innovation involves other parties.  As it involves other parties, we begin to recognize that all innovation happens in the context of an ecosystem.  Understanding your ecosystem and how to work within it to maximize innovation effectiveness will become a key differentiator.  You simply will not do everything by yourself, and there are plenty of good partners in your ecosystem if you will allow yourself to work with the ecosystem.  The best innovators in the near future will 1) understand the players in their ecosystem and their value propositions 2) have existing relationships with those players and 3) understand how and when to leverage those relationships to drive the most value.

Digital Transformation

Innovation has been on the periphery of management thinking for a while.  Some companies have been successful, some have not.  Some have fully deployed innovation tools and methods, some have not.  However, a new management imperative is emerging, and it remains to be seen if the new imperative - digital transformation - plays nicely with innovation, works in parallel or works in opposition.  All three could unfold.

My sense is that most executives will want to focus on digital transformation.  It seems obvious and natural and builds on existing products and platforms.  However, executive time is constrained, and time for digital transformation may mean less time, budget and attention for innovation.  On the other hand, a fully digitally transformed business should be able to conduct innovation much more effectively.  Digital transformation will either be a significant enabler, or increase barriers for innovation.

Signals not predictions

I've learned over time that making predictions about innovation, especially corporate innovation, is a fool's game.  However I think some of the items I've included here are either already underway (shifting risk to third parties with accelerators or corporate venture) or are obvious concerns (what does digital transformation mean to corporate innovation?).

While platforms and ecosystems have been discussed for years, I think innovators who understand the space are recognizing the value of a platform but also some of the risks involved, and how difficult it is to build a truly viable platform, while others are really only beginning to understand the value of the ecosystem that they live in.

Without a doubt we can say that digital transformation will have an impact on innovation, we just don't yet know what that impact will be.  We can also see that platforms and ecosystems, while both valuable, carry different risks.  Increasingly a platform may be viewed as something to regulate, like a utility, while tight ecosystem connections may offer more value.

Innovation needs aren't getting any less strategic for large corporations, and the demand from consumers is getting more intense.  What companies need is a specific, defined, communicated and implemented innovation strategy that helps clarify expectations, roles and goals.  Without that strategy and good communication, many organizations will continue to struggle to do innovation well, even 20 years into the innovation epoch.