The Innovation Paradox
Tony Davila and Marc J. Epstein
Tony Davila and Marc J. Epstein
Innovation Paradox
For most of the 20th century, innovation was owned by large corporations who have had significant resources
In the 1960s, venture capitalists emerged and startup companies started to emerge from universities a source of new ideas
This created a new channel for BREAKTHROUGH INNOVATIONS - innovations that could change industry or create new ones
Internet growth fuelled this channel, early online opportunities emerged during a time when the venture capitalist model was perfected
This gave competitive advantage to fast moving startups
These that took advantage of technology that changed the way people interacted with each other and available funding.
Large companies dominate markets - ability to execute is recipe for success - winners execute better
Constant INCREMENTAL INNOVATIONS - small regular improvements, keep them in lead
Innovative solutions are increasingly complex, requiring access to resources, knowledge, networks and execution power
The benefits of incremental innovations can be a liability for breakthrough innovations
INNOVATION PARADOX - Investment that are made to make companies more innovative cause them to be less able to come up with breakthrough innovations, due to the focus on incremental improvements and therefore incremental innovation.
Operational excellence and incremental innovation feeds success within existing business models, but fails for creating new ones
Incumbents sometimes see market changes, but often disregard to focus on incremental innovation e.g. Nokia —> Smartphones, Kodak —> Digital photography
These companies get better in a shrinking market
Innovation is a spectrum - incremental (improvements) to breakthrough (discovery)
Incremental innovation is important for maintaining competitive advantage in current markets
Breakthrough innovations need to be followed up with incremental innovations
Organisation setup / management determines how innovations are created and harnessed
Strategic bets depend on people at top having the right vision and organisation ready to execute e.g. Steve Jobs and Apple
**Strategic discoveries **focus on harnessing insights from many people with different expertise, trusting employees rather than management
Organisations need to trust employees and allow failures to happen
**Startup corporation **- utilises strengths of breakthroughs and the ability to scale of established organisations
Six steps - Inspire, Attract, Combine, Learn, Leverage, Integrate
Offence - breakthrough innovation / Defence - incremental innovation
Business Units - allows focus on markets e.g. General Motors and the approach that targets specific audiences
Allows for incremental innovation and improvements in efficiencies
Focused on execution, but can overlook breakthrough innovation, missing opportunities
Business Units measure short term results, focus on short term do not lend itself to innovation
Business Units are risk adverse, this rejects uncertainty of breakthrough innovations which are generally risky
Startups - copy and combine
- Copy - replication of ideas e.g. copycat versions of American companies in Europe e.g. eBay, Zappos
- Combining ideas e.g. Amazon - internet and retail
Entrepreneurs, experiment, learn, experiment - failure is an effective tool
Believe in idea beyond immediate financial rewards
Goal driven vs curiosity driven - narrow results vs broader discoveries
Start Up Corporation
Google - 20% free time to come up with innovations
Blends innovation of startup with strengths of established corporations, networks and relationships
Happily learning from everywhere, rather than “not invented here” mentality
**Inspire - **
- Cross pollination of existing ideas to develop new ideas
- Environments for creativity needs to be set up to encourage innovation
**Attract - **
- Strategic discovery combines internal and external sources of ideas, need to attract these ideas from external sources
- How to attract rich pipeline of ideas
Combine -
- Combine ideas to appeal to bigger markets
- Combination of different perspectives to create something new
Learn -
- Edison - “I have not failed, I’ve just found 10,000 ways that won’t work”
- Innovations are not perfect at inception, requires refinement, e.g. Nespresso took many years to refine, originally targeting hotels, restaurants and businesses, before focusing on consumers
Leverage -
- Complex solutions works best when it leverage advantages of established companies that has access to knowledge, resource and networks, giving it the ability to scale
Integrate -
- Integration with existing business to bring it all together
Overcoming the innovation paradox
- Structured process that gives directions and boundaries as well as freedom to go back and forth as solution is crafted
- Management solutions that combine company and market forces in different ways and different stages
- Combining internal resources with access to rich networks
Breakthrough innovation has no roadmap, needs different frame of mind from typical business units
Soft Foundations - Culture and Leadership
Innovative cultures
Culture can foster or kill innovations
Making resources available to innovators
Supporting people to take risks regardless if they succeed or fail
Seeing breakthrough efforts as necessary to long term survival
Balance technology and business insights for innovation
Opening communicating within the organisation and its networks
Google has Chief Culture Office to maintain unique culture
Culture —> how people think —> how people behave
Reshape behaviour to change culture
Management needs to be persistent and consistent to affect culture
Recruiting great talent - effectiveness of people to make impact
Need to balance talent and ego
Retention, maintain passion to discover
Experimentation culture, test and learn before roll out
Customer focus - how to better serve customers
Stretch goals -
- Need to be important for organisation, but more important for society
- Fun to achieve
- Seen as difficult but not impossible
- Simple enough for the team to visualise success
- Previous success creates confidence for ongoing success, remind teams of past success
Leadership
Leaders need to trust employees to come up innovations
Free up time to encourage employees to be curious
Strategist -
- Identify what the team should focus on
- Focus - identify the things the organisation will not be doing
**Sponsor - **
- Play to win / Play not to lose
- How much effort should be allocated to exploiting vs exploring - balance need
- Leaders need to support and show their appreciation
Architect -
- Personal involvement, key processes and capabilities are developed
- Make resources available, e.g. time
- Make sure processes work as planned without failure
- Efficiency requires standardisation, therefore sacrificing of certain freedoms
- Eliminate none value adding activities
- Maximise time - reduce unnecessary bureaucracy
- Avoid time wasting on decision making
**Evangelist - **
- Clear communication of pros and cons, scare and inspire
- Re-emphasis - if we don’t do, bad things happen, if we do this, good things will happen
- Explain consequences of failure to innovate “only the paranoid survive”
Avenues to evangelise
- Competition - a villain
- Stories of successful companies that failed
- History how we got here, success is based on past achievements and must not be forgotten
- Vulnerabilities - highlight threats
Focus on positive - remind of greater purpose
Recognise success - seize opportunity to laud success
Ensure momentum - attack easy to solve and cross tasks off to do list
Show passion for improvement and “love” what you do, without love, you fail
Courage to take risks, tolerance of uncertainty and long term focus
Breakthrough innovation is complex, a leader possesses clear vision and focus that removes unessential complications
Vision and simplicity lowers chances of taking unnecessary risks
Tolerate uncertainty and maintain longterm focus - keep cool when next step is not clear, focus on goal
Self confidence - difference from status quo, potential to fail - leaders need to be able to sell risk to key stakeholders
Belief in vision and mission
Hard Foundations - Strategies, Incentives, Management Systems
Both soft and hard foundations needed
Strategy for breakthrough innovation
Incremental strategy is based on past and known / foreseeable, therefore defines incremental innovation
Breakthrough innovation cannot be planned due to the unknown
Playing not to lose - defensive, have enough knowledge and resource to not lose, be ready to adapt when change occurs - fast seconds
Aggressive players have strategy to stay competitive, but also devote resources to create new markets and upset existing - allows for breakthrough innovation
Budgeting - allow enough for business to explore new discoveries Google uses 70-20-10; 70 for current strategies - 20 for midrange gaols - 10 for long term breakthrough
Support pursuit of strategic discoveries
Incentives
Intrinsic vs extrinsic - innovation is based on passion and vision, not financial reward
When driven by passion, failure is seen as a temporary setback
Winston Churchill describes success as moving from failure to failure without losing enthusiasm
Go after passion, money will follow
Vision and values - belief systems
Motivates people to constantly seek fresh ideas
Economic incentives - need to balance, not too much, not too little,
Needs to be seen as fair, share value created, recognise effort
Promotions, access to more information, networks
Reward and recognition
Management Systems - structures and processes for exchange of information, coordination and resource allocation
Stimulate exploration efforts, communicate strategic boundaries, allocate resources for exploration, hosting events to gather people from external networks
Idea fairs / Innovation fairs
Summary
Innovation myth - caused by two trends - technological shifts / advances and rise of capital venture funding
Innovation myth = established companies cannot bring breakthrough innovation to market
Innovation paradox = narrow understanding of innovation = many companies believe this myth - becomes self fulfilling prophecy
Business Units structure - drive incremental innovation, creates efficiencies, short term financial goals,
But blocks breakthrough innovation as is limits discovery and vision
Breakthrough innovation works in a different way, encourages discovery, vision and experimentation, searching across diverse environments
Strategic bets - top down, from visionary leaders - management structures don’t allow multiple successes, as failure is immediately blocked
Strategic discoveries - bottom up - needs startup corporation - allows stages of innovation of startup whilst leverage strengths of established companies
Established companies do not have start up speed and not exposed to market forces like startups
Strategic discoveries are good at complex combinations of technology, markets and networks
Strategic discoveries do not happen at business unit level, and management structure needs to allow for and nurture
Soft and hard foundations are needed
Culture for risk taking important
Startup corporation has insights from startup plus advantages of established company
Startup principles -
- Be exposed to different environments
- Copy and combine to learn and invent
- Migrate ideas to new contexts
- Link people and ideas
- Communicate and share
- Take risks
- Play with new combinations
- Leverage your networks
In designing a startup corporation, established businesses need to determine how to manage process of innovation, how to inspire people to come up with breakthrough ideas
Main weakness is failure to manage entire innovation process, there is a need to focus on execution, as initial visible and inspirational are given resources, but with no follow up.
Image credit: Audible