Over the past 50 years, the average life span of companies in the S&P 500 has been cut in half. It is more critical than ever to help leaders increase the resilience in their organization. Many leaders understand building up your organisation's innovation capabilities is the key to resilience but few know how to start. For anything sustainable to be built we believe three fundamental ideas must first be accepted by leaders and widely disseminated in the organization. We call this innovation inception.
Too often, we see companies carry out innovation projects as "business as usual".
In exploitation the focus is on managing the existing business model(s). The key words are efficiency and growth. The level of uncertainty is relatively low, because you already know the market, customers and products/services. Investors can expect steady returns and dividends. Planning and execution are possible. Failure is a sign of poor planning and/or execution and is therefore prohibited. Executives and managers know their business inside out and ensure execution on time and within budget.
Exploration on the other hand focuses on the creation of new business models. The key words are search and breakthrough. The level of uncertainty is high, and the investment logic is closer to the one in venture-capital, with a large portfolio of small investments. The process requires rapid iterative experimentation with frequent "failure" leading to learning and adaptation. The people involved are more like explorers who excel in an uncertain environment, and are capable of recognizing patterns and making sense of weak signals.
Resilient companies accept this difference between exploration and exploitation, and are able to develop a culture of exploration and a culture of execution living in harmony under one roof.
People often don't understand each other when they talk about innovation. The main reason for this confusion is that there are three different types of innovation. To bring clarity to any discussion, it is fundamental to specify what type of innovation we are talking about.
The first type of innovation is aimed at improving operational efficiency. When Amazon automates the management of its warehouses with robots, it is very innovative, but it does not change Amazon's e-commerce business model. Nor does it create additional revenue. But it does make one of the key activities necessary to operate this business model a lot more efficient.
The second type of innovation is sustaining innovation (incremental, adjacent). The idea here is to add new value propositions to an existing business model. When Amazon adds e-books and e-readers (Kindle) to its e-commerce site, these new value propositions create additional revenues. But we're still very close to Amazon's core business.
The third type is transformative (disruptive) innovation. When Amazon reuses it's IT and technology expertise to create Amazon Web Services, we are at the heart of transformative innovation. A new value proposition for a new customer segment that leads to a new business model that exists alongside the e-commerce business model.
Most of our customers do not innovate like Amazon. They have an innovation portfolio that is massively geared towards efficiency innovation, with a low percentage of sustaining innovation projects, and a few rare transformative innovation projects. Yet, it is this type of innovation that produces the highest long-term value and creates protection from disruption. One of our goals with The Invincible Company is to help companies rebalance their exploration portfolio towards more transformative innovation.
In transformative innovation, the rules of the game are different: transformative innovation is a volumes game.
In venture capital, investors understand that it is impossible to predict in advance which start-ups will become tomorrow's successes. To maximize the chances of investing in future successes venture capitalists invest in a large number of projects, and accept to lose their investment in the vast majority of cases.
According to a study by Correlation Ventures on the return distribution of their funds between 2004 and 2013, only 1 investment out of 250 leads to a real success, with a return of more than 50x.
There is no rational and statistical reason to think that business leaders can beat the venture capital industry. The success rate that leaders can expect from transformative innovation will therefore be similar or even lower than that.
Too often, companies invest in one, two or three ideas. These big projects will receive significant funding and leadership support. The company becomes so invested in them that it almost impossible to stop them or change course, even when all the signals point to a future financial debacle.
To develop resilience, an organization must be prepared to manage a portfolio with a large volume of ideas and projects and accept high "failure" rates. Leaders need to become comfortable with “killing” the vast majority of projects along the way. “Killing” a project is not natural for most executives in large companies who approach these types of decisions with the reflexes of the exploit world. But it is a necessary shift to allow the innovation portfolio to produce much better outcomes.
In conclusion, here are the three fundamental ideas that leaders need to make their own to unleash the transformative innovation potential of their organizations: