3 Disciplines of Disruptive Innovation
Many say disruption is a game for Startups. We disagree. Corporates can be innovators by becoming ambidextrous organizations. This is a step beyond adopting Lean Startup, Design Thinking, and Business Model Canvas. It requires a scale of ambition from leaders equal to the opportunity or threat of disruption.
In 2013, the cover of the Harvard Business Review announced that the ‘Lean Startup Changes Everything’. It promised to show large corporates how to lead disruptive innovation by teaching them secrets from the startup playbook. Many firms jumped on board with Lean, led by GE, while others enthusiastically embraced open innovation, design thinking, hackathons, the business model canvas, and other related disciplines.
Ten years on, results are mixed. Corporates have used all these approaches to accelerate incremental innovation, making existing offerings better, cheaper, more suited to customer needs. Even so, it is rare to see these firms scale genuinely disruptive new businesses. GE created its own version of Lean and invested heavily in a new digital business unit. Yet, by 2018 the new venture had become a white elephant and CEO Jeff Immelt was forced to step down. Other less prominent firms had similar experiences. As Lean’s guru-in-chief, Steve Blank, said that “After three or four years of watching innovation in large companies trying to use the lean startup methodology, I’m embarrassed to say that most of it has ended up in innovation theater” with nice coffee mugs and posters but few results.”
My new California Management Review article, with Professor Charles O’Reilly from Stanford University, examines why these recipes for radical innovation have not worked and what firms should do about it. We argue that there is nothing intrinsically wrong with methods like Lean or Design Thinking, but that what is needed is a disciplined end-to-end approach that turns turning the best ideas into disruptive new businesses.
Charles and I call our approach the ‘Three Stages of Disruptive Innovation’. In the article, we explain how firms need to: (1) Ideate by generating ideas for potential new businesses, (2) Incubate the best of these ideas with disciplined business experiments, and (3) Scale the validated ideas by reallocating resources to provide the customers, capacity, and capabilities they need to grow the new business. All three disciplines are necessary, none are sufficient for success. Most firms overspend on ideation, incubate without sufficient discipline, and underestimate the barriers to scaling.
Many firms have mastered Ideation, bringing insight and ideas into the firm to generate customer-centered propositions. Though they risk mistaking ideation for innovation. They believe that generating lots of great ideas will translate into disruptive businesses. Unfortunately, there is no correlation between a supply of great ideas and successfully building breakthrough innovation businesses. Indeed, many create an ‘Innovation Zoo’ with? vibrant energy and many ideas, but not focus. Three key disciplines are needed:
- Scale of Ambition – each firm that starts on the road to disruptive innovation needs a defining aspiration equal to the opportunity or threat that they face.
- Strategy Manifesto – the senior team needs to make a statement about how this ambition can be realized and why it matters to the firm. The manifesto should be short, bold, and declarative.
- Hunting Zones – the ambition and manifesto set boundaries for ideation, defining the markets, business models, types of problems, or customers to focus on. This ensures effort is focused on areas most likely to deliver on the ambition.
Incubation is about validating the best ideas by testing the value proposition, go to market model, and pricing in live customer trials. The Lean Startup is a good discipline. It focuses us on how to rigorously test new business concepts. However, to make it work firms need to observe three key issues in managing the cultural and organizational barriers to success:
- Hypothesis testing – incubation requires mastering the iterative loop of test and learn: state an assumption, test it in the real world, and then adapt based on evidence. As Jeff Bezos says, “Most large organizations embrace the idea of innovation but are not willing to suffer the string of failed experiments necessary to get there.” Comfort with the iterative loop at senior management levels is essential.
- Feedforward measurement – Another incubation challenge is the measurement system. Most organizations operate on a feedback loop – what was our goal, how did we do, what explains the variance, how can we close the gap? What is required for an experiment is a feedforward system that tracks performance toward a strategic goal. What data do we have to tell us how an experiment is performing relative to its hypotheses?
- Executive Oversight – Senior managers need to be formally involved in the decision-making on experiments in the incubation process. The biggest threat to moving from incubation to scaling a new venture is a profitable business unit that makes the rational choice to divert investment for a more certain, short-term reward. The senior team needs to stay focused on its ambition. That means senior executives must commit time and attention to reviewing the experiment as it unfolds.
Scaling means converting a successful experiment into a commercially successful business. Many firms have mastered ideation, some are excellent at incubation, but relatively few can claim to have delivered disruptive businesses at scale. To be successful at scaling, a new venture needs to add customers, capacity, and capability fast enough to maximize the market opportunity. It can be slow and expensive to build the capacity, much faster to buy it or find a reliable partner. These are good strategies. There are some great case studies for well-planned acquisitions that enable firms to build a disruptive new business. The best is LexisNexis which in ten years created a wholly new multi-billion-dollar big data business by tying together its existing data assets with more data, a technology platform, and a customer base from several acquisitions. There are also many cases of failure, particularly if you buy a startup with immature technology and an unproven business model. A better option is to leverage your existing business assets to grow a new business internally. It sounds far-fetched but with the right senior sponsorship and organizational approach it can work. The key is to give the new unit lots of autonomy, while safeguarding its access to the resources of the mothership.
In our article, we describe case studies of firms that successfully take innovations from Ideation to Incubation to Scaling. We draw on evidence from digital innovators like Lexis Nexis Risk Solutions, Amazon, and, older cases, like IBM’s Emerging Business Opportunities which were so successful in the 2000s. What these cases demonstrate is that for large firms, simply ‘acting like a start-up’ is not enough to guarantee success. The organizational and cultural inhibitors of success inside a corporation remain formidable. Only when the disciplines of the three stages – ideate, incubate, and scale – are in place will new ideas result in commercially successful, disruptive businesses.