Forbes: Blaming The CFO: A Lazy Explanation For Walmart, GM, And Intel Closing Innovation Units

This article was originally published on Forbes.

Walmart’s (NYSE: WMT) closure of its Store No. 8 lab is causing concern that short-term budget cuts are killing innovation. It is one thing for a CFO to cut the fat, but this is attacking the muscle that businesses need to capture new opportunities.

Units like Store 8 play a vital role in connecting large firms like Walmart to startup ecosystems. They create opportunities for firms to learn about new technologies and business models outside of day-to-day business. Killing off Store 8 cuts that connection, so making it more likely Walmart will miss the next big thing in retail, just like it missed ecommerce twenty years ago.

“CFO kills innovation budget” doesn’t tell the full story

CFOs can make remarkably short-term choices when there is a need to squeeze budgets to hit EBITDA targets. Investments made in one year can be written off at an alarming speed to save budget in the next, without any apparent concern for the long-term implications of the decision.

However, it is a bit easy to rail against short-term CFO budget cutting, without having considered some alternative explanations. In this instance there are at least two other very good reasons why Walmart might have decided to close Store 8: 1) Store 8 had become an innovation island, too separated from the core business to contribute to commercial performance, and 2) The innovation lab is not a forever thing; by its nature it gets formed, dissolved, and reformed depending on what it needs to achieve. Walmart Store 8’s job was done. I have limited knowledge, but here are some thoughts which I think are relevant to any similar unit.

Innovation islands

The difficulty with the corporate lab is that it pushes innovation to the fringe. It becomes a buffer between the operational business and the vibrant external ecosystem. If you are a startup, you get opportunities to engage with Walmart via Store 8, but that’s completely different from having your innovation adopted in the stores.

Large organizations very quickly turn unit boundaries drawn on a chart into walls. That’s particularly common for innovation units. One executive that I worked with in the past few years was the ideal leader of a corporate innovation unit. He was smart, exploratory, open-minded, and trusted by the leaders of the core business, including the CFO, always a tricky customer to convince. However, three years into the job, he had built a wall between him and his old colleagues. He only hired outsiders, with no experience of the legacy company, and made it clear that he was the only person that could speak with the mothership. Why? Because he wanted to protect the new unit’s independence. He wanted to be free.

This push for independence only has one trajectory. The core business wins and the new unit gets wound up. That seems to be the story at GM’s electric commercial vehicle unit, BrightDrop. The company hired a talented entrepreneur to lead the development of a new product; he delivered but did not want to integrate with the rest of the commercial unit.

There is limited evidence of this applying at Walmart. The unit was founded by an entrepreneur, Marc Lore, after the acquisition of Jet.Com. There is some suggestion that in this era there was a disconnect between the lab and the operating units. However, under Lore’s successor Scott Eckert, it seems that this changed. Store 8 had an advisory board with heads of the operating units and did experiments using the stores, keeping them involved with the evolution of new technologies (what they called the domain derby), and spent significant effort working with the line units to gain credibility. If there was a gap between lab and business, it sounds like Eckert was closing it.

Forever Lab

The other explanation may seem a little heretical: Store 8 had done its job and it was time to move on. This flies in the face of a school of thought that argues for a “systematic engine” for innovation that is always on. This perspective argues that innovation is a discipline like marketing or manufacturing that should always exist. This is logically satisfying, but I think it is wrong.

Innovation is the conversion of invention into value. If you run a business, you want everyone working on how to do things better, serve more customers, deliver more value. That can happen anywhere in the organization and frequently starts in the periphery far away from the people with formal responsibility for it. You create a separate unit when you believe there is something the core business cannot do. That’s often because innovation threatens some aspect of the existing business model (what my Harvard colleague, Mike Tushman calls “competence destroying innovation”).

Store 8 was created when Walmart was scrambling to catch-up with Amazon. It had massively underestimated the importance of ecommerce and its ability to generate new business models. Store 8 was designed to close the gap and make technology more central to how Walmart does business. After 7 years, Walmart has upped its game, doing things like home deliveries via text messaging. It has built capability in the business overall, with over 300 employees moving from the lab to the core business.

Store 8 could have found a new purpose, but retail is a relatively simple business. It depends on getting the right stock on the shelves and getting customers through the doors. Technologists may get excited about reinventing retail with virtual reality and contactless stores, but retailers themselves do not see the business case. Retail innovation is about better product and better customer experiences. They get more benefit from reimagining the store, as Dick’s Sporting Goods did with their “house of sport” format that includes climbing walls and soccer pitches, or the world’s first autonomous ice making factory at Southeastern Grocers.

The real story for Store 8 is that it had run its course and no longer solved a problem Walmart thought was worth the money. The lesson for everyone else is to focus on the purpose of the innovation unit. The question to as is “what outcomes do you need to generate?” What is it that you need to learn? What markets do you want to enter? What capabilities do you need to build? An innovation unit is about creating space within the business to pursue these innovation goals. It is not an end-in-itself.