It's time to address the elephant in the room: If Innovation fails, dear companies, is greatly due to how you manage and approach innovation (or better how you avoid it)
It's not my love of punk and rockn'roll that is typing, but my will of clearly show the main reason why Innovation fails in large companies as Albert Einstein used to say
"If you can't say it simply it means you haven't understood it well enough"
Let's take a step back: why Innovation is so Important? What is innovation?
"Innovation is what distinguishes leaders from followers" - Steve Jobs
It's the ability of staying relevant and to continue to create value for our beloved customers (existing one with new or better services to new ones)
Something we might not have understood is that the economic model has shifted from a Sustained Advantage into a Transient Advantage.
Only 10 years ago creating and reaching a competitive advantage was everything every company wanted. That is true also as I type, is just that today that competitive advantage lasts a lot less!
The new way that companies have to stay relevant is to continuously create new sources of competitive advantage and that is Innovation Ability.
This might all make sense to you, but trust me, it's not that immediate in the real world. I've been working on innovation for more than a decade now, I've been an intern, an analyst a manager, a director and a VP. I've been working from the outside as strategic advisor and within as an executive. I've worked with all sort of companies, from ice creams to cigarettes, from automotive to Insurance and IoT. Some of them were incredibly successful, smoother already started tho struggle but when it comes to approach innovation they all have one think in common: they think they know better.
It's true the most common reaction is denial: even when they call you in to solve the problem (or at least address it) they minimise or deny the need of change. It's in that moment that you know this is going to be tough and that you probably won't succeed as you know you could.
This is the elephant in the room: Companies want to Innovate by keep doing what they've always been doing. Now what this is more Insanity that innovation as someone famously once said.
"Insanity is repeating the same mistakes and expecting different results."
The truth is that companies are not designed to continuously create Innovation as the current transient advantage model would want. On the contrary they seem to be designed to act conservatively and Iterate "what they know better". Companies that are tied up in these dynamics lose their capacity to innovate and fail dramatically usually by doubling down ona once successful strategy that is now anachronistic and failing.
Let’s consider briefly the history of HMV.
HMV’s rise started with the pop music revolution of the 1960s, when the company began expanding its retail operations in London. It doubled in size in the 1970s and had established itself as the country’s leading specialist music retailer by the early 1980s. In 2002 HMV floated on the London Stock Exchange, valued at about £1 billion.
By then, however, some employees and analysts had started to express doubts about the long-term sustainability of HMV’s business model.
Although the arrival of DVDs and computer games initially boosted store profits, supermarketchains had begun selling popular CDs at a discount, and in early 1998 Amazonhad started selling CDs online. A few years later downloadable music appeared on the internet, culminating in the launch of Apple’s iTunes store in 2003.
But HMV’s top management doggedly stuck to its strategy.
In 2004 the company opened its 200th store in the UK and began acquiring rival chain stores, sometimes out of bankruptcy. By 2008 the company was running a global network of more than 600 outlets.
As early as 2002 its advertising agency had tried to alert the board to pending dangers—online retailers, downloadable music, and supermarket discounting—but HMV’s managing director, Steve Knott, had angrily rejected the warning: “I have never heard such rubbish. I accept that supermarkets are a thorn in our side, but not for the serious music…buyer, and as for the other two, I don’t ever see them being a real threat; downloadable music is just a fad.”
Not until 2010 did HMV open a digital music store. By then, of course, the company was far too late to the party, and in January 2013 it went into receivership.
Why this happens?
This happens for a number of reasons that are deeply rooted in the human brain.
In a classic experiment, two groups of participants were asked whether they would be willing to invest $1 million to develop a stealth bomber. The first group was asked to assume that the project had not yet been launched and that a rival company had already developed a successful (and superior) product. Unsurprisingly, only 16.7%of those participants opted to commit to the funding.
The second groupwas asked to assume that the project was already 90% complete. Its members, too, were told that a competitor had developed a superior product. This time 85% opted to commit the resources to complete the project.
The results show that people tend to stick to an existing course of action, no matter how irrational.
What exactly is going on? Research has identified a number of mutually reinforcing biases that collectively explain why people’s judgment may be swayed by a prior commitment to a course of action.
The six most important are:
The sunk cost fallacy: When making investment decisions, people often factor in costs they have already incurred. If they abandon a project, those costs won’t be recovered.
Loss aversion: If withdrawing from a course of action implies certain and immediate losses, decision makers often prefer to allocate more resources to continue with it—despite low expected returns—if they see any chance of turning the situation around.
The illusion of control: People habitually overestimate their ability to control the future
Preference for completion: People have an inherent bias toward completing tasks—whether that means finishing a plate of food or seeing a project through.
Pluralistic ignorance: Dissenters often believe that they alone have reservations about a course of action; as a consequence, they remain silent.
Personal identification: People’s identities and social status are tied to their commitments. Thus withdrawing from a commitment may result in a perceived loss of status or a threat to one’s identity.
In combination, these biases lead a company’s decision makers to ignore signals that their strategy is no longer working. It is what Karl Weick, of the University of Michigan, calls Consensual Neglect or Groupthink: the tendency of organizational decision makers to tacitly ignore events that undermine their current strategy and double down on the initial decision in order to justify their prior actions.
A recent study from Harvard Business Review on what the biggest obstacles to innovation in large companies are, confirms what I've just written and the examples are there for you to see (HMV, Nokia, Motorola, Polaroid, Toys are Us etc)
The responses, from 270 corporate leaders in strategy, innovation, and research and development roles, leaves no doubts.
Politics, turf wars, and a lack of alignment (cited by 55% of respondents.) came as an absolute first. "Some business units or functions believe they’re already doing innovation on their own, and that any sort of new initiative is edging into their terrain — and potentially competing for resources. Some may be hoping that the CEO’s “favorite child” of the moment, a new Chief Innovation Officer or Chief Digital Officer, will go away if ignored.
Cultural issues (45% of respondents.) The culture at large companies is typically built on a foundation of operational excellence and predictable growth. Change-makers trying to conduct experiments are rarely greeted with open arms — especially when they’re working on an idea that may cannibalize stable businesses or upend today’s distribution model.
Inability to act on signals crucial to the future of the business (42% of respondents.) The problem seems to be acting on crucial signals. When your “forward scouts” see something important, what mechanisms exist to set up collaborations with outside vendors or startups, or run a quick pilot test with a function or business unit? Too many companies wait for the annual strategic off-site to roll around before they address the changing dynamics of their market.
Lack of budget (41% of respondents.) In most cases, that budget level produces a small innovation team that may be doing some concept development work, trend scouting, or training employees on innovation methodologies — but isn’t having a broad impact on the company. “With a budget of less than $1 million, it seems like the job is to build a case for innovation investment, versus [doing the work of] innovation itself,” says Rick Waldron, a former Nike executive who ran the apparel company’s innovation accelerator until last year. That level of funding, Waldron suggests, can be used to “bring senior management along on the journey and educate them” with a few concrete project examples that “will be the key to unlocking more resources for an innovation program.”
Lack of the right strategy or vision (36% of respondents.) This answer includes a multitude of sins. Are employees clear on what kind of innovation they’re supposed to be doing? Are they looking for ideas to streamline operations and serve customers better, or developing new business models around existing products? Without a coherent strategy and clear vision for what the company aims to achieve, innovation efforts wind up feeling scattershot and isolated.
Also Innovation projects often fail because the resources are spent on the wrong kind of innovation. Too much money is spent on attention-grabbing activities that are straightforward to do, like hiring new people, procuring new technologies, and buying more facilities. It is much less obvious, and usually harder, to change the design of a current service system, introduce new customer experiences, or build a better business model — but the return on those investments may be much higher.
Innovation needs to be considered in two ways: innovation capacity and innovation ability.
Innovation capacity is the organization’s potential for innovation. This is the stuff that’s easy to buy, and that organizations tend to spend too much on: assets and resources. But capacity alone is insufficient to create new, significant, sustainable value for customers — no matter how huge the capacity.
Innovation ability is the more difficult aspects of creating value, like new customer experiences, a revised service system, or new business models. An organization may have many people providing innovation capacity, but may still struggle to increase innovation ability, because capacity by itself does not invent nor implement a new business model or a better customer experience. Yes, an organization requires a certain amount of innovation capacity, but there is no increased value creation through an increase in innovation capacity alone.
Nokia during 2007-2010 was an example of a corporation with great innovation capacity. Nokia always offered technologically feature-rich mobile phones — in fact, Nokia invented the smartphone. Nokia actually offered a touchscreen smartphone two years before Apple’s iPhone. Yet Nokia hung on to the Symbian operating system despite knowing its weaknesses in the eyes of the consumer. Nokia did have resources to develop a new operating system, but chose to stick with Symbian. As a result, Nokia became less and less able to create new value. At one point Nokia manufactured 90 different mobile phones. Their functionality was developed slightly from one model to the next, but most phones were examples of innovation driven by the company’s innovation capacity.
In short, technology was a strength for both companies, but Apple did a much better job connecting its technology to a service system delivering new customer experiences through a relevant business model. Developers outside of Apple were allowed to sell apps through iTunes and the App Store. Apple kept 30% of the sales made by outside developers. The huge number of apps created provided customers with a very wide selection of new customer experiences.
Nokia launched the OVI Store globally in May 2009. The company was however unable to match the service system provided by the iPhone in combination with iTunes and the thousands of applications that had already been developed. The then Nokia CEO Stephen Elop was quoted in Wired of February 2011 stating: “The first iPhone shipped in 2007, and we still don’t have a product that is close to their experience.” The Ovi Store was discontinued in 2015.
Three lessons for value creation emerge here.
First, organizations should spend less on building the capacity for innovation. In other words, even if your organization increases the number of people working on innovation initiatives by 10% or even 20% — while at the same time no other changes are made internally — there is simply no legitimate reason to believe that the organization will create even greater value.
Second, to succeed with innovation initiatives, corporations need to consider the value drivers that change through innovation ability — the business model, customer experiences, and the service system. Even if an organization has a new idea, a new technology, a new product, or a new service, none of these will necessarily increase the organization’s innovation success rate unless innovation ability changes one or more of the value drivers.
Finally, the thinking and practice of innovation should start from the premise that successful innovation is driven by the shared value created. Innovation should be value-driven; corporations, and governments, need to create value for a network of stakeholders: customers, suppliers, and the firm — maximizing value solely for the owners is not enough.
Companies need to create instead the condition for Innovation Ability to strive. How? By establishing a culture that encourages innovation
To paraphrase Joseph Schumpeter “Innovation is an act of creative disruption” that requires to let go existing paradigms to evaluate and embrace new ones.
By 2020 companies will spend around 160bln $ on strategic consulting, with a 12 years CAGR of 4.8% and this is just a single indicator of companies realising their existence depends on strategic innovation.
A corporation can have the same idea, product, service or technology as its main competitor, but to win in the marketplace it must develop a new business model, customer experience, or service system that will put that new idea, product, or technology to use and this is possible only if the culture of the organisation is clearly set towards continues Innovation.