You’d think that in a large iconic company responsible for many of the modern world’s key innovations that innovation would work well. Multiple innovation programmes, clear direction from the top and a huge desire to change it’s DNA to meet competition and win.
It took one team over 800 internal meetings, trying to win support, to get their product to market.
The company is a stock market favourite and its annual report ticks all the right boxes for strategists, stock pickers and innovators. Yet, it struggles to innovate effectively and well.
Innovation theatre and the limits of “buy not make”
It’s not alone. Most large companies struggle with innovation. Some of them are derided for innovation theatre; spending money not to create genuine innovation, but to be seen as innovative and satisfy their stakeholders.
Others shrug, and decide to buy rather than make – picking up startups from their VC backers at handsome valuations only to write them off a few years later because the customers weren’t there, the technology didn’t work as well as expected or the strategic focus had shifted.
I know a lot more about the make side of the equation and so I’ll stick to that.
The two structural problems large businesses cannot escape
There are two core problems that large businesses face.
Shareholder expectations and the tyranny of reliable earnings
Their shareholders expect reliable earnings. If these are not delivered the share price declines and sooner or later the CEO is ousted.
Business as usual – the maximisation of revenue from existing products and services is the most reliable and risk free way of delivering this free cash flow. Managers who deliver this are promoted, those who don’t aren’t.
Innovation as an agency problem
Combined these two problems form an agency problem. The agents that shareholders have hired to run the company for them focus on maximising short term revenue because it is the least risky option for the agent.
Shareholders believe that shares should only go up not down, despite all warnings to the contrary.
The agents, the CEO and his/her managers, make the shareholder’s investment far more risky because their approach discounts the impact of competition, particularly from outside the existing competitive base.
Short-term optimisation and competitive blindness
By focusing on their existing competitors and maximising revenue from that competitive set they fail to look beyond their immediate horizon. The temptation is always to go for jam today, rather than starting to disrupt existing operations in the hope of more jam tomorrow.
A century of missed futures: the US Steel example
Andrew Carnegie gave away vast amounts of his wealth to make the world a better place. The current CEO of US Steel would struggle to endow a single library. Why? Because for a hundred years the CEO of US Steel has always focused on the core business to maximise gains for shareholders.
Multiple CEOs stepped back from innovations in aluminium, plastics, composite materials and more because they weren’t steel; meaning that the company had a smaller and smaller place in the market until it dropped out of the S&P500.
Why most “stars” are really cash cows in disguise
The BCG matrix famously divides up the world into stars, cash cows, question marks and dogs. Shareholders want to own stars for growth and cash cows for dividend yield. They’ll own question marks if they think they have an insight and buy dogs if there is the possibility of a takeover or turnaround.
Most large businesses see themselves as stars. The reality is that they are cash cows only a small PESTLE change away from being question marks or dogs.
Vision beats optimisation
The real stars, in contrast, have something going for them – again often PESTLE derived, through a genuine innovation or a more effective business model (Eg Ryan Air / Easy Jet vs Lufthansa and BA)
The difference is often that they have a stronger vision – that drives them, rather than a desire to be in the top three of any industry that they compete in. Jack Welch’s GE dropped out of the S&P100 as well.
‘Who do we want to be?‘ ‘Who do we want to serve?’ These questions are more important than ‘What do we do?‘
Risk-taking driven by purpose, not optimisation
These hard charging organisations take risks, like Jeff Bezos creating a cloud services division to use up spare seasonal computing capacity before the core business was profitable.
It’s not the risk taking that is key though. It’s a different perception about the nature of risk.
Risk in business as usual organisations
In a well managed organisation risk is something that has to be removed from operations and supply chain as much as possible. In Nicholas Nassim Taleb’s words for them risk only has downside. The downside is unlimited, their jobs, and the upside is limited to an annual bonus. This keeps them on the path of business as usual.
Risk in innovative organisations
In contrast risk in innovative organisations doesn’t constrain the operational set, it opens up new opportunities to play and win. Upside is seen as less limited and the downside as an opportunity to increase resilience – aka competitiveness.
When customers become collaborators
I remember a team on a programme that we ran coming back to us and talking about some of their customer discovery. They went out and asked customers, of many years, what they wanted and needed to make their business work better.
No one had ever asked them that before. The only interactions that they had had with out client were with the sales teams, and with CS. It was the first time that anyone had cared – and the result was a floodgate opening, sharing a hoard of valuable data about how products and services could be improved.
For that team, it blew their mind. The customer shifted from a transaction, or a problem to be managed, to a collaborator wanting to work on hard and interesting problems with us.
Why innovation looks like a cost instead of a capability
Innovation fails in well run organisations that focus on business as usual because they miss the wood for the trees.
They have the wrong perception of risk and the wrong tools for managing it. Innovation seems to be an unnecessary cost, a dangerous burden, an operational challenge – all of which detract from what they ‘should’ be doing.
Innovation as a way to make business as usual safer
As I work through this series of essays I hope to show you that innovation in many ways is a tool to make BAU more reliable, less risky and more profitably, whilst also offering the opportunity of unlimited upside – both in career as well as in shareprice.