Whether it’s cloud computing in the IT industry, over-the-top (OTT) content in media, mobil digital payments in finance, or data science just about everywhere, industry after industry continues to be radically transformed by technology-based disruptive innovations. This is all part of what Joseph Schumpeter called creative destruction over 70 years ago, - the powerful force that rejuvenates the economy by replacing declining businesses with fast-growing startups.
For a startup a disruptive innovation is all upside, an opportunity to take-on established companies with new products that offer significantly better capabilities and/or lower costs. Startups hope that their compelling new offerings will help them establish a foothold in the marketplace and, over time, become leaders in their industry.
It’s different for established companies. Over the years, they’ve amassed a number of valuable assets and extensive organizations. Change is often difficult for such companies. Already consumed with managing their existing operations, - e.g., products and services; supply chain and channel partners; sales and marketing; revenues, profits and cash; - they may see a new innovation as more of a threat or distraction than an opportunity.
How should established companies deal with complex, company-wide transformative initiatives? This is a subject I’ve thought long and hard over the years, given my personal experiences with such initiatives through my long career at IBM as well as my subsequent teaching and consulting activities. Let me share some of the key lessons I’ve learned through the years.
A clear, compelling strategy
Disruptive innovations are very exciting, but we often forget that they are truly disruptive, - not only in the marketplace, but also in your own organization. Change can be a positive experience, but change can also be very difficult, even painful for many people. You’re essentially asking them to embark on a journey toward an unpredictable, unchartered future. What will be the impact on their jobs? Do they have the required skills for whatever is ahead? How well will they personally fare in the new environment? The culture of the institution may not be able to stretch enough to implement the needed changes, even when the very survival of the organization might be at stake.
You cannot transform a large complex organization through business-as-usual objectives, - e.g., growing revenue and profit, cutting expenses, improving quality, developing better products and services. You need the passion of a clear, compelling vision that captures everyone’s imagination. While the target is sometimes unique to the company, - e.g., IBM’s System/360; Apple’s iPod, iPhone and iPad, - it’s often easier if it’s a technology or market strategy, like the Internet of cloud computing, that every company must embrace sooner or later, whether they like it or not.
After having survived a near-death experience in the early 1990s, then IBM Chairman and CEO Lou Gerstner turned his attention to the daunting tasks of re-building IBM’s brand, transforming its culture, and setting the company’s future direction. In Who Says Elephants Can't Dance?, his excellent book about this period, Gerstner explained his decision to embrace the Internet in the Fall of 1995 as the centerpiece of IBM’s strategic vision:
“I decided to declare e-business as our moon-shot, our galvanizing mission, an equivalent of the System/360 for a new era. We infused it into everything. It provided a powerful context for all of our businesses. It gave us both a marketplace-based mission and a new ground for our own behaviors and operating practices - in other words, culture. Most important, it was outward-facing. We were no longer focused on turning ourselves around. We were focused on setting the industry agenda again.”
Top management support
I’m very proud to have led IBM’s Internet strategy in the mid-late 1990s. But, there’s no question in my mind that such a complex, company-wide initiative would not have succeeded had it not received the strong and visible support from CEO Lou Gerstner. Similarly, IBM’s Linux strategy in the early 2000s required the strong, visible leadership of then CEO Sam Palmisano.
Top management support is absolutely essential for disruptive initiatives to have any serious chance of success. Otherwise the venture might be buried within a larger operational unit, which will manage it based on typical business metrics. It will get little visibility to top management because of its small contributions to revenue and profit. It’s then only a matter of time before the effort is forgotten and eventually terminated.
The new initiative must be carefully nurtured and protected until it has enough concrete results and marketplace successes to stand on its own. It’s important to assign an experienced senior executives to lead the new ventures during its fragile, startup phase. In its early stages, other parts of the company can make its life difficult or worse if they view it as an internal threat that’s competing with them for resources, senior management attention or marketplace visibility. Visible top management support is very helpful in tempering these natural sibling rivalries and getting everyone to work together as part of one company-wide team.
Appropriate organizational framework
“A surprising number of innovations fail not because of some fatal technological flaw or because the market isn’t ready. They fail because responsibility to build these businesses is given to managers or organizations whose capabilities aren’t up to the task. Corporate executives make this mistake because most often the very skills that propel an organization to succeed in sustaining circumstances systematically bungle the best ideas for disruptive growth. An organization’s capabilities become its disabilities when disruption is afoot.”
In many institutions, people who do well in operational jobs are likely to be the ones promoted to higher management positions. But as they rise up in the organization, other skills become increasingly important. In particular, managers have to make the transition from managing only for near term results to also managing for continued relevance in the future - that is, they now have to be good at both operations and strategy. Easier said than done.
A lot of companies have trouble navigating the delicate balance between operations and strategy. Operational excellence requires a disciplined management style, including detailed metrics on quality, competition, customer satisfaction, sales, expenses, and the like.
But managing a more strategic initiative, especially one based on a disruptive innovation, requires a different, more entrepreneurial management style, including continuous experimentation and learning in the marketplace. It cannot be based on rigorous data analysis because, in its early stages, there is little data to analyze. There are lots of unknowns because, early on, it’s not clear how the market for a new product or service will develop.
Large, established companies cannot possibly compete with startups on focus and speed. Instead, the company needs to figure out how to best integrate the new disruptive innovation with its key core assets. This will make it easier to then embrace the innovation as a way of rejuvenating and transforming the company and its various offerings, processes and business models. If properly done, it can be a major competitive advantage over both established competitors and fast moving startups.
In the case of IBM’s Internet strategy, we came up with the concept of e-business which we succinctly defined as Web + IT, that is, the combination of the industrial-strength IT infrastructures being widely used in business and government with the new universal reach and connectivity of the Web. Any institution, by integrating its existing databases and applications with a web front end, could now reach its customers, employees, suppliers and partners at any time of the day or night, no matter where they were. Anyone with a browser and an Internet connection was now able to access information and transactions of all sorts. The brand reputation, installed customer base and IT infrastructures that companies had built over the years would be even more valuable assets when combined with the new Internet capabilities.
Marketing and communications
Given that disruptive innovations are generally based on new ideas, few will understand what they’re all about in their early stages. It’s important to explain what’s unique and different about the new innovation to key constituencies, including clients, partners, analysts, reporters, and the company’s own employees. Effective marketing and communications are thus essential.
In IBM in the mid 1990s, we couldn’t wait until we had a well defined Internet strategy to establish a market presence because our competitors were not waiting and neither were our customers. We developed our strategy in the marketplace, figuring out what we should do by working closely with clients in different industries. As we did so, it started to become clear that the Internet was going to have a profound impact on business, and every company needed to consider how to leverage the Internet for business value and become what we called an e-business. Given how new all this was, we had to work work hard on how to best communicate in the simplest way possible why a business should embrace the Internet and become an e-business.
Managing an initiative based on a new disruptive innovation can be quite hard for companies, no matter how big and strong they might be. But in the end, there’s no alternative. And if properly handled, such transformative initiatives are a very effective way of propelling the institution into the future.