A Very Delicate Balance

I recently gave several talks on Technology-based Business Innovation that were based on the graduate seminar I taught at MIT last semester.  Teaching a new graduate course forces you to think really hard about what it is you want to communicate.  Trying to compress the content of thirteen, three-hour seminars into a one-hour talk forces you go the next step and think even harder about the very essence of your material.

So, what is the essence of Technology-based Business Innovation?  Why is it so very hard for any company beyond its young, entrepreneurial, adolescent years – say, ten to twenty or so - to continue to embrace the kinds of disruptive innovations that got it started and made it successful to begin with? 

As you would expect, there are no simple answers to these questions.  The more you reflect on what it takes to manage a business, the more you realize that it is very, very hard, involving lots of decisions - some small, some large.  While the people who manage companies are very smart for the most part, lots of the decisions they make do not work out - as a glance at the business section of your favorite papers will attest.  Why is that?

A start-up is all about upside and the future.  It is fighting hard to make it, and hopefully to be the discoverer of The Next Big Thing that will propel it to untold fame and riches.  As we know, the mortality rate of start-ups is quite high, but good entrepreneurs just pick themselves up and go on to the next new company and potential dream.

But for those who make it, especially those who make it big, the situation begins to change after a while.  They now have products, services, business partners, an installed base, marketplace brand and (hopefully) loyal customer relationships to protect and grow.  They have a revenue stream, investors, a stock price and financial expectations to meet - quarter after quarter after quarter.  They have employees, assets, an established organization and a corporate culture. 

Life is good, but it is also now fraught with peril.  Start-ups, now emerging from all corners of our increasingly flat world, are fighting to get their innovative new products and services into the marketplace.  They need customers, revenues and profits.  And most likely, the easiest place to find them is to take them away from the established leaders.  Each of them just wants a small slice of your market share at first, with more to follow for those good or lucky enough to get established.

As we know, there is only one answer - innovation.  Marketplace leaders must embrace the disruptive innovations being used against them by hungry start-ups - or else.  Sounds easy enough.  But, as it turns out, it is amazingly difficult.

It almost seems as if there is a kind of life cycle in business.  Companies are born.  Many don't make it beyond a few years, but some do and over time become leaders in their industries, with growing revenues and market share.  Then, after a certain number of years, they start slowing down and stop innovating.  At that point, the invisible hand of the marketplace will often deem the business to be more valuable as a kind of carcass for fast-growing new companies to feed on, rather than as an ongoing, viable institution.  In other words - your time is up!!

In his seminal book, The Innovator's Dilemma, Clay Christensen succinctly wrote about the challenges that successful  companies face:  "They pour resources into their core business.  They listen to their best customers.  And in doing so, industry leaders get blindsided by disruptive innovations—new products, services, or business models that initially target small, seemingly unprofitable customer segments, but eventually evolve to take over the marketplace.  This is the innovator’s dilemma - and no company or industry is immune."

Successful companies - especially market leaders being chased by small and large competitors - must achieve a delicate balance between carefully managing their existing operations, and embracing disruptive innovations that will propel them into the future.  Operational excellence entails improving their existing products and services of the company with a string of incremental innovations that will add new features, lower cost and improve quality.  It means nurturing employees, business partners and customers, so they will all be happy to be associated with the company.  And it requires a strong focus on meeting the quarterly revenue, profit and cash expectations of their investors and the financial community.  Whether we like it or not, the consequences of not doing so are dire, indeed.

Operational excellence requires detailed analysis of technologies, quality, processes, competitors, customer satisfaction and market segments, and as such, is well suited for a hierarchic, disciplined style of management.  But managing an emergent business, especially one based on new, disruptive innovations, requires a very different style.  It cannot be based on rigorous information analysis, because in its early stages, there is little information to analyze.  There are lots of unknowns because, early on, it is not clear how the market for a new product or service will develop.  Consequently, managing disruptive innovations requires a management style based on establishing an early market presence and well-planned experimentation; close external collaborations with research communities, business partners and early adopters; and continuous refinement until it becomes clear what the company's strategy should be.

A lot of companies have trouble managing this delicate balance.  The operational demands are so intense, especially in the fast-moving, highly competitive and demanding times we live in, that just about all the efforts and funds of the company are spent managing their core business.  The management team is just flat out of time and energy to be able to nurture an emergent business opportunity with small revenues and a promising but unpredictable future.  By the time they notice that some new ideas are catching the attention of their customers, who are being courted by companies no one ever heard of, it is often too late to catch up.

Ideally, an established company can embrace a new innovation not by trying to act like the start-up it is not, but by figuring out how to leverage the new innovations to evolve its organization, culture and business models into the future.  How can you best leverage the skills and talent of the organization, while embracing the new ideas and market realities?  How can you leverage your installed base and customer relationships, so they become early adopters of the innovative new products and services?  How can you leverage the strengths of your brand, while infusing it with the new energy and freshness that accompany disruptive innovations?  And how can you leverage the strengths of the organization that have served you well all along, while leaving behind those parts that have become outmoded?  You want to make sure that the business is in harmony with the new forces out there in the marketplace.

These are tough questions, but they are the kinds of questions companies must successfully address as they formulate their long term strategies.  While there are many technical, market and financial issues, a company's entrenched culture is usually the biggest obstacle standing in their way.  But there is really no other way.  In the end, there is no alternative but to properly manage the delicate balance between excellence in its existing operations, and embracing disruptive innovations.

Comments

[C. Enrique Ortiz]

Hello Irving... interesting piece. You write:

"delicate balance between carefully managing their existing operations, and embracing disruptive innovations"

...which is why a lot of innovation occurs on small, or startup companies, because there is no need for balance; the balance tilts one way, which is the way of innovation.

I wonder what your thoughts are on innovation w.r.t "mobile/wireless"?

I also wonder when you will be at Austin again? I run a small SIG called MobileMonday Austin, and would love to have to present; we would be lucky to have you come speak to our small audience of Austin mobile technologists :-)

ceo

[Chris Ward]

So what does a large business do, when someone comes along wanting a slice of its capital or its revenue ?

http://www.multichannel.com/article/CA6532982.html is a case ... not involving IBM either way ... where someone is trying to take money from the cable TV distribution companies in the US, arguably 'double-dipping' on a bill that had already been paid.

I see a kind of 'circling-the-wagons' behavior; big corporations making double-sure with their competition/anti-trust lawyers that any contract they sign is for a high enough price to assure expected profitability; that any product or service they provide externally is according to a contract. It becomes commercially necessary for the survival of the big corporation as a single entity.

Become a client, you're within the 'wagon circle', and we'll do anything for you.

Don't sign that contract, you're outside the wagon-circle, you're on your own.

Is it good for the world, though ? What message does it send to the next generation ... the schoolchildren, and the universities ... if they're in the 'desert' outside ?

Should the corporations 'give back' to develop the next generation of clients and employees ? And how do you do it, when you have the circled wagons ?

[Christine Flanagan]

Hi Irving - We've all certainly heard ad nauseam that marketplace leaders must address any disruptive innovations being levied against the business model, otherwise, they risk obsolescence. You know better than anyone that this is easy to understand, yet difficult to embrace.

At the risk of sounding morbid, perhaps the delicate balance should ultimately reflect an organ donor model. Like people, business units have a life cycle. But important components can be saved to not only live another day but also evolve into the next big thing. (Clay Christensen once told me to think of it like biological evolution: The population will evolve, even though individuals can't.)

All this gets back though to the one intractable issue for established companies and that's mindset. All the scientific arguments in the world can't change an entrenched culture. It's like telling a terminal cancer patient to just give up and accept the inevitable. And that just won't do.

There are no easy answers, which is why I wholeheartedly embrace an experimentation model that involves all parts of the business model - not just R&D.

Keep up the posts - I really enjoy them! Chris