Disruptive Innovations and Organizational Change

Over the last few years I have given a number of seminars on Technology-based Business Transformation.  In these seminars, I examine how companies can leverage disruptive innovations to go after new business opportunities or to significantly transform themselves.  Often, the transformations are needed because the business is in crisis, such as happened to IBM in the early 1990s or is the case with a number of media companies today. 

The seminars are generally organized into three section.  The first two focus on strategy formulation and execution respectively.  The last section deals with the organizational and cultural issues involved in going through such a major transformation.

Many companies fail to adequately embrace a disruptive innovation not because they did not develop the right strategy, but because the strategy was essentially rejected by the organization, and was thus doomed to fail from its very beginning.  The culture of the institution was not able to stretch enough to be able to implement the needed changes.  This happens even when the very survival of the organization is at stake.  It is as if a kind of institutional depression has set in.  

We sometimes forget that disruptive innovations are indeed disruptive, not only in the marketplace but also for individuals and organizations.  Much as we often talk about embracing change as a positive experience, change is in fact very difficult, even painful for many people.  You are asking them to move into unknown, perhaps even unchartered territory.  What will be the impact on their jobs?  Do they have the required skills for whatever is ahead?  How well will they personally do in the new environment?

 
When first launching a project based on a new technology or idea, you really don’t know what lies ahead.  You cannot answer lots of the questions people will have.  Incremental changes are much easier, because you are essentially improving existing products and services while continuing to sell to and support a similar client base.  But, with disruptive changes, the new products and services you will be working on are likely to be quite different from what you have done in the past.  Since one of the reasons for embracing a disruptive idea is to expand your markets, it is possible that you will also be selling to different kinds of customers, requiring different sales and channel approaches.

A major part of my responsibilities at IBM over the past fifteen years with the company was to help organize company-wide efforts to bring emerging technologies to market, such as the Internet and Linux.  Let me share some of what I learned in the process of organizing these disruptive initiatives along three main dimensions: governance, collaborations and marketing and communications.

Governance

One of the biggest challenges in launching a disruptive initiative is that there is generally no natural home for it within the existing organization.  It is not just that what you are doing is new, but that the skills and support you need often cuts across multiple parts of the organization.  A virtual or matrix organization, is often the most practical way to launch a new venture that does not naturally fit into any of the existing units of the company.

For both the Internet and Linux efforts we set up a relatively small virtual organization to coordinate the activities across IBM.  Given that the overall objective was for each unit to start embracing the new technologies, the bulk of the actual execution was done in the units, not in the small, virtual organization.

The key functions of the virtual team included formulating the overall strategy, marketing and communications to ensure that the messages were consistent, overall coordination of the various activities across the company, and anything else that needed to get done for the initiative to succeed.  The team included selected new developments, as well as a few dedicated sales teams to handle initial sales.  With both the Internet and Linux, we said from the outset that the virtual team would be disbanded and its functions integrated back into the operational units once central coordination was no longer needed.

Linux and the Internet are examples of what we called Emerging Business Opportunities (EBO) in IBM.  The name EBO is not used as much within IBM these days, but the innovation process continues, with Cloud Computing, and various Smart Planet efforts being among their latest manifestations.

Top management support is absolutely essential for initiatives based on disruptive innovations to have any serious chance of success.  It is also critical to assign experienced, senior executives to lead the new ventures during their startup phase.  In its early years, the venture is all promise with little immediate revenue, let alone profit.  It needs to be carefully nurtured and protected until it has concrete results and marketplace successes and is thus able to better stand on its own. 

One of the major reasons why breakthrough innovations have been very difficult for large, established companies is that they treat such efforts as they do any other projects.  If the new venture is organized and managed based on typical business metrics, it will be buried within a much larger operational unit.  It is then only a matter of time before the effort is forgotten and eventually terminated.

Collaborations

While obvious, it is important to keep in mind that when starting a new venture, your number one objective in the early stages is survival.  Eventually you want to aspire to a lot more.  But, it is hard to have a successful strategy in the marketplace if you don’t make it past the first few months and years.

Staying alive is particularly critical for ventures based on disruptive technologies and innovations because at first, you don’t really know what you are doing.  You need to buy time so you can learn what it is you need to do, what kind of product or service the marketplace wants, whether the value of your brand helps or hinders you in this new space, and how eventually you will earn revenues and profits.

The strategy for survival is somewhat different for small, new companies than it is for entrepreneurial ventures within existing larger companies.  With both, you have to get to market quickly and do reasonably well against the competition, especially if you are going after a hot new area.  But, in a large enterprise, you also have to pay a lot of attention to other parts of the company, who can make your life difficult or worse if they view you as an internal threat; and who can provide invaluable assistance if they feel that they are a part of theexciting, new initiative.

It is thus imperative to reach out to other parts of the company, sit down with their management and technical leaders and see how the new innovation you are leading can help their existing business.  You want to make them feel part of your virtual team if at all possible.  It is hard for another part of the company to support your new efforts if they feel that it will compete with them for funds, senior management attention or customers in the marketplace.  The more a unit feels part of the new initiative, the more they will support it and help it succeed.   

For example, with both the Internet and Linux efforts, one of our biggest internal allies in IBM was the mainframe organization.  The reason is that we worked closely with them to integrate mainframes with the Internet and World Wide Web by supporting the key standards, as well as porting Linux to run on mainframe virtual machines.  The mainframe organization thus became a stakeholder and close ally in these emerging initiatives, especially in the early stages when you are fighting to survive and help is most badly needed.

Marketing and Communications

Marketing and communications are absolutely critical to a new, disruptive initiative from the very beginning.  First of all, you need to be able to explain what it is you are doing in simple terms, something that is easier said than done especially when talking about a new and potentially disruptive initiative. Often, the people leading the venture underestimate how important it is to develop clear, simple messages and how much work it takes to do so.  They are then frustrated that many of their key constituencies do not understand what the new venture is about.

It is very important to focus communications efforts on internal audiences as well as external ones.  If the employees of the company do not understand the new initiatives, it is hard for them to support them.  Considerable attention must therefore be payed to internal communications and education so people understand the overall strategy, and their own role, as well as that of their unit in helping it succeed.  Often, one of the most effective ways of explaining the strategy to employees is through outside communications.  People will believe what they read in newspapers, magazine articles and other external sources more than they will be in internal company communications.

For a company with a well known brand, a disruptive innovative initiative represents an excellent opportunity to re-energize and re-vitalize their overall brand image.  It is often one of the most important reasons for embracing the initiative, but only if the marketing and communications are carefully managed.

For example, in the mid 1990s, we used our Internet strategy to significantly transform IBM’s brand.  We badly wanted to infuse the brand with the key qualities people were associating with the Internet, e.g.,  open, innovative, dynamic, youthful.  Given that IBM was emerging from a near-death experience, we needed to re-position the brand as being part of the future instead of the past, and prove to the world that IBM gets the Internet and all the massive changes it was ushering into the business world and society in general.

After much work, we came up with what became our e-business strategy, focused on leveraging the Internet for business value.  e-business was embraced by the whole company and played a key role in transforming both IBM’s overall strategy, culture and brand image.

There are many reasons why disruptive innovations fail.  A surprising number do so not because the company put together a flawed strategy, executed it poorly, or the market was not ready.  They fail because proper attention was not paid to the organizational and cultural changes required so that the institution and its people will embrace the innovation and work hard to make it succeed.  In the end, these human elements of innovation are likely to make the most important difference between success and failure.

Comments

[Account Deleted]

Dear Irving,

Great posting! I think you should also take into account the culture of company to be ready to innovate.

Alexei

[twitter.com/jaycross]

Great post, Irving. You are always prescient. However, I do wonder how you jump ahead in the calendar. This page is dated January 31, but today is January 29.

[Tomforemski]

"We sometimes forget that disruptive innovations are indeed disruptive..."

I find it incredible when sometimes people will tell me that their company is well aware of the disruption and that they can deal with it. Well, probably not. Disruptive technologies disrupt!

You can see the train wreck ahead of you, and you will still slam into it. That's what few people/companies realize.

Look at all the companies and people disrupted by PC technologies. IBM barely survived, it had to reinvent itself from a computer company to a computer services company.

Often, you can't change fast enough, you can't downsize fast enough, you can't change your company culture fast enough, you can't shift to the new business model, you slam into the train wreck. That's what's happening to many media companies and there's not a whole lot they can do, or will be able to do. The Internet is a media technology and that's where the disruption is being seen.

And the dirty little secret is that, now, every company is a media company. Every company is in the path of disruption, whether it makes diapers or publishes newspapers.

[Hal]

Dear Irving.
I'm a ardent believer of your ideas, from outside US.
I have red your post and I can follow a lot your positions but I fully disagree with the results of some IBM transformation.
You wrote an excellent post on last january'2009: "leadership in a time of crisis". Virtual and matritial organisation are being a disaster in IBM. This is just the big barrier against the leadership, against the innovation, against the smarter talent. This type of organisation is working in favour of the operational management, all the time the top managers asking for results, asking for figures, asking for short time business.
Do you know what is the friction index in a organisation ?. Anyway, IBM organisation has a terrible friction index !!, So, it's time to change that organisation and maybe..... some people on top.

[Yunzhi Yang]

I'm interested in the marketing and communication part. It's good to know and confirm that both internal and external communication are important to the survival and business of corporations, also it's effective to use an external to build an internal communication, like the case shared. I am impressed by the innovation and strategy IBM has made in the past decade. Thanks for sharing the post. Great post as always.

[Santhosh Raviendranath]

Dear Mr Irving,
I completely agree with you that "Often, the transformations are needed because the business is in crisis"

I have understood from my own experience that organizational structure will change and become more virtual in the future. Nice to read your detailed post on this topic.