Since Clayton Christensen’s groundbreaking book The Innovator’s Dilemma came out in 1997, much discussion about innovation has centered on the differences between sustaining and disruptive innovation. Christensen noted that large organizations were good at sustaining innovation, that is, the types of innovation that move product features and value forward to existing core customers and markets. He further observed that large organizations were less successful at disruptive innovation – the type of innovation that creates or redefines markets. He attributed this to organizational dynamics that keep business resources allocated towards existing markets and business models. Disruptive innovation seemed to be the domain of startups and the lack of existing infrastructure or customers that influence corporate behavior explained why startups could leapfrog incumbents and thrive with substantially less access to capital and customers.
This book sparked two decades of excellent discussions about whether large companies can pursue disruptive innovation or whether it is necessarily the domain of startups. McKinsey proposed a time horizon model: the more disruptive an innovation, the further out on the time horizon it would be for returns. They described this as a Horizon 1, 2, 3 model, and noted that companies should maintain a mix of innovation investment types to meet short-term and long-term horizon benefits. Eric Schmidt of Google took this one step further, describing the appropriate allocation of resources amongst the three time horizons as (70/20/10) follows, with the expected return from each horizon reversed (10/20/70).
Another innovation concept is the idea of “ambidextrous” organizations, that is organizations that adopt a dual-mode structure in which one set of organization, processes, and norms are adopted to serve core markets, and another are adopted to “free” business units to pursue disruptive innovation. The objective of this dual-mode structure is to allow companies to remain good at steady improvements in an existing business and get better at breakthrough innovation through the creation of separate divisions that can operate with different underlying norms, processes, and regulations more favorable to fast-moving, disruptive ideas. The notions of ambidexterity and Lean Startup posit that different organizational cultures based on the level of disruption is a key ingredient to successful innovation outcomes.
But, do these distinctions really matter and are they based on the right set of assumptions? Some ideas to consider:
Deciding whether an innovation is sustaining or disruptive is no longer useful.
- Technology has now advanced to a point where new innovations can disrupt entire markets in a very short time period. In 2013, unicorn startups (greater than $1B) were developed in only four ecosystems. Now, they are being produced in more than 80 worldwide. Whether an idea is developed by a startup or a large organization, it can reach scale very quickly. The “when” assumptions behind time horizons are not very useful.
- An idea can seem disruptive at the start and as it is tested on customers, evolve to be more incremental, or vice versa. If customers are willing to change quickly, an incremental idea can suddenly need to become a disruptive business model change to be successful. We see companies miss these opportunities all the time.
- An understanding of whether an idea is sustaining or disruptive is really an after-the-fact assessment. What is more important for driving the strategic success of your business is driving your culture (incentives and decision-making) using forward-looking indicators – how and where is change occurring and how should you be responding to adapt?
We see a lot of companies pursue what they see as a multi-horizon strategy, with agile product development focused on the core business (Horizon 1), a small Lean Startup accelerator or two to explore Horizon 2 opportunities, and idea competitions and incubators for Horizon 3 projects. The outcome of this is that the Horizon 2 and 3 projects have no opportunity to change the direction of the Horizon 1 business. A new way to think about this is not about horizons, but how to create a feedback system to visualize where and how customers are willing to change. Understanding and valuing early customer change indicators not only leads to new customers and new business models, but also an understanding of how customer change is disrupting your core business and if you need to react right now (Horizon 1) or can wait (Horizon 3).
Creating innovation-customer change feedback cycles can be the key to getting out of the Horizon and “what does ambidexterity mean to us?” trap.
- Run innovation at scale. Testing and experimenting with dozens to hundreds of ideas, rather than a few, gives you a landscape of real-time data on how customer segments are actually shifting and how quickly.
- Stop projects that aren’t driving customers to change their behavior early in your product development process. Often you can do that with customer interviews alone.
- Insight derived from innovation at scale and early customer traction needs to feed back directly into business units rather than occur in isolated outposts or incubators. That lets you adjust your strategy continuously at both the innovation team level (Should we keep investing in this team’s specific business model?) and at the Board level (Which strategies are actually getting customer adoption? Should we be adjusting our core business strategy and operations to take advantage of this newfound willingness to change?).
We most often see companies trying to pick Idea Competition winners based on no actual customer data on the one hand and discussing what the success or failure of a single innovation team means to their strategy without rigorously testing a range of opportunities on customers on the other. This is trying to fly while almost completely blind.
Here are some questions to ask about your innovation efforts and whether they could drive your current and future strategies. Do you have an innovation process that lets you:
- See where disruption is occurring in existing, adjacent, and new markets?
- Drive a consistent, measurable, improvable innovation process?
- Create closed-loop feedback with your existing sales organization?
- Involve employees from all parts of your organization so you can take advantage of all of their knowledge and touchpoints across different customer types and geographies?
- Drive Open Innovation partnerships with large companies and startups in a way that you can rapidly stop bad projects while getting strategic insights on what partnerships are actually driving early customer traction?
A recent McKinsey study noted that only 6% of those surveyed were satisfied with their innovation efforts. That makes sense to us as so much innovation happens in outposts or idea competitions that have no opportunity to drive strategic insights while actually launching new businesses. We see lots of programs run on ideation platforms or using PDF printouts of canvases paired with PowerPoint presentations. Would you run finance, product development, or sales using those simple kinds of tools at your company?
Steve Blank’s The Four Steps to the Epiphany was published 15 years ago and was a significant step in understanding how to operationalize customer-driven business model validation.
We are at the beginning of a new era that builds on his validation ideas, but with a much bigger vision – a real-time innovation process run on a digital platform can drive strategy across multiple horizons and create an adaptive, optimizing innovation culture. Is your organization getting ready for the digital transformation of innovation?
We are happy to share more of what we’ve learned about building efficient digital innovation ecosystems that continuously generate strategic insights. We call that capability Innovation Performance Management. You can contact us at Hypershift Systems.