Innovation introduces new technologies, transforms business models, and fundamentally disrupts industries. The most difficult place from which to drive disruptive innovation is within the successful enterprise – the one whose technologies will ultimately be made obsolete, whose business models will be replaced, whose solid revenue base of the past will be eroded, and whose status as industry leader might be challenged or crushed.
The worst place to develop a new business model is from within your existing business model. Clayton Christensen, February 2016
The Power of Innovativeness
Innovativeness is, for all intents and purposes, a prerogative of startups and just a handful of established companies that have managed to retain a culture of re-inventing themselves. Each year, MIT Technology Review selects companies for its compilation of “50 Smartest Companies.” To make the list, a company must have truly innovative technology and a business model that is both practical and ambitious, with the result that the company has set the agenda in its field over the past 12 months [1]. We analyzed the 2015 list and found that 22% of the “smartest” companies were founded in the past five years and 70% of the 50 companies were started since 1995. The 0-5 year bracket includes, among others, AliveCor (personal heart monitor), Enlitic (deep-learning), Slack (workplace collaboration), and Xiaomi (smartphones). 
Uber is in the 5-10 year category, and Alibaba, Baidu, Facebook, Google, Illumina, Netflix, SpaceX, and Tesla are prominent names in the 10-20 year bracket. Amazon, Amgen, Apple, Microsoft, and Nvidia populate the 20-50 year mid-range. Interestingly, there are also 5 companies that were founded more than 100 years ago that somehow managed to remain innovative or reinvent themselves: Bristol-Myers Squibb (for leading cancer immunotherapy), Generali (an Italian insurance company for using fitness data from wearables and other health data to calculate insurance rates), IBM (for its research into artificial intelligence), Philips (for its leadership in LED lighting), and ThyssenKrupp (a German conglomerate for reinventing the elevator with magnetic levitation technology). Overall, innovativeness, as measured by making the MIT Technology Review list, clusters around fairly young and often still privately owned companies. The same pattern emerges when looking through Forbes’ “The World’s Most Innovative Companies 2015” [2] or FastCompany’s “Most Innovative Companies 2015” [3].
New entrants do not only dominate rank lists of innovative companies. They are also a main driver of economic growth in the U.S. Small companies, those with 1 to 499 employees, created 77% of all new jobs and accounted for 64% of net job gains between June 1990 and September 2005 according to data from the Business Employment Dynamics (BED) program of the U.S. Bureau of Labor Statistics (BLS) [4]. Total venture capital-backed company employment exceeded 10 million jobs in 2005 representing 9% of total private sector employment. Companies financed by venture capital added jobs at an annual growth rate of 4.1% between 2003 and 2005 – three times higher than the 1.3% total private sector employment growth rate. In some industry sectors, venture funded companies accounted for almost all jobs, led by software (89.4%) and computers and peripherals (88.9%) [5]. On top of jobs directly created by companies that received VC funding, it is estimated that venture-funded companies have generated an additional 15 million jobs in goods and services industries supporting those businesses [6].
In addition to job growth, venture-funded companies are also driving R&D innovation. 85% of the total R&D of the 1,339 public companies that were started between 1979 and 2013 occurred at venture-backed companies despite the fact that they only represented 43% of the total population on of public companies in this sample [7].
Being innovative at an early stage is an essential requirement for beating the odds of a startup – 3 out of 4 startups fail according to a 2012 WSJ article [8]. Remaining innovative as an established company is an essential requirement for retaining its leadership position, for delivering shareholder value, and for continuing to contribute to economic growth. Failing to do so – not only delivering technology and product innovation but increasingly important also coming up with novel service, revenue, and business models – all too often leads to a company that was highly innovative in its early days and defined and dominated an industry for many years but that is eventually fading into oblivion: Digital Equipment Corporation (minicomputers), Kodak (photographic film), Borders (retail bookstores).
The Hallmarks of Innovativeness
Harvard professor Clayton Christensen, the godfather of disruptive innovation, started his research by looking at the question of “How could good managers get that dumb that fast?”, back then the prevailing explanation for why once successful companies had fallen off a cliff in the 80s. His quantitative research of the disk-drive industry, which was later replicated in many other product and service sectors, revealed that good companies lost their footing not because good management suddenly turned stupid, but because good management continued to make the “right” decisions within their company’s specific context. They followed the fundamental business principles, strategies, and processes that were taught at the leading business schools and that had helped them to create successful companies in the first place. But their companies were suddenly under attack by new entrants focusing on unattractive market segments with products that were (initially) too inferior to attract high-margin mainstream customers; and in many cases these new entrants would eventually put the incumbent out of business. Clayton Christensen published his insights in the 1997 book “The Innovator’s Dilemma” [9].
Almost 20 years after the first edition of Christensen’s book, every B-school student and every manager has read about the concept of disruptive innovation and often reviewed the historical case studies. But to this date, breakthrough innovation that eventually transforms industries and threatens prior leaders or that creates entire new markets seems to be the domain of startups, and not of the established enterprise. A 2005 Harvard Business Review article on “Building Breakthrough Businesses Within Established Organizations” postulated three principles that large enterprises need to apply in order to build innovative new businesses within the context of their existing organizations [10]. These three principles are:
- Forget: forget your organization’s business model and redefine products, customers, value proposition, and value delivery; this is probably the hardest lesson to implement because it asks management within the old and the new businesses to deliberately ignore and often even violate the principles that made the organization big and successful in the first place
- Borrow: provide your new business with access to resources within the existing organization, but focus on unique and truly valuable assets for the new business and don’t deploy resources that are commodities or even counter-productive for the new entity (like financial processes or HR systems) in order to comply with company policies or to leverage efficiencies
- Learn: accept that initial assumptions and predictions for the new business will often be off – even by several magnitudes, but evaluate core assumptions on an ongoing basis and be ready to adapt strategy and execution for the new business as uncertainty gets reduced and risks are getting eliminated for the new venture
There are times in the life of a company for solid management and there are times for creative innovativeness. There is no need to shut down your core business in order to be innovative. In a large enterprise, both might co-exist at the same point in time (the core business versus a new initiative) but they should always stay separated from each other. I strongly believe in a set of polar opposites that define creative innovativeness versus solid management. This is based on my own experience as a consultant working with startups as well as Fortune 500 clients in mobile phone, consumer electronics, telecommunications, semiconductor, medical device, and pharmaceutical industries and as a former executive at companies in Silicon Valley. Choose the “right” side when driving innovation within the context of an enterprise:
Vision versus market research & projections
Innovations create something that did not exist before or at least not in that combination: a technology platform, a product, a way of delivering value, a revenue model. There are no market reports, no benchmarks, no customers, and no experts available to research or predict the size of the opportunity or how to get there. “Apple market research [under Steve Jobs] is an oxymoron. The Apple focus group was the right hemisphere of Steve’s brain talking to the left one” [11]. Even if there aren’t that many people like Steve Jobs around, it is still better to have a vision and follow it than to try to “validate” an innovative idea upfront. Too often have reputable experts been completely wrong when trying to evaluate an innovative concept:
- “This ‘telephone’ has too many shortcomings to be seriously considered as a means of communication.” Western Union internal memo, 1876
- “I think there is a world market for maybe five computers.” Thomas Watson, Chairman of IBM, 1943
- “There is practically no chance communications space satellites will be used to provide better telephone, telegraph, television or radio service inside the United States.” T.A.M. Craven, FCC commissioner, 1961
- “There’s no chance that the iPhone is going to get any significant market share.” Steve Ballmer, CEO Microsoft, 2007
Validation for a truly innovative concept is only possible in the actual marketplace.
Creativity versus planning
Frozen food is a $20bn industry in the U.S. The commercial breakthrough for frozen food came with Swanson’s Thanksgiving TV dinner in the mid 50s. The story goes that the company had overestimated the demand for turkey during the 1953 Thanksgiving season and had 260 tons of frozen turkey sitting in railroad cars after the Holiday. Swanson had the creative idea to salvage the leftover turkey by creating a pre-cooked dinner consisting of turkey, cornbread dressing and gravy, buttered peas, and sweet potatoes packaged in a tray like those used for airline food service. The fact that Swanson planned to sell 5,000 turkey TV dinners that first year, in 1954, but ended up selling 10 million, shows the unpredictability of a disruptive innovation.
Developers versus managers
Innovation teams should be heavily skewed toward development skills. The make or break for the new concept will hinge on the ability to develop early prototypes, beta releases to third party developers and partners within the existing or emerging ecosystem, and the first product launched. This is certainly true if the innovation is centered around a technology or product innovation, but the concept is also applicable to business or service model innovations like Uber. In a case like this, critical skills include market and ecosystem development in addition to whatever technology development is required. At the early stages of innovation, there is just not much to manage but everything to develop.
Prototypes versus Power Points
Innovative teams are voracious developers and testers of prototypes. Only this approach will provide the two most important pieces of feedback at the early stage of a potentially ground-breaking innovation: Can we even build this thing? Does anyone care to use it? Aside from the debate about how good a communication tool PowerPoint is in principle, presentations are useful to convey known information. PowerPoint is a lot less useful in a situation with many known unknowns and even more unknown unknowns. Rapid prototyping has been the hallmark of great innovation teams throughout history and across industries including:
- “I have not failed. I’ve just found 10,000 ways that won’t work.” Thomas A. Edison, Inventor
- Bill Bowerman used his waffle iron to create prototypes of a waffle-soled running shoe: “What if you reversed the pattern and formed a material with raised waffle-grid nubs?” Bill Bowerman, co-founder Nike
- The first working Apple Watch prototype was an iPhone rigged with a Velcro strap. “A very nicely designed Velcro strap.” Kevin Lynch, VP Technology Apple
Innovation has traditionally been the domain of new entrants and startups. Enterprises have often followed their pre-programmed path and relied on time-honored strategies and management best practices – and have been taken by surprise by a fundamental disruption of their business and in many cases lost their industry leadership for good. They are facing structural hurdles to innovating and re-inventing themselves brought about by the curse of their own past success. Even enterprises can innovate like a startup if they separate the innovation initiative from their core business, don’t burden the new business with planning and process, and let the innovation teams focus on vision, creativity, development, and prototyping.
[1] 50 Smartest Companies 2015. MIT Technology Review, June 2015
[2] The World’s Most Innovative Companies. Forbes, February 2015
[3] Most Innovative Companies 2015. FastCompany, March 2015
[4] Employment Dynamics: Small and Large Firms Over the Business Cycle. Monthly Labor Review, March 2007
[5] Venture Impact: The Economic Impact of Venture Capital Backed Companies to the U.S. Economy. National Venture Capital Industry Association (NVCA), 2007
[6] Venture Impact: The Economic Impact of the Venture Capital Industry on the U.S. Economy. National Venture Capital Industry Association (NVCA), 2003
[7] The Economic Impact of Venture Capital: Evidence from Public Companies. Gornall W., Stebulaev IA., November 2015
[8] The Venture Capital Secret: 3 Out of 4 Start-Ups Fail. Wall Street Journal, September 2012
[9] Clayton Christensen: The Innovator’s Dilemma. Harvard Business School Press, 1997
[10] Building Breakthrough Businesses Within Established Organizations. Harvard Business Review, May 2005
[11] Guy Kawasaki: What I learned from Steve Jobs. October 2011
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